The recent and on-going legal issues and claims relating to Facebook's IPO highlight the fact that the development of the site may be significantly hindered in the future by legal battles and by the development of laws and regulations around the world.
Facebook's IPO Fallout
Facebook's Nasdaq IPO and the rapid drop in its share price since has sparked a series of lawsuits and investigations, principally relating to questions about selective disclosures of the company's financial prospects, with the IPO banks being accused of not sharing their negative outlook with all investors. US laws on IPOs and disclosure are notoriously complex and full of many grey areas. Given the fact that big sums of money are involved, Facebook risks finding itself, either directly or indirectly, caught up with protracted litigation in this respect.
In late May the Securities and Exchange Commission's enforcement division opened a preliminary enquiry into the Facebook offering, while the Senate Banking Committee and the House Financial Services Committee have also started informal examinations into the IPO process. Even if Facebook is not implicated itself, any such investigations will involve dealing with Facebook executives, wasting valuable management time in the process.
Following its recent acquisition of Instagram, Facebook received notice that US antitrust regulators will carry out a prolonged review of the deal. Like Google, which is currently facing anti-trust claims relating to its dominance of the free search and web browser markets, Facebook is now being investigated for its decision to buy out a rising photo sharing competitor.
As US federal guidelines for the Justice Department and Fair Trade Commission suggest, as Facebook paid a large premium above Instagram's market value this may indicate anticompetitive behaviour. Indeed, Facebook would not have paid so much unless it believed photo sharing was key for the social web and a main engine for future growth.
Microsoft spent years battling with US and European regulators over antitrust claims and its likely that Facebook, as it undertakes more acquisitions and builds more dominant products, will face the same distractions.
Legal risk factors identified by Facebook in its IPO document
US technology lawyer Evan Brown outlines six key technology law issues (across jurisdictions) raised in Facebook's SEC S-1 filing that are likely to impact on the ability of Facebook to operate and grow in the future. Some of these points are highlighted and expanded on below.
Facebook mentions adverse developments in advertising regulation which could restrict online behavioural advertising, such as obligations for users to opt-out of data collection and measures to enhance user privacy which could seriously limit the effectiveness and value of advertising on Facebook. In the UK there have recently been calls for legislation to restrict Facebook's ability to advertise to children.
Facebook owns an incredible amount of information about, and created by, its users and as a result data security is key to maintain confidence in the site. A significant data breach would mean a PR backlash, regulatory investigations and civil liability to its users for negligence and other causes of action.
In relation to intellectual property, Facebook needs to be able to rely on the security of its trademark, copyright and patent assets. It also faces a challenge in the future regarding its open source contributions and use of open source in its products which may hamper its licensing ability and create an increased litigation risk. Patent trolls and other patent owners may also aggressively assert their rights in order to extract value from a very well capitalised Facebook which not only imposes a burden on the company in defending the claims, but also Facebook may have to pay judgments, get licenses or develop workarounds as a result. Only a few weeks ago Yahoo threatened to pursue legal action based on the allegation that Facebook infringed it's patents and did not pay licensing fees to Yahoo for such patents.
Facebook acknowledges that it faces, and will face, third party claims relating to information that is published on the site by its users. While it is protected from such liability by US law, there is a danger that the risk is increased in some countries outside the US where the relevant laws are either unclear or in an early stage of development.