Background

As we discussed in several earlier blog posts, this case stems from a complaint that the FTC filed against AT&T Mobility in the Northern District of California in October 2014 alleging that AT&T deceived customers by throttling their unlimited data plans without adequate disclosures. AT&T moved to dismiss the case on the grounds that it was exempt under Section 5, based on its status as a common carrier, but the district court denied the motion, finding that the common carrier exemption was activity-based, and AT&T was not acting as a common carrier when it offered mobile broadband service, which, at the time the FCC classified as a non-common-carrier “information service.” AT&T appealed and a three-judge panel of the Ninth Circuit reversed the district court, holding that the common carrier exemption was “status-based,” and the FTC lacked jurisdiction to bring the claim. As we noted then, the three-judge panel’s decision was the first recent case to address the “status-based” interpretation of the common carrier exemption, and the decision – if it stood – could re-shape the jurisdictional boundaries between the FCC’s and the FTC’s regulation of entities in the communications industry.

The En Banc Court’s Analysis

The FTC appealed the case to an en banc panel of the Ninth Circuit, which issued its opinion this week. The court’s decision relied on the text and history of the statute, case law, and significant deference to the interpretations of the FTC and FCC, which both view the common carrier exemption as activity-based rather than status-based.

The Court first analyzed the history of Section 5 and the common carrier exemption. It found that the Congress intended the exemption to be activity based and rejected textual arguments advanced by AT&T that other statutory provisions—including Section 6 of the FTC Act and the Packers and Stockyard Exception—demonstrated that the common carrier exemption was status based. The Court gave significant weight to the understanding of common carriers in 1914, when the FTC Act was first passed, and legislative statements made during consideration of that Act.

The Court then addressed case law that an entity can be a common carrier for some activities but not for others. The Court found this case law to support an activity-based interpretation of the common carrier exemption. Specifically, the Court found that while Congress has not defined the term “common carrier,” Supreme Court case law leading up to and following the passage of the FTC Act interpreted the term “common carrier” as an activity-based classification, and not as a “unitary status for regulatory purposes.” The Court found that its approach was consistent with the Ninth Circuit’s longstanding interpretation of the term “common carrier” as activity-based, as well as the interpretations of the Second, Eleventh, and D.C. Circuits. (AT&T did not contest these cases, but instead argued that the FCC had many legal tools to address non-common carrier activities, including Title I ancillary authority and potential structural separation.)

Notably, the Court also provided significant deference to the views of the FTC and FCC, both of which have recently expressed the view that the FTC could regulate non-common carrier activities of common carriers. The Court cited the FCC’s amicus brief before the en banc panel and a 2015 Memorandum of Understanding between the two agencies that interpreted the common carrier exemption as activity-based.

Finally, the Court rejected arguments that the FCC’s 2015 Open Internet Order reclassifying mobile broadband as a common carrier service (or the FCC’s 2017 Restoring Internet Freedom Order reversing that classification) retroactively impacted the outcome of the appeal.

Agency Response

After the court issued its opinion, both FTC Acting Chairman Maureen Ohlhausen and FCC Chairman Ajit Pai applauded the ruling. Chairman Ohlhausen stated that the ruling “ensures that the FTC can and will continue to play its vital role in safeguarding consumer interests including privacy protection, as well as stopping anticompetitive market behavior,” while Chairman Pai stated that the ruling is “a significant win for American consumers” that “reaffirms that the [FTC] will once again be able to police Internet service providers” after the Restoring Internet Freedom Order goes into effect.

Our Take

The Ninth Circuit’s ruling is unsurprising in some senses. When a court grants en banc review, it often is for the purpose of reversing or at least narrowing the panel’s initial decision. AT&T also faced fairly strong questioning during the oral argument in September. Further, the Court’s decision affirms a position that the FTC had taken for many years and that the FCC – as evidenced by the 2015 Memorandum of Understanding – supported. Thus, the en banc court here effectively affirms current practice.

All of that said, the issue is not settled. AT&T’s reaction was decidedly muted, and it may still seek Supreme Court review of the question. This option may be particularly attractive to AT&T because it noted several times during the oral argument that it faced both FTC and FCC enforcement actions against it for allegedly the same activities. The Ninth Circuit did not mention the FCC enforcement action or the potentially conflicting interpretations of AT&T’s obligations. It is not clear whether both actions could or would proceed as a result of the decision.

Going forward, once the FCC’s Restoring Internet Freedom Order takes effect, we can expect that the FTC will serve as the top cop for alleged broadband consumer protection violations, including with respect to open Internet- and privacy-related complaints. And yet, there is still some uncertainty. The FCC’s Restoring Internet Freedom Order is under appeal. If the appeals court that ultimately hears the challenges to the Restoring Internet Freedom Order were to reverse the Order, the possibility exists that broadband services would again come under FCC common carrier jurisdiction, thereby exempting the provision of such services from FTC jurisdiction even under an activity-based interpretation of the FTC Act. Thus, we may not have finality on broadband regulation, despite the Court’s decision this week.

More broadly, we expect that the FTC will continue to push for eliminating the common carrier exemption altogether before the Congress, as it has for many years. Congressional action to repeal the exemption appears unlikely in the near term.

At least for now, broadband providers should continue to ensure that their privacy and broadband practices are in line with FTC guidelines and judicial interpretations of Section 5, and should comply with remaining FCC Open Internet requirements, such as the transparency rule.

The MOU generally divides FCC and FTC jurisdiction over BIAS providers as follows:

FCC	FTC
Monitor the broadband market and identify market entry barriers by, among other activities, reviewing informal complaints filed by consumers. Take enforcement actions against ISPs that fail to comply with the Transparency Rule’s posting requirement. FCC enforcement would not address the adequacy of the disclosure, however.	Investigate and take enforcement action against ISPs for unfair, deceptive, or otherwise unlawful acts or practices, including but not limited to, actions pertaining to the accuracy of the disclosures required under the Transparency Rule, as well as their marketing, advertising, and promotional activities.

The agencies have made clear that they will coordinate their activities “to promote consistency in law enforcement and to prevent duplicative or conflicting actions.” They will also continue to share consumer complaints with each other and will collaborate on consumer and industry outreach and education efforts. FCC Chairman Ajit Pai said in a statement that the MOU “outlines the robust process by which the FCC and FTC will safeguard the public interest,” but Commissioner Mignon Clyburn (a Democrat) called the MOU “a smoke and mirrors PR stunt, distracting from the FCC’s planned destruction of net neutrality protections later this week.”

Despite the MOU and upcoming Restoring Internet Freedom Order, significant questions will remain about the appropriate jurisdiction of the FCC and FTC with respect to BIAS and ISPs. For example, less than three months ago, the Ninth Circuit received arguments in a rehearing en banc of the court’s earlier decision to dismiss an FTC case against AT&T Mobility over allegedly “unfair and deceptive” throttling practices in connection with wireless data services provided to AT&T’s customers with unlimited data plans. Implementation of the MOU may be impacted by how the Ninth Circuit resolves this jurisdictional dispute. If the Ninth Circuit finds the common carrier exemption to be activity-based, then the FCC’s expected decision to walk back from “common carrier” designation for BIAS will open the door for FTC oversight. On the other hand, if the Ninth Circuit finds that exemption to be status-based – or resolves the case without resolving the question – then the FTC’s ability to proceed under the MOU may be in question. Thus, even after the MOU is finalized, we may have to wait to see the final impact of the agreement.

Private lines are dedicated connections chiefly used by businesses, banks, and other institutions to transmit large amounts of sensitive data, and by wireless carriers to ease congestion by funneling traffic from cell towers to wired telephone and broadband networks. Private lines can carry solely intrastate or interstate traffic or a mix of both, and under the FCC’s rules interstate telecommunications revenues are subject to federal universal service fund (USF) contributions, while intrastate telecommunications revenues are not.

In classifying the jurisdiction of a private line, providers have long looked to the Federal Communications Commission’s (FCC or Commission) Ten Percent Rule defining interstate telecommunications. Specifically, the Commission has held that where more than ten percent of the traffic on a private line is interstate, the revenues and costs of the entire line are classified as interstate. The Commission previously agreed that the best method for confirming the traffic carried over a private line was by obtaining a customer certification regarding the traffic. Many in the telecommunications industry viewed the Ten Percent Rule as establishing a presumption that a private line was intrastate unless a customer certified that more than 10 percent of the private line’s traffic was interstate.

In its Order, the Bureau denied and remanded back to USAC long-pending requests from six carriers to review USAC audit findings that reclassified the carriers’ private line revenues from jurisdictionally intrastate to jurisdictionally interstate, thereby subjecting the carriers to significant USF contribution obligations. However, the Bureau’s Order has import for the telecommunications industry in general. The Order not only rejects the perceived intrastate jurisdiction presumption, it also clarifies that carriers are required to conduct a good faith inquiry into the nature of the traffic carried on the private line. Moreover, the Order is instructive that, for purposes of audits – and therefore relevant to a carrier’s proactive measures – examples of supporting documentation include customer certifications or other acknowledgements (such as contract terms) that more than ten percent of the traffic is interstate or that ten percent or less is interstate, provided the carrier explains to customers what constitutes intrastate and interstate traffic before relying on such certifications. Carriers also can rely on sworn declarations from a corporate officer attesting the private lines are technically unsuitable for any interstate usage and the Bureau noted that these declarations ideally would be supported with detailed engineering reports or other evidence of the service’s technical specifications. However, the Bureau acknowledged the challenges of meeting this standard in light of the difficulty for a carrier to demonstrate that the customer has not linked the private line to other network facilities that permit the private lines to carrier interstate traffic.

The key takeaway for private line providers is the importance of carefully considering the nature of the traffic carried over private lines – and retaining documentation of that nature – when classifying the jurisdiction of private line revenues. The importance of document retention was underscored by the Bureau’s statements that carriers subject to USF contributions are required to retain, for five (5) years from the contribution date, all records demonstrating compliance with the FCC’s rules regarding reporting of revenues on the FCC Form 499A. The Bureau also issued an important warning to carriers undergoing audits, that if a carrier withholds or fails to timely provide information during a USAC audit, the carrier cannot later claim that USAC failed to consider all evidence or request additional information related to a carrier’s untimely filed information. While not directly relevant to private line classifications, all carriers should take heed of the need to completely and promptly respond to audit requests.

* * *

As expected, the FTC asked the Ninth Circuit to rehear the case en banc. The request, if granted by the court, would result in the full contingent of judges hearing the case, likely early next year. The FTC advances three primary arguments in support of rehearing, but the most interesting by far is its claim of a gap in consumer protection jurisdiction as a result of the ruling.

The FTC’s lead argument is that the decision allegedly “creates an enforcement gap” because “no other federal agency has the FTC’s breadth of authority to protect consumers from many unfair or deceptive practices across the economy and to obtain redress for consumer harm.” In support, the FTC argues that the FCC’s jurisdiction “is limited to matters ‘for and in connection with’ common-carrier service” and, unlike the FTC, the FCC cannot collect consumer redress and is subject to a one year statute of limitations. The FTC further argues that the Ninth Circuit panel’s status-based approach to determining FTC jurisdiction has wide-reaching implications for any company who can claim to be a “common carrier” in some aspect of its business to avoid enforcement actions for non-common-carriage activities. (We noted this open question in our previous post as well.) Such entities – which the FTC identified to include large cable companies, satellite service providers, internet companies and energy utilities – may manipulate their common carrier status to avoid FTC jurisdiction. Finally, the FTC claims that the ruling “threatens the FTC’s ability to enforce other important consumer protection statutes including the Children’s Online Privacy Protection Act, the Telemarketing and Consumer Fraud and Abuse Act, and the Restore Online Shoppers’ Confidence Act, and several others.”

Notably, the FTC’s position was previewed by FTC Chairwoman Edith Ramirez in her written testimony for an FTC oversight hearing before the Senate Committee on Commerce, Science and Transportation on September 27, 2016. As we predicted, Chairwoman Ramirez argued that the case supported the FTC’s long-time effort to repeal the common carrier exception, stating in part that following the Ninth Circuit’s ruling, coupled with the FCC’s 2015 decision to reclassify broadband Internet access as a common carriage service, “[a]ny company that has or acquires the status of a common carrier will be able to argue that it is immune from FTC enforcement against any of its lines of business by virtue of its common carrier status.”

Whether the FCC agrees with the FTC’s characterization of its jurisdiction is yet to be determined. Nevertheless, the fault line is clearly identified in the FTC’s filing. We will continue to monitor this case and will post any new developments here.

The Ninth Circuit’s decision is the latest in a series of actions attempting to identify the jurisdiction over Internet access services and Internet-based services. As providers and regulators have struggled to identify the proper regulations applicable to such services, the Ninth Circuit’s decision could force significant shifts by both the FTC and FCC for at least a large segment of the industry.

Background

At issue before the Ninth Circuit was the scope of the FTC Act’s exemption of “common carriers” from the FTC’s authority. The FTC argued, and the trial court held, that the common carrier exemption only applied to the extent that the service in question is a common carrier service (i.e., an “activity-based” test that precluded FTC jurisdiction only where a common carrier is engaging in common carrier activities). Because the service that the FTC challenged (wireless broadband Internet access service (“BIAS”)) was not a common carrier service at the time that the FTC brought its action against AT&T, the trial court held AT&T was not engaging in common carrier activity and therefore the FTC had authority to bring its lawsuit.

AT&T appealed the decision, arguing that the FTC Act’s exemption of common carriers should be based on their status, and thus telecommunications service providers like itself are exempt from the FTC’s authority regardless of whether the activity at issue is a common carrier service.

The Ninth Circuit noted two things related to the dispute. First, the court noted that “it is undisputed that AT&T is and was a ‘common carrier[] subject to the Acts to regulate commerce’ for a substantial part of its activity.” Further, the court noted that, during the time period in question, AT&T’s mobile data service “was not identified and regulated by the FCC as a common carrier service” although, since the FCC’s 2015 Open Internet Order, the FCC has classified the service as a common carrier service.

The Ninth Circuit sided with AT&T, and remanded the case for an entry of an order for dismissal. The court held that under the plain language of the statute, the exemption is based on a company’s status and applies regardless of the activity at issue. The “literal reading of the words Congress selected,” the court wrote, “simply does not comport with an activity-based approach [to the common carrier exemption].” The court compared the common carrier exemption to the other exemptions in the statute (for banks, savings and loan institutions, federal credit unions, air carriers and foreign air carriers) that are admitted by the FTC to be status-based, and to the exemption for meatpackers “insofar as they are subject to the Packers and Stockyards Act,” which the court found to be activity-based. The court held that amendments enacted in 1958 to Section 5 – which added the “insofar as” language – indicated an activity-based exemption for that provision but affirmed status-based exemptions for the remainder “then and now.”

Notably, the Ninth Circuit chose to address the status question, rather than addressing a more narrow issue of whether the FCC’s 2015 reclassification of BIAS as a telecommunications service applied to AT&T’s service retroactively.

Implications

The FTC issued a statement that it is “disappointed” and “considering [its] options,” but it is unclear whether it will appeal the ruling to the Supreme Court. It is worth noting that, although the Ninth Circuit did not discuss the decisions, this is the third time that a court of appeals has faced status-based arguments relating to the common carrier exemption. The Seventh Circuit’s 1977 decision in U.S. v. Miller, and the Second Circuit’s 2006 decision in FTC v. Verity Int’l, Ltd., both involved entities claiming common carrier status, although neither decision brought finality to the question. If the FTC pursues the issue further, industry and practitioners could receive welcome guidance on the issue.

More broadly, the FTC has openly called for the end of the common carrier exemption in the past few years. This decision may add fuel to the agency’s efforts in that regard.

As is, the decision makes it more difficult for the FTC to bring an action against a company that can claim to be a common carrier. The Ninth Circuit’s decision noted that AT&T unquestionably was a common carrier “for a substantial part of its activity” and at one point distinguished a case, noting that AT&T’s status “is not based on its acquisition of some minor division unrelated to the company’s core activities.” Nevertheless, the court’s analysis leaves open the possibility that even providing only a small amount of common carrier service may be enough to qualify all of a company’s activities for the common carrier exemption.

On the FCC side, there are equally broad questions raised by the decision. The FCC recently has broadly construed its own authority under Section 201(b), to a fair degree of controversy, to address practices of common carriers “for or in connection with” their services, such as advertising and billing. Presumably, these efforts will continue after the Ninth Circuit’s ruling. The Ninth Circuit’s ruling, however, may encourage the FCC to fill any potential gap in coverage by taking a broader view of its own authority to regulate non-common carrier services that common carriers offer to consumers. This could have significant implications for a number of ongoing FCC proceedings, including a proceeding to overhaul the FCC’s privacy rules after the Open Internet Order and requests to classify SMS messaging and interconnected voice-over-Internet-Protocol (VoIP) service as telecommunications services subject to common carrier regulation. This also might color the FCC’s approach to regulation of over-the-top services provided by non-carrier entities using telecommunications or Internet services.

Time will tell how this plays out, but for now, the Ninth Circuit appears to have significantly reset the boundaries between the agencies’ jurisdictions. AT&T is not off the hook yet, however, as it faces a parallel action from the FCC, which has issued a Notice of Apparent Liability to AT&T, alleging that its disclosures in connection with its unlimited data plans violated the FCC’s “transparency” rules. The FCC proposed $100 million in forfeitures for the violation, which sparked vigorous dissent by the two Republican commissioners and was opposed by AT&T in a strongly-worded response. The FCC forfeiture proceeding remains pending.

Alysa Hutnik and Spencer Elg, of Kelley Drye’s Advertising Group, co-authored this post.

Yesterday, the FTC testified before a Senate Subcommittee and recommended that proposed data security legislation introduced by Senators Pryor (D., AR) and Rockefeller (D., WV) (The Data Security and Breach Notification Act of 2010, S.3742) be modified so that its requirements and the FTC’s enforcement authority thereunder be extended to telecommunications common carriers.

The FTC’s testimony – available here – is the latest in a series of FTC actions signaling the agency’s concern regarding the amount of personal information telecom common carriers handle and the FTC's ability – or inability – to take enforcement action against such carriers.

The proposed legislation is one of several pieces of proposed data security legislation in play on the Hill. It would require a broad array of commercial and nonprofit entities to (a) implement reasonable data security policies and procedures, and (b) notify consumers of a security breach involving electronic records. It also would require covered entities to offer credit reports and monitoring services to consumers impacted by a data breach. The proposed legislation also would give general concurrent enforcement authority to the FTC and state attorneys general.

At yesterday’s hearing, subcommittee members and hearing witnesses discussed the proposed legislation’s “exemption” provision and the manner in which it might address potential redundancy with other federal data protection statutes such as the HIPPA, FCRA and the Gramm-Leach-Bliley Act. The FTC proposed the following revision:

Second, as the proposed legislation is currently drafted, its requirements do not apply to telecommunications common carriers, many of which maintain significant quantities of highly personal information. The Commission believes that the legislation should cover these entities and that the Commission should have authority to enforce the legislation as to them.

Notably, in making its recommendation to extend the reach of the proposed legislation to telecommunications common carriers, the FTC made no mention of Section 222 of the Communications Act and the FCC’s related CPNI rules which require such entities to comply with a complex data security requirements and also require breach notification to consumers, as well as to the FBI and Secret Service.

For more information on the scope of FTC jurisdiction over broadband service providers, see this earlier post on broadband provider privacy obligations.