United States: Of "Lunch Stands And Merry-Go-Rounds": Ninth Circuit's Rejection Of FTC Authority Over "Throttling" Could Have Far Reaching Implications For Cable And Other Broadband Providers

On August 29th, a Ninth Circuit panel unanimously held that the FTC has no power to challenge "throttling" of unlimited data plan customers by mobile broadband providers as an "unfair or deceptive act." The panel found that a core source of FTC authority (Section 5 of the FTC Act) does not apply to any "common carriers" that are subject to regulation under the Communications Act of 1934. (FTC v. AT&T Mobility LLC, No. 14-04785 (9th Cir. Aug. 29, 2016)).

Critically, the panel found that the "common carrier" exception to section 5 applies based on the status of the entity as a regulated common carrier, not whether the particular activities at issue are regulated common carrier services. Given the FCC’s 2015 reclassification of all public broadband services (wired and mobile) as “common carrier” services, the decision potentially could be applied to exempt cable companies and other broadband providers (e.g., Google) from FTC Act section 5 enforcement actions for all of their services, not just those subject to the Open Internet Order.

The District Court Decision

In FTC v. AT&T Mobility, the FTC claimed that AT&T violated section 5’s prohibition on “unfair and or deceptive” practices by allegedly throttling data for “unlimited mobile data” customers without adequate consent or disclosures. AT&T moved to dismiss on the ground that, because it is a regulated communications common carrier with respect to its mobile telephone services, it has the “status” of a common carrier and is entirely exempt from section 5. The FTC, however, argued that the “common carrier” exemption applies only to “common carrier” activities and, during the period in question, AT&T’s mobile broadband service was not a “common carrier” activity, in contrast to its mobile telephone service.

Ultimately, the issue presented was: whether the common carrier exemption in section 5 is status-based, such that an entity is exempt from regulation as long as it has the status of a common carrier, or is activity-based, such that an entity with the status of a common carrier is exempt only when the activity the FTC is attempting to regulate is a common carrier activity.

The district court had agreed with the FTC and held that section 5’s exemption for “common carriers subject to the Acts to regulate commerce” applied narrowly only to a firm’s “common carrier” services. Because the FTC Act does not define “common carrier,” the lower court looked to the common law. It concluded that, when the FTC Act was passed in 1914, firms were regulated as common carriers only with respect to their common carrier services – i.e., general, public offers of carriage of people, freight, or, later, telephonic communication.

For example, it noted a 1912 Supreme Court case concerning the jurisdiction of the ITC (the FTC’s predecessor) over a company that provided common carrier transit services, but that also owned and operated “lunch stands, merry-go-rounds, bowling alleys, [and] bath houses.” The court observed that the ITC’s common carrier jurisdiction extended only to the freight carriage services, not to the entertainment services, despite the fact that the same firm owned and operated all of the services.

The district court also noted that the Communications Act – which is one of “the Acts to regulate commerce” – defines common carriers according to the specific service at issue. Indeed, a key issue leading up to the 2015 Open Internet Order was whether the FCC could and should “reclassify” wired and mobile broadband s Title II “common carrier” services.

Because there was no Ninth Circuit precedent, and courts in other jurisdictions were split on how to interpret the “common carrier” exemption, the district court allowed AT&T to seek an immediate appeal of the decision.

The Ninth Circuit Reversal

The Ninth Circuit reversed, holding that “AT&T is excluded from the coverage of section 5.”

Unlike the district court, the panel found the plain language of the exemption for “common carriers subject to the Acts to regulate commerce” compelled the conclusion that the exemption was based on the status of a firm as a regulated common carrier, not on the particular actions at issue. By contrast, the panel found that an additional exemption for “packers and stockyards” is expressly limited to “…corporations insofar as they are subject to the Packers and Stockyards Act of 1921″ and, therefore, an “activity” based exemption.

The Ninth Circuit also rejected the district court and FTC’s parsing of the legislative history and precedent concerning the “common carrier” and “Packers and Stockyards” exemptions. The panel’s conclusion was that Congress knew how to describe an activity-based exemption (the Packers and Stockyards exemption) when it intended to enact one.

Finally, the panel found that the language and structure of section 5 was so clear that it overcame any deference to which the FTC’s interpretation might otherwise be due. Indeed, the court noted it was not persuaded even by a 2015 FCC-FTC Consumer Protection Memorandum of Understanding, which stated that "the agencies express their belief that the scope of the common carrier exemption in the FTC Act does not preclude the FTC from addressing non-common carrier activities engaged in by common carriers."

Potential Implications

Assuming the panel’s decision is not modified or reversed en banc or by the Supreme Court, the AT&T Mobility decision has implications far beyond alleged “throttling” of mobile broadband. Among the potential implications are:

  • Any firm that provides any “common carrier” services governed by the Communications Act may be deemed to have the status of a “common carrier” for purposes of the exemption from section 5. (But note that the panel did say that “acquisition of some minor division unrelated to the company’s core activities that generates a tiny fraction of its revenue” should not bring the entire company within the common carrier exemption.)
  • The exemption would take such firms outside section 5 for all aspects of their business, not just the common carrier broadband services. This could mean, for example, that cable companies and others may be wholly exempt from section 5, even for non-broadband services such as linear television, video-on-demand, and set-top box leases.
  • A section 5 exemption bars the FTC with respect to both its consumer protection role and its antitrust role, an area in which the FTC recently has taken a more aggressive position.
  • Although the FCC is now regulating broadband as a common carrier, its powers are not identical to the FTC’s. For example, the FCC has no authority to seek refunds for customers and has a more limited “look back” period to challenge conduct. As a practical matter, the FCC also is simply newer to these issues and roles.
  • A finding that an entity as a whole is exempt section 5 as a common carrier does not mean that the entity as a whole will then be regulated as a common carrier elsewhere. For example, common carrier regulations under the Communications Act turn on the particular activity at issue. Thus, a service may be exempt from section 5 because it is offered by a common carrier, but not be subject to any common carrier regulations by the FCC.

Of "Lunch Stands and Merry-Go-Rounds": Ninth Circuit's Rejection of FTC Authority Over "Throttling" Could Have Far Reaching Implications for Cable and Other Broadband Providers

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