Common carriers beyond FTC’s reach, 9th Circuit says

Common carriers beyond FTC’s reach, 9th Circuit saysEarly last week the Ninth Circuit Court of Appeals dropped a bomb on the FTC when it held that all common carriers are exempt from the FTC’s jurisdiction, even if those common carriers are engaged in “non-common carrier” activities.  The Ninth Circuit’s decision in FTC v. AT&T Mobility LLC firmly rejected the FTC’s prior interpretation of its authority under Section 5 of the FTC Act, under which the FTC has previously regulated the non-common carrier activities of common carriers.  Unless the Ninth Circuit’s decision if reversed or otherwise modified, the FTC’s “data throttling” suit against AT&T will be over for all intents and purposes.  However, more importantly, the Ninth Circuit’s decision raises several new questions regarding the FTC’s jurisdiction and its ability to go after common carriers.

AT&T’s “Data Throttling” Program

By way of background, in 2007, AT&T became the exclusive service provider for the Apple iPhone in the United States.  Around that same time, AT&T began offering its customers an “unlimited” mobile data plan, which allowed customers access to “unlimited” mobile data as part of their payment plan.  However, starting in June 2010, AT&T ceased offering its “unlimited” data plan to new customers.  Since that time, AT&T has required its new customers to choose from among several “tiered” data plans, which gives customers a fixed amount of data under their plan, but charges customers extra for data usage over the fixed amount.  Those customers that had the previous “unlimited” data plan were grandfathered into the new system to avoid encouraging those customers to switch to a different service provider.

In July 2011, AT&T made the decision to begin reducing the speed at which unlimited data users received data on their smartphones.  Under AT&T’s alleged “data throttling” program, unlimited data plan customers had their data speeds throttled for the remainder of their billing cycle once they exceeded a certain data threshold.

FTC Sues AT&T Over “Data Throttling” Program

In its lawsuit against AT&T, the FTC alleged that AT&T failed to adequately inform its customers of its data throttling program.  Specifically, the FTC alleged two separate claims under Section 5, pursuant to which the FTC may “prevent persons, partnerships, or corporations, except … common carriers subject to the Acts to regulate commerce … from using … unfair or deceptive acts or practices in or affecting commerce.”

In Count I, the FTC asserts that AT&T’s imposition of data speed restrictions on customers with contracts “advertised as providing access to unlimited mobile data” and without terms “provid[ing] that [AT&T] may modify, diminish, or impair the service of customers who use more than a specified amount of data” is an unfair act or practice.

In Count II, the FTC asserts that AT&T’s failure to adequately disclose that it “imposes significant and material data speed restrictions on unlimited mobile data plan customers who use more than a fixed amount of data in a given billing cycle” is a deceptive act or practice.

AT&T Moves to Dismiss FTC Complaint, Arguing It is Exempt From FTC Liability

In response to the FTC’s complaint, AT&T filed a motion to dismiss, alleging that it’s immune from liability under Section 5 due to its status as a common carrier.  In its opposition, the FTC contended that AT&T is not exempt from FTC liability because AT&T’s mobile data services are non-common carrier activities, which means Section 5’s exemption for common carriers do not apply to AT&T in the instant case.

FCC Reclassifies Mobile Data Service as a Common Carrier Service

During the time AT&T’s motion to dismiss was pending, the Federal Communications Commission (“FCC”) reclassified mobile data service from a non-common carrier service to a common carrier service.  Following the FCC’s reclassification, AT&T argued to the lower district court that the FCC’s Reclassification Order, even though prospective in application, stripped the FTC of authority to maintain its claims against AT&T, even as to past violations.

District Court Denies AT&T’s Motion to Dismiss

The district court subsequently denied AT&T’s motion to dismiss, rejecting AT&T’s view of the common carrier exemption, concluding that it applies “only where the entity has the status of common carrier and is actually engaging in common carrier activity.”  The district court also rejected AT&T argument that the FCC’s reclassification order stripped the FTC of its authority to pursue its claims against AT&T for data throttling.  AT&T thereafter appealed to the Ninth Circuit Court of Appeals.

Ninth Circuit Reverses Lower District Court on Appeal

On appeal, the Ninth Circuit reversed the lower district court’s ruling, holding:

The common carrier exemption in section 5 of the FTC Act carves out a group of entities based on their status as common carriers.  Those entities are not covered by section 5 even as to non-common carrier activities.  Because AT&T was a common carrier, it cannot be liable for the violations alleged by the FTC. The district court’s denial of AT&T’s motion to dismiss is reversed, and the case is remanded for entry of an order of dismissal.

“Activity-based” v. “Status-Based

Most notably, in its opinion, the Ninth Circuit declined to defer to the FTC’s “activity-based” interpretation of Section 5, as well as rejecting the FTC’s reliance on Crosse & Blackwell Co. v. FTC, which held that the FTC Act’s exemption for meat packers did not apply to an entity that was also engaged in canning soups and similar products, because meat packing was an inconsequential part of the company’s business.  In rejecting the FTC’s reliance on Crosse, the Ninth Circuit noted that “AT&T’s status as a common carrier is not based on its acquisition of some minor division unrelated to the company’s core activities that generates a tiny fraction of its revenue.”

The Ninth Circuit then criticized the holding in Crosse as a “decision [that] seems to be based on little more than the court’s own view of the most effective regulatory regime in explicit disregard of the words of the statute. But the text of a statute cannot be disregarded in that manner.”

Ninth Circuit Declines to Rule on FCC’s Reclassification Order

While the FCC’s reclassification order was put at issue by AT&T in the lower district court, the Ninth Circuit determined that it need not decide that issue on appeal, concluding: “Because we conclude that the common carrier exemption is a status-based exemption that excludes AT&T from section 5’s coverage, we need not address AT&T’s remaining arguments regarding overlapping regulation and the effect of the FCC’s Reclassification Order.”

Could This be the End of the FTC’s Enforcement Against Common Carriers?

As the ink on the Ninth Circuit’s opinion is still drying, the implications of its decision have potential far-reaching consequences for the FTC in its enforcement efforts against common carriers.  If the Ninth Circuit’s “status-based” interpretation of common carriers under Section 5 stands, then all common carriers, including recently reclassified Internet service providers and mobile data service providers, may find themselves free from FTC oversight.

Common Carriers Everywhere Rejoice, but Will it be Short-Lived?

While common carriers are likely to rejoice in the Ninth Circuit’s decision, any gap in the FTC’s jurisdiction is likely to be filled, and most likely by the FCC, who has taken the view that it must intervene to impose new data security and privacy regulations on common carriers. The FCC, through its recent data security and breach enforcement activities, has revealed its clear intent to become a dominant player in the common carriers arena. In fact, AT&T is currently challenging a proposed $100 million fine by the FCC for the same data throttling and notice issues that were the subject of the now dismissed FTC action.

FCC to the Rescue? Not so Fast

Even though the FCC has announced its intention to crackdown on common carriers, the Ninth Circuit’s decision may still leave a significant gap in enforcement.  For example, the FCC’s stated position on common carrier states that, “Section 222 is a sector-specific statute that includes detailed requirements that Congress requires be applied to the provision of telecommunications services, but not to the provision of other services by broadband providers nor to information providers at the edge of the network.”  Even still, under the Ninth Circuit’s ruling, the FTC could not sue Google for instance over provision of its “Google Fiber” broadband internet access service because its status as a common carrier would exempt it from FTC liability.  Likewise, the FTC would not be able to regulate Google’s privacy or data security for the same reason.

Thus, while the FCC will likely close the gap on regulating common carriers, its authority will be limited.  More importantly, unless Congress acts to rewrite Section, then the FTC may be unable to go after common carriers in the future, even if they are engaged in “non-common carrier” activities.

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