Support for FTC Jurisdiction Over Broadband: Ninth Circuit En Banc Rules Common Carrier Exemption is ​“Activity,” and not ​“Status-based,” Reversing Earlier AT&T Victory

The Republican-led FCC’s effort to get out of the business of regulating broadband providers’ consumer practices took a step forward on Monday. In an appeal that has been proceeding in parallel with the FCC’s ​“Restoring Internet Freedom” reclassification proceeding, the U.S. Court of Appeals for the Ninth Circuit issued an opinion giving the Federal Trade Commission (FTC) broad authority over practices not classified by the FCC as telecommunications services. Specifically, the Ninth Circuit, sitting en banc, issued its long-awaited opinion in Federal Trade Commission v. AT&T Mobility, holding that the ​“common carrier exemption” in Section 5 of the FTC Act is ​“activity based,” exempting only common carrier activities of common carriers (i.e., the offering of telecommunications services), and not all activities of companies that provide common carrier services (i.e., rejecting a ​“status-based” exemption). The case will now be remanded to the district court that originally heard the case. Coupled with the FCC’s reclassification of Broadband Internet Access Services (BIAS) in the net neutrality/restoring internet freedom proceeding, the opinion repositions the FTC as top cop on the Open Internet and broadband privacy beats.

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.