Commissioner Starks most recently served as an Assistant Bureau Chief in the FCC’s Enforcement Bureau, where he primarily worked on competition and Universal Service Fund matters. He joined the Commission in 2015 from the Department of Justice, where he was Senior Counsel in the Office of the Deputy Attorney General. Prior to that, he was an associate attorney in private practice, a clerk for the U.S. Court of Appeals for the Eighth Circuit, a legislative staffer in the Illinois State Senate, and a financial analyst at Goldman Sachs. He earned a degree in social studies and graduated magna cum laude from Harvard College, and then graduated from Yale Law School.

Joining Commissioner Starks’ staff are three FCC veterans. Daudeline Meme will serve as Acting Chief of Staff and Acting Legal Advisor for wireless and international matters. She previously served as Deputy Chief in the FCC’s International Bureau, Legal Advisor to Commissioner Clyburn, Chief of Staff and Assistant Chief for spectrum issues in the Enforcement Bureau, and in the Office of former Chairman Tom Wheeler. Michael Scurato will be Acting Legal Advisor for media and consumer protection matters. He comes from the Enforcement Bureau, where he served as Special Counsel for the Bureau Chief. He previously served as Legal Advisor for Commissioner Clyburn and as Vice President of Policy at the National Hispanic Media Coalition. Commissioner Starks’ Acting Legal Advisor for wireline and public safety matters will be Randy Clarke, who most recently served as FCC counsel to the Senate Committee on Commerce, Science, and Transportation. Before that he was Acting Deputy Chief of the Wireline Competition Bureau, where he served in various roles since 2004.

Mr. Starks’ swearing in occurred just prior to his first Commission meeting on January 30—a truncated meeting containing no item votes due to the recently-concluded partial government shutdown. Commissioner Starks takes his seat after a long-delayed confirmation process. He was nominated by President Trump on June 4, 2018, and was slated for a quick confirmation alongside the reconfirmation of Republican Commissioner Brendan Carr. In September 2018, Republican Senator Dan Sullivan placed a hold on Commissioner Carr’s reconfirmation due to concerns over the FCC’s management of the Universal Service Fund Rural Health Care Program. Mr. Starks’ confirmation was delayed as a result, as the Senate intended to vote on the nominees as a package. The hold was lifted in late-December 2018 and Congress confirmed both Mr. Starks and Mr. Carr on January 2, 2019, the last full day of the 115th Congress. Mr. Starks’ swearing in was further delayed due to the government shutdown.

The decision is notable because the last three appeals of previous FCC net neutrality orders were heard in the D.C. Circuit. The last time the Ninth Circuit heard a challenge of FCC net neutrality rules was nearly 15 years ago, in Brand X Internet Services v. FCC, which led to the Supreme Court’s seminal opinion on the FCC’s classification of cable modem service in 2004, National Cable & Telecommunications Association v. Brand X Internet Services. The Brand X decision in turn ushered in a decade of deregulatory policy in the broadband ecosystem.

The Ninth Circuit’s most recent foray into broadband policy came last month when an en banc panel held that the “common carrier exemption” in Section 5 of the Federal Trade Commission (FTC) Act—which prohibits unfair and deceptive trade practices—was “activity-based” and therefore that the FTC could bring a suit against AT&T Mobility for alleged violations of Section 5 related to the company’s non-common-carrier broadband service. A previous panel had held that AT&T Mobility was entirely exempt from Section 5 based on its “status” as a common carrier, raising significant questions about the boundaries of FTC and FCC jurisdiction. The en banc decision brings the Ninth Circuit back into harmony with other circuits that have addressed the issue.

We’re monitoring the appeal and will continue to update this blog with developments.

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.

As we previously discussed, the Order effectively reverses the Commission’s 2015 Open Internet Order, reclassifying broadband Internet access service as a lightly regulated Title I "information service" and eliminating the 2015 Order's open Internet rules (while retaining a modified version of the transparency requirement).

The Order will not go into effect until after the Office of Management and Budget completes its Paperwork Reduction Act review, which could take several months. However, last Thursday’s publication is significant because it triggers deadlines for challenges to the Order, both in the courts and in Congress.

The Federal Register publication gives litigants ten days to file petitions for review in federal courts of appeals if they would like to be included in a court lottery to determine the venue for consolidating the Order’s challenges. The following petitions have already been filed:

• New York District Attorney General Eric Schneiderman announced he and 22 other Democratic attorneys general filed a petition for review at the U.S. Court of Appeals for the D.C. Circuit;
• Public Knowledge, Mozilla, Vimeo, National Hispanic Media Coalition, and New America’s Open Technology Institute each filed petitions for review in the D.C. Circuit;
• The California Public Utilities Commission and Santa Clara County each filed appeals in the Ninth Circuit;

Federal Register publication also allows lawmakers to formally introduce a Congressional Review Act (CRA) resolution of disapproval, which would reverse the Order and prevent the Commission from subsequently introducing a substantially similar Order. While CRA resolutions are a powerful tool in the hands of the majority – as we saw with the rollback of the Broadband Privacy Order earlier this year – as the minority party, the Democrats are at a significant disadvantage. Senator Ed Markey, D-MA, and House Communications Subcommittee ranking member Mike Doyle, D-PA, have led the Democrat’s effort to draft a CRA resolution to nullify the Order. At the time of this blog post, the CRA resolution had 50 Senator co-sponsors, including all 49 Democratic senators and Senator Susan Collins, R-ME. President Trump is not expected to support the CRA resolution, even if the measure passed both chambers of Congress.

In addition to activities in federal court and in Congress, 26 states are considering net neutrality legislation, and five state governors have issued executive orders regarding net neutrality following the Commissioners’ December 2017 vote.

We will follow up this blog post with a more comprehensive review of the Restoring Internet Freedom Order soon. In the meantime, contact any of the authors of this blog post for more information on the proceeding.

So what happens now? The FCC has not yet published the text of the Restoring Internet Freedom Order, but we don’t expect any significant changes between the draft item and the final item. Once the item is released, the Office of Management and Budget (OMB) must review the item and publish it in the Federal Register, which will trigger implementation dates (60 days from publication, except for items requiring further OMB approval) and start the clock for parties to challenge the order through an appeal or petition for reconsideration. Based on news reports and the trade press, we expect the following things to happen:

• Several parties will appeal the Order. As has happened after each of the open Internet orders, we expect parties will file federal appeals, and we expect the cases will be consolidated in a single appeal in the U.S. Court of Appeals for the D.C. Circuit. Several parties, including Public Knowledge, Free Press, Incompas, the National Hispanic Media Coalition, and New York Attorney General Eric Schneiderman on behalf of a multi-state lawsuit, are expected to file suit in the near term. The deadline for appeal—for all practical purposes—is ten days after publication in the Federal Register. As we discussed in our earlier blog post on this issue, appellate courts give substantial deference to agency decisions, so long as the ultimate decision addresses the relevant facts and arguments and the outcome is within the zone of reasonable interpretations of the statute. It is possible, therefore, that the court of appeals will uphold the 2017 rollback of the Title II classification without finding that the 2015 ruling was unreasonable.
• Democrats in Congress are working to nullify the Order. Democrats in Congress have already begun the process of trying to nullify the Order through a Congressional Review Act (CRA) resolution. While CRA resolutions are a powerful tool in the hands of the majority—as we saw with the rollback of the Broadband Privacy Order earlier this year—as the minority party, the Democrats are at a significant disadvantage. We don’t expect the CRA resolution to pass, or for the President to sign it if it did.
• Republicans in Congress will attempt to pass net neutrality legislation. We expect Republicans and BIAS providers to push for a bill that enshrines the basic bright-line net neutrality protections (i.e., blocking and throttling) in law, formally classifies BIAS as an information service, and otherwise prohibits the FCC from expanding its net neutrality authority and preempts the states from passing their own net neutrality protections. House Communications Subcommittee Chairman Marsha Blackburn of Tennessee introduced just such a bill on Wednesday (The Open Internet Preservation Act), raising significant concerns from Democrats and representatives of edge providers, such as the Internet Association, that the bill failed to address important protections, including a ban on paid prioritization.
• States will attempt to introduce their own net neutrality protections. In the wake of the Restoring Internet Freedom Order, several states announced initiatives to impose their own net neutrality protections on ISPs operating within their jurisdiction. For example, legislators in Washington state and California have introduced bills to reinstate net neutrality protections, although federal law may preempt such laws. Gov. Inslee of Washington State also suggested using the states’ power as a large purchaser of BIAS and telecommunications services to make net neutrality a condition of state contracting.
• The Federal Trade Commission and Department of Justice will fill the enforcement gap using general consumer protection and antitrust laws. As mentioned above, the Restoring Internet Freedom Order cedes most net neutrality enforcement authority to the FTC. In response to last week’s vote, FTC Acting Chairman Maureen Ohlhausen stated that the agency looks forward to serving as “the cop on the broadband beat.” However, as we’ve discussed in detail in earlier posts, the scope of the FTC’s jurisdiction is still undergoing review in the Ninth Circuit, where the entire court is reviewing (en banc) an earlier decision by the court that the “common carrier exemption” of Section 5 of the FTC Act exempts all activities of common carriers—e.g., telecommunications providers—from FTC jurisdiction (known as a “status-based exemption”). If the Ninth Circuit upholds the earlier panel decision, it would leave many ISPs outside the jurisdictional reach of the FTC and FCC, and would create a “circuit split” between the Ninth Circuit and the Second Circuit (which interprets the common carrier exemption as limited to the common carrier activities of common carriers). Then it would be up to the Supreme Court to resolve the split, unless Congress clarifies or eliminates the exemption. Nevertheless, last week the FTC and FCC forged ahead with a Memorandum of Understanding to coordinate and cooperate on net neutrality enforcement activities and consumer education efforts. Further, in the wake of the vote, the Antitrust Division of the Department of Justice noted that it “stands ready to vigilantly protect American consumers and free markets” from activities of ISPs that violate the antitrust laws. The House Antitrust Subcommittee recently held a hearing to explore the role of antitrust law in protecting consumers from net neutrality harms, which we covered in a separate post.

• Reclassify fixed and mobile BIAS as an information service. The most significant change in the draft Order to the regulatory classification of BIAS. We expect that the Commission will follow through with its plan to reverse the 2015 Open Internet Order’s classification of fixed and mobile BIAS as a common carrier telecommunications service under Title II of the Communications Act, reclassifying BIAS as an “information service” and reinstating the regulatory framework that was in place prior to March 2015.
• Vacate the bright-line rules and the general conduct standard. Having reclassified BIAS as an information service, we further expect the Commission will eliminate the conduct rules adopted in the 2015 Title II Order, including the “bright-line” prohibitions on paid prioritization, blocking and throttling and the 2015 Order’s general conduct rule. The general conduct rule, which raised particular concern from Republican commissioners when it was adopted, prohibited BIAS providers from unreasonably interfering with or disadvantaging the ability of consumers to select, access, and use lawful Internet content, applications, and services, and for edge providers to make such content, applications, and services available to end users.
• Retain, but refactor, the open Internet transparency rule. Contrary to early suggestions, the Restoring Internet Freedom Order likely will not scrap the open Internet transparency rule, which was first imposed in 2010 and later enhanced in 2015. Instead, we expect that the Order will rescind the 2015 Order’s enhancements to the 2010 rule and provide additional flexibility to providers, allowing them to either post the statement on their websites or to submit them to the FCC for posting on a publicly accessible website.
• Return consumer protection authority to the FTC (with caveats). By reclassifying BIAS as an information service, the Order cedes the FCC’s consumer protection authority over BIAS to its sister agency the Federal Trade Commission (FTC). Specifically, while the 2015 Open Internet Order applied core consumer protection provisions of the Communications Act to BIAS providers, including sections 201, 202, 222, and 255, BIAS will now be subject to Section 5 of the FTC Act, which prohibits unfair and deceptive trade practices. Importantly, although the FCC and FTC are actively working on a memorandum of understanding to promote coordination of enforcement efforts, it’s an open question whether the FTC is able to enforce Section 5 against BIAS providers who also provide regulated common carrier services. Specifically, in 2016 the Ninth Circuit ruled that Section 5’s exemption for “common carriers” applied not just to a company’s common carrier activities, but to all activities of a common carrier. As a result of this decision, any BIAS provider that also provides telecommunications services may be shielded from both FCC and FTC jurisdiction. The FTC has appealed the panel decision en banc and the court heard argument in September. How the Ninth Circuit resolves this question – or whether it reaches a result without addressing the jurisdictional question – may impact whether the FTC will be able to be the “cop on the beat” that the FCC Order expects.
• Addresses several procedural issues. The draft Restoring Internet Freedom Order also resolves several procedural issues, denying a request from trade group INCOMPAS to modify protective orders related to four recent major transactions involving BIAS providers, and denying a request from the National Hispanic Media Coalition to incorporate several informal complaint in a subsequent proceeding open for public comment.

Ultimately, we will be back in a familiar location – in appeals over the FCC’s classification of broadband. Three of the FCC’s previous attempts have been before the D.C. Circuit, with two reversals (at least in part) of the FCC’s action and (ironically) one decision sustaining the 2015 decision that this Order will reverse. Appellate courts give substantial deference to agency decisions, so long as the ultimate decision addresses the relevant facts and arguments and the outcome is within the zone of reasonable interpretations of the statute. It is possible, therefore, that both the FCC’s classification of BIAS as a Title II service and its expected reclassification of BIAS could be upheld, so long as the court determines that the decision falls within this traditional zone of deference. If that happens, then it will ultimately be up to Congress to prevent constant flip-flopping of the regulatory regime applicable to these services.

We are tracking and will provide a more complete client advisory when the final Order is released.

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.

The core question discussed at the hearing was whether current antitrust law is sufficient to ensure net neutrality absent FCC rules. The panelists—including FTC Acting Chairman Maureen Ohlhausen and Commissioner Terrell McSweeney; former FCC Commissioner Robert McDowell; and Michael Romano, NTCA Senior Vice President of Industry Affairs and Business Development—and committee members were generally divided down party lines, with Republicans arguing that FCC rules were both unnecessary and counterproductive and Democrats arguing that rules were necessary to ensure an open Internet, free expression, and innovation.

At the same time, all panelists agreed that Congress should eliminate the so-called “common-carrier exemption,” which exempts Title II common carriers from FTC jurisdiction. By eliminating the exemption, the panelists argued that the FTC could assume a greater role in enforcing net neutrality and other consumer protection violations related to the communications industry.

The hearing took place in the midst of ongoing regulatory and judicial proceedings that would define the contours of FTC and FCC jurisdiction with respect to broadband providers. Specifically, the FCC is considering a Notice of Proposed Rulemaking that would dramatically scale back the FCC's earlier 2015 open Internet order--reclassifying broadband internet access as a lightly regulated “information service” and returning primary jurisdiction over broadband services to the FTC. At the same time, the Ninth Circuit has before it a pending rehearing en banc of a 2016 decision that broadly interpreted "common carrier exemption” as applying to all activities of common carrier entities, not just common-carrier activities. As we discussed in an earlier blog post, the original ruling was controversial, and FCC Chairman Ajit Pai has praised the decision to rehear the case.

For more information on the state of play with the current boundaries between FCC and FTC jurisdiction (in the context of consumer privacy), please join us for an ABA Antitrust Section webinar sponsored by the Privacy and Information Security and Media and Technology Committees on November 13, 2017 featuring:

• Jennifer Tatel, Partner, Wilkinson Barker Knauer
• Neil Chilson, Chief Technologist, Federal Trade Commission
• Rick Chessen, Senior Vice President, Law and Regulatory Policy, NCTA – The Internet & Television Association
• Yosef Getachew, Policy Fellow, Public Knowledge

The NPRM seeks to reclassify broadband Internet access service (BIAS) as a Title I information service, and reinstate a prior determination that mobile BIAS does not constitute a commercial mobile service. It proposes, in short, essentially the opposite conclusions as were reached by the Democrat-controlled Wheeler FCC in 2015. By classifying BIAS as an information service, the item seeks to return privacy jurisdiction over Internet service providers (“ISPs”) to the Federal Trade Commission (“FTC”). Furthermore, the NPRM seeks to eliminate the Title II Order’s general conduct standard, and seeks comment on whether to keep, modify, or eliminate the bans on blocking, throttling, and paid prioritization. Moreover, the item questions the wisdom and propriety of the Commission’s oversight authority with respect to the broadband interconnection market. Finally, the NPRM questions the necessity of the Open Internet transparency rule - a non-behavioral disclosure requirement upheld in two forms by the D.C. Circuit.

As described by proponents, the NPRM is a necessary response to regulatory uncertainty and reductions in network investment that resulted from the Title II Order.

As is always the case on matters of net neutrality, this NPRM is highly controversial. Prior to the item even being released, over 1.6 million comments had already been filed in the docket – a number that would have been even higher had the Commission not invoked sunshine rules to prohibit further comments in the week prior to the release of the NPRM.

The text of the NPRM has not yet been released. However, according to a draft of the item, comments will be due on July 17, and reply comments will be due August 16, assuring that the debate will continue into the fall.

The depth of the disagreement was evident in the Commissioners' statements during consideration of the item. FCC Chairman Ajit Pai and Republican Commissioner Michael O’Rielly released statements in favor of the NPRM. Unsurprisingly, Democratic Commissioner Mignon Clyburn vehemently dissented.

Chairman Pai defended the item by citing the robust growth of BIAS under the prior Title I regime, claiming the FCC’s utility style regulation under Title II was stifling investment in broadband networks, and lamenting the chilling effects of regulatory uncertainty on "pro-consumer" plans such as wireless zero rating and sponsored data services. He also claimed that the Title II Order damaged small carriers that struggled under the weight of the compliance costs associated with the 2015order. Furthermore, Chairman Pai claimed that the Title II Order’s general conduct standard would result in DC lawyers micromanaging the complex technical decisions of network engineers in ways that would stifle innovation and threaten the viability of next-generation 5G service.

Commissioner O’Rielly asserted that the Title II Order leaped to prohibitive conclusions on the basis of insufficient evidence (such as with the ban on paid prioritization), and welcomed the NPRM as a chance to reassess the validity of prior conclusions through cost-benefit analysis. He also emphasized the importance of the Commission reaching a conclusion with respect to whether or not BIAS is an interstate service, since an affirmative conclusion in that regard could preclude certain state privacy laws currently under consideration.

However, Commissioner Clyburn blasted the NPRM as an unnecessary and harmful abdication of the Commission’s responsibilities to protect consumers and promote competition. She warned that the proposal leaves too much discretion for ISPs to self-police, relies on questionable assumptions about investment in broadband infrastructure, and is myopic in its economic analysis insofar as it fails to account for the benefits of robust Open Internet rules for the broader Internet economy (i.e. edge providers). Finally, she touted the benefits of an Open Internet for those most vulnerable in our society, and expressed concern that reclassification may harm other efforts of the Commission to facilitate communications access for low-income Americans.

If the terminology is any indicator, neither side is likely to give ground. Democrats touted the 2015 order as "Protecting the Open Internet" while the Republicans have titled this proceeding as “Restoring Internet Freedom.” This NPRM certainly is the latest word on the subject, but it is unlikely to be the last.

The original Ninth Circuit decision was notable because it held that the “common carrier exemption” in section 5 of the FTC Act—which excludes common carriers from FTC jurisdiction—was “status based” rather than “activity based,” and as such AT&T was not subject to the FTC’s jurisdiction even for non-common-carrier activities. The original decision had the effect of resetting the jurisdictional boundaries between the FTC and the Federal Communications Commission (FCC) and removing a wide swath of the telecommunications and technology ecosystem from the FTC’s jurisdictional reach.

In a statement, FCC Chairman Ajit Pai applauded today’s order, noting that it will make it “easier for the FTC to protect consumers’ online privacy” and “strengthens the case for the FCC to reverse its 2015 Title II Order,” which classified broadband Internet access service (BIAS) as a common carriage "telecommunications service" and established the FCC's current open Internet rule framework. The 2015 Title II Order is now the subject of a draft Notice of Proposed Rulemaking scheduled for a Commission vote at its May 18, 2017 open meeting.

First, the Commission proposes to reclassify BIAS as an information service and reinstate the determination that mobile BIAS is not a commercial mobile service. On both accounts, the NPRM essentially reverts to the policy determinations and justifications that underlay the Commission’s earlier classifications of fixed and mobile BIAS as information services, and seeks comments on those views. In support of its position, the NRPM looks to the statutory text of the 1996 Telecommunications Act, Commission precedent, and public policy considerations.

Second, the Commission seeks comment on the effect of the regulatory frameworks that the Commission adopted in its Title II Order. Specifically, it seeks comment on the FCC’s earlier decision to forbear from applying certain provisions of Title II to ISPs while imposing others, including section 222, which pertains to customer proprietary network information (CPNI). The NPRM also discusses the fate of the FCC’s Lifeline program, proposing to maintain Lifeline support for broadband, but apparently limiting such support to ”‘the provision, maintenance, and upgrading’ of broadband facilities capable of providing supported services.” Finally, the NPRM asks how reclassification of BIAS as an information service would impact other issues, such as pole attachments and infrastructure investment, and seeks proposals on how to further encourage broadband deployment.

Third, the NPRM seeks comment on the existing open Internet rules and whether to “keep, modify, or eliminate them.” Specifically, the NPRM:

• proposes to eliminate the Title II Order’s “general conduct” standard and the list of factors underlying it;
• asks whether the FCC’s ex ante bright line rules (i.e., no blocking, no throttling, no paid prioritization, and transparency) are necessary at all;
• proposes to retain the reasonable network management exception for any rules it does not eliminate;
• asks whether to apply any rules it retains to mobile BIAS; and
• asks whether it should retain the enforcement procedures established in the Title II Order, including its informal and formal complaint procedures, advisory opinions, the role of the open Internet “ombudsperson” charged with representing consumer interests, and delegated authority to FCC bureaus for further rulemaking.

Finally, the NPRM proposes to conduct a cost-benefit analysis as a part of its new proceeding. Specifically, the NPRM seeks comment on how to conduct such an analysis and the importance of such an analysis, and proposes to rely on the Office of Management and Budget’s Circular A-4, Section E, which compares a baseline scenario to the proposed framework.

So what can we glean from the draft NPRM? Like Congress’s joint resolution rescinding the FCC’s 2016 Privacy Order, the Restoring Internet Freedom NPRM seeks to turn back the clock to immediately before the Title II Order was introduced. Despite occasional acknowledgement of existing rules and consumer protection objectives, the overall thrust of the NPRM is deregulatory. The key question for the Commission, then, is what, if anything, will remain from the existing open Internet framework, and how, if at all, the FTC will take up the mantle of broadband cop on the beat if the Commission reclassifies BIAS as an information service. At this stage, it’s still too early to tell. Stay tuned for more as we approach the Commission’s May 18^th vote and gain greater clarity on comment filing deadlines.

During an event at the Newseum in Washington, D.C., Chairman Pai announced that he would present a Notice of Proposed Rulemaking (NPRM) to reassess many aspects of the 2015 Open Internet Order, which reclassified broadband Internet access service (BIAS) as a Title II telecommunications service and imposed a number of common-carrier style regulations on BIAS. On May 18, 2017, Chairman Pai will ask for a Commission vote on the NPRM at the Commission’s monthly open meeting.

While many questions remain about the specific objectives of the item, according to Chairman Pai, the NPRM contains the following core objectives:

• Reclassification. The FCC seeks comment on reclassifying BIAS from a Title II telecommunications service to a Title I information service, returning to the status quo before the 2015 Open Internet Order.
• Reducing Uncertainty. The FCC seeks comment on eliminating the multi-factor general conduct standard contained in the 2015 Open Internet Order. This standard was the basis, for example, for the Wireless Bureau’s 2016 investigations into wireless carrier “free data” programs.
• Assessing Bright-line Rules. The Commission seeks comment on what ought to be done with respect to the existing bright line rules prohibiting blocking, throttling, and paid prioritization of BIAS traffic.

The FCC will release the draft text of the NPRM tomorrow. We will follow up as more information becomes available.

In the 2015 Open Internet Order, the FCC adopted enhanced transparency disclosure requirements for Internet service providers by requiring providers to disclose promotional rates, all fees and/or surcharges, all data caps and allowances, and additional network performance metrics (e.g., packet loss).

Initially, the Order exempted providers with 100,000 or fewer broadband connections (small providers) from such reporting transparency obligations for one year. However, former Chairman Wheeler’s FCC allowed such obligations to expire.

The FCC’s actions on Thursday restored the small carrier exemption, so that small providers will be exempt from reporting obligations for the next five years. They also expanded the exemption by changing the small provider threshold from 100,000 or fewer broadband connections to 250,000 or fewer broadband connections.

The Commission’s decision to expand the scope of the small carrier exemption was not without controversy. Commissioner Clyburn dissented from the Order, claiming that the expansion will allow some of the largest Internet service providers in the country to exempt their subsidiaries which have under 250,000 connections. She also claimed the Commission did not provide a sufficient rationale for changing course from FCC precedent.

Although the Order was approved on February 23, it is retroactive to January 17. Despite this development, small carriers remain subject to the requirements of the 2010 transparency rule, which include network management practices, network performance characteristics, and commercial terms of service.

For questions about transparency requirements or other aspects of Open Internet enforcement, feel free to reach out to the authors of this article or your regular Kelley Drye contact.

In light of this development, the FCC will be active far sooner than was generally expected. Typically, due to the grueling nomination process, it can take anywhere from six to nine months for a new chairman to assume the role. However, the selection of a current FCC commissioner will mean that Chairman Pai can immediately start dismantling some of the hallmarks of the previous administration, including the 2015 Open Internet Order and 2016 Broadband Privacy Order.

I. The Draft Framework

The Report first establishes several overall considerations for analyzing zero-rated or sponsored data plans under the 2015 Open Internet Order. These include considerations about whether the specific offering affects Internet openness, whether the practice violates the three bright-line open Internet rules (no blocking, no throttling, and no paid prioritization), and whether the practice violates the catch-all general conduct standard, which prohibits broadband providers from unreasonably interfering with or unreasonably disadvantaging end users or edge providers’ use of the Internet. With respect to the general conduct standard, the Commission analyzes several factors based on a series of questions:

• Non-Discrimination/Competitive Effects: Is zero-rating available, or available on materially favorable terms, only for a service directly affiliated with the BIAS provider? Does the zero-rating plan create exclusionary arrangements between the BIAS provider and unaffiliated content providers that raise reasonable competitive concerns from excluded parties? If a BIAS provider charges edge providers to be zero-rated, are those charges imposed on affiliated and unaffiliated entities effectively on a non-discriminatory basis?
• Data Cap: Is the associated data cap sufficiently high as to make all data effectively zero-rated for the overwhelming majority of customers, both on a static and forward-looking basis, such that consumers really are not facing a choice between zero-rated and non-zero-rated activity?
• Choice and End User Control: Do consumers and edge providers have the ability to easily opt into and out of the zero-rated plan if they prefer to remain with offers in line with those available at the time the plan was introduced, or to control other aspect of using the zero-rated service? Do consumers have easy alternatives for switching to other BIAS providers with different zero-rating practices?
• Transparency: Are consumers and edge providers fully informed about the terms and conditions of the zero-rated plan in a timely, easy to understand and easy to execute manner? Do consumers have the ability to easily track usage and take actions to avoid hitting the cap without significant impacts on their usage behaviors?
• Other: Does the zero-rated traffic serve a civic engagement purpose, such as increasing broadband adoption or serving health care, education, government, non-profits, etc.? Is the offering a functionally-equivalent, non-BIAS data service being used to evade the net neutrality rules?

II. Application to Mobile Broadband Zero-Rated and Sponsored Data Arrangements

With this framework in mind, the Report analyzes four zero-rating or sponsored data arrangements: (1) T-Mobile Binge On; (2) AT&T Data Perks; (3) AT&T Sponsored Data; and (4) Verizon FreeBee Data 360.

The Commission first finds that neither Binge On nor Data Perks is likely to violate the general conduct standard. With respect to Binge On, the Report finds that the service is unlikely to violate the general conduct standard because T-Mobile does not charge edge providers or end users for the service; consumers can disable it at any time; its technical standards do not appear to exclude edge providers; and T-Mobile provides “little streaming video programming of its own” and “does not compete substantially with downstream edge providers that supply video programming using Binge On.” Similarly, the Report finds that AT&T’s Data Perks service does not violate the general conduct standard because it allows consumers to get additional data to use for whatever purpose they choose and “most Data Perks participants are not marketing services that run over BIAS.”

However, the Report concludes that AT&T’s Sponsored Data program and Verizon FreeBee Data 360 are both likely to violate the general conduct standard. AT&T’s Sponsored Data program, the Report asserts, “likely obstruct[s] competition for video programming services delivered over mobile Internet platforms and harm[s] consumers by inhibiting unaffiliated edge providers’ ability to provide such service to AT&T’s wireless subscribers” while favoring affiliated content from DIRECTV. In particular, the Report finds that “[a]ll indications are that AT&T’s charges far exceed the costs AT&T incurs in providing the sponsored data service.” The Report similarly finds that Verizon’s FreeBee data favors its own zero-rated go90 content over unaffiliated content, although it notes that the magnitude of any anticompetitive effect likely is less than that of AT&T’s program, which provides access to full-length programming, since go90 only offers a limited array of short video and sports programming. Despite this lower risk of harm, the Report concludes that “there is the same potential for discriminatory conduct in favor of affiliated services, and its competitive impacts in the short-form portion of the market exist today,” and in the future Verizon could decide to include long-form content in its FreeBee program.

III. Key Takeaways from the Report

The framework outlined in the Report is a tentative draft, expressing concern, rather than the adoption of a rule, forfeiture order, or consent decree. Further, the Report was issued as Chairman Wheeler is leaving and the Republicans are taking control. Republican Commissioners Pai and O’Rielly support zero-rated (“free data”) programs and oppose applying Title II and the open Internet rules to broadband providers. As a result, the Report should not have a significant impact on industry practices.

In the 2015 Order, the FCC adopted enhancements to the transparency rule, which covers both content and format of disclosures by providers of broadband Internet access service. However, OMB had been reviewing the enhanced transparency rule, after receiving complaints that the rule violated the Paperwork Reduction Act (PRA). The Commission made clear that it would announce an effective date for the enhanced transparency rule in the Federal Register in wake of OMB approval.

Now that OMB approval is complete, the FCC has sent a notice for publication to the Federal Register, and clarified that the enhanced transparency rule goes into effect January 17, 2017.

The End of the Small Provider Exemption:

The completion of OMB review coincides with the end of a temporary exemption for small Broadband Internet access service (BIAS) providers from the enhanced transparency rule.

The 2015 Open Internet Order expanded the transparency rule from the 2010 Open Internet Order by creating new obligations, requiring providers to disclose promotional rates; all fees and/or surcharges; all data caps and allowances; and additional network performance metrics (e.g., packet loss).

The 2015 Open Internet order exempted small providers (i.e., those with 100,000 or fewer broadband connections) from these new transparency obligations.

Initially, on December 15, 2015, the Federal Communications Commission’s (FCC’s) Consumer and Governmental Affairs Bureau (CGB or the Bureau) issued a Report and Order extending the exemption for one year. The FCC could have opted to make this exemption permanent, but did not take that course of action.

For additional information regarding the enhanced transparency rule, the small provider exemption or the 2015 Open Internet Order, please contact a member of Kelley Drye’s Communications Practice.

The FCC’s settlement requires T-Mobile to pay a total of $48 million. It further requires T-Mobile to clearly and conspicuously disclose any material limitations on the amount and speed of mobile data for its “unlimited” plans, and includes reporting and training obligations.

Facts and Law Underlying Liability

According to the FCC, T-Mobile advertised “unlimited” mobile data service without adequately disclosing that during times of high network usage characterized as “contention”— defined as network stress that does not rise to the level of “congestion” (i.e., where Internet access begins failing altogether)—an algorithm would limit the data speed of its customers who had used more than a certain, preset amount of data. Customers whose data was de-prioritized or throttled by T-Mobile experienced network speeds even slower than other users connected to the same cell site. T-Mobile received hundreds of complaints from consumers whose data service was affected by these throttling practices. In considering whether T-Mobile violated the FCC’s 2010 Open Internet Order, the FCC pointed to the Transparency Rule that requires Internet service providers (“ISPs”) to publicly disclose accurate information about the technical and financial terms under which they offer services. The purpose of this rule is to enable consumers to make informed choices about which services to buy and how to use them. While ISPs may be permitted to implement data management practices (e.g., throttling) to address network congestion, the Transparency Rule requires that ISPs provide specific information related to their practices such as the types of traffic subject to practices; purposes served by practices; practices’ effects on end users’ experience; criteria used in practices, and the typical frequency of congestion usage limits and the consequences of exceeding them. At a minimum, ISPs must prominently display or provide links to these disclosures “on a publicly available, easily accessible website that is available to current and prospective end users.”

In addition to requiring the disclosure of information related to data management practices, the FCC’s 2015 Open Internet Order made clear that the Transparency Rule requires an ISP’s advertising to be accurate and consistent with its disclosed practices. As noted by the FCC, “a provider making an inaccurate assertion about its service performance in an advertisement, where the description is most likely seen by consumers, could not defend itself against a Transparency Rule violation by pointing to an ‘accurate’ official disclosure in some other public place.” “Allowing such defenses,” according to the FCC, “would undermine the core purpose of the Transparency Rule.” In its investigation as to whether T‑Mobile violated the Transparency Rule, the FCC determined that several necessary disclosures were missing in T-Mobile’s advertising. Specifically, the FCC determined that from August 2014 until June 12, 2015, T-Mobile’s disclosures did not inform consumers of (i) the specific data threshold that triggered the de-prioritization; (ii) how application of the de-prioritization could impact consumers’ ability to use data services; (iii) the specific speed reductions that consumers could face; and (iv) the types of apps and data services that could be adversely affected.

Terms of the Consent Decree

Under the terms of the settlement, T-Mobile has agreed to pay a total of at least $48 million and to adhere to certain conduct provisions. Key terms of the monetary payment include:

• Civil Penalties: T-Mobile will pay a $7.5 million civil penalty to the FCC.
• Consumer Benefits: T-Mobile will spend up to $35 million in consumer benefits, including (i) giving a discount of 20%, up to $20, on the price of any in-stock accessory to certain customers with “unlimited” data plans and (ii) giving a 4 GB upgrade to “unlimited” plan customers who subscribe to a mobile data service line under the T-Mobile or MetroPCS brands.
• Broadband Service and Devices to Schools: T-Mobile will spend at least $5 million in providing mobile broadband service and devices to students at low-income schools. To the extent that the $35 million in consumer benefits is not spent, the unspent money will be added to the $5 million in broadband service and devices to schools.

• Update Disclosures: T-Mobile will update its disclosures to clearly explain how the “Top 3 Percent Policy” works and the impact it has on consumer data speeds.
• Unlimited Clarification: If T-Mobile continues to advertise data service as “unlimited,” it must clearly and conspicuously disclose all material restrictions (including its “Top 3 Percent Policy”) on the amount and speed of mobile data.
• Notice: T-Mobile must notify consumers when they are approaching the threshold before the “Top 3 Percent Policy” goes into effect.
• Consumer Broadband Label: T-Mobile must adopt the FCC’s “Consumer Broadband Label” in conjunction with its other Open Internet disclosures within 90 days.

Observations:

This latest FCC enforcement action demonstrates the agency’s continuing commitment to aggressive and high profile enforcement in the consumer protection arena. Last June, the FCC proposed to fine AT&T $100 million for similar conduct related to unlimited data plans. Further, the FCC recently released guidance on complying with the Transparency Rule (raising challenges from industry) and consumer-facing broadband disclosures. The FCC also continues to examine the permissibility of sponsored data plans under its open Internet rules.

In the wake of the FCC’s 2015 Open Internet Order, which reclassified broadband services as common carrier services (taking those services outside the scope of the FTC’s jurisdiction), and the Ninth Circuit’s recent decision in FTC v. AT&T, which found that the common carrier exception to the FTC’s jurisdiction is status based rather than activity based (eliminating the FTC’s jurisdiction over ISPs), the FCC’s role as a consumer protection watchdog is likely to continue to grow.

As a result, broadband providers should reexamine their network management practices, advertising, and transparency statements to ensure compliance with FCC rules and guidance.

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

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.