The 9th U.S. Circuit Court ruled this week that common carriers are exempt from all FTC Act Section 5 actions. The ruling gives AT&T a legal victory over the Federal Trade Commission, but has more far-reaching implications than even AT&T may have anticipated.
When AT&T became the exclusive service provider for iPhones in the United States in 2007, it offered iPhone customers an “unlimited” mobile data plan. This plan allowed users unlimited data for a fixed monthly rate. AT&T stopped offering the unlimited plan in 2010 and grandfathered preexisting unlimited data plans into its new tiered-plan system. In 2011, AT&T began “throttling” the remaining unlimited data plans. This entailed slowing data speeds for those customers after they had exceeded a certain data threshold.
The FTC filed a complaint under Section 5 of the FTC Act alleging two claims against AT&T stemming from the throttling program: that the throttling was an unfair act because the initial agreements said nothing about modifying the service, and that AT&T had failed to adequately disclose the throttling program to consumers.
Section 5 empowers the FTC to prevent corporations from using “unfair or deceptive acts or practices in or affecting commerce” and is used frequently as an enforcement mechanism in consumer protection actions, including on privacy or data security grounds. Section 5 also lists an exemption for certain entities, including “common carriers subject to the Acts to regulate commerce.” At the time of the complaint, AT&T was only considered a common carrier regarding landline phone and mobile voice service, not mobile Internet access. Though the FCC’s 2015 Open Internet Order reclassified mobile data service as a common carrier service, the throttling occurred before this change. The FTC alleged that the exemption for common carriers applies only to the extent that the service in question is a common carrier service and that at the time of throttling mobile data service was not classified as such.
The US District Court in California agreed with the FTC, stating, “the common carrier exception applies only where the entity has the status of common carrier and is actually engaging in common carrier activity.” AT&T then appealed this ruling to the 9th Circuit, where a panel this week ruled that the Section 5 exemption applies to all entities with common carrier status regardless of whether the activity in question is a common carrier activity.
9th Circuit ruling
The 9th Circuit’s ruling turned on whether the Section 5 exemption was status-based or activity-based. A status-based exemption exempts an entity entirely from Section 5 authority so long as the entity has the “status” of a common carrier. An activity-based exemption exempts an entity from Section 5 authority only insofar as the activity it has engaged in is a common carrier activity. The 9th Circuit based its determination that the common carrier exception is status-based on the language of the statute and the structure of the FTC Act.
The 9th Circuit maintained that the “plain language” of the statute refers solely to entities with “common carrier” status and makes no reference to activities affecting the exemption’s application. In the same section, “banks,” “savings and loan institutions,” and “Federal credit unions” are also exempted, and the FTC acknowledges those exemptions are status-based. According to the court, the statute’s phrasing similarity indicates that all of these exemptions are meant to be status-based.
In contrast, the 9th Circuit pointed out that the exemption for “Packers and Stockyards” found within the same section specifically states that it applies to entities “insofar as they are subject to the Packers and Stockyards Act.” The court viewed this language as indicating an activity-based approach. The absence of parallel “insofar as” language for common carriers was interpreted as an indication that Congress did not intend the common carrier exemption to be activity-based.
The ruling addressed – and set aside – several arguments based on statutory interpretation opposing the status-based approach. The FTC will now likely seek review of the 9th Circuit panel decision either by the entire 9th Circuit sitting en banc or through an appeal to the Supreme Court. If the FTC requests a rehearing en banc, it must argue that the case involves a question of “exceptional importance” that deserves to be weighed by the entire court. A decision that conflicts with another U.S. Court of Appeals will often meet this standard, but there is room for debate on the significance of a circuit split in this case. A circuit split could also make it more likely that the Supreme Court would grant certiorari.
An appeal would draw FTC authority into heightened judicial focus. The LabMD ruling, which may find its way to the Supreme Court, has already prompted questions regarding the scope of FTC authority. The two cases together represent a judicial effort to determine the bounds of FTC authority.
Potential problems with the ruling
The 9th Circuit determination that the common carrier exemption is status-based has serious implications for regulatory authority in the common carrier space – and beyond. Importantly, even as the FTC is barred from bringing actions against common carriers based on their common carrier status, the FCC may be unable to fill the regulatory gap.
The FCC may be unable to regulate non-common carrier activities committed by common carriers. The FCC derives its authority over telecommunications carriers (treated as common carriers) from Title II of the Communications Act. However, the Act specifically states that “a telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services.”
Therefore, the ruling potentially creates a lacuna, a regulatory gap or loophole, where neither the FTC nor FCC can regulate a company. A common carrier engaged in an activity that does not provide telecommunications services, such as deceptive advertising or content services, would be outside the remit of the FCC’s Title II authority because of the Communication Act’s activity-based exemption and outside of the FTC’s authority because of the FTC Act’s status-based exemption. An additional barrier to FTC enforcement lies in the 2015 Open Internet Order – also known as the Net Neutrality Order – which classified mobile data services as a common carrier service. The FCC may be able to bring an enforcement action under other provisions, but those are unlikely to provide complete coverage of non-carrier activities by common carriers.
Another interesting aspect of this ruling is the conflict between the 9th Circuit’s interpretation and historical agency interpretation of the exemption. The FTC has consistently maintained that it may address non-common carrier activities engaged in by common carriers. Moreover, as recently as last November, in their FTC-FCC Consumer Protection Memorandum of Understanding, the FCC and FTC have agreed with an interpretation supporting the FTC’s authority to regulate non-common carrier activities of common carriers. The Memorandum states, “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.” The 9th Circuit gave the agencies’ interpretations little deference in the case. Revealing a possible circuit split, the Fourth Circuit, in contrast, agreed with the agencies’ interpretation in a previous case.
Importantly, the 9th Circuit ruling prompts a question regarding how much common carrier action is required for an entity to attain the status of a common carrier and, thus, benefit from the common carrier exemption. This is particularly important in a day and age when communication providers vertically consolidate up and down the value chain. Conversely, online providers may acquire or launch new activity that can be classified as a common carrier service. The only guidance the ruling gives is a reference to the House Report on the Packers and Stockyards amendment that declared that the FTC lacked jurisdiction over several large national grocery chains because they owned “a 20 percent or more interest in packinghouses.” It is uncertain whether the same standard is applied to telecommunications carriers or whether the designation is based on percentage of overall business, income, resource allocation, or another means of determination.
With the AT&T Mobility case, a federal court of appeals has clipped the wings of the FTC and significantly limited its authority to enforce in a space in which it has been increasingly active. While the FTC is likely to appeal the case, it is uncertain how other courts will interpret the regulatory framework. The current ruling exposes a regulatory blind spot and the implications will remain relevant and vital in markets ranging from telecommunication services to online content delivery.
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