Recent Items

9th Circuit Shoots Down FTC’s Consumer Protection Authority Over Common Carriers

Apologies to readers for posting this post closer to lunch than to breakfast. (It’s ironic that given the content of this post, as I tried to post, I experienced my own internet access problem.)

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends most of her time in India and other parts of Asia researching a book about textile artisans. She also writes regularly about legal, political economy, and regulatory topics for various consulting clients and publications, as well as writes occasional travel pieces for The National (http://www.thenational.ae).

A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued a sweeping decision, Federal Trade Commission v AT&T, on Monday that drastically restricts the Federal Trade Commission’s (FTC) consumer protection authority over companies that offer “common carrier” services (e.g., telephone services, mobile data, and internet services) whether or not these services comprise their core business. Moreover, since no other federal agency currently has the necessary scope of regulatory authority over this area, if this decision stands, significant activities of such companies would be essentially unregulated.

As the Washington Post reports:

The ruling could wind up giving Google and Facebook — not to mention other companies across the United States — the ability to escape all consumer-protection actions from the FTC, and possibly from the rest of government, too, critics claim, unless Congress intervenes.

Background and What the Decision Says

The FTC had brought an action against AT&T over the adequacy of the company’s disclosures regarding its data throttling plan, under which AT&T intentionally and substantially reduced the data speed of customers to whom it had sold unlimited mobile data plans.

It’s worth quoting from the opinion at length; the court clearly understood what type of behavior AT&T had engaged in:

AT&T offers mobile voice service and mobile data service to its customers. Mobile data service allows customers with smartphones to access the internet using AT&T’s mobile data network. Customers with mobile data service can, among other things, send and receive email, use GPS navigation, and stream videos.

In 2007, AT&T became the exclusive service provider for the Apple iPhone in the United States. At that time, AT&T began offering iPhone customers an “unlimited” mobile data plan, allowing users access to an unlimited amount of data for a fixed monthly rate. Starting in June 2010, however, AT&T stopped offering unlimited mobile data plans to new customers. Since then, it has required new customers to select one of various “tiered” data plans, under which a customer has a set data allowance per month for a fixed monthly rate and incurs additional charges for any data usage in excess of the set data allowance. Customers with preexisting unlimited data plans were grandfathered into the new system to avoid encouraging them to switch to a different service provider.

In July 2011, AT&T decided to begin reducing the speed at which unlimited data plan users receive data on their smartphones. Under AT&Ts data throttling program, unlimited data plan customers are throttled for the remainder of a billing cycle once their data usage during that cycle exceeds a certain threshold. Although AT&T attempts to justify this program as necessary to prevent harm to the network, AT&T’s throttling program is not actually tethered to real-time network congestion. Instead, customers are subject to throttling even if AT&T’s network is capable of carrying the customers’ data. AT&T does not regularly throttle its tiered plan customers, no matter how much data those customers use.

The FTC filed an action against AT&T, relying on its regulatory authority under Section 5 of the FTC Act.  The FTC has long used this authority to regulate deceptive advertising over many years in a wide range of situations.

So, it seems that what AT&T was providing– a “throttled” service– was by no stretch of the imagination “unlimited”. Instead, what we see here is a textbook example of a crapification of a service, after the initial contract was entered into, with AT&T opting to provide a less crappy service– the so-called tiered plans– to subsequent customers, under new contracts, and for whom it could charge more for the pleasure. And AT&T neglected to inform those original customers– the ones who thought they’d purchased and continued paying for an unlimited plan– that they weren’t getting what they paid for.

So why did the court toss the FTC’s case?

First, it’s necessary to understand that section 5 of the FTC Act includes an exemption from regulation for common carriers. The FTC had argued for an activity-based exemption. Translated into plain English that means that a company– even if a common carrier– would be exempt from the FTC’s consumer protection authority only when it engaged in common carrier activities.

But the court rejected this argument and decided instead that based on the language and structure of Section 5 of the FTC Act, the common carrier exception was a status-based exemption. That means a common carrier was exempt from regulation purely based on its status as a common carrier, regardless of the type of activities it engaged in. The court decided  that since AT&T was as a common carrier, it was not covered by the FTC’s consumer protection regulatory authority,  and so it  dismissed the FTC’s lawsuit.

Implications

This decision is hugely significant, and according to the law firm Davis Wright Tremaine:

reflects a major rebuke of the FTC’s prior interpretation of its authority under Section 5 under which the agency regulated the non-common carrier activities and services of companies otherwise classified as common carriers. . . . The decision also raises a host of new questions regarding who falls within (or outside of) the FTC’s jurisdiction.

The decision effectively creates a regulatory gap over any activity a company wants to engage in, for companies deemed to be common carriers. The Federal Communications Commission (FCC) has authority to regulate common carrier activities, but that is narrowly defined, and it doesn’t cover many activities at issue.

Now, what does this have to do with Facebook and Google? They weren’t parties to the lawsuit, nor is either mentioned in the opinion.  Well, since the FTC cannot touch common carriers, and the FCC currently can only regulate those aspects of telecommunications companies that offer either internet and telephone services, the decision means that any company that creates or purchases either a phone company or an internet service provider (ISP) can escape federal consumer protection regulations entirely. The FCC currently seeks to impose comprehensive privacy and data security regulations on ISPs,  and conceivably, these could fill some– but not all–  of the regulatory gap.

The Bottom Line

Again from the Washington Post:

Consumer protection advocates say [the decision] would allow any company to evade FTC oversight simply by launching or buying a small telecom service. Google already benefits from this line of reasoning because it operates Google Fiber. A company such as Facebook, whose goal is to connect a billion additional people to the Internet, could acquire its own broadband provider and claim common-carrier status.

Verizon has recently acquired AOL and Yahoo and since it already provides telephone and internet services, qualifies as a common carrier. Under this decision, the broad range of its activities would be similarly exempt from FTC regulation. Other companies are also attempting to figure out the implications of the decision for their activities.

I emphasize again the wide scope of the decision. The court says the FTC lacks authority to regulate common carriers. So no matter how egregious the company conduct– however false, deceptive, misleading, or otherwise problematic it might be– the FTC would be unable to do anything about it. Nor, at the moment, would any other federal agency.

The AT&T case concerned regulation of advertising. But since the court’s decision rejected outright the FTC’s claim to be able to regulate any activities of companies deemed to be common carriers, it is not limited to deceptive advertising alone. Facebook and Google gorge themselves on their access to your personal data and the decision prevents the FTC, the agency that has a record of regulating privacy issues, from exercising any oversight of these activities (provided that these or other companies make the appropriate acquisitions or otherwise position themselves to qualify as common carriers).

The FTC is reportedly pondering an appeal of this decision and the issue may eventually find its way to the Supreme Court.  Whether or not that court weighs in, to correct the situation and allow for regulation to occur by the FTC (or the FCC for that matter), it may be necessary for Congress to act.

Print Friendly, PDF & Email

41 comments

  1. Vatch

    It may or may not be relevant that each of the three judges was appointed by George W. Bush. I hate to say it, because I dislike Hillary Clinton intensely, but this event provides an argument against voting for a Republican Presidential candidate such as Donald Trump. I’m sure that Libertarian Gary Johnson approves of this judicial decision.

    https://en.wikipedia.org/wiki/William_Q._Hayes

    https://en.wikipedia.org/wiki/Sandra_Segal_Ikuta

    https://en.wikipedia.org/wiki/Richard_Clifton

    1. JTMcPhee

      Do we really think Clinton would nominate judges who would be any less perverse? Look at OBombers appointments, and who owns shares in Clinton Enterprises.

      I wonder if any state attorneys general are going to try to “protect the public” in this area going forward with the few state laws that could apply, anything the KochALECs have not gutted? In lawyerese, I’d have to wonder if a regulatory vacuum can be argued by AT&T’s shit-stocking lawyers to constitute “federal pre-emption.” https://en.m.wikipedia.org/wiki/Federal_preemption

      Gee, will the DoFokkingJ be asking for a rehearing en banc from the Ninth, or approaching the Supremes on the issue?
      Nah, why even ask? “The forms have been observed! Carve the roast, make mine the filet!”

      Shoot, I keep forgetting that the Rule of Law is just a drifting miasma redolent of violence and corruption, using the frame of “law” that all societies unfortunately need some of as nothing more than a gobbet to hang the innocent and powerless from. My apologies to the Universe that as an attorney, I made my own little contributions, two decades ago, to the filth…

      When do people get to that point of just burning it all down? Before the Fokkers finish blowing it up? Since the mob is a very blunt object, no good at the complex tasks of undoing the crapification and corruption…

      1. Vatch

        Do we really think Clinton would nominate judges who would be any less perverse? Look at OBombers appointments

        I don’t know. Obama’s appointments to the executive branch have been disastrous (Eric Holder and Mary Jo White are examples). I don’t know whether his judicial appointments have been quite so bad. Can anyone provide some examples of genuinely bad judicial appointments by Obama?

          1. Vatch

            That’s a valid example. However, he hasn’t been confirmed, and he might never be confirmed. Are there other examples? Over the years, the Republicans put a lot of disturbing judges on the bench. In addition to the three in the current case, there are Supreme Court justices Clarence Thomas, Samuel Alito, and the late Antonin Scalia, who was praised by Trump earlier this year.

            1. JTMcPhee

              On the other hand, Eisenhower put Earl Warren on the bench, wild lefty. Thinking he would be reliably bought in. I think the vetting and “management” have gotten tighter since.

              1. Jerri-Lynn Scofield Post author

                They have indeed– I’m in the process of trying to put together a post on the composition of the Supremes. Stay tuned……

                1. Vatch

                  That will be useful. Thanks.

                  However, the composition of the appellate courts is very important, too. Has Obama appointed appellate judges who are ideologically similar to the judges appointed by Bush? Even the district judges can be important. Judge Jed Rakoff, of the Southern District of New York, has been a heroic thorn in the side of the do-nothing S.E.C. Rakoff was appointed by Bill Clinton.

                    1. Vatch

                      Of course. Please list several of the far right wing federal judges who were appointed by Obama. They probably exist, but I don’t know who they are.

                      I need this information for use in family discussions with a person who will vote for Hillary Clinton solely because he thinks that she will appoint better judges than Trump will.

                      Thanks in advance.

                    1. tegnost

                      no i think clinton will make bad appointments, and don’t see either kagan or sotomeyer as the reincarnation of thurgood marshall, which is actually what we need, not more leading lights from the ivy league. Trump won’t get what congress won’t vote for.

                    2. Vatch

                      That’s a very useful list! Thank you. This will make it easier for non-Republican Trump supporters to tell us which Obama judges are as dangerously right wing as Bush judges. Or maybe they don’t exist. . . .

                      I disapprove of both Trump and Clinton. I’ve found the argument about judicial appointments to be the strongest argument in favor of supporting Clinton. If there’s an effective way to counter this argument, I would like to know what that is.

                2. Uahsenaa

                  I look forward to seeing this. I spent the last few weeks listening to oral arguments from the most recent slate of cases and was astounded to hear in plan language just how bought in to Beltway groupthink the court is. This was especially apparent in the McDonnell corruption case.

                3. Science Officer Smirnoff

                  It helps to recall the comprehensive offensive of Bush-Cheney. . . all the way to U. S. attorneys.

                  The dismissal of U.S. Attorneys controversy was initiated by the unprecedented[1] midterm dismissal of seven United States Attorneys on December 7, 2006, by the George W. Bush administration’s Department of Justice. Congressional investigations focused on whether the Department of Justice and the White House were using the U.S. Attorney positions for political advantage. Allegations were that some of the attorneys were targeted for dismissal to impede investigations of Republican politicians or that some were targeted for their failure to initiate investigations that would damage Democratic politicians or hamper Democratic-leaning voters.[2][3] The U.S. attorneys were replaced with interim appointees, under provisions in the 2005 USA PATRIOT Act reauthorization.[4][5][6] [7][8] wiki

                  Their outstanding move was placing Janice Rogers Brown on the D. C. Circuit (the female Clarence Thomas—except she makes Thomas look like a conservative).

                  1. Science Officer Smirnoff

                    P. S. There is also this juicy blast from the past [bit off topic] in the wiki:

                    On May 2, 2007, the Senate Judiciary Committee issued a subpoena to Attorney General Gonzales compelling the Department of Justice to produce all email from Karl Rove regarding evaluation and dismissal of attorneys that was sent to DOJ staffers, no matter what email account Rove may have used, whether White House, National Republican party, or other accounts, with a deadline of May 15, 2007, for compliance. The subpoena also demanded relevant email previously produced in the Valarie Plame controversy and investigation for the CIA leak scandal (2003).[117]

                    In August 2007, Karl Rove resigned without responding to the Senate Judiciary Committee subpoena claiming, “I just think it’s time to leave.”[118]

                    https://en.wikipedia.org/wiki/Dismissal_of_U.S._attorneys_controversy#Contempt_of_Congress_charges

                    1. Jerri-Lynn Scofield Post author

                      This is all true. But recall, as politically corrupted as the DoJ was under Gonzales, when the dotcom bubble burst, this same Bush Jr. politically-corrupted DoJ successfully prosecuted corporate executives from Adelphi, Enron, and WorldCom, among others, and sent some away to do serious jail time. Under Eric Holder– Obama’s first AG– the DoJ instead followed the “Holder doctrine” and eschewed corporate charges against companies and executives, instead opting for negotiated settlements (often w/ slap on the wrist penalties that were way undersized considering to the magnitude of damage done, especially by TBTF banks, other financial predators, those involved in mortgage servicing abuses, etc ). The DoJ under Obama’s second AG, Lynch, originally followed the Holder doctrine, until that was superseded by the Yates doctrine announced last September. See this NYT summary and I should note, if Dealbook calls the doctrine “horribly misguided” you can bet your pension, savings, and the title to your house that, if anything, that’s an understatement: http://www.nytimes.com/2015/09/12/business/dealbook/justice-dept-shift-on-white-collar-crime-is-long-overdue.html?_r=0

                      The prosecutorial guidelines set out in the Yates doctrine are supposed to be way tougher, but to date I don’t see any huge upsurge in the number of corporations and executives getting charged with anything– or did I miss something?

                      Also, there is some merit to the argument that Dem judicial picks tend to be better. But how the legal system works is more than just a question of who sits on the bench. This discussion of what guidelines the DoJ uses may seem horribly recondite and inside-baseball. I do wish these points were better appreciated by non-lawyers. Understanding the implications of what I’ve very briefly summarized here, IMHO, is far more important than whether prosecutors play for the red or the blue team.

      2. Didn't Change My Tune

        Re JTMcPhee,
        So you were a lawyer on the other side awhile back? But you now vent your spleen, and urge on the crowd, “When do the people get to the point of just burning it down. Before the Fokkers finish blowing it up.” The answer to your question is in your history. We are on the Lomg March, against what you were. It will take persistence, not jumping around, not angry outbursts from the impatient and mercurial. This is a useful article with many thoughtful, informative comments from readers who care and want to educate, not throw it all out the window with self-indulgent bombast.

    2. Science Officer Smirnoff

      The full Ninth Circuit is another political consideration entirely. . . Jerri-Lynn waves ’em all in: go en blanc.

  2. flora

    An overly broad ruling to a narrow question. Is there a zeal to tear down as many regulations as possible before a TPP or TTIP passes, so that such regulations can not be raised again?

    1. hunkerdown

      The TPP obligates governments to pass laws according to certain objectives or pay fines. This, not some momentous signature photo-op, is exactly what the TPP taking effect looks like.

      (One could fairly say that TPP is identitarianism extended to the investor class.)

      1. flora

        ISP and telecommunication service is necessary these days. The IRS wants people to file online. SS and Medicare want people to communicate online, for example. The govt wants everybody to contact them online. But the courts now take the telecom & ISP providers out of the govt regulatory environment? Maybe in 20 years, instead of saying “he got railroaded”, we’ll be saying “he got telecommed”.

  3. L

    This may not be appealed directly to the supreme court. It is possible that they could seek to have it reviewed by the entire 9th circuit En Banc rather than just a single panel. Whether that would change things is another matter.

    1. Jerri-Lynn Scofield Post author

      You are correct. I opted not to include that detail b/c I was trying to simplify things for a non-legal audience. But by using the phrase “find its way to the Supreme Court” I was trying to signal to the cognoscenti that I was aware there was an intervening step (particularly since I’d included the detail that the decision was by a three-judge panel).

      1. JTMcPhee

        Some brave state attorney general might take a stab at AT&T using whatever is left by KochALEC gutting of state law. Not likely, of course, the rot is too pervasive.

        Query whether the barring of federal regulation then becomes somehow a matter of “federal law” such that ” federal pre-emption” would apply. I tried to link the Wiki article on the subject but my post was blocked by Skynet.

  4. tawal

    Talk about Orwellian!?! Is there anything the federal government does that is in the public interest. An educated guess says: IEDs coming to Versailles on the Potomac before 2020.

  5. terriertribe

    Seemingly just in time, this ruling paves the way for Google/Youtube to issue new monitization rules (which they did), whereby they decide if postings are “acceptable” for ad revenue sharing. The first ones to get defunded appear to be political blogs critical of the Clintons. While this does not prevent the bloggers from posting, it means they now have a very expensive hobby.

  6. Carolinian

    Well if the courts are going to gut regulation we consumers will just have to take our cellphone business to one of ATT’s many competitors. Oh wait….

    However on the plus side ATT’s somewhat justifiable chintziness (too much traffic on cell networks can impede access for everyone–do we really want more cell towers?) has led to the proliferation of public wifi networks in restaurants and stores as smartphone owners use their wifi to evade the data caps. For those of us who like to use public wifi for non smartphone devices this is the golden age.

  7. TheCatSaid

    Jerri-Lynn, thanks for the analysis & update.

    Anyone out there–what role might members of the public play in relation to the issue of internet regulation and bandwidth/speed? I remember a previous excellent NC post that discussed the problems caused by historical agreements with companies that had monopolies in the past, that use those contracts to keep competitors offering faster speeds from entering the playing field.

  8. Haven't Changed My Tune

    Would somebody explain the difference between the FTC and the FCC “authorities” (to use pentagon language) over deceptive advertising by common carriers, and what a common carrier is?
    My sense is that the complexities underlying these issues are why the organized economic interests are so dominant. It is they who understand these issues, not the paying public. It may also explain why three circuit court judges, chosen at random from 29 judges, would rule so broadly on the narrow issue. It would only take two to control the outcome. But the fact there are three, in a circuit that is generally liberal, seems an important sign of the times.

    1. Jerri-Lynn Scofield Post author

      In the first paragraph of the post, I defined what a common carrier is (as highlighted below):

      A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued a sweeping decision, Federal Trade Commission v AT&T, on Monday that drastically restricts the Federal Trade Commission’s (FTC) consumer protection authority over companies that offer “common carrier” services (e.g., telephone services, mobile data, and internet services) whether or not these services comprise their core business.

      The FCC can regulate common carriers, but its regulatory authority is very narrow and IIRC does not cover advertising. (The FCC has announced pending regulations that would cover privacy and data security; see the link in the post).

      So, the bottom line is that the agency that can regulate advertising– the FTC– cannot regulate any aspect of any company that offers common carrier services while the agency that can regulate common carriers– the FCC– cannot regulate their advertising.

      Please let me know if this answer clears up the confusion and if you have any further questions.

      1. Haven't Changed My Tune

        Jerry-Lynn,
        Thank you. Your reply post cleared it up for me. I wasn’t as confused, as ignorant. Congratulations on being invited into the fold, apparently by Smith and Strecker. I consider Naked Capitalism the best, and consistent, systematic analysis of the political economy. I attribute that to Yves, bless her. I make one suggestion: posters should try to avoid acronyms, e.g. there is a one character difference between FTC and FCC. I know senior staffers in each, but their descriptions are Greek to me — but then they don’t read Naked Capitalism.

        1. Jerri-Lynn Scofield Post author

          Point taken re FTC and FCC being too close. I kept having to check myself as I was writing that I wasn’t mixing them up– I have the fattest of fingers when I am typing quickly. And no matter how many times one checks, when– as you rightly point out, there’s only one different character– it’s all too easy to mix them up.

  9. solublefish

    Good news briefing, but I think it could do with some more depth. The decision of the 3 judge panel looks wrong on its face; but to see that clearly requires address of a few basic questions: When was the original enabling lege for the FTC written? Why were “common carriers” excluded, and how were such defined? Do modern corps like AT&T bear any meaningful resemblance – in their structure or activities – to those exempt common carriers?

  10. danny

    I have a hard time believing this decision will survive Supreme Court review in tact, let alone an en banc review. Courts typically avoid interpreting laws in such a way that they defy common sense lead to absurd results that Congress probably wouldn’t intend. In this case the absurdity is that the federal government wouldn’t be able to police misrepresentations made by telecoms and their various affiliated companies in many circumstances, despite a historical record of FTC enforcement.
    That said, I don’t think this decision would fully extract the FTC from this important regulatory function. What we classify as telecoms are a collection of entities each engaged in different businesses, only some of which are regulated under the Communications Act. For example, the AOL entity (owned by Verizon) doesn’t provide any common carrier services. Similarly, while Google Fiber Inc provides what I assume to be common carrier services in certain markets, Google Inc itself doesn’t. I also wouldn’t doubt that AT&T Mobility LLC is essentially a holding company and a marketing entity/affiliate is responsible for the advertising and marketing services and thus possibly outside the common carrier exception. As such, I expect the FTC would start taking a closer look at the individual entities and their relationships to make the telecoms prove that each is properly classified a common carrier to get us close to where we are today. Just my 2 cents.

Comments are closed.