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.
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.