Ninth Circuit Panel Throttles FTC Enforcement

The Federal Trade Commission (FTC) recently filed a petition to appeal a Ninth Circuit decision that exempts telecom giant AT&T from enforcement action by the agency. The litigation dates back to October 2014, when divisions of the FTC’s Bureau of Consumer Protection brought an action against AT&T for its undisclosed speed throttling of “unlimited” data plan subscribers. AT&T landed a major blow in August 2016 when a Ninth Circuit panel determined that the FTC Act exempts common carriers from regulation, thereby stripping the FTC of enforcement authority over AT&T. The FTC argues that the decision creates an “enforcement gap” for companies classified as common carriers, leaving consumers vulnerable to shady practices with little recourse. The agency also expressed concern over the Court’s decision with regards to the FCC’s reclassification of broadband providers as common carriers, which would seem to exempt all Internet Service Providers from the FTC consumer protection authority.

First, a quick primer on the underlying common carrier reclassification. Back in February of 2015, the FCC voted to adopt rules that would promote net neutrality. The problem was that the FCC lacked the authority to prevent throttling and paid prioritization (aka net neutrality violations) for all Internet services, because the FCC had previously classified Internet services as an “information service” instead of a “Telecommunications Service.” In order to regulate Internet services to prevent Net Neutrality violations, the FCC reclassified broadband providers – both fixed and mobile – as common carriers of “telecommunications service,” granting the FCC broad authority under Title II of the Communications Act of 1934. This decision was largely heralded as a win for proponents of an open Internet, but the latest chapter in the feud between the FTC and AT&T exposes one potential issue created by the controversial decision.

Section 5 of the FTC Act (15 U.S. Code § 45) expressly prohibits unfair business practices and empowers the FTC to protect consumer interests. Using this authority, the FTC has gone after companies for fraudulent billing schemes, false advertising, and countless other abusive practices. AT&T sells a number of tiered mobile broadband data plans, mostly distinguished by limits on data usage and throughput, or speed. At the time of the suit, AT&T no longer offered “unlimited” data plans to new customers, but millions of existing plans were grandfathered into the new structure. Those plans were still purported to be unlimited, but while the data usage had no cap, AT&T surreptitiously throttled subscriber speed after a certain threshold had been reached. The FTC alleged that AT&T throttled speeds by up to 90 percent, affecting over 3.5 million subscribers without proper disclosure. In its initial suit, the agency sought a permanent injunction and financial damages in the form of refunds for affected customers.

A panel of three judges on the Ninth Circuit looked to the agency’s charter and agreed with AT&T’s argument that the FTC Act expressly exempts common carriers from regulation. Under the act, the FTC may “prevent persons, partnerships, or corporations, except . . . common carriers subject to the Acts to regulate commerce . . . from using . . . unfair or deceptive acts or practices in or affecting commerce.” 15 U.S.C. § 45(a)(2). This exemption exists to prevent companies from being subject to double regulation. However, when the litigation began, AT&T was classified as a common carrier of phone service, not broadband service. The FTC argued that the exemption applied to common carrier activity, rather than common carrier status, meaning it should be able to regulate the mobile broadband service because AT&T was only a common carrier as to its phone service. Using the language of the FTC Act and its legislative history, the court concluded that the exception is status based, not activity based, thereby stripping the FTC of power over AT&T.

In its appeal, the FTC argues that sticking with a status-based interpretation of the common carrier exception leaves a huge loophole for circumventing enforcement. All companies labeled as common carriers in any respect will now be exempt, while the agency fears a potential arms race for common carrier acquisitions. The FTC cites AOL and Yahoo as winners of the decision, as they are not common carriers, but through acquisition by Verizon might now be able to skirt regulation from the FTC. The FTC is also the main agency charged with protecting consumer data privacy, but the decision could potentially bar the agency from preventing deceptive privacy practices by companies like Google that own common carrier subsidiaries. Though the FCC will still have authority due to reclassification, the FTC notes that the FCC lacks the ability to redress consumer losses.

Under the current precedent, the FTC loses jurisdiction over any ISP, which is especially problematic considering the FCC’s limited role as a consumer protection agency. If the appeal is granted, the FTC will try its case before an 11-judge panel. The FTC’s primary arguments revolve around statutory interpretation and conflicting precedents in the Ninth Circuit, but it also offers strong policy arguments for consumer protection.

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