On 27 February 2018, the U.S. Court of Appeals for the Ninth Circuit ruled unanimously in an en banc decision that the Federal Trade Commission (FTC) may bring enforcement actions against AT&T and other telecommunications providers for their non-common carrier activities (Federal Trade Commission v. AT&T Mobility). The decision was applauded in statements by FTC Acting Chairman Maureen Olhaussen and Federal Communications Commission (FCC) Chairman Ajit Pai, once again highlighting the FTC's increased role in overseeing broadband internet access service (BIAS) providers following the recent passage of the FCC's Restoring Internet Freedom Order (RIF Order). In reaffirming the FTC’s jurisdiction to oversee the non-common carrier activities of common carriers, the decision resolves jurisdictional questions that previously surrounded the FTC's ability to carry out its regulatory responsibilities as contemplated by the FTC-FCC memorandum of understanding (MOU) relating to the passage of the RIF Order.

Background on the FCC's Restoring Internet Freedom Order and the related FTC-FCC Memorandum of Understanding

On 14 December, 2017, the FCC passed the RIF Order, which reclassified BIAS as an "information service." Previously, in 2015, the FCC had classified BIAS as a "common carrier" service and instituted a series of pre-emptive conduct rules that prohibited Internet Service Providers (ISPs) from engaging in general categories of practices known as blocking, throttling, and paid prioritization (which involves prioritizing the delivery of certain online traffic in exchange for payment). Among the justifications for reclassification was restoring the FTC's jurisdiction in monitoring broadband markets. As a result, the RIF Order eliminated the 2015 conduct rules and reinstituted a modified version of the "Transparency Rule" the FCC previously adopted in 2010. Under the Transparency Rule, ISPs are required to disclose accurate information relating to their network management practices, performance characteristics, and general commercial terms for BIAS.

On the same day the RIF Order was passed, the FTC and FCC entered into a MOU, which set out how the agencies will coordinate their online consumer protection efforts, including oversight and enforcement efforts related to ISPs. Under the terms of the MOU, the FCC is tasked with reviewing third party complaints and ensuring ISPs comply with the Transparency Rule requirements whereas the FTC would be responsible for challenging inaccurate disclosures and ISPs that engage in unfair and deceptive conduct (including anticompetitive practices related to the provision of BIAS). For more information on these developments, please see our recent article here.

Questions surrounding FTC's authority to regulate common carriers

At the time the FCC reclassified BIAS in 2018, the FTC was appealing a challenge to the agency's authority to bring enforcement actions against companies that offer "common carrier" services. In October 2014, the FTC brought a case against AT&T Mobility for certain throttling practices the company had taken in connection with wireless data services provided to limited data plan customers that were alleged to have anticompetitive effects. AT&T subsequently filed a motion to dismiss, arguing that its status as a "common carrier" under the Communications Act of 1934 exempts the company from the FTC's purview under Section 5(a)(2) of the FTC Act, even as it relates to the provision of AT&T's non-common carrier services. AT&T also argued that the FCC's 2015 reclassification efforts deprived the FTC of jurisdiction over AT&T's mobile broadband activities. While the district court rejected AT&T's motion in 2015, a panel of the Ninth Circuit in 2016 overruled the district court decision on appeal. In turn, the FTC appealed, while also arguing that its enforcement authority is generally broader than that of the FCC, since the FTC is also entitled to seek money damages on behalf of consumers. The Ninth Circuit granted rehearing en banc, which temporarily set aside the Ninth Circuit panel decision pending review.

The central issue in this case is whether Section 5(2)(a) of the FTC Act's common carrier exemption is "status-based" or "activity-based." The FTC argued that the exemption is an "activity-based" exemption, which means an entity would be exempt only with respect to those specific services that are themselves defined as being related to common carriage. By contrast, AT&T argued that the exemption is "status-based," meaning that the entity itself would be exempt from challenge so long as any of the services it offers are defined as being related to common carriage.

Relevance of the FTC's "Common Carrier" exemption to FTC and FCC oversight of BIAS

The FTC's ability to carry out the terms of the MOU critically depends on how the FTC Act's common-carrier exemption is defined. For example, under a "status-based" test, an ISP could be exempt from FTC challenge for any of its BIAS-related activities so long as the ISP is defined as a "common carrier" services with respect to its non-BIAS services. By contrast, under the "activity-based" test, an ISP would remain subject to FTC oversight related to its provision of BIAS since such services are not defined as relating to common carriage.

Following the Ninth Circuit panel decision, various stakeholders (including both agencies) expressed various policy concerns. For example, some argued that implementation of the 2015 reclassification order would have resulted in uneven treatment of BIAS providers that incidentally provide common carrier services and those that do not. Similarly, following the passage of the RIF order, others expressed concerns that an ISP could evade regulatory oversight for its broadband activities by offering new services related to common carriage or acquiring entities that offer such services.

The Ninth Circuit’s en banc decision

In an en banc decision, the Ninth Circuit unanimously ruled that the FTC Act's common carriage exemption is "activity-based," effectively overruling the panel decision and affirming the district court's denial of AT&T's motion to dismiss.

Notably, in determining that the FTC's interpretation was rooted in judicial precedent and consistent with the legislative history of the FTC Act, the court addressed concerns that the prior panel decision deprived the FTC of necessary oversight authority in the telecommunications sector. In discussing the "practical ramifications" of "[p]ermitting the FTC to oversee the non-common-carriage practices of telecommunications companies," the court explained that the "activity based" view comports with "common sense" and "avoids regulatory gaps and provides consistency and predictability in regulatory enforcement." The court also noted that the 2015 reclassification order only applied on a "prospective basis" (a point that was reaffirmed by the RIF Order) and that these reclassification efforts did not moot the FTC's appeal.

Key takeaways

The Ninth Circuit decision clarifies an important jurisdictional issue that had remained opened following the passage of the RIF Order and the entry of the FTC-FCC MOU. The decision reaffirms the FTC's shared role in overseeing broadband markets and its ability to challenge ISPs for certain network management and content delivery practices related to the provision of BIAS.

Another important development is that the FTC's substantive challenge to AT&T's throttling practices was sent back down to the district court for further proceedings. Resolution of this challenge may shed further light on the types of conduct related to the provision of BIAS that will receive regulatory scrutiny as well as the FTC's practical ability to challenge such practices.