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U.S. Court of Appeals Upholds FCC’s Wireline Broadband Order

 

October 17, 2007

The U.S. Court of Appeals for the Third Circuit (the “Third Circuit”) has upheld the FCC’s Wireline Broadband Order, concluding that it was based on a permissible interpretation of the Communications Act and a proper exercise of the FCC’s discretion.  See Time Warner Telecom, Inc., et al. v. FCC, et al., Nos. 05-4769, 05-5153, 06-1466, 06-1467 (3rd Cir. filed Oct. 16, 2007).  The Wireline Broadband Order eliminates, among other things, the requirement that local exchange carriers (“LECs”) give third-party Internet service providers (“ISPs”) nondiscriminatory access to the LEC’s wireline transmission facilities.

Background and Overview*

In 1980, in its Computer II decision, the FCC distinguished between “basic service” and “enhanced service,” the former being subject to the panoply of regulations under Title II of the Communications Act.  Consistent with this regulatory classification, the FCC required those carriers engaged in the provision of basic services to grant competing providers access to their wireline facilities on a nondiscriminatory basis pursuant to tariffs governed by Title II.  The general provision of enhanced service was deregulated subject to the FCC’s ancillary jurisdiction under Title I of the Communications Act, with the proviso that the provision of enhanced service by AT&T and its Regional Bell Operating Company progeny was restricted.  Several decades later, Congress passed the Telecommunications Act of 1996 (the “1996 Act”) that introduced two new regulatory classifications—i.e., “telecommunications service” and “information service”—that parallel the “basic” and “enhanced” service distinction established previously by the FCC.  Under the 1996 Act, only telecommunications service is subject to mandatory regulation under Title II; information service is subject to the FCC’s Title I authority.

The FCC first applied the 1996 Act’s new regulatory classification to broadband Internet access service in its Cable Modem Declaratory Ruling.  In that ruling, the FCC concluded that broadband Internet access service provided by cable companies is an “information service,” which does not include a separate “telecommunications service” subject to mandatory Title II common carrier regulation.  In addition, the FCC declined to apply its Computer II nondiscriminatory access requirements to cable modem broadband service providers.  The United States Supreme Court upheld the Cable Modem Declaratory Ruling in the Brand X case.

Shortly after the Supreme Court’s Brand X decision, the FCC released the Wireline Broadband Order substantially limiting federal regulation of wireline broadband Internet access service.  First, the FCC ruled that wireline broadband Internet access service, like cable modem service, is an information service whether such service is provided by a LEC or a non-facilities-based ISP.  Second, the FCC eliminated the Computer II requirements on the grounds that market conditions no longer justify requiring LECs to grant independent ISPs nondiscriminatory access to their wireline transmission facilities.

Several petitioners, consisting of independent ISPs, competing telecommunica-tions service providers, cable modem providers, and various public interest organizations, challenged the FCC’s decision.  The petitioners argued that the FCC’s order allows telephone companies to deny competitors access to their wireline networks, thereby resulting in decreased competition and consumer choice in the market for broadband Internet service. 

Findings and Conclusions

Statutory Classification.  In the Wireline Broadband Order, the FCC rejected the proposition that wireline broadband Internet access service includes both an information service and a telecommunications service, finding instead that wireline broadband Internet access service is a functionally integrated information service.  In arriving at this conclusion, the FCC applied the same analytical approach used in the Cable Modem Declaratory Ruling, finding that wireline broadband Internet access service provided over a provider’s own facilities is appropriately classified as an information service because its provider offers a single integrated service (i.e., Internet access) to end users.  The Third Circuit concluded that this statutory classification was based on a reasonable interpretation of the Communications Act.

Record Evidence.  The Wireline Broadband Order found that, like cable modem service, wireline broadband Internet access service combines computer processing, information provision, and data transport which enable end users to run a variety of applications.  Because the FCC found that end-users perceive the finished product (i.e., Internet access) to be similar whether provided by wireline or cable modem providers, the FCC concluded that its decision to classify wireline broadband Internet access service as an information service logically flowed from the Supreme Court’s Brand X decision.  The Third Circuit found that the record adequately supports the FCC’s conclusion in this regard.  Additionally, the Third Circuit dismissed the petitioners’ attempts to distinguish wireline broadband service from cable modem service on grounds that LECs offer their wireline transmission component on a stand-alone basis to other ISPs, noting that the fact that LECs have provided independent ISPs with stand-alone transmission capabilities is a function of the very regulatory requirements that the FCC’s Wireline Broadband Order seeks to eliminate, i.e., wireline providers have been the only broadband provider required by Computer II to offer their transmission component on a stand-alone basis.

Inconsistency with Past FCC Decisions.  On appeal, the petitioners’ argued that the FCC’s classification of wireline broadband Internet access as an information service is improper because it conflicts with past agency decisions, focusing specifically on an earlier FCC ruling treating broadband Internet access service as both an information service and a telecommunications service.  The Third Circuit dismissed this argument, noting that (a) the FCC admitted in the Wireline Broadband Order that past agency statements concerning the regulatory treatment of wireline broadband Internet access service had not been entirely consistent but nevertheless found that there was ample basis in its prior rulings to support its classification, and (b) to the extent that the FCC’s current classification of wireline broadband Internet access service conflicts with past agency rulings, Brand X makes clear that an initial agency interpretation “is not instantly carved in stone.” 

Inconsistency with CALEA.  The petitioners also argued that the FCC’s classification of wireline broadband Internet access service as a fully integrated information service is arbitrary and capricious in light of an allegedly conflicting interpretation issued by the FCC in a proceeding implementing CALEA.  In the CALEA proceeding, the FCC determined that broadband services are hybrid telecommunications-information services subject to the CALEA statute (whose substantive provisions apply to telecommunications carriers but not information service providers).  The Third Circuit agreed with the FCC that this argument was a “red herring,” holding that the FCC has the discretion to interpret the distinct language in the two statutes differently.

Nondiscriminatory Access Under Computer II.  According to the petitioners, the the FCC’s blanket deregulation of wireline broadband Internet access service violated the FCC’s existing regulatory policy for assessing incumbent local exchange carrier (“ILEC”) market power, and that the FCC was required to consider ILECs’ dominance in the business market and certain geographic markets.  The Third Circuit rejected this argument because, to the extent that the FCC’s decision not to conduct a traditional market analysis constituted a departure from past agency practice, it is well-settled that an agency may change its course so long as it can justify its change with a reasoned analysis.  The court concluded that, in considering how the market for broadband services is likely to develop, it was not improper for the FCC to refrain from a traditional market analysis and to rely instead on larger trends and predictions concerning the future of the broadband services market.  The Third Circuit also found that the FCC’s broad market analysis was both reasonable and consistent with the approach upheld by the Supreme Court in Brand X.

NARUC I Test. The petitioners argued that, having eliminated the Computer II nondiscriminatory access requirements, the FCC was required to determine whether broadband transmission facilities should nevertheless be regulated on a common carriage basis under the test set forth in NARUC I, an earlier decision holding that a carrier has to be regulated as a common carrier if the public interest requires.  The Third Circuit rejected this contention, finding that, in addition to considering the market conditions in the broadband service arena, the FCC explained at length its judgment that continued regulation of wireline broadband providers under Computer II would harm consumers by impeding the development and deployment of innovative wireline broadband Internet access technologies and services.

Violation of Section 214.  Finally, the Third Circuit rejected the argument that the Wireline Broadband Order violated section 214 of the Communications Act and the Due Process Clause of the Constitution by granting ILECs a blanket certification to discontinue providing existing customers with common carrier broadband Internet access transmission services.  Section 214 of the Communications Act requires a common carrier to first obtain from the FCC a certificate that neither the present nor future public convenience and necessity will be adversely affected prior to discontinuing service.  The Third Circuit concluded that the FCC fully considered the public interest before eliminating the Computer II requirements, and that the petitioners failed to point to any authority that prevents the FCC from granting a blanket certification.  The Third Circuit also noted that the Wireline Broadband Order (a) imposed a one-year transition period requiring facilities-based wireline transmission providers to continue to honor existing transmission arrangements with their current ISP or other customers, and (b) required LECs to provide both the customer and the FCC with advance notice of any discontinuance of service.

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