9th Circuit Vacates FCC Declaratory Ruling That Cable Modem Service is an Information Service Without a Separate Offering of a Telecommunications Service

October 6, 2003. The U.S. Court of Appeals (9thCir) issued its opinion [39 pages in PDF] in Brand X Internet Services v. FCC, vacating the Federal Communications Commission's (FCC) declaratory ruling that cable modem service is an information service, and that there is no separate offering as a telecommunications service.

The FCC adopted a Declaratory Ruling and Notice of Proposed Rulemaking [75 pages in PDF] at its March 14, 2002 meeting. This is FCC 02-77 in Docket No. 00-185 and Docket No. 02-52. See also, March 14 FCC release.

The Declaratory Ruling (DR) component of this item states that "we conclude that cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service."

The opinion of the Court of Appeals vacates this DR. In so doing, the Court has placed itself in the role of writing broadband policy for the U.S., and thereby, undermined the FCC's attempts to promote broadband deployment.

FCC Chairman Michael Powell promptly announced that the FCC will appeal.

The Court of Appeals wrote that its opinion was solely a matter of stare decisis. That is, it was bound by its previous opinion in AT&T v. City of Portland, 216 F.3d 871 (2000).

Petitions for Review. This proceeding is a consolidation of seven petitions for review of the DR filed in three different circuits. The petitions advanced a wide variety of arguments.

Brand X (No. 02-70518), EarthLink (No. 02-70684), the State of California (No. 02-70879), and the Consumer Federation of America (No. 02-70686), argued that cable modem service is both an information service and a telecommunications service, and is therefore subject to regulation on a common carriage basis -- that is, that cable broadband providers must be required to let other internet service providers (ISPs) use their facilities.

The National League of Cities (No. 02-71425), the National Association of Telecommunications Officers and Advisors, the United States Conference of Mayors, the National Association of Counties, and the Texas Coalition of Cities for Utility Issues, and others argued that cable modem service is both an information service and a cable service, and therefore is subject to regulation by local authorities.

Verizon (No. 02-70685) argued that argued that the FCC DR was correct, but that the FCC should have also ruled that DSL service, like cable modem service, is an information service.

Why Regulatory Classifications Matter. The FCC's regulatory classifications are important because each industry sector regulated sector by the FCC operates under vastly different rules. The basic rules for each is codified in the Communications Act of 1934, which has been amended on many occasions. The most recent major revision was the Telecommunications Act of 1996.

Previously, the FCC regulated industries have been easily compartmentalized. These industry sectors have included TV and radio broadcasters, phone companies that provided plain old fashioned telephone service (POTS), wireless phone companies that provided voice service with cell phones, and cable companies that piped in programming. Also, there was one category, information services. Telecommunications services carry a large regulatory burden. Cable services are less regulated. Information services remain largely unregulated.

Tthe basic regulatory schemes are complex, and the Congress has left it to the FCC to write and update detailed regulations to implement the basic scheme of the Communications Act. The classification of services has become more complex with the development of new technologies and convergence with older technologies.

Regulatory classifications have consequences. They can, for example, affect whether or not certain companies may gain forced access to the facilities of other companies, and the prices that are paid. And hence, regulatory classifications can affect the expected return on investment for constructing new facilities. And, whether or not new facilities are constructed affects how many consumers will reap the benefits of those new services.

The underlying purpose of FCC Chairman Powell, and the FCC, in issuing its Declaratory Ruling, was to promote deployment of broadband facilities, thereby increasing the number of people with access to affordable broadband internet connections. The Declaratory Ruling was intended, in part, to give cable companies and their investors the incentive to build new cable based facilities. (Commissioner Michael Copps dissented on this matter.)

The Appeals Court ruling upsets the strategy of Powell and the majority of the Commission to promote broadband deployment and adoption.

Portland Case. The per curiam opinion of the three judge panel does not address the merits of various policy arguments regarding how to promote broadband deployment. Nor does it address technical issues that may be relevant to classifying cable modem service. Rather, it is simply an application of precedent in the 9th Circuit -- the AT&T v. Portland case.

This was a federal suit brought by AT&T and TCI, a cable company which AT&T had just acquired, for a declaratory judgment that the City of Portland and the County of Multnomah illegally refused to grant AT&T/TCI's request for change of control. At issue was whether local governments have authority to condition the transfer of cable licenses on opening access to Internet access providers. The FCC had just completed its review of the merger, and declined requests from ISPs to impose an open access, or forced access, requirement upon AT&T.

Portland argued that this was a cable service, and that it had authority under the Cable Act to impose open access conditions on transfers. AT&T did not argue that this was an information service. Rather, it argued federal preemption, and various constitutional issues.

On June 4, 1999, the U.S. District Court (DOr) issued its opinion granting Defendants' motion for summary judgment and denying plaintiffs' motion for summary judgment. It held that the City of Portland has the authority to condition the transfer of control of TCI's cable licenses on AT&T's opening of its Internet cable facilities to competing ISPs. AT&T appealed.

The FCC was not a party to this proceeding. Nevertheless, on August 16, 1999, the FCC filed an amicus curiae brief with the 9th Circuit. However, the FCC brief took no position as to whether this service is "cable", "telecommunications" or "information." It wrote that "the Commission has not yet conclusively resolved the issue."

On June 22, 2000, the Court of Appeals (9thCir) issued its opinion reversing the District Court. It wrote, "We hold that subsection 541(b)(3) prohibits a franchising authority from regulating cable broadband Internet access, because the transmission of Internet service to subscribers over cable broadband facilities is a telecommunications service under the Communications Act. Therefore, Portland may not condition the transfer of the cable franchise on nondiscriminatory access to AT&T's cable broadband network."

In the absence of an FCC position regarding the regulatory classification of cable modem service, the 9th Circuit adopted its own. Now, the FCC faults the 9th Circuit for not adopting a position that the FCC itself did not assert at the appropriate time. See also, TLJ story titled "FCC Files Amicus Curiae Brief in Cable Access Case", August 16, 1999.

See also, TLJ Summary of AT&T v. City of Portland.

Opinion of the 9th Circuit. In the present case, the 9th Circuit stated the issue before it. "We must decide whether our prior interpretation of the Telecommunications Act controls review of the Federal Communications Commission's decision to classify Internet service provided by cable companies exclusively as an interstate ``information service.创"

It wrote that "There, we concluded that cable broadband service was not a ``cable service创 but instead was part ``telecommunications service创 and part ``information service.创 Because the Commission抯 Declaratory Ruling agreed with our conclusion that cable broadband service is not ``cable service,创 but disagreed with our conclusion that it is in part ``telecommunications service,创 we must AFFIRM in part, VACATE in part, and REMAND for further proceedings not inconsistent with this opinion."

Judge Diarmuid O'Scannlain wrote a concurring opinion. He wrote that the opinion is correct, because "we are bound by our own interpretation of the Telecommunications Act in Portland and must vacate the FCC抯 Declaratory Ruling."

However, he was clearly uncomfortable with the outcome. For example, he wrote that "Regardless of one's view of the wisdom of the FCC抯 declaratory ruling, it cannot be denied that our holding today effectively stops a vitally important policy debate in its tracks, at least until the Supreme Court reverses us or Congress decides to act."

O'Scannlain even speculated that the FCC may ignore the 9th Circuit. He wrote in a footnote, "Given the importance of the regulatory classification of broadband internet service, one wonders whether our decision today will prompt the FCC to follow the example of the Social Security Administration, the National Labor Relations Board, and the Internal Revenue Service, among other federal agencies, in adopting a policy of "nonacquiescence" in the face of court rulings with which the agency disagrees."

Judge Sidney Thomas also wrote a concurring opinion. In contrast, he was quite satisfied with the result. He wrote that the Portland case in controlling, but that even if that precedent did not exist, the statute would still compels the result reached by the Court.

Michael PowellMichael Powell Reaction. FCC Chairman Michael Powell (at right) issue a statement. He wrote that "I am disappointed that the Court felt that it was bound by its prior decision and did not address the merits of the Commission's classification. Unfortunately, as noted by Judge O'Scannlain, the ruling ``effectively stops a vitally important policy debate in its tracks,创 producing ``a strange result创 which will throw a monkey wrench into the FCC's efforts to develop a vitally important national broadband policy. I will direct the FCC's General Counsel to appeal."