06.22.2015
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Updates
Last week, the FCC adopted in a partisan 3-2 vote a Notice of Apparent Liability for Forfeiture and Order (the NAL) against AT&T with an unprecedented proposed penalty of $100 million as well as numerous other compliance obligations, marking the first time the agency has enforced its net neutrality transparency rule. This action, made on June 17, 2015, is the latest example of the FCC’s increasingly aggressive and wide-ranging approach to regulatory enforcement. It also reflects the escalating turf battle between the FCC and the Federal Trade Commission, in which both agencies have simultaneously targeted the same conduct.[1] The NAL is therefore of great significance not only for parties regulated by net neutrality (e.g., mobile and fixed broadband Internet service providers), but also for the policy’s intended beneficiaries (e.g., consumers, edge providers, app developers and device manufacturers) and others subject to FCC jurisdiction.
Background of AT&T’s MBR Policy
In 2007, AT&T began offering consumers “unlimited” data plans that contained no high-speed data caps or automatic speed restrictions. It ceased offering these plans to new subscribers in 2010 but continued to honor the unlimited plans of “grandfathered” subscribers, of which there are millions.
Beginning in 2011, AT&T decided to establish new “Maximum Bit Rate” (MBR) policy, under which it capped the maximum speed throughput that the unlimited data plan experienced once subscribers met a certain data usage limit in a monthly billing cycle. Once subscribers reached the applicable data usage limit, their service speed was reduced significantly—well below the normal network speeds that AT&T advertised. The FCC stated that it received “thousands” of complaints that the reduced speeds rendered many mobile apps inoperable and such a reduction was not what subscribers expected when they agreed to the unlimited plan.
Initially, the MBR policy was not tied to local network congestion—only to whether an unlimited plan subscriber hit certain usage limits. In mid-2014, AT&T changed its MBR policy to make it congestion-based for a subset of its unlimited plan customers (excluding 4G LTE unlimited customers until May 2015). The FCC noted that AT&T conducted focus group studies in 2009 and 2010, which showed that consumers had a negative view of the MBR policy and believed that the throttling practice was inconsistent with the concept of unlimited data.
In the NAL, the FCC found that although AT&T had provided disclosures of its MBR policy through a number of methods, those disclosures were largely flawed and failed to overcome the broader misleading practice of continuing to describe the plan as “unlimited” to customers. In other words, under the FCC’s reasoning a provider cannot cure a misleading or inaccurate statement made “in large type that it contradicts in fine print.”
The NAL’s Application of the Transparency Rule
The FCC’s net neutrality transparency rule, as adopted in 2010,[2] states:
A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance, and commercial terms of its broadband Internet access services sufficient for consumers to make informed choices regarding use of such services and for content, application, service, and device providers to develop, market, and maintain Internet offerings.
47 C.F.R. § 8.3.[3]
As it stated in the NAL, the FCC found that AT&T’s statements about its unlimited data plan were inaccurate and misleading in light of the MBR policy, that the disclosures about the MBR policy were insufficient to overcome the misleading and inaccurate statements about the unlimited plan, and that, as a result, consumers were not given sufficient notice about the unlimited plan with which to make an informed consumer decision.
The FCC also suggested that the practice gave AT&T a competitive advantage over other wireless carriers that offered more accurate disclosures about similar throttling practices because, due to such greater transparency about their limitations, the plans offered by other carriers likely sounded comparatively inferior to AT&T’s unlimited plan. As a result of these issues, the FCC determined the following:
- AT&T apparently violated the 2010 net neutrality transparency rule, and to the extent that AT&T’s actions continue, it will continue to be in violation (and will possibly incur a greater forfeiture or damages);
- AT&T must correct any misleading and inaccurate statements about its unlimited data plan;
- AT&T must individually inform all of its unlimited plan customers, via bill insert or other similar method, that AT&T’s disclosures were in violation of the transparency rule and that AT&T is correcting its violation with a revised disclosure statement;
- The revised disclosure must provide customers with enough information to allow them to make informed choices about the purchase and use of their unlimited data plans and must provide them with an opportunity to cancel their plans without penalty;
- The revised disclosure must also include the maximum speeds to which AT&T limits unlimited data plan customers’ services when applying the MBR policy;
- A proposed forfeiture penalty of $100 million dollars should be imposed, based on a statutory penalty of $16,000 per violation, multiplied by several million customers on a continuing basis (e.g., the FCC stated that AT&T’s bills continued to describe its plan as “unlimited” in monthly invoices and term renewals with contradictory fine print);
- AT&T must file a report to the FCC within 30 days of the NAL, regardless of whether it seeks to appeal the NAL, in which it must explain its progress in carrying out the foregoing measures; and
- Upon review of AT&T’s report, the FCC will make a final decision on the NAL and consider whether other measures, such as damages, are also “lawful and appropriate.”
Analysis of the FCC’s AT&T Penalty
Procedurally, a notice of apparent liability is only an allegation of an FCC rule violation to which the recipient has an opportunity to respond before a final forfeiture order is adopted. Thus, it appears to be unprecedented for the FCC to require AT&T to submit a report within 30 days of the NAL’s adoption describing its progress in implementing the NAL’s demands, regardless of whether AT&T challenges the NAL, as it has already indicated it will do. As Commissioner O’Rielly said in his dissent, this is effectively like requiring a criminal defendant to testify against himself during his trial.
Regardless of the merits of AT&T’s throttling policy, this aspect of the NAL appears to be the most vulnerable to appeal and potentially the most troubling when viewed as precedent for the future. In effect, at any given time such parties may be only 30 days away from having to submit a similar report on matters that the FCC wrongly alleges to be a violation of law.
Similarly, the amount of the penalty is staggering, even if the FCC rationalizes it as a “fraction” of the revenue AT&T allegedly generated from the unlimited plans. Indeed, the language used in the NAL suggests that the FCC’s penalty is not merely guided by a neutral mathematical calculation but by broader policy objectives. For example, the FCC stated that “[f]urther, we aim to deter future violations by imposing a penalty that will not be viewed by AT&T as a mere ‘cost of doing business.’ We find that a penalty of $100,000,000 will serve as a sufficient deterrent to future violations.” In rare instances in different contexts, the FCC has issued multimillion dollar penalties in the past. But inflating the penalty well beyond traditional ranges of FCC penalties, to what many view as primarily designed to garner media attention and send a message to the industry, is another facet of the NAL that may be a vulnerable issue on appeal.
In addition, the decision did nothing to reduce the simmering partisan boil in which the broader net neutrality debate has been immersed for years. The two Republican FCC members, Commissioners Pai and O’Rielly, both strongly criticized the NAL as unfair and too severe for the apparent violations, particularly under circumstances in which, as they view the facts, AT&T had fully complied with the FCC’s prior guidance for disclosures under the transparency rule.[4]
While few may have sympathy for throttling practices unrelated to network congestion, the amount of the penalty and the enforcement methods could reinforce the view held by FCC critics that the net neutrality rules generally, and the FCC’s recent enforcement practices in particular, are overzealous. In the end, however, how the decision is perceived will likely depend on where one already stands on net neutrality—advocates will applaud the result as a victory for consumers while opponents will see it as further proof of heavy-handed, duplicative and ultimately counterproductive governmental interference with industry. But regardless of one’s perspective, there is no debate that companies subject to FCC jurisdiction must be attuned to the risks from an FCC newly focused on enforcement and prepared to take unprecedented and aggressive action against perceived violations of consumer rights.
Endnotes
1 The same throttling practices by AT&T against its unlimited data plan subscribers are also the subject of litigation between the Federal Trade Commission and AT&T. Fed. Trade Comm’n v. AT&T Mobility LLC, No. 14-CV-04785 (N.D. Cal. Oct. 28, 2014).
2 Preserving the Open Internet, Report and Order, 25 FCC Rcd 17905 (2010), aff’d in part, vacated and remanded in part sub nom. Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014).
3 The transparency rule was expanded by the 2015 net neutrality order, but the 2010 version will remain the governing rule until the revisions are approved by the Office of Management and Budget.
4 Commissioner Pai’s emphasis on AT&T arguably complying with the FCC’s prior guidance in terms of methods and language for transparency rule disclosures appears to miss a central point by the FCC in the NAL, however: that in the context of a data plan promoted as unlimited, such “fine print” disclosures were insufficient to overcome the misleading “large type” marketing message implied by the term unlimited.
© 2015 Perkins Coie LLP
