The FTC has no jurisdiction over common carriers even when they engage in non-common carrier activity, according to a recent U.S. Court of Appeals for the Ninth Circuit opinion.  In FTC v. AT&T Mobility, No. 15-16585 (9th Cir. Aug. 29, 2016), the court dismissed the FTC’s action against AT&T under Section 5 of the FTC Act, 15 U.S.C. § 45(a), for alleged data “throttling.”  The court held that the statutory exemption for common carriers, such as telecommunications service providers, is a “status-based” jurisdictional carve-out and thus exempts such entities from Section 5, regardless of whether the FTC’s claim in any given case concerns solely an entity’s non-common carrier activities. 

This rejection of the FTC’s longstanding position that the “common carrier exemption” to Section 5 is “activities-based” may be particularly important because the FCC recently expanded the scope of services classified as those of a common carrier in its 2015 Open Internet Order (aka the net neutrality order), which the U.S. Court of Appeals for the D.C. Circuit upheld in June 2016.  Because AT&T Mobility did not expand the FCC’s jurisdiction, the decision may create a regulatory gap for activities of common carriers, i.e., telecommunications service providers, falling outside both the reach of the FCC and FTC for certain activities.  This update describes the AT&T Mobility case in more detail, its implications for businesses and consumers going forward, and possible next steps for the FTC.

AT&T Mobility Background

Section 5’s prohibition on deceptive or unfair acts or practices or unfair methods of competition expressly does not apply to “common carriers” subject to the Communications Act, among other types of specified entities, such as banks, railroads and airlines.  The FTC has long asserted that this exemption is activities-based, such that the agency could enforce Section 5 against FCC-regulated common carriers to the extent they were engaged in activities other than the provision of common carrier service.

Based on that theory, the FTC asserted the authority to file suit in 2014 against AT&T, alleging that it had deceptively marketed certain mobile data plans as offering “unlimited” service.  (The FCC has similarly taken enforcement action against AT&T for data throttling, as discussed here.)  More specifically, the FTC alleged that AT&T’s practice of “throttling,” i.e., reducing the data transmission speed of, its “unlimited” data plan users was (1) deceptive because AT&T advertised “unlimited mobile data” and did not adequately disclose any “significant and material data speed restrictions on unlimited mobile data plan customers,” and (2) unfair because AT&T’s mobile data contracts were advertised as providing access to unlimited mobile data, and they did not provide that AT&T could impair the service of customers subject to such contracts who used more than a specified amount of data for permissible activities. 

AT&T filed a motion to dismiss the FTC’s complaint, arguing that it is a common carrier exempt from Section 5 liability.  The district court disagreed, finding that the common carrier exemption applies only where an entity has the status of a common carrier and is actually engaging in common carrier activity, which the provision of mobile data service was not at the time in dispute.  (The FCC’s reclassification of mobile data service as a common carrier service under the Communications Act did not occur until after the FTC’s lawsuit was filed and only applies prospectively.) 

Ninth Circuit’s Decision

In a unanimous decision, the Ninth Circuit reversed the district court and held that the FTC’s claims could not be maintained because AT&T was exempted from the coverage of Section 5 of the FTC Act.  The court ruled that the common carrier exemption extended to AT&T because its status as a common carrier made it immune from Section 5 liability even when it engages in non-common carrier activity.  The court noted that Section 5 also exempted “banks,” “savings and loan institutions” and “federal credit unions,” which the FTC had conceded are status-based exemptions, and reasoned that the “common carrier” exemption should be read similarly.  By contrast, Section 5 exempts entities “insofar as they are subject to the Packers and Stockyards Act,” demonstrating that where Congress wanted to craft an activities-based exemption, it clearly did so.  The court thus concluded that the FTC lacked authority under Section 5 to sue AT&T because of its status as a common carrier, even if the activity in dispute was non-common carrier.

Implications and Open Questions

AT&T Mobility may have significant consequences for common carriers and others considering becoming one.  First, if it remains good law, the decision may deal a fatal blow to the FTC’s efforts to police unfair and deceptive acts and practices or unfair methods of competition by those entities deemed common carriers by the FCC.  The Ninth Circuit effectively held that Congress intended for other agencies (such as the FCC) to exclusively regulate common carriers, not the FTC.  Further, the decision may embolden the FCC to take the lead in regulating deceptive or unfair practices by common carriers. 

Second, the decision may create a regulatory gap for activity by common carriers that falls outside the FCC’s jurisdiction.  Although the decision finds that Section 5 exempts common carriers from FTC “activities-based” jurisdiction, it did nothing to expand or otherwise address FCC jurisdiction over such non-common carrier activities.  For instance, the FTC—not the FCC—traditionally regulates non-common carrier activities relating to consumer protection matters, such as marketing practices.  With this decision, common carriers are arguably shielded from FTC review of their non-common carrier activities even if the FCC’s authority does not extend to such non-common carrier activities.

Third, important questions remain about the reach of the Ninth Circuit’s ruling.  The Ninth Circuit suggested that there may be limits to the status-based nature of the common carrier exemption, noting that “AT&T’s status as a common carrier is not based on its acquisition of some minor division unrelated to the company’s core activities that generates a tiny fraction of its revenue.”  (Opinion at 17.)  These potential limits, however, remain uncertain and could be tested in future cases.  In addition, even under the Ninth Circuit’s logic, there is uncertainty regarding how this jurisdictional exemption would apply to a non-common carrier subsidiary within a corporate family with a parent company or affiliates operating as a common carrier.  The FTC, following its past practice in connection with other jurisdictional carve-outs, would likely take the position that it can reach any entity that is not itself a common carrier, even if it has a parent, subsidiary or other corporate affiliate that is.  (See, e.g., Complaint, FTC v. Countrywide Home Loans, Inc., No. CV10-4193 (C.D. Cal. June 7, 2010) (alleging Section 5 violations by mortgage servicing subsidiary of bank)).  However, the FCC has taken a broader view of the reach of common carrier status within a corporate family, particularly in the case of licensed common carriers.  As a result, this issue could give rise to a novel inter-agency jurisdictional question regarding which agency’s precedent controls on the reach of common carrier status within a corporate family organization.

Finally, the decision could be subject to further review by an en banc Ninth Circuit or the U.S. Supreme Court, or could be distinguished or rejected by other courts (as the FTC will likely argue the U.S. Court of Appeals for the Second Circuit did in FTC v. Verity Int’l Ltd., 443 F.3d 48, 59 (2d Cir. 2007)).  In addition, the ruling may prompt the FTC to redouble its longstanding and bipartisan efforts to convince Congress to repeal the common carrier exemption.  In any event, while the effects of the Ninth Circuit’s opinion continue to ripple, businesses and other stakeholders would be wise to review its implications carefully for existing business models, existing regulatory matters and for any new business plans.

© 2016 Perkins Coie LLP