Supreme Court Says Broadband Cable Lines Need Not Be Shared with Competing ISPs

In a decision released June 27, 2005, the last day of the Supreme Court’s term, the Court said that cable operators have no statutory obligation to allow other ISPs to provide high speed broadband service through the cable operator’s wires. The Court reversed and remanded the case to the U.S. Court of Appeals for the Ninth Circuit, finding the FCC's decision exempting cable broadband service from mandatory common carrier regulation was a lawful construction of the Communications Act and one entitled to judicial deference. National Cable & Telecomm. Ass'n v. Brand X Internet Serv., No. 04-277 (U.S. June 27, 2005). This decision will help to shape the FCC’s ongoing regulation – or deregulation – of the telecommunications and cable industries as well as the debate on “convergence” and “intermodal competition” and may also have far-reaching ramifications with respect to the interrelationships among federal agency actions, statutory construction and judicial review of agency decisions.

Background

The issue underlying this decision has been discussed since the late 1990s, when it was referred to as “open access” or “forced access.” A federal court first gave credibility to the idea when it allowed a local cable franchise authority to consent to AT&T’s purchase of a TCI cable franchise on the condition that AT&T allow unrestricted access to its cable broadband transmission facilities to Internet service providers unaffiliated with AT&T. AT&T Corp. v. City of Portland, 43 F.Supp.2d 1146 (D.Or. 1999). On appeal, the United States Court of Appeals for the Ninth Circuit reversed, saying that cable modem service was a “telecommunications service” under the Communications Act and as such, conditioning a franchise transfer in this manner was beyond the city’s cable franchising power. AT&T Corp. v. Portland, 216 F.3d 871 (9th Cir. 2000).

Two years later, the FCC issued a Declaratory Ruling addressing the regulatory implications of broadband Internet service, which concluded that cable modem service provided by cable operators constituted an “information service” rather than a “telecommunications service” under the Communications Act. As an “information service,” this service was not subject to common carrier regulation under Title II of the Act and unaffiliated Internet providers could not require a cable operator to allow them to provide broadband service over the cable operator’s facilities. Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 17 FCC Rcd. 4798 (2002) (the “Declaratory Ruling”).

Several parties sought judicial review of the Declaratory Ruling and the Ninth Circuit, the same court that decided AT&T Corp. v. Portland, was chosen through a lottery to be the venue for the appeal. Relying on its own prior decision, the Ninth Circuit vacated the Declaratory Ruling, to the extent it said that cable modem service was not a “telecommunications service” and said the FCC could not interpret the Communications Act so as to exempt cable operators providing broadband service from Title II regulation. Brand X Internet Serv. v. FCC, 345 F.3d 1120 (9th Cir. 2003).

Decision

In an opinion authored by Justice Thomas, in which he was joined by Chief Justice Rehnquist and Justices Stevens, O’Connor, Kennedy, and Breyer, the Supreme Court reversed and remanded the decision to the Ninth Circuit. First, the Court decided to analyze the case using the framework established in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Chevron requires a federal court to defer to an agency's construction of a statute, even if that construction differs from what the court believes to be the best interpretation, where the particular statute is within the agency's jurisdiction to administer, the statute is ambiguous on the point at issue, and the agency's construction is reasonable.

The Supreme Court first found that the FCC had the authority to address this issue and it had issued the Declaratory Ruling in an exercise of its authority. The Court next said that the Court of Appeals incorrectly relied on its decision in AT&T Corp. v. Portland rather than on Chevron, in concluding that the Portland decision’s interpretation of the Communications Act overrode that of the FCC in the Declaratory Ruling. The Supreme Court gave broad discretion to the FCC, explaining that a court's prior construction of a statute trumps an agency’s construction of that statute only when the prior court decision found that its construction followed from the unambiguous terms of the statute and thus left no room for agency discretion. In other circumstances, the agency may adopt a different statutory construction because the agency remains the authoritative interpreter (within the limits of reason) of a statute the agency is charged with administering.

The Supreme Court went on to find that the Court of Appeals erred in not giving deference to the FCC’s interpretation of the definition of “telecommunications service.” The Court said such deference was required because the Court of Appeals’ Portland decision had found only that the best reading of the Communications Act was that cable modem service was a “telecommunications service,” but not that this was the only permissible reading of the statute.

The Supreme Court also agreed that the FCC’s construction of the “telecommunications service” definition was a permissible reading of the Communications Act that was entitled to deference under Chevron. The analysis required by Chevron mandates that a reviewing court first determine whether a statute’s plain terms address the question and second, whether the statute is ambiguous on the point. If so, then the court must defer to the agency’s interpretation as long as the construction is a reasonable policy choice for the agency to make.

Using this analysis, the Supreme Court said the FCC was reasonable in finding an ambiguity in the statute and holding that cable broadband service was a telecommunications service rather than an information service. The Court also found reasonable FCC’s analysis of whether a cable operator providing broadband Internet service is “offering” telecommunications service directly to the public, which is the definition of a telecommunications service in the Communications Act. 47 U.S.C. § 153(46). The FCC had agreed that a cable operator uses “telecommunications” to provide consumers with Internet service, but it said the question of whether cable modem service included an offering of telecommunications depended on the nature of the functions offered to the end user. In that regard, the FCC found that an end user doesn’t see cable broadband service as a telecommunications offering because the consumer uses the telecommunications wire only in connection with the information-processing capabilities of Internet access. The integrated character of the service had led the FCC to conclude that cable modem service is not a stand-alone telecommunications offering. The Court disagreed with assertions that a cable operator in fact “offers” a telecommunications service when it sells broadband Internet service, finding that the components of broadband service are functionally integrated (like the components of a car), rather than functionally separate (like selling pets and leashes or pizza and pizza delivery).

The Court then reviewed the distinction between “basic” and “enhanced” services in the FCC’s Computer II decision, which it said also supported the conclusion that the Communications Act is ambiguous about whether cable operators “offer” telecommunications when they sell cable modem service. The Court reviewed the FCC’s regulatory treatment of facilities-based and non- facilities-based information service providers, concluding that if the Communications Act fails unambiguously to classify non-facilities-based providers that use telecommunications inputs to provide an information service as entities offering telecommunications service, then the Act also does not unambiguously classify facilities-based information service providers as telecommunications-service offerors. The relevant definitions do not distinguish between facilities-based and non-facilities-based carriers, and the Court said that this silence suggests the FCC has the discretion to fill the statutory gap.

The Court next found that the FCC’s construction of the Communications Act was a reasonable policy choice for it to make. In so doing, the Court disagreed that the FCC’s construction would unreasonably allow a communications provider to evade common carrier regulation by merely bundling an information service with a telecommunications service or that it would exempt any information service from common carrier regulation. The Court also disagreed that the FCC’s decision was unreasonable because it would permit inconsistent regulatory treatment of DSL service and cable modem service, finding that the FCC had provided a reasoned explanation for treating the two services differently. Contrasting with the FCC’s 1998 decision classifying DSL service as a telecommunications service, the Court said the Declaratory Ruling recognized that changed market conditions (e.g., the multiple platforms that were developing for offering broadband Internet service) warranted different treatment of facilities-based cable operators that provide Internet access. The Court also found nothing arbitrary in the FCC’s approach of providing a fresh analysis of the issue as it applied to the cable industry. Finally, the Court said that the Declaratory Ruling appeared to be a first step in the FCC’s effort to reshape the way it regulates information service providers and any inconsistency between the regulatory treatment of cable modem service and DSL service can be adequately addressed when the FCC fully reconsiders its treatment of DSL service in pending or future proceedings.

Separate Opinions

Justice Stevens wrote separately (presumably in response to Justice Scalia’s dissent) to draw the distinction that, although the Court of Appeals’ interpretation of an ambiguous provision in a regulatory statute does not foreclose an agency’s contrary reading, this principle would not apply to a Supreme Court decision that would presumably remove any pre-existing ambiguity. Justice Breyer concurred in the decision that the Declaratory Ruling falls within the scope of its statutory authority – although just barely – but he wrote separately to take issue with Justice Scalia’s characterization of the Court’s 2001 opinion in U.S. v. Mead Corp., as to the formal process that is required for courts to afford deference to an agency’s decision under Chevron.

Justice Scalia delivered a strong dissent, joined by Justice Souter and Justice Ginsberg. The dissent called “ridiculous” the majority’s denial that one part of a joint offering is being offered merely because it is not offered on a “stand alone” basis. In the dissent’s view, the telecommunications component of a cable modem service retains such ample independent identity that it must be regarded as being an offer when seen from the perspective of the end user who would reasonably view the cable modem service as providing both high-speed Internet access and other applications and functions, particularly given that the FCC requires the physical transmission pathway to the Internet for dial-up access and broadband DSL service to be sold separately from the Internet functionality. The dissent points to the FCC’s statutory authority to forbear from imposing Title II regulation as a means to dispel concern that if cable-modem service providers were deemed to provide telecommunications services, then so must all ISPs.

Justice Scalia also faulted the majority’s decision as producing a “breathtaking novelty: judicial decisions subject to reversal by Executive officers.” According to Justice Scalia, the majority’s approach means that even when an agency itself is party to a case in which a Court construes a statute, the agency could still disregard that construction and seek Chevron deference for its contrary construction the “next time around.” Justice Scalia argues the majority’s position that a court’s interpretation is conclusive only if it finds that interpretation is “the only permissible reading of the statute” calls into question past statutory construction cases that did not include an “unambiguous” finding and creates a “wonderful new world” full of promise “for administrative-law professors in need of tenure articles and, of course, for litigators.”