Supreme Court Reinstates FCC's Decision Classifying Cable Modem Service as an Information Service

Yesterday, in National Cable Telecommunications Association v. Brand X, the U.S. Supreme Court reversed the Ninth Circuit and held that the FCC was entitled to deference when it classified cable modem service as an "information service." In Brand X v. FCC, the Ninth Circuit had refused to defer to the FCC and rejected the FCC's classification, finding instead that cable modem service was part "telecommunications service" and part "information service" and thus possibly subject to common carrier regulation. In yesterday's 6–3 decision, authored by Justice Thomas, the Court held that the FCC, as the expert agency, had made a "reasonable policy choice" in classifying cable modem service as an "information service" and that the Ninth Circuit erred in failing to properly respect the FCC's interpretation of ambiguous provisions of the Communications Act.

In a characteristically scathing dissent, Justice Scalia (joined by Justices Souter and Ginsburg) disagreed and argued that the FCC misread the Communications Act because cable operators must "offer" telecommunications service when they provide cable modem service and a court must not defer to an agency's reading of a statute, ambiguous or otherwise, if prior precedent of the court is to the contrary, lest "judicial decisions [become] subject to reversal by Executive officers." Justices Stevens and Breyer each filed brief but separate concurrences responding to narrow aspects of Justice Scalia's dissent.

Although yesterday's decision stands as a substantial victory for the cable industry, there will likely be no immediate change in how cable modem service is provided because the cable industry has been operating under the FCC's "information service" classification all along and broadband competition has been robust. Yesterday's decision, however, surely marks the resumption of the contentious administrative and legislative debate regarding the manner in which cable modem service may ultimately be regulated. "The Commission's decision appears to be a first step in an effort to reshape the way the Commission regulates information service providers." The Commission will ultimately have to resolve competing claims about whether and how to regulate information services and providers in pending rulemaking proceedings.

Background—the FCC and Ninth Circuit decisions

As a result of regulatory and franchising disputes involving cable operators, local franchising authorities and Internet service providers, the FCC issued a Declaratory Ruling in March 2002 finding that cable modem service was an interstate "information service" and thus was not subject to regulation as either a "cable service" or a "telecommunications service." The decision was controversial as it ended for the time being efforts by ISPs to gain "forced access" to cable operators' high speed modem service and also precluded state and federal regulation of the service, including the assessment of franchise fees on cable modem revenues. At the same time, the FCC commenced a rulemaking to consider whether cable modem service should nonetheless be regulated in some fashion, such as requiring a variation on ISP forced access, and whether LEC broadband DSL service should be reclassified as an information service.

The LFAs, ISPs, and several consumer groups, frustrated by having to wait and see if the FCC would ultimately regulate cable modem service in some fashion, appealed the FCC's Declaratory Ruling to three different circuit courts of appeal, including the Ninth Circuit. The appeals were randomly assigned to the Ninth Circuit and then consolidated for briefing and argument. In October 2003 the Ninth Circuit reversed the FCC in part, finding that its prior decision in AT&T v. City of Portland, which held that cable modem service was a "telecommunications service," was binding as stare decisis and the FCC's contrary analysis and decision were therefore not entitled to deference. The Ninth Circuit did agree that cable modem service was not a "cable service" (as it also held in Portland), but concluded that cable modem service was part "information service" and part "telecommunications service" and thus cable modem service providers were subject to regulation as common carriers under Title II of the Communications Act.

The Ninth Circuit would have sent the proceeding back to the FCC to resolve the numerous competing regulatory possibilities that the decision raised, but the government and cable industry sought and obtained a stay of the decision and then filed for certiorari in the Supreme Court. A group representing the interests of local franchising authorities also conditionally cross-petitioned for certiorari seeking review of that aspect of the Ninth Circuit's decision holding that cable modem service was not a cable service.

On Dec. 10, 2004, the Supreme Court granted the government's and cable industry's petitions and denied the LFAs' cross-petition, thereby putting to rest any possibility that cable modem service would be classified as "cable service." The Supreme Court's review would thus be confined to these two questions: whether the FCC's "information service" classification was proper and whether that classification was entitled to deference.

The Supreme Court's decision

The Court resolved both questions in favor of the cable industry. In deciding that the Ninth Circuit's refusal to accord deference to the FCC was improper, the Court revisited the well-known Chevron decision and its progeny to conclude that when an agency that is charged with interpreting a complex statute that is susceptible to more than one reasonable interpretation, the reviewing court must defer to the agency's reasonable interpretative choice even if that court's prior precedent reached a different conclusion. "Before a judicial construction of a statute, whether contained in a precedent or not, may trump an agency's, the court must hold that the statute unambiguously requires the court's construction." Justice Thomas also noted that when a statute is ambiguous, "it is for agencies, not courts, to fill gaps."

On the second issue, the Court found that the FCC properly interpreted the definitions of "information" and "telecommunications" in the Communications Act. The Court accepted the conclusion that cable operators do not "offer" telecommunications services because no telecommunications component is separately "offered" on a "stand-alone" basis, but is instead "sufficiently integrated with the finished service to make it reasonable to describe the two as a single, integrated offering." The fact that the Commission currently regulates competitive broadband DSL service as a telecommunications service did not preclude the Commission's conclusion with respect to cable modem service. The decisions with respect to telephone companies' broadband services were based on monopoly power and bottleneck facilities, not any particular "offering." In any event, the Court noted that the Commission may ultimately deregulate DSL service, or regulate cable modem service, or change its mind altogether. "Any inconsistency between the order under review and the Commission's treatment of DSL service can be adequately addressed when the Commission fully reconsiders its treatment of DSL service and when it decides whether, pursuant to its ancillary Title I jurisdiction, to require cable companies to allow independent ISPs access to their facilities."

Future implications

The immediate practical implications of the yesterday's decision are limited, especially since the cable industry has been operating under the regulatory paradigm the Court affirmed, as most observers expected. Although the Supreme Court remanded the case to the Ninth Circuit "for further proceedings" consistent with yesterday's opinion, the Ninth Circuit will likely vacate its earlier decision, affirm the FCC and dismiss the petitions for review, ending the litigation.

The FCC will now address issues such as forced access, regulatory parity, deregulation of DSL service, customer service, customer privacy, and universal service in the pending rulemaking. The resolution of that rulemaking, and the pending appeal of the FCC's decision preempting local regulation of VoIP (currently in the Ninth Circuit but requests to transfer to the Eighth Circuit are pending) will have a greater impact on how cable operators deliver cable modem and related information services.

If you have any questions or would like to review the implications, please contact us.