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Shannon P. Duffy

The Legal Intelligencer

10-17-2007

In a victory for big telephone companies, a federal appeals court has upheld a ruling by the Federal Communications Commission that effectively deregulated high-speed Internet access service provided over traditional telephone lines.

In its September 2005 ruling, the FCC relieved telephone companies of decades-old regulations that required them to grant competing Internet service providers "nondiscriminatory" access to their wirelines in order to reach consumers.

Challenging the ruling in the three consolidated appeals, captioned Time Warner Telecom Inc. v. FCC, were independent Internet service providers, competing telecommunications service providers, cable modem providers and several public interest organizations.

The FCC's order now allows telephone companies to enter into individually negotiated arrangements with companies that seek access to their broadband wireline facilities.

In the appeals, the independent providers argued that the FCC's order effectively allows telephone companies to deny competitors access to their wirelines, thereby resulting in decreased competition and consumer choice in the market for broadband Internet service.

Time Warner's lawyer, David P. Murray of Wilkie Farr & Gallagher in Washington, D.C., argued that if the dominant telephone companies were not forced to make their transmission lines available to competitive providers of Internet access, they would be free to target their investments in network upgrades so that they would be available only to their own Internet access services.

The result, Murray argued, would be a disparity in service between the broadband Internet access service offered by telephone companies and their competitors, giving the telephone companies "the ability to raise prices unilaterally on their higher-quality services without fear of losing market share."

But lawyers for the FCC argued that the agency properly decided to abandon the regulations because they "imposed significant costs" on telephone companies, "thereby impeding innovation and investment in new broadband technologies and services."

Now a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals has ruled that the FCC's decision simply extended the logic of the U.S. Supreme Court's 2005 ruling in National Cable & Telecommunications Association v. Brand X Internet Services.

In Brand X, the justices upheld a previous FCC ruling that said cable companies provide an "information service" rather than a "telecommunications service" and therefore should not be forced to share their infrastructure with Internet service providers.

Soon after, the FCC handed down its "Wireline Broadband Order" to extend the same rules to telephone companies.

In the order, the FCC said it had determined that "like cable modem service (which is usually provided over the provider's own facilities), wireline broadband Internet access service combines computer processing, information provision, and data transport, enabling end users to run a variety of applications" such as e-mail and surfing the Internet.

The FCC concluded that, due to the similarity between how end users perceive Internet access -- whether provided by wireline or cable modem providers -- its decision to classify wireline broadband Internet access service as an "information service" logically flowed from the Supreme Court's Brand X decision.

The 3rd Circuit agreed, finding that the FCC's decision was entitled to deference.

"In our view, the record adequately supports the FCC's conclusion that, from the perspective of the end-user, wireline broadband service and cable modem service are functionally similar and, therefore, that they should be subject to the same regulatory classification under the Communications Act," U.S. Circuit Judge Julio M. Fuentes wrote.

Fuentes, in an opinion joined by 3rd Circuit Senior Judge Morton I. Greenberg and visiting Judge Alan D. Lourie of the Federal Circuit, also rejected the argument that the FCC's ruling was improper because it conflicted with past agency decisions.

"The FCC candidly admitted in the Wireline Broadband Order that past agency statements concerning the regulatory treatment of wireline broadband Internet access service had not been 'entirely consistent,' but nevertheless found that there was ample basis in its prior rulings to support its classification of wireline broadband Internet access service as a functionally integrated information service," Fuentes wrote.

Merely showing that an agency's ruling is in conflict with its prior decisions is not enough to invalidate it, Fuentes found.

"To the extent that the FCC's current classification of wireline broadband Internet access service conflicts with past agency rulings," Fuentes said, "Brand X makes clear that an 'an initial agency interpretation is not instantly carved in stone. On the contrary, the agency ... must consider varying interpretations and the wisdom of its policy on a continuing basis.'"

Fuentes also rejected the argument that the FCC's decision-making process was flawed because it failed to conduct a "full market analysis."

Attorney James M. Carr of the FCC's office of general counsel argued that the agency properly opted not to do a market analysis because it wanted to "avoid making highly dubious and premature conclusions about a nascent and dynamic market that is rapidly changing."

In its order, Carr said, the FCC explained that only 20 percent of consumers who have access to advanced telecommunications capability currently subscribe to services providing such capability, and that about 50 percent of U.S. households subscribe to either broadband or narrowband Internet access service.

Alternative broadband platforms are developing and emerging, Carr said, such as satellite, wireless and powerline, in both the residential and business markets.

By comparison, Carr said, the FCC found that the market for telephone services has had a market penetration rate of roughly 90 percent for more than 20 years.

As a result, Carr argued, in the FCC's view, "snapshot data" of the broadband service market "may quickly and predictably be rendered obsolete as the market continues to evolve."

Fuentes agreed, saying the FCC had properly considered "how the market for broadband services is likely to develop" and had predicted that "market penetration of cable modem and wireline broadband service will grow dramatically in the future and that the two services will compete head-to-head."

The FCC also predicted that both cable and wireline services will continue to invest in and expand the reach of their services, Fuentes noted, and that emerging broadband platforms will exert competitive pressure and gain market share.

As a result, Fuentes said, "We agree with the FCC that these reasons justified its decision to refrain from a traditional market analysis and to rely instead on larger trends and predictions concerning the future of the broadband services market."