FCC Wins Two Appeals Court Decisions in Three Days

Over the last several years, the D.C. Circuit has been the U.S. Court of Appeals preferred forum for those seeking to get court reversals of FCC decisions. Although historically friendly to the FCC, from the mid-1990s forward the D.C. Circuit became increasingly hostile to the agency and its decisions. This makes it more interesting that within the space of three days the FCC defeated challenges to its policies brought before the D.C. Circuit by two of its most prominent regulatees – Verizon and the National Cable & Telecommunications Association.

Both cases are related to the use and protection of customer information. In the Verizon case, the Court upheld the FCC’s ruling against the Verizon “retention marketing” program which used competitors’ requests for number porting to target winback efforts. In the NCTA case, the FCC upheld the agency’s decision to require “opt in” from customers before their personal data can be disclosed to contractors and third party marketing partners. For more detail on each of these court rulings, keep reading.

First, on February 10, 2009, the D.C. Circuit upheld the FCC’s June 23, 2008, ruling against Verizon’s “retention marketing program” that used number porting requests from other carriers to target winback efforts. The DC Circuit rejected all of Verizon’s arguments, including claims (1) that the FCC misread Section 222(b) of the Communications Act regarding the treatment of confidential information by carriers, (2) that two of the carriers who brought the matter to the FCC (Comcast and Bright House Networks) are not “common carriers” protected by Section 222(b), and (3) that the FCC ruling violates Verizon’s First Amendment rights.

The FCC’s June 23 Order concluded that Verizon violated Section 222(b) of the Telecom Act with a “retention marketing plan” that targeted winback efforts using local service requests (LSRs) from other carriers for transfers of telephone numbers away from Verizon and to competing carriers. Three competitors – Time Warner Cable, Comcast Corporation and Bright House Networks – brought a complaint against Verizon at the FCC, arguing that Verizon’s use of the number transfer information was improper and in violation of the Communications Act.

The FCC staff first issued a ruling in Verizon’s favor, concluding that the information was not “received by Verizon for purposes of providing services”. Instead, the FCC staff concluded that Verizon received the information for the purpose of transferring services away to other providers and that was not within the scope of the law. The full FCC decision on June 23 reversed the staff and concluded that Verizon’s plan was in violation of the Act. The D.C. Circuit ruling upholds the June 23 decision against Verizon issued by the full FCC.

The Court first upheld the FCC’s reading of Section 222(b). As a threshold question, it agreed with the FCC that “advance notice of a carrier change that one carrier is required to submit to another is carrier ‘proprietary information’ under section 222(b).” Having agreed with the FCC that the information at issue was within the reach of Section 222(b), the Court then reviewed the language of the statute to determine if it barred Verizon’s actions. The Court concluded that the statute is ambiguous, and that the FCC’s interpretation is reasonable. It found that Verizon’s reading of the law would produce an “anomalous” result because Verizon’s interpretation would protect both resellers and purchasers of UNEs from Verizon, but not facilities based competitors whose only contact with Verizon is number porting. Since that is contrary to the Telecom Act’s goal of encouraging facilities based competition, the Court found the FCC reading of Section 222(b) to be legally reasonable.

The Court also agreed with the FCC and rejected Verizon’s claim that two of the complaining parties – Comcast and Bright House – are not common carriers. The companies both stated that they are carriers, had state CPCNs and entered into interconnection agreements with Verizon. These were viewed, in combination, as reasonable evidence of common carrier status. Consequently, those companies were within the scope of Section 222.

Finally, the Court rejected Verizon’s First Amendment argument. It applied the “commercial speech” test and agreed that the FCC has a “substantial interest” in the issue it was addressing and that the FCC ruling is “designed carefully” to meet the goal. Agreeing that Verizon “is disabled only from using an opportunity placed in its hands by a technological necessity”, the Court found no “serious constitutional difficulty” in the FCC’s actions barring Verizon’s use of the information.   

The NCTA case, decided on February 13, 2009, also raised a First Amendment challenge to the FCC’s regulations, in that case relating to disclosure of “customer proprietary network information.” The CPNI rules have had a somewhat tortured history with the courts. In 1999, the 10th Circuit overturned FCC rules requiring a customer to “opt in” to give consent for disclosure of data to any entity outside the business relationship. Under those rules CPNI could not be shared without an affirmative “opt in” approval from the customer agreeing to disclosure. The 10th Circuit ruled in 1999 that the FCC opt in rule was an unconstitutional restriction on the carrier’s right to speak with its customers. In that case, then, the First Amendment argument succeeded.

As a result of the 1999 10th Circuit ruling, the FCC modified its rules to rely on an “opt out” approach for CPNI disclosure, meaning that customers were deemed to have consented unless they affirmatively “opted out” of having their data shared. This opt out approach was applied to disclosure to carrier affiliate companies and to joint venture partners and third party contractors. However, in 2005 the FCC was asked to consider more stringent rules, and in 2007 it modified the CPNI rules again. Those changes restored the “opt in” approach for disclosure to third parties such as joint venturers and independent contractors. The NCTA challenged the new opt in requirement before the D.C. Circuit, raising the First Amendment argument that had succeeded with the 10th Circuit in 1999.

The FCC adopted its 2007 opt in rules under Section 222 of the Communications Act. The D.C. Circuit disagreed with the 1999 10th Circuit decision by stating that the Tenth Circuit “doubted whether [the government’s] interest could be deemed ‘substantial’” enough to meet the test for restrictions on commercial speech. “We do not share the Tenth Circuit’s doubt.” The Court went on to explain that it views protection of consumer credit information and privacy to be a “substantial interest” of the government. Throughout the discussion, the Court returned several times to the theme that the NCTA did not challenge the constitutionality of Section 222 itself, just the FCC rules. In the Court’s view, if Section 222 is constitutional, and the opt out method is constitutional, there is virtually no room left to argue that the opt in requirement is not constitutional as well. The D.C. Circuit also rejected arguments that the FCC failed to explain the reasons underlying its decision to modify its rules and reinstate the opt in requirement for some disclosures. Because carriers have less control over data when it is disclosed to third parties than when it is disclosed to their own affiliates, the Court concluded it is reasonable to allow opt out for affiliate disclosures but require opt in for third party disclosures.

Finally, a faithful reader has pointed out that in a recent column I referred to Commissioner Susan Tate, when her name is actually Deborah. I apologize to the Commissioner and thank my faithful reader for pointing out the error. IP

Danny E. Adams currently serves as managing partner of Kelley Drye & Warren’s Tysons Corner office and is a member of the firm’s Executive Committee. He is a member of the bar in Virginia, District of Columbia and Arizona.