Supreme Court Rules in Brand X Case

June 27, 2005. The Supreme Court issued its opinion [59 pages in PDF] in NCTA v. Brand X, upholding the Federal Communications Commission's (FCC) determination that cable broadband internet access service is an information service, and reversing the judgment of the U.S. Court of Appeals (9thCir).

The Supreme Court overturned the 2003 opinion [39 pages in PDF] of the 9th Circuit, which vacated the FCC's 2002 Declaratory Ruling (DR) that cable modem service is an information service, and that there is no separate offering as a telecommunications service.

The 9th Circuit vacated the FCC's DR, in part, because it determined that as a result of a procedural oddity, it need not apply Chevron deference. The Supreme Court held that Chevron deference applies in this matter, and that under this standard of review, the FCC's DR is a lawful construction of the Communications Act.

This is a victory, after an long and hard fought battle, for the broadband policy of former FCC Chairman Michael Powell.

See also, related story titled "Reaction to the Supreme Court's Opinion in the Brand X Case" in TLJ Daily E-Mail Alert No. 1,163, June 28, 2005.

On March 14, 2002, the FCC adopted a Declaratory Ruling and Notice of Proposed Rulemaking [75 pages in PDF]. The Declaratory Ruling (DR) component of this item states that "we conclude that cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service."

Brand X, EarthLink, the State of California, and others filed petitions for review of the FCC's order in various federal circuits. These petitions for review were assigned to the 9th Circuit by lottery.

These petitioners argued that cable modem service is both an information service and a telecommunications service, and is therefore subject to regulation on a common carriage basis. That is, they argue that cable broadband providers must be required to let other internet service providers (ISPs) use their facilities.

The 9th Circuit decided without applying the deference to administrative agencies required by Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). Rather, it concluded that it was bound by the doctrine of stare decisis to follow its June 22, 2000 opinion in AT&T v. Portland, which held that cable modem service is a telecommunications service. The Portland case is also reported at 216 F.3d 871.

The FCC was not a party to that earlier action; it had not yet issued its DR. Moreover, the cable operator, AT&T, argued for telecommunications status, rather than information services status.

On October 6, 2003 the U.S. Court of Appeals (9thCir) issued its opinion [39 pages in PDF] in Brand X Internet Services v. FCC, vacating the FCC's declaratory ruling that cable modem service is an information service, and that there is no separate offering as a telecommunications service. See also, story titled "9th Circuit Vacates FCC Declaratory Ruling That Cable Modem Service is an Information Service Without a Separate Offering of a Telecommunications Service" in TLJ Daily E-Mail Alert No. 754, October 7, 2003. This opinion is also reported at 345 F.3d 1120.

Opinion of the Court. Justice Clarence Thomas wrote the opinion for the Supreme Court. He first reviewed the FCC's Computer II rules, which distinguished between basic and enhanced service, and the Telecommunications Act of 1996's distinction between telecommunications service and information service. He then summarized the FCC's reasoning in its DR.

Clarence ThomasThomas (at right) then shifted to a discussion of procedure. He noted the procedural history of the case, and that the 9th Circuit decision not to accord the DR Chevron deference. He concluded that the 9th Circuit "erred" in according stare decisis to the Portland case, and in not applying Chevron deference.

Thomas summarized the Chrevron doctrine. "In Chevron, this Court held that ambiguities in statutes within an agency’s jurisdiction to administer are delegations of authority to the agency to fill the statutory gap in reasonable fashion. Filling these gaps, the Court explained, involves difficult policy choices that agencies are better equipped to make than courts. ... If a statute is ambiguous, and if the implementing agency’s construction is reasonable, Chevron requires a federal court to accept the agency’s construction of the statute, even if the agency’s reading differs from what the court believes is the best statutory interpretation."

He concluded that "Only a judicial precedent holding that the statute unambiguously forecloses the agency's interpretation, and therefore contains no gap for the agency to fill, displaces a conflicting agency construction." But, the present statute is ambiguous.

The Supreme Court did not overturn the Portland opinion. Rather, it wrote that "our conclusion that it is reasonable to read the Communications Act to classify cable modem service solely as an "information service" leaves untouched Portland’s holding that the Commission’s interpretation is not the best reading of the statute." (Emphases in original, at page 14.)

Having determined that Chevron deference applies, Justice Thomas proceeded to review the FCC's order under the two part test set out in Chevron.

First, following a lengthy review of the Communications Act, and the cable modem service, Thomas concluded that the Communications Act fails unambiguously to classify facilities-based information service providers, such as cable modem services providers, as telecommunications service offerors. And second, Thomas concluded that the FCC's construction of the Communications Act in its DR was not unreasonable.

Justices John Paul Stevens and Stephen Breyer each wrote short concurring opinions regarding Chevron deference.

Scalia's Dissent. Justice Antonin Scalia wrote a long and vigorous dissenting opinion that was joined, in part, by Justices David Souter and Ruth Ginsburg.

He wrote, "Actually, in these cases, it might be more accurate to say the Commission has attempted to establish a whole new regime of nonregulation, which will make for more or less free-market competition, depending upon whose experts are believed. The important fact, however, is that the Commission has chosen to achieve this through an implausible reading of the statute, and has thus exceeded the authority given it by Congress."

Scalia also mocked the FCC's "self-congratulatory paean to its deregulatory largesse".

He explained that "what the Commission hath given, the Commission may well take away -- unless it doesn’t. This is a wonderful illustration of how an experienced agency can (with some assistance from credulous courts) turn statutory constraints into bureaucratic discretions. The main source of the Commission’s regulatory authority over common carriers is Title II, but the Commission has rendered that inapplicable in this instance by concluding that the definition of "telecommunications service" is ambiguous and does not (in its current view) apply to cable-modem service. It contemplates, however, altering that (unnecessary) outcome, not by changing the law (i.e., its construction of the Title II definitions), but by reserving the right to change the facts. Under its undefined and sparingly used "ancillary" powers, the Commission might conclude that it can order cable companies to "unbundle" the telecommunications component of cable-modem service."

"And presto," wrote Scalia, "Title II will then apply to them, because they will finally be "offering" telecommunications service! Of course, the Commission will still have the statutory power to forbear from regulating them ... Such Möbius-strip reasoning mocks the principle that the statute constrains the agency in any meaningful way." (Parentheses in original. Footnote omitted.)

Scalia concluded that "After all is said and done, after all the regulatory cant has been translated, and the smoke of agency expertise blown away, it remains perfectly clear that someone who sells cable-modem service is "offering" telecommunications. For that simple reason set forth in the statute, I would affirm the Court of Appeals."