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The Senate should not reconfirm Jessica Rosenworcel to the Federal Communications Commission (FCC), in order to allow the Trump Administration to usher in needed reforms in the critical area of communications policy.

As documented by the Free State Foundation (FSF) and other supporters of free markets, the Obama Administration’s FCC has done a dismal job in overseeing communications regulation, both as a matter of law and economics (see, for example, the abuses documented in FSF publications).  The FCC’s proposal to impose common carrier-like regulations on the Internet is just one example of what constitutes not merely flawed policy, but a failure to adhere to the rule of law, as I explain in an October 2016 Heritage Foundation Legal Memorandum (citations omitted):

[T]he rule of law involves “a system of binding rules” that have been adopted and applied by a valid government authority and that embody “clarity, predictability, and equal applicability.”

 Practices employed by government agencies that undermine the rule of law ignore a fundamental duty that the government owes its citizens and thereby undermine America’s constitutional system. Federal courts, however, will not review a federal administrative action unless an actual litigated “case or controversy” is presented to them, and they generally are reluctant to invoke constitutional “first principles” to strike down federal agency initiatives. Judicial intervention is thus a poor check on an agency’s tendency to flout the rule of law—or merely give it lip service—by acting in an unpredictable and inequitable manner.

It follows, therefore, that close scrutiny of federal administrative agencies’ activities is particularly important in helping to achieve public accountability for an agency’s failure to honor the rule of law standard. Applying such scrutiny to the FCC reveals that it does a poor job of adhering to rule of law principles. Accordingly, specific legislative reforms to rectify that shortcoming warrant serious consideration by Congress. . . .

The FCC has fallen short in meeting rule of law standards, both in its procedural practices and in various substantive actions that it has taken. . . .

[FCC Procedural failures include] delays, lack of transparency, and inefficiencies in agency proceedings (including “voting on secret texts and delaying the publication of orders”; excessive cost burdens on regulated parties; outdated rules; and problems in agency interactions with the public. . . .

Substantive agency actions also undermine the rule of law if they fall outside the scope of the agency’s constitutional, statutory, or regulatory authority.  By their nature, such actions indicate that an agency does not view itself as bound by the law and is unwilling to clarify how the government’s coercive powers will be applied.  Significant FCC initiatives in recent years have involved such derogations from rule of law principles and have proved to be far more serious than mere procedural imperfections. 

Specific FCC abuses of the rule of law, documented in my Heritage Legal Memorandum, include the imposition of arbitrary conditions on merging parties having nothing to do with the actual effects of a merger.  They also involve regulatory initiatives that exceed the FCC’s statutory authority, such as (1) an attempt to repeal state municipal broadband regulation (struck down in court), (2) the “Open Internet Order” which seeks to regulate the Internet under the guise of “net neutrality,” (3) the unauthorized extension of FCC rules covering joint sales agreements by broadcast stations (struck down in court), and (4) the unauthorized regulation of video “set top box” equipment.

The FCC has also brought a variety of public enforcement actions against private parties that could not reasonably have known that they were violating a legal norm as defined by the FCC, thereby violating principles of clarity, predictability, and equal treatment in law enforcement.

Key FCC actions that flout the rule of law have been enacted by partisan three-to-two FCC votes, with the three Democratic Commissioners (Chairman Tom Wheeler, Mignon Clyburn, and Jessica Rosenworcel) voting in favor of such measures and the two Republican Commissioners (Ajit Pai and Michael O’Rielly) voting in opposition.  Without Commissioner Rosenworcel’s votes, the FCC’s ability to undermine the rule of law in those instances would have been thwarted.

Commissioner Rosenworcel’s term expired in June 2015, but she remained on the Commission.  In 2015 President Obama nominated her for a new five-year term as FCC Commissioner, and, as explained by the Senate Commerce Committee, “[s]he may remain in her current role as commissioner until December 31, 2016 while awaiting Senate confirmation for a second term.”

Rosenworcel’s remomination has not yet been taken up by the Senate, giving President-Elect Trump the opportunity to select a new Commissioner (and Chairman) who can steer the FCC in a market-oriented direction that respects the rule of law.  On December 2nd, however, it was reported that “[Senate Minority Leader] Harry Reid and President Obama are circulating a petition to remove the hold on FCC Commissioner Jessica Rosenworcel so that she can be reconfirmed before Congress recesses next week.”

This is troublesome news.  Confirmation of Rosenworcel would deny the new President the ability to reshape communications policy, with serious negative effects on Internet freedom and innovation in the economically vital communications sector.  Senate Republicans should stand firm and deny confirmation to Ms. Rosenworcel, in order to ensure that the new President has the opportunity to reform the FCC.

In an October 25 blog commentary posted at this site, Geoffrey Manne and Kristian Stout argued against a proposed Federal Communications Commission (FCC) ban on the use of mandatory arbitration clauses in internet service providers’ consumer service agreements.  This proposed ban is just one among many unfortunate features in the latest misguided effort by the Federal Communications Commission (FCC) to regulate the privacy of data transmitted over the Internet (FCC Privacy NPRM), discussed by me in an October 27, 2016 Heritage Foundation Legal Memorandum:

The growth of the Internet economy has highlighted the costs associated with the unauthorized use of personal information transmitted online. The federal government’s consumer protection agency, the Federal Trade Commission (FTC), has taken enforcement actions for online privacy violations based on its authority to proscribe “unfair or deceptive” practices affecting commerce. The FTC’s economically influenced case-by-case approach to privacy violations focuses on practices that harm consumers. The FCC has proposed a rule that that would impose intrusive privacy regulation on broadband Internet service providers (but not other Internet companies), without regard to consumer harm.  If implemented, the FCC’s rule would impose major economic costs and would interfere with neutral implementation of the FTC’s less intrusive approach, as well as the FTC’s lead role in federal regulatory privacy coordination with foreign governments.

My analysis concludes with the following recommendations:

The FCC’s Privacy NPRM is at odds with the pro-competitive, economic welfare enhancing goals of the 1996 Telecommunications Act. It ignores the limitations imposed by that act and, if implemented, would harm consumers and producers and slow innovation. This prompts four recommendations.

The FCC should withdraw the NPRM and leave it to the FTC to oversee all online privacy practices under its Section 5 unfairness and deception authority. The adoption of the Privacy Shield, which designates the FTC as the responsible American privacy oversight agency, further strengthens the case against FCC regulation in this area.

In overseeing online privacy practices, the FTC should employ a very light touch that stresses economic analysis and cost-benefit considerations. Moreover, it should avoid requiring that rigid privacy policy conditions be kept in place for long periods of time through consent decree conditions, in order to allow changing market conditions to shape and improve business privacy policies.

Moreover, the FTC should borrow a page from former FTC Commissioner Joshua Wright by implementing an “economic approach” to privacy.  Under such an approach, FTC economists would help make the commission a privacy “thought leader” by developing a rigorous academic research agenda on the economics of privacy, featuring the economic evaluation of industry sectors and practices;

The FTC would bear the burden of proof in showing that violations of a company’s privacy policy are material to consumer decision-making;

FTC economists would report independently to the FTC about proposed privacy-related enforcement initiatives; and

The FTC would publish the views of its Bureau of Economics in all privacy-related consent decrees that are placed on the public record.

The FTC should encourage the European Commission and other foreign regulators to take into account the economics of privacy in developing their privacy regulatory policies. In so doing, it should emphasize that innovation is harmed, the beneficial development of the Internet is slowed, and consumer welfare and rights are undermined through highly prescriptive regulation in this area (well-intentioned though it may be). Relatedly, the FTC and other U.S. government negotiators should argue against adoption of a “one-size-fits-all” global privacy regulation framework.  Such a global framework could harmfully freeze into place over-regulatory policies and preclude beneficial experimentation in alternative forms of “lighter-touch” regulation and enforcement.

Although not a panacea, these recommendations would help deter (or, at least, constrain) the economically harmful government micromanagement of businesses’ privacy practices in the United States and abroad.  The Internet economy would in turn benefit from such a restraint on the grasping hand of big government.

Stay tuned.

Over the weekend, Senator Al Franken and FCC Commissioner Mignon Clyburn issued an impassioned statement calling for the FCC to thwart the use of mandatory arbitration clauses in ISPs’ consumer service agreements — starting with a ban on mandatory arbitration of privacy claims in the Chairman’s proposed privacy rules. Unfortunately, their call to arms rests upon a number of inaccurate or weak claims. Before the Commissioners vote on the proposed privacy rules later this week, they should carefully consider whether consumers would actually be served by such a ban.

FCC regulations can’t override congressional policy favoring arbitration

To begin with, it is firmly cemented in Supreme Court precedent that the Federal Arbitration Act (FAA) “establishes ‘a liberal federal policy favoring arbitration agreements.’” As the Court recently held:

[The FAA] reflects the overarching principle that arbitration is a matter of contract…. [C]ourts must “rigorously enforce” arbitration agreements according to their terms…. That holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been “overridden by a contrary congressional command.”

For better or for worse, that’s where the law stands, and it is the exclusive province of Congress — not the FCC — to change it. Yet nothing in the Communications Act (to say nothing of the privacy provisions in Section 222 of the Act) constitutes a “contrary congressional command.”

And perhaps that’s for good reason. In enacting the statute, Congress didn’t demonstrate the same pervasive hostility toward companies and their relationships with consumers that has characterized the way this FCC has chosen to enforce the Act. As Commissioner O’Rielly noted in dissenting from the privacy NPRM:

I was also alarmed to see the Commission acting on issues that should be completely outside the scope of this proceeding and its jurisdiction. For example, the Commission seeks comment on prohibiting carriers from including mandatory arbitration clauses in contracts with their customers. Here again, the Commission assumes that consumers don’t understand the choices they are making and is willing to impose needless costs on companies by mandating how they do business.

If the FCC were to adopt a provision prohibiting arbitration clauses in its privacy rules, it would conflict with the FAA — and the FAA would win. Along the way, however, it would create a thorny uncertainty for both companies and consumers seeking to enforce their contracts.  

The evidence suggests that arbitration is pro-consumer

But the lack of legal authority isn’t the only problem with the effort to shoehorn an anti-arbitration bias into the Commission’s privacy rules: It’s also bad policy.

In its initial broadband privacy NPRM, the Commission said this about mandatory arbitration:

In the 2015 Open Internet Order, we agreed with the observation that “mandatory arbitration, in particular, may more frequently benefit the party with more resources and more understanding of the dispute procedure, and therefore should not be adopted.” We further discussed how arbitration can create an asymmetrical relationship between large corporations that are repeat players in the arbitration system and individual customers who have fewer resources and less experience. Just as customers should not be forced to agree to binding arbitration and surrender their right to their day in court in order to obtain broadband Internet access service, they should not have to do so in order to protect their private information conveyed through that service.

The Commission may have “agreed with the cited observations about arbitration, but that doesn’t make those views accurate. As one legal scholar has noted, summarizing the empirical data on the effects of arbitration:

[M]ost of the methodologically sound empirical research does not validate the criticisms of arbitration. To give just one example, [employment] arbitration generally produces higher win rates and higher awards for employees than litigation.

* * *

In sum, by most measures — raw win rates, comparative win rates, some comparative recoveries and some comparative recoveries relative to amounts claimed — arbitration generally produces better results for claimants [than does litigation].

A comprehensive, empirical study by Northwestern Law’s Searle Center on AAA (American Arbitration Association) cases found much the same thing, noting in particular that

  • Consumer claimants in arbitration incur average arbitration fees of only about $100 to arbitrate small (under $10,000) claims, and $200 for larger claims (up to $75,000).
  • Consumer claimants also win attorneys’ fees in over 60% of the cases in which they seek them.
  • On average, consumer arbitrations are resolved in under 7 months.
  • Consumers win some relief in more than 50% of cases they arbitrate…
  • And they do almost exactly as well in cases brought against “repeat-player” business.

In short, it’s extremely difficult to sustain arguments suggesting that arbitration is tilted against consumers relative to litigation.

(Upper) class actions: Benefitting attorneys — and very few others

But it isn’t just any litigation that Clyburn and Franken seek to preserve; rather, they are focused on class actions:

If you believe that you’ve been wronged, you could take your service provider to court. But you’d have to find a lawyer willing to take on a multi-national telecom provider over a few hundred bucks. And even if you won the case, you’d likely pay more in legal fees than you’d recover in the verdict.

The only feasible way for you as a customer to hold that corporation accountable would be to band together with other customers who had been similarly wronged, building a case substantial enough to be worth the cost—and to dissuade that big corporation from continuing to rip its customers off.

While — of course — litigation plays an important role in redressing consumer wrongs, class actions frequently don’t confer upon class members anything close to the imagined benefits that plaintiffs’ lawyers and their congressional enablers claim. According to a 2013 report on recent class actions by the law firm, Mayer Brown LLP, for example:

  • “In [the] entire data set, not one of the class actions ended in a final judgment on the merits for the plaintiffs. And none of the class actions went to trial, either before a judge or a jury.” (Emphasis in original).
  • “The vast majority of cases produced no benefits to most members of the putative class.”
  • “For those cases that do settle, there is often little or no benefit for class members. What is more, few class members ever even see those paltry benefits — particularly in consumer class actions.”
  • “The bottom line: The hard evidence shows that class actions do not provide class members with anything close to the benefits claimed by their proponents, although they can (and do) enrich attorneys.”

Similarly, a CFPB study of consumer finance arbitration and litigation between 2008 and 2012 seems to indicate that the class action settlements and judgments it studied resulted in anemic relief to class members, at best. The CFPB tries to disguise the results with large, aggregated and heavily caveated numbers (never once actually indicating what the average payouts per person were) that seem impressive. But in the only hard numbers it provides (concerning four classes that ended up settling in 2013), promised relief amounted to under $23 each (comprising both cash and in-kind payment) if every class member claimed against the award. Back-of-the-envelope calculations based on the rest of the data in the report suggest that result was typical.

Furthermore, the average time to settlement of the cases the CFPB looked at was almost 2 years. And somewhere between 24% and 37% involved a non-class settlement — meaning class members received absolutely nothing at all because the named plaintiff personally took a settlement.

By contrast, according to the Searle Center study, the average award in the consumer-initiated arbitrations it studied (admittedly, involving cases with a broader range of claims) was almost $20,000, and the average time to resolution was less than 7 months.

To be sure, class action litigation has been an important part of our system of justice. But, as Arthur Miller — a legal pioneer who helped author the rules that make class actions viable — himself acknowledged, they are hardly a panacea:

I believe that in the 50 years we have had this rule, that there are certain class actions that never should have been brought, admitted; that we have burdened our judiciary, yes. But we’ve had a lot of good stuff done. We really have.

The good that has been done, according to Professor Miller, relates in large part to the civil rights violations of the 50’s and 60’s, which the class action rules were designed to mitigate:

Dozens and dozens and dozens of communities were desegregated because of the class action. You even see desegregation decisions in my old town of Boston where they desegregated the school system. That was because of a class action.

It’s hard to see how Franken and Clyburn’s concern for redress of “a mysterious 99-cent fee… appearing on your broadband bill” really comes anywhere close to the civil rights violations that spawned the class action rules. Particularly given the increasingly pervasive role of the FCC, FTC, and other consumer protection agencies in addressing and deterring consumer harms (to say nothing of arbitration itself), it is manifestly unclear why costly, protracted litigation that infrequently benefits anyone other than trial attorneys should be deemed so essential.

“Empowering the 21st century [trial attorney]”

Nevertheless, Commissioner Clyburn and Senator Franken echo the privacy NPRM’s faulty concerns about arbitration clauses that restrict consumers’ ability to litigate in court:

If you’re prohibited from using our legal system to get justice when you’re wronged, what’s to protect you from being wronged in the first place?

Well, what do they think the FCC is — chopped liver?

Hardly. In fact, it’s a little surprising to see Commissioner Clyburn (who sits on a Commission that proudly proclaims that “[p]rotecting consumers is part of [its] DNA”) and Senator Franken (among Congress’ most vocal proponents of the FCC’s claimed consumer protection mission) asserting that the only protection for consumers from ISPs’ supposed depredations is the cumbersome litigation process.

In fact, of course, the FCC has claimed for itself the mantle of consumer protector, aimed at “Empowering the 21st Century Consumer.” But nowhere does the agency identify “promoting and preserving the rights of consumers to litigate” among its tools of consumer empowerment (nor should it). There is more than a bit of irony in a federal regulator — a commissioner of an agency charged with making sure, among other things, that corporations comply with the law — claiming that, without class actions, consumers are powerless in the face of bad corporate conduct.

Moreover, even if it were true (it’s not) that arbitration clauses tend to restrict redress of consumer complaints, effective consumer protection would still not necessarily be furthered by banning such clauses in the Commission’s new privacy rules.

The FCC’s contemplated privacy regulations are poised to introduce a wholly new and untested regulatory regime with (at best) uncertain consequences for consumers. Given the risk of consumer harm resulting from the imposition of this new regime, as well as the corollary risk of its excessive enforcement by complainants seeking to test or push the boundaries of new rules, an agency truly concerned with consumer protection would tread carefully. Perhaps, if the rules were enacted without an arbitration ban, it would turn out that companies would mandate arbitration (though this result is by no means certain, of course). And perhaps arbitration and agency enforcement alone would turn out to be insufficient to effectively enforce the rules. But given the very real costs to consumers of excessive, frivolous or potentially abusive litigation, cabining the litigation risk somewhat — even if at first it meant the regime were tilted slightly too much against enforcement — would be the sensible, cautious and pro-consumer place to start.

____

Whether rooted in a desire to “protect” consumers or not, the FCC’s adoption of a rule prohibiting mandatory arbitration clauses to address privacy complaints in ISP consumer service agreements would impermissibly contravene the FAA. As the Court has made clear, such a provision would “‘stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ embodied in the Federal Arbitration Act.” And not only would such a rule tend to clog the courts in contravention of the FAA’s objectives, it would do so without apparent benefit to consumers. Even if such a rule wouldn’t effectively be invalidated by the FAA, the Commission should firmly reject it anyway: A rule that operates primarily to enrich class action attorneys at the expense of their clients has no place in an agency charged with protecting the public interest.

Next week the FCC is slated to vote on the second iteration of Chairman Wheeler’s proposed broadband privacy rules. Of course, as has become all too common, none of us outside the Commission has actually seen the proposal. But earlier this month Chairman Wheeler released a Fact Sheet that suggests some of the ways it would update the rules he initially proposed.

According to the Fact Sheet, the new proposed rules are

designed to evolve with changing technologies and encourage innovation, and are in harmony with other key privacy frameworks and principles — including those outlined by the Federal Trade Commission and the Administration’s Consumer Privacy Bill of Rights.

Unfortunately, the Chairman’s proposal appears to fall short of the mark on both counts.

As I discuss in detail in a letter filed with the Commission yesterday, despite the Chairman’s rhetoric, the rules described in the Fact Sheet fail to align with the FTC’s approach to privacy regulation embodied in its 2012 Privacy Report in at least two key ways:

  • First, the Fact Sheet significantly expands the scope of information that would be considered “sensitive” beyond that contemplated by the FTC. That, in turn, would impose onerous and unnecessary consumer consent obligations on commonplace uses of data, undermining consumer welfare, depriving consumers of information and access to new products and services, and restricting competition.
  • Second, unlike the FTC’s framework, the proposal described by the Fact Sheet ignores the crucial role of “context” in determining the appropriate level of consumer choice before affected companies may use consumer data. Instead, the Fact Sheet takes a rigid, acontextual approach that would stifle innovation and harm consumers.

The Chairman’s proposal moves far beyond the FTC’s definition of “sensitive” information requiring “opt-in” consent

The FTC’s privacy guidance is, in its design at least, appropriately flexible, aimed at balancing the immense benefits of information flows with sensible consumer protections. Thus it eschews an “inflexible list of specific practices” that would automatically trigger onerous consent obligations and “risk[] undermining companies’ incentives to innovate and develop new products and services….”

Under the FTC’s regime, depending on the context in which it is used (on which see the next section, below), the sensitivity of data delineates the difference between data uses that require “express affirmative” (opt-in) consent and those that do not (requiring only “other protections” short of opt-in consent — e.g., opt-out).

Because the distinction is so important — because opt-in consent is much more likely to staunch data flows — the FTC endeavors to provide guidance as to what data should be considered sensitive, and to cabin the scope of activities requiring opt-in consent. Thus, the FTC explains that “information about children, financial and health information, Social Security numbers, and precise geolocation data [should be treated as] sensitive.” But beyond those instances, the FTC doesn’t consider any other type of data as inherently sensitive.

By contrast, and without explanation, Chairman Wheeler’s Fact Sheet significantly expands what constitutes “sensitive” information requiring “opt-in” consent by adding “web browsing history,” “app usage history,” and “the content of communications” to the list of categories of data deemed sensitive in all cases.

By treating some of the most common and important categories of data as always “sensitive,” and by making the sensitivity of data the sole determinant for opt-in consent, the Chairman’s proposal would make it almost impossible for ISPs to make routine (to say nothing of innovative), appropriate, and productive uses of data comparable to those undertaken by virtually every major Internet company.  This goes well beyond anything contemplated by the FTC — with no evidence of any corresponding benefit to consumers and with obvious harm to competition, innovation, and the overall economy online.

And because the Chairman’s proposal would impose these inappropriate and costly restrictions only on ISPs, it would create a barrier to competition by ISPs in other platform markets, without offering a defensible consumer protection rationale to justify either the disparate treatment or the restriction on competition.

As Fred Cate and Michael Staten have explained,

“Opt-in” offers no greater privacy protection than allowing consumers to “opt-out”…, yet it imposes significantly higher costs on consumers, businesses, and the economy.

Not surprisingly, these costs fall disproportionately on the relatively poor and the less technology-literate. In the former case, opt-in requirements may deter companies from offering services at all, even to people who would make a very different trade-off between privacy and monetary price. In the latter case, because an initial decision to opt-in must be taken in relative ignorance, users without much experience to guide their decisions will face effectively higher decision-making costs than more knowledgeable users.

The Chairman’s proposal ignores the central role of context in the FTC’s privacy framework

In part for these reasons, central to the FTC’s more flexible framework is the establishment of a sort of “safe harbor” for data uses where the benefits clearly exceed the costs and consumer consent may be inferred:

Companies do not need to provide choice before collecting and using consumer data for practices that are consistent with the context of the transaction or the company’s relationship with the consumer….

Thus for many straightforward uses of data, the “context of the transaction,” not the asserted “sensitivity” of the underlying data, is the threshold question in evaluating the need for consumer choice in the FTC’s framework.

Chairman Wheeler’s Fact Sheet, by contrast, ignores this central role of context in its analysis. Instead, it focuses solely on data sensitivity, claiming that doing so is “in line with customer expectations.”

But this is inconsistent with the FTC’s approach.

In fact, the FTC’s framework explicitly rejects a pure “consumer expectations” standard:

Rather than relying solely upon the inherently subjective test of consumer expectations, the… standard focuses on more objective factors related to the consumer’s relationship with a business.

And while everyone agrees that sensitivity is a key part of pegging privacy regulation to actual consumer and corporate relationships, the FTC also recognizes that the importance of the sensitivity of the underlying data varies with the context in which it is used. Or, in the words of the White House’s 2012 Consumer Data Privacy in a Networked World Report (introducing its Consumer Privacy Bill of Rights), “[c]ontext should shape the balance and relative emphasis of particular principles” guiding the regulation of privacy.

By contrast, Chairman Wheeler’s “sensitivity-determines-consumer-expectations” framing is a transparent attempt to claim fealty to the FTC’s (and the Administration’s) privacy standards while actually implementing a privacy regime that is flatly inconsistent with them.

The FTC’s approach isn’t perfect, but that’s no excuse to double down on its failings

The FTC’s privacy guidance, and even more so its privacy enforcement practices under Section 5, are far from perfect. The FTC should be commended for its acknowledgement that consumers’ privacy preferences and companies’ uses of data will change over time, and that there are trade-offs inherent in imposing any constraints on the flow of information. But even the FTC fails to actually assess the magnitude of the costs and benefits of, and the deep complexities involved in, the trade-off, and puts an unjustified thumb on the scale in favor of limiting data use.  

But that’s no excuse for Chairman Wheeler to ignore what the FTC gets right, and to double down on its failings. Based on the Fact Sheet (and the initial NPRM), it’s a virtual certainty that the Chairman’s proposal doesn’t heed the FTC’s refreshing call for humility and flexibility regarding the application of privacy rules to ISPs (and other Internet platforms):

These are complex and rapidly evolving areas, and more work should be done to learn about the practices of all large platform providers, their technical capabilities with respect to consumer data, and their current and expected uses of such data.

The rhetoric of the Chairman’s Fact Sheet is correct: the FCC should in fact conform its approach to privacy to the framework established by the FTC. Unfortunately, the reality of the Fact Sheet simply doesn’t comport with its rhetoric.

As the FCC’s vote on the Chairman’s proposal rapidly nears, and in light of its significant defects, we can only hope that the rest of the Commission refrains from reflexively adopting the proposed regime, and works to ensure that these problematic deviations from the FTC’s framework are addressed before moving forward.

On October 6, the Heritage Foundation released a legal memorandum (authored by me) that recounts the Federal Communications Commission’s (FCC) recent sad history of ignoring the rule of law in its enforcement and regulatory actions.  The memorandum calls for a legislative reform agenda to rectify this problem by reining in the agency.  Key points culled from the memorandum are highlighted below (footnotes omitted).

1.  Background: The Rule of Law

The American concept of the rule of law is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law.  As the late Friedrich Hayek explained:

[The rule of law] means the government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

In other words, the rule of law involves a system of binding rules that have been adopted and applied by a valid government authority and that embody clarity, predictability, and equal applicability.   Practices employed by government agencies that undermine the rule of law ignore a fundamental duty that the government owes its citizens and thereby weaken America’s constitutional system.  It follows, therefore, that close scrutiny of federal administrative agencies’ activities is particularly important in helping to achieve public accountability for an agency’s failure to honor the rule of law standard.

2.  How the FCC Flouts the Rule of Law

Applying such scrutiny to the FCC reveals that it does a poor job in adhering to rule of law principles, both in its procedural practices and in various substantive actions that it has taken.

Opaque procedures that generate uncertainties regarding agency plans undermine the clarity and predictability of agency actions and thereby undermine the effectiveness of rule of law safeguards.  Process-based reforms designed to deal with these problems, to the extent that they succeed, strengthen the rule of law.  Procedural inadequacies at the FCC include inordinate delays and a lack of transparency, including the failure to promptly release the text of proposed and final rules.  The FCC itself has admitted that procedural improvements are needed, and legislative proposals have been advanced to make the Commission more transparent, efficient, and accountable.

Nevertheless, mere procedural reforms would not address the far more serious problem of FCC substantive actions that flout the rule of law.  Examples abound:

  • The FCC imposes a variety of “public interest” conditions on proposed mergers subject to its jurisdiction. Those conditions often are announced after inordinate delays, and typically have no bearing on the mergers’ actual effects.  The unpredictable nature and timing of such impositions generate a lack of certainty for businesses and thereby undermine the rule of law.
  • The FCC’s 2015 Municipal Broadband Order preempted state laws in Tennessee and North Carolina that prevented municipally owned broadband providers from providing broadband service beyond their geographic boundaries. Apart from its substantive inadequacies, this Order went beyond the FCC’s statutory authority and raised grave federalism problems (by interfering with a state’s sovereign right to oversee its municipalities), thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law.  The Order was struck down by the U.S. Court of Appeals for the Sixth Circuit in August 2016.
  • The FCC’s 2015 “net neutrality” rule (the Open Internet Order) subjects internet service providers (ISPs) to sweeping “reasonableness-based” FCC regulatory oversight. This “reasonableness” standard gives the FCC virtually unbounded discretion to impose sanctions on ISPs.  It does not provide, in advance, a knowable, predictable rule consistent with due process and rule of law norms.  In the dynamic and fast-changing “Internet ecosystem,” this lack of predictable guidance is a major drag on innovation.  Regrettably, in June 2014, a panel of the U.S. Court of Appeals for the District of Columbia, by a two-to-one vote, rejected a challenge to the order brought by ISPs and their trade association.
  • The FCC’s abrupt 2014 extension of its long-standing rules restricting common ownership of local television broadcast stations, to encompass Joint Sales Agreements (JSAs) likewise undermined the rule of law. JSAs, which allow one television station to sell advertising (but not programming) on another station, have long been used by stations that had no reason to believe that their actions in any way constituted illegal “ownership interests,” especially since many of them were originally approved by the FCC.  The U.S. Court of Appeals for the Third Circuit wisely vacated the television JSA rule in May 2016, stressing that the FCC had violated a statutory command by failing to carry out in a timely fashion the quadrennial review of the television ownership rules on which the JSA rule was based.
  • The FCC’s February 2016 proposed rules that are designed to “open” the market for video set-top boxes, appear to fly in the face of federal laws and treaty language protecting intellectual property rights, by arbitrarily denying protection to intellectual property based solely on a particular mode of information transmission. Such a denial is repugnant to rule of law principles.
  • FCC enforcement practices also show a lack of respect for rule of law principles, by seeking to obtain sanctions against behavior that has never been deemed contrary to law or regulatory edicts. Two examples illustrate this point.
    • In 2014, the FCC’s Enforcement Bureau proposed imposing a $10 million fine on TerraCom, Inc., and YourTelAmerica, Inc., two small telephone companies, for a data breach that exposed certain personally identifiable information to unauthorized access. In so doing, the FCC cited provisions of the Telecommunications Act of 1996 and accompanying regulations that had never been construed to authorize sanctions for failure to adopt “reasonable data security practices” to protect sensitive consumer information.
    • In November 2015, the FCC similarly imposed a $595,000 fine on Cox Communications for failure to prevent a data breach committed by a third-party hacker, although no statutory or regulatory language supported imposing any penalty on a firm that was itself victimized by a hack attack

3.  Legislative Reforms to Rein in the FCC

What is to be done?  One sure way to limit an agency’s ability to flout the rule of law is to restrict the scope of its legal authority.  As a matter of first principles, Congress should therefore examine the FCC’s activities with an eye to eliminating its jurisdiction over areas in which regulation is no longer needed:  For example, residual price regulation may be unnecessary in all markets where competition is effective. Regulation is called for only in the presence of serious market failure, coupled with strong evidence that government intervention will yield a better economic outcome than will a decision not to regulate.

Congress should craft legislation designed to sharply restrict the FCC’s ability to flout the rule of law.  At a minimum, no matter how it decides to pursue broad FCC reform, the following five proposals merit special congressional attention as a means of advancing rule of law principles:

  • Eliminate the FCC’s jurisdiction over all mergers. The federal antitrust agencies are best equipped to handle merger analysis, and this source of costly delay and uncertainty regarding ad hoc restrictive conditions should be eliminated.
  • Eliminate the FCC’s jurisdiction over broadband Internet service. Given the benefits associated with an open and unregulated Internet, Congress should provide clearly and unequivocally that the FCC has no jurisdiction, direct or indirect, in this area.
  • Shift FCC regulatory authority over broadband-related consumer protection (including, for example, deceptive advertising, privacy, and data protection) and competition to the Federal Trade Commission, which has longstanding experience and expertise in the area. This jurisdictional transfer would promote clarity and reduce uncertainty, thereby strengthening the rule of law.
  • Require that before taking regulatory action, the FCC carefully scrutinize regulatory language to seek to avoid the sorts of rule of law problems that have plagued prior commission rulemakings.
  • Require that the FCC not seek fines in an enforcement action unless the alleged infraction involves a violation of the precise language of a regulation or statutory provision.

4.  Conclusion

In recent years, the FCC too often has acted in a manner that undermines the rule of law. Internal agency reforms might be somewhat helpful in rectifying this situation, but they inevitably would be limited in scope and inherently malleable as FCC personnel changes. Accordingly, Congress should weigh major statutory reforms to rein in the FCC—reforms that will advance the rule of law and promote American economic well-being.

There must have been a great gnashing of teeth in Chairman Wheeler’s office this morning as the FCC announced that it was pulling the Chairman’s latest modifications to the set-top box proposal from its voting agenda. This is surely but a bump in the road for the Chairman; he will undoubtedly press ever onward in his quest to “fix” a market that is flooded with competition and consumer choice. But, as we stop to take a breath for a moment while this latest FCC adventure is temporarily paused, there is a larger issue worth considering: the lack of transparency at the FCC.

Although the Commission has an unfortunate tradition of non-disclosure surrounding many of its regulatory proposals, the problem has seemingly been exacerbated by Chairman Wheeler’s aggressive agenda and his intransigence in the face of overwhelming and rigorous criticism.

Perhaps nowhere was this attitude more apparent than with his handling of the Open Internet Order, which was plagued with enough process problems to elicit a call for a delay of the Commission’s vote on the initial rules from Democratic Commissioner Rosenworcel, and a strong rebuke from the Chairman of the House Oversight Committee prior to the Commission’s vote on the final rules (which were not disclosed to the public until after the vote).

But the same cavalier dismissal of public and stakeholder input has plagued the Chairman’s beleaguered set-top box proposal, as well.

As Commissioner Pai noted before Congress in March:

The FCC continues to choose opacity over transparency. The decisions we make impact hundreds of millions of Americans and thousands of small businesses. And yet to the public, to Congress, and even to the Commissioners at the FCC, the agency’s work remains a black box.

Take this simple proposition: The public should be able to see what we’re voting on before we vote on it. That’s how Congress works, as you know. Anyone can look up any pending bill right now by going to congress.gov. And that’s how many state commissions work too. But not the FCC.

Exhibit A in Commissioner Pai’s lament was the set-top box proceeding:

Instead, the public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.

Now, although the Chairman’s initial proposal was eventually released, we have only a fact sheet and an op-ed by Chairman Wheeler on which to judge the purportedly substantial changes embodied in his latest version.

Even Democrats in Congress have recognized the process problems that have plagued this proceeding. As Senator Feinstein (D-CA) urged in a recent letter to Chairman Wheeler:

Given the significance of this proceeding, I ask that you make public the new proposal under consideration by the Commission, so that all interested stakeholders, members of Congress, copyright experts, and others can comment on the potential copyright implications of the new proposal before the Commission votes on it.

And as Senator Heller (R-NV) wrote in a letter to Chairman Wheeler this week:

I believe it is unacceptable that the FCC has not released the text of this proposal before Thursday’s vote. A three-page fact sheet does not provide enough details for Congress to conduct proper oversight of this rulemaking that will significantly impact both consumers and industry…. I encourage you to release the text immediately so that the American public has a full understanding of what is being considered by the Commission….

Of course, this isn’t a new problem at the FCC. In fact, before he supported Chairman Wheeler’s efforts to impose Open Internet rules without sufficient public disclosure, then-Senator Obama decried then-Chairman Martin’s efforts to enact new media ownership rules with insufficient process in 2007:

Repealing the cross ownership rules and retaining the rest of our existing regulations is not a proposal that has been put out for public comment; the proper process for vetting it is not in closed door meetings with lobbyists or in selective leaks to the New York Times.

Although such a proposal may pass the muster of a federal court, Congress and the public have the right to review any specific proposal and decide whether or not it constitutes sound policy. And the Commission has the responsibility to defend any new proposal in public discourse and debate.

And although you won’t find them complaining this time (because this time they want the excessive intervention that the NPRM seems to contemplate), regulatory advocates lamented just exactly this sort of secrecy at the Commission when Chairman Genachowski proposed his media ownership rules in 2012. At that time Free Press angrily wrote:

[T]he Commission still has not made public its actual media ownership order…. Furthermore, it’s disingenuous for the FCC to suggest that its process now is more transparent than the one former Chairman Martin used to adopt similar rules. Genachowski’s FCC has yet to publish any details of its final proposal, offering only vague snippets in press releases… despite the president’s instruction to rulemaking agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.

As Free Press noted, President Obama did indeed instruct “agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.” In his Memorandum on Transparency and Open Government, his first executive action, the president urged that:

Public engagement enhances the Government’s effectiveness and improves the quality of its decisions. Knowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge. Executive departments and agencies should offer Americans increased opportunities to participate in policymaking and to provide their Government with the benefits of their collective expertise and information.

The resulting Open Government Directive calls on executive agencies to

take prompt steps to expand access to information by making it available online in open formats. With respect to information, the presumption shall be in favor of openness….

The FCC is not an “executive agency,” and so is not directly subject to the Directive. But the Chairman’s willingness to stray so far from basic principles of transparency is woefully inconsistent with the basic principles of good government and the ideals of heightened transparency claimed by this administration.

The FCC’s blind, headlong drive to “unlock” the set-top box market is disconnected from both legal and market realities. Legally speaking, and as we’ve noted on this blog many times over the past few months (see here, here and here), the set-top box proposal is nothing short of an assault on contracts, property rights, and the basic freedom of consumers to shape their own video experience.

Although much of the impulse driving the Chairman to tilt at set-top box windmills involves a distrust that MVPDs could ever do anything procompetitive, Comcast’s recent decision (actually, long in the making) to include an app from Netflix — their alleged arch-rival — on the X1 platform highlights the FCC’s poor grasp of market realities as well. And it hardly seems that Comcast was dragged kicking and screaming to this point, as many of the features it includes have been long under development and include important customer-centered enhancements:

We built this experience on the core foundational elements of the X1 platform, taking advantage of key technical advances like universal search, natural language processing, IP stream processing and a cloud-based infrastructure.  We have expanded X1’s voice control to make watching Netflix content as simple as saying, “Continue watching Daredevil.”

Yet, on the topic of consumer video choice, Chairman Wheeler lives in two separate worlds. On the one hand, he recognizes that:

There’s never been a better time to watch television in America. We have more options than ever, and, with so much competition for eyeballs, studios and artists keep raising the bar for quality content.

But, on the other hand, he asserts that when it comes to set-top boxes, there is no such choice, and consumers have suffered accordingly.

Of course, this ignores the obvious fact that nearly all pay-TV content is already available from a large number of outlets, and that competition between devices and services that deliver this content is plentiful.

In fact, ten years ago — before Apple TV, Roku, Xfinity X1 and Hulu (among too many others to list) — Gigi Sohn, Chairman Wheeler’s chief legal counsel, argued before the House Energy and Commerce Committee that:

We are living in a digital gold age and consumers… are the beneficiaries.  Consumers have numerous choices for buying digital content and for buying devices on which to play that content. (emphasis added)

And, even on the FCC’s own terms, the multichannel video market is presumptively competitive nationwide with

direct broadcast satellite (DBS) providers’ market share of multi-channel video programming distributors (MVPDs) subscribers [rising] to 33.8%. “Telco” MVPDs increased their market share to 13% and their nationwide footprint grew by 5%. Broadband service providers such as Google Fiber also expanded their footprints. Meanwhile, cable operators’ market share fell to 52.8% of MVPD subscribers.

Online video distributor (OVD) services continue to grow in popularity with consumers. Netflix now has 47 million or more subscribers in the U.S., Amazon Prime has close to 60 million, and Hulu has close to 12 million. By contrast, cable MVPD subscriptions dropped to 53.7 million households in 2014.

The extent of competition has expanded dramatically over the years, and Comcast’s inclusion of Netflix in its ecosystem is only the latest indication of this market evolution.

And to further underscore the outdated notion of focusing on “boxes,” AT&T just announced that it would be offering a fully apps-based version of its Direct TV service. And what was one of the main drivers of AT&T being able to go in this direction? It was because the company realized the good economic sense of ditching boxes altogether:

The company will be able to give consumers a break [on price] because of the low cost of delivering the service. AT&T won’t have to send trucks to install cables or set-top boxes; customers just need to download an app. 

And lest you think that Comcast’s move was merely a cynical response meant to undermine the Commissioner (although, it is quite enjoyable on that score), the truth is that Comcast has no choice but to offer services like this on its platform — and it’s been making moves like this for quite some time (see here and here). Everyone knows, MVPDs included, that apps distributed on a range of video platforms are the future. If Comcast didn’t get on board the apps train, it would have been left behind at the station.

And there is other precedent for expecting just this convergence of video offerings on a platform. For instance, Amazon’s Fire TV gives consumers the Amazon video suite — available through the Prime Video subscription — but they also give you access to apps like Netflix, Hulu. (Of course Amazon is a so-called edge provider, so when it makes the exact same sort of moves that Comcast is now making, its easy for those who insist on old market definitions to miss the parallels.)

The point is, where Amazon and Comcast are going to make their money is in driving overall usage of their platform because, inevitably, no single service is going to have every piece of content a given user wants. Long term viability in the video market is necessarily going to be about offering consumers more choice, not less. And, in this world, the box that happens to be delivering the content is basically irrelevant; it’s the competition between platform providers that matters.

As Commissioner Wheeler moves forward with his revised set-top box proposal, and on the eve of tomorrow’s senate FCC oversight hearing, we would do well to reflect on some insightful testimony regarding another of the Commission’s rulemakings from ten years ago:

We are living in a digital gold age and consumers… are the beneficiaries. Consumers have numerous choices for buying digital content and for buying devices on which to play that content. They have never had so much flexibility and so much opportunity.  

* * *

As the content industry has ramped up on-line delivery of content, it has been testing a variety of protection measures that provide both security for the industry and flexibility for consumers.

So to answer the question, can content protection and technological innovation coexist?  It is a resounding yes. Look at the robust market for on-line content distribution facilitated by the technologies and networks consumers love.

* * *

[T]he Federal Communications Commission should not become the Federal Computer Commission or the Federal Copyright Commission, and the marketplace, not the Government, is the best arbiter of what technologies succeed or fail.

That’s not the self-interested testimony of a studio or cable executive — that was Gigi Sohn, current counsel to Chairman Wheeler, speaking on behalf of Public Knowledge in 2006 before the House Energy and Commerce Committee against the FCC’s “broadcast flag” rules. Those rules, supported by a broad spectrum of rightsholders, required consumer electronics devices to respect programming conditions preventing the unauthorized transmission over the internet of digital broadcast television content.

Ms. Sohn and Public Knowledge won that fight in court, convincing the DC Circuit that Congress hadn’t given the FCC authority to impose the rules in the first place, and she successfully urged Congress not to give the FCC the authority to reinstate them.

Yet today, she and the Chairman seem to have forgotten her crucial insights from ten years ago. If the marketplace for video content was sufficiently innovative and competitive then, how can it possibly not be so now, with audiences having orders of magnitude more choices, both online and off? And if the FCC lacked authority to adopt copyright-related rules then, how does the FCC suddenly have that authority now, in the absence of any intervening congressional action?

With Section 106 of the Copyright Act, Congress granted copyright holders the exclusive rights to engage in or license the reproduction, distribution, and public performance of their works. The courts are the “backstop,” not the FCC (as Chairman Wheeler would have it), and section 629 of the Communications Act doesn’t say otherwise. All section 629 does is direct the FCC to promote a competitive market for devices to access pay-TV services from pay-TV providers. As we noted last week, it very simply doesn’t allow the FCC to interfere with the license arrangements that fill those devices, and, short of explicit congressional direction, the Commission is simply not empowered to interfere with the framework set forth in the Copyright Act.

Chairman Wheeler’s latest proposal has improved on his initial plan by, for example, moving toward an applications-based approach and away from the mandatory disaggregation of content. But it would still arrogate to the FCC the authority to stand up a licensing body for the distribution of content over pay-TV applications; set rules on the terms such licenses must, may, and may not include; and even allow the FCC itself to create terms or the entire license. Such rules would necessarily implicate the extent to which rightsholders are able to control the distribution of their content.

The specifics of the regulations may be different from 2006, but the point is the same: What the FCC could not do in 2006, it cannot do today.

Imagine if you will… that a federal regulatory agency were to decide that the iPhone ecosystem was too constraining and too expensive; that consumers — who had otherwise voted for iPhones with their dollars — were being harmed by the fact that the platform was not “open” enough.

Such an agency might resolve (on the basis of a very generous reading of a statute), to force Apple to make its iOS software available to any hardware platform that wished to have it, in the process making all of the apps and user data accessible to the consumer via these new third parties, on terms set by the agency… for free.

Difficult as it may be to picture this ever happening, it is exactly the sort of Twilight Zone scenario that FCC Chairman Tom Wheeler is currently proposing with his new set-top box proposal.

Based on the limited information we have so far (a fact sheet and an op-ed), Chairman Wheeler’s new proposal does claw back some of the worst excesses of his initial draft (which we critiqued in our comments and reply comments to that proposal).

But it also appears to reinforce others — most notably the plan’s disregard for the right of content creators to control the distribution of their content. Wheeler continues to dismiss the complex business models, relationships, and licensing terms that have evolved over years of competition and innovation. Instead, he offers  a one-size-fits-all “solution” to a “problem” that market participants are already falling over themselves to provide.

Plus ça change…

To begin with, Chairman Wheeler’s new proposal is based on the same faulty premise: that consumers pay too much for set-top boxes, and that the FCC is somehow both prescient enough and Congressionally ordained to “fix” this problem. As we wrote in our initial comments, however,

[a]lthough the Commission asserts that set-top boxes are too expensive, the history of overall MVPD prices tells a remarkably different story. Since 1994, per-channel cable prices including set-top box fees have fallen by 2 percent, while overall consumer prices have increased by 54 percent. After adjusting for inflation, this represents an impressive overall price decrease.

And the fact is that no one buys set-top boxes in isolation; rather, the price consumers pay for cable service includes the ability to access that service. Whether the set-top box fee is broken out on subscribers’ bills or not, the total price consumers pay is unlikely to change as a result of the Commission’s intervention.

As we have previously noted, the MVPD set-top box market is an aftermarket; no one buys set-top boxes without first (or simultaneously) buying MVPD service. And as economist Ben Klein (among others) has shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive:

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

Engineering the set-top box aftermarket to bring more direct competition to bear may redistribute profits, but it’s unlikely to change what consumers pay.

Stripped of its questionable claims regarding consumer prices and placed in the proper context — in which consumers enjoy more ways to access more video content than ever before — Wheeler’s initial proposal ultimately rested on its promise to “pave the way for a competitive marketplace for alternate navigation devices, and… end the need for multiple remote controls.” Weak sauce, indeed.

He now adds a new promise: that “integrated search” will be seamlessly available for consumers across the new platforms. But just as universal remotes and channel-specific apps on platforms like Apple TV have already made his “multiple remotes” promise a hollow one, so, too, have competitive pressures already begun to deliver integrated search.

Meanwhile, such marginal benefits come with a host of substantial costs, as others have pointed out. Do we really need the FCC to grant itself more powers and create a substantial and coercive new regulatory regime to mandate what the market is already poised to provide?

From ignoring copyright to obliterating copyright

Chairman Wheeler’s first proposal engendered fervent criticism for the impossible position in which it placed MVPDs — of having to disregard, even outright violate, their contractual obligations to content creators.

Commendably, the new proposal acknowledges that contractual relationships between MVPDs and content providers should remain “intact.” Thus, the proposal purports to enable programmers and MVPDs to maintain “their channel position, advertising and contracts… in place.” MVPDs will retain “end-to-end” control of the display of content through their apps, and all contractually guaranteed content protection mechanisms will remain, because the “pay-TV’s software will manage the full suite of linear and on-demand programming licensed by the pay-TV provider.”

But, improved as it is, the new proposal continues to operate in an imagined world where the incredibly intricate and complex process by which content is created and distributed can be reduced to the simplest of terms, dictated by a regulator and applied uniformly across all content and all providers.

According to the fact sheet, the new proposal would “[p]rotect[] copyrights and… [h]onor[] the sanctity of contracts” through a “standard license”:

The proposed final rules require the development of a standard license governing the process for placing an app on a device or platform. A standard license will give device manufacturers the certainty required to bring innovative products to market… The license will not affect the underlying contracts between programmers and pay-TV providers. The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.

But programming is distributed under a diverse range of contract terms. The only way a single, “standard license” could possibly honor these contracts is by forcing content providers to license all of their content under identical terms.

Leaving aside for a moment the fact that the FCC has no authority whatever to do this, for such a scheme to work, the agency would necessarily have to strip content holders of their right to govern the terms on which their content is accessed. After all, if MVPDs are legally bound to redistribute content on fixed terms, they have no room to permit content creators to freely exercise their rights to specify terms like windowing, online distribution restrictions, geographic restrictions, and the like.

In other words, the proposal simply cannot deliver on its promise that “[t]he license will not affect the underlying contracts between programmers and pay-TV providers.”

But fear not: According to the Fact Sheet, “[p]rogrammers will have a seat at the table to ensure that content remains protected.” Such largesse! One would be forgiven for assuming that the programmers’ (single?) seat will surrounded by those of other participants — regulatory advocates, technology companies, and others — whose sole objective will be to minimize content companies’ ability to restrict the terms on which their content is accessed.

And we cannot ignore the ominous final portion of the Fact Sheet’s “Standard License” description: “The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.” Such an arrogation of ultimate authority by the FCC doesn’t bode well for that programmer’s “seat at the table” amounting to much.

Unfortunately, we can only imagine the contours of the final proposal that will describe the many ways by which distribution licenses can “harm the marketplace for competitive devices.” But an educated guess would venture that there will be precious little room for content creators and MVPDs to replicate a large swath of the contract terms they currently employ. “Any content owner can have its content painted any color that it wants, so long as it is black.”

At least we can take solace in the fact that the FCC has no authority to do what Wheeler wants it to do

And, of course, this all presumes that the FCC will be able to plausibly muster the legal authority in the Communications Act to create what amounts to a de facto compulsory licensing scheme.

A single license imposed upon all MVPDs, along with the necessary restrictions this will place upon content creators, does just as much as an overt compulsory license to undermine content owners’ statutory property rights. For every license agreement that would be different than the standard agreement, the proposed standard license would amount to a compulsory imposition of terms that the rights holders and MVPDs would not otherwise have agreed to. And if this sounds tedious and confusing, just wait until the Commission starts designing its multistakeholder Standard Licensing Oversight Process (“SLOP”)….

Unfortunately for Chairman Wheeler (but fortunately for the rest of us), the FCC has neither the legal authority, nor the requisite expertise, to enact such a regime.

Last month, the Copyright Office was clear on this score in its letter to Congress commenting on the Chairman’s original proposal:  

[I]t is important to remember that only Congress, through the exercise of its power under the Copyright Clause, and not the FCC or any other agency, has the constitutional authority to create exceptions and limitations in copyright law. While Congress has enacted compulsory licensing schemes, they have done so in response to demonstrated market failures, and in a carefully circumscribed manner.

Assuming that Section 629 of the Communications Act — the provision that otherwise empowers the Commission to promote a competitive set-top box market — fails to empower the FCC to rewrite copyright law (which is assuredly the case), the Commission will be on shaky ground for the inevitable torrent of lawsuits that will follow the revised proposal.

In fact, this new proposal feels more like an emergency pivot by a panicked Chairman than an actual, well-grounded legal recommendation. While the new proposal improves upon the original, it retains at its core the same ill-informed, ill-advised and illegal assertion of authority that plagued its predecessor.

The American concept of “the rule of law” (see here) is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution, and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law (see here).  It holds that the executive must comply with the law because ours is “a government of laws, and not of men,” or, as Justice Anthony Kennedy put it in a 2006 address to the American Bar Association, “that the Law is superior to, and thus binds, the government and all its officials.”  (See here.)  More specifically, and consistent with these broader formulations, the late and great legal philosopher Friedrich Hayek wrote that the rule of law “means the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  (See here.)  In other words, as former Boston University Law School Dean Ron Cass put it, the rule of law involves “a system of binding rules” adopted and applied by a valid government authority that embody “clarity, predictability, and equal applicability.”  (See here.)

Regrettably, by engaging in regulatory overreach and ignoring statutory limitations on the scope of their authority, federal administrative agencies have shown scant appreciation for rule of law restraints under the current administration (see here and here for commentaries on this problem by Heritage Foundation scholars).  Although many agencies could be singled out, the Federal Communications Commission’s (FCC) actions in recent years have been especially egregious (see here).

A prime example of regulatory overreach by the FCC that flouted the rule of law was its promulgation in 2015 of an order preempting state laws in Tennessee and North Carolina that prevented municipally-owned broadband providers from providing broadband service beyond their geographic boundaries (Municipal Broadband Order, see here).   As a matter of substance, this decision ignored powerful economic evidence that municipally-provided broadband services often involve wasteful subsidies for financially–troubled government-owned providers that interfere with effective private sector competition and are economically harmful (my analysis is here).   As a legal matter, the Municipal Broadband Order went beyond the FCC’s statutory authority and raises grave constitutional problems, thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law (see here).  The Order lacked a sound legal footing in basing its authority on Section 706 of the Telecommunications Act of 1996, which merely authorizes the FCC to promote local broadband competition and investment (a goal which the Order did not advance) and says nothing about preemption.   In addition, the FCC’s invocation of preemption authority trenched upon the power of the states to control their subordinate governmental entities, guaranteed to them by the Constitution as an essential element of their sovereignty in our federal system (see here).   What’s more, the Chattanooga, Tennessee and Wilson, North Carolina municipal broadband systems that had requested FCC preemption imposed content-based restrictions on users of their network that raised serious First Amendment issues (see here).   Specifically, those systems’ bans on the transmittal of various sorts of “abusive” language appeared to be too broad to withstand First Amendment “strict scrutiny.”  Moreover, by requiring prospective broadband enrollees to agree not to sue their provider as an initial condition of service, two of the municipal systems arguably unconstitutionally coerced users to forgo exercise of their First Amendment rights.

Fortunately, on August 10, 2016, in Tennessee v. FCC, the U.S. Court of Appeals for the Sixth Circuit struck down the Municipal Broadband Order, pithily stating:

The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities. This is shown by the fact that no federal statute or FCC regulation requires the municipalities to expand or otherwise to act in contravention of the preempted state statutory provisions. This preemption by the FCC of the allocation of power between a state and its subdivisions requires at least a clear statement in the authorizing federal legislation. The FCC relies upon § 706 of the Telecommunications Act of 1996 for the authority to preempt in this case, but that statute falls far short of such a clear statement. The preemption order must accordingly be reversed.

The Sixth Circuit’s decision has important policy ramifications that extend beyond the immediate controversy, as Free State Foundation Scholars Randolph May and Seth Cooper explain:

The FCC’s Municipal Broadband Preemption Order would have turned constitutional federalism inside out by severing local political subdivisions’ accountability from the states governments that created them. Had the agency’s order been upheld, the FCC surely would have preempted several other state laws restricting municipalities’ ownership and operation of broadband networks. Several state governments would have been locked into an unwise policy of favoring municipal broadband business ventures with a track record of legal and proprietary conflicts of interest, expensive financial failures, and burdensome debts for local taxpayers.

The avoidance of a series of bad side effects in a corner of the regulatory world is not, however, sufficient grounds for breaking out the champagne.  From a global perspective, the Sixth Circuit’s Tennessee v. FCC decision, while helpful, does not address the broader problem of agency disregard for the limitations of constitutional federalism and the rule of law.  Administrative overreach, like a chronic debilitating virus, saps the initiative of the private sector (and, more generally, the body politic) and undermines its vitality.  In addition, not all federal judges can be counted on to rein in legally unjustified rules (which in any event impose costly delay and uncertainty, even if they are eventually overturned).  What is needed is an administration that emphasizes by word and deed that it is committed to constitutionalist rule of law principles – and insists that its appointees (including commissioners of independent agencies) share that philosophy.  Let us hope that we do not have to wait too long for such an administration.