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Municipal broadband has been heavily promoted by its advocates as a potential source of competition against Internet service providers (“ISPs”) with market power. Jonathan Sallet argued in Broadband for America’s Future: A Vision for the 2020s, for instance, that municipal broadband has a huge role to play in boosting broadband competition, with attendant lower prices, faster speeds, and economic development. 

Municipal broadband, of course, can mean more than one thing: From “direct consumer” government-run systems, to “open access” where government builds the back-end, but leaves it up to private firms to bring the connections to consumers, to “middle mile” where the government network reaches only some parts of the community but allows private firms to connect to serve other consumers. The focus of this blog post is on the “direct consumer” model.

There have been many economic studies on municipal broadband, both theoretical and empirical. The literature largely finds that municipal broadband poses serious risks to taxpayers, often relies heavily on cross-subsidies from government-owned electric utilities, crowds out private ISP investment in areas it operates, and largely fails the cost-benefit analysis. While advocates have defended municipal broadband on the grounds of its speed, price, and resulting attractiveness to consumers and businesses, others have noted that many of those benefits come at the expense of other parts of the country from which businesses move. 

What this literature has not touched upon is a more fundamental problem: municipal broadband lacks the price signals necessary for economic calculation.. The insights of the Austrian school of economics helps explain why this model is incapable of providing efficient outcomes for society. Rather than creating a valuable source of competition, municipal broadband creates “islands of chaos” undisciplined by the market test of profit-and-loss. As a result, municipal broadband is a poor model for promoting competition and innovation in broadband markets. 

The importance of profit-and-loss to economic calculation

One of the things often assumed away in economic analysis is the very thing the market process depends upon: the discovery of knowledge. Knowledge, in this context, is not the technical knowledge of how to build or maintain a broadband network, but the more fundamental knowledge which is discovered by those exercising entrepreneurial judgment in the marketplace. 

This type of knowledge is dependent on prices throughout the market. In the market process, prices coordinate exchange between market participants without each knowing the full plan of anyone else. For consumers, prices allow for the incremental choices between different options. For producers, prices in capital markets similarly allow for choices between different ways of producing their goods for the next stage of production. Prices in interest rates help coordinate present consumption, investment, and saving. And, the price signal of profit-and-loss allows producers to know whether they have cost-effectively served consumer needs. 

The broadband marketplace can’t be considered in isolation from the greater marketplace in which it is situated. But it can be analyzed under the framework of prices and the knowledge they convey.

For broadband consumers, prices are important for determining the relative importance of Internet access compared to other felt needs. The quality of broadband connection demanded by consumers is dependent on the price. All other things being equal, consumers demand faster connections with less latency issues. But many consumers may prefer slower speeds and connections with more latency if it is cheaper. Even choices between the importance of upload speeds versus download speeds may be highly asymmetrical if determined by consumers.  

While “High Performance Broadband for All” may be a great goal from a social planner’s perspective, individuals acting in the marketplace may prioritize other needs with his or her scarce resources. Even if consumers do need Internet access of some kind, the benefits of 100 Mbps download speeds over 25 Mbps, or upload speeds of 100 Mbps versus 3 Mbps may not be worth the costs. 

For broadband ISPs, prices for capital goods are important for building out the network. The relative prices of fiber, copper, wireless, and all the other factors of production in building out a network help them choose in light of anticipated profit. 

All the decisions of broadband ISPs are made through the lens of pursuing profit. If they are successful, it is because the revenues generated are greater than the costs of production, including the cost of money represented in interest rates. Just as importantly, loss shows the ISPs were unsuccessful in cost-effectively serving consumers. While broadband companies may be able to have losses over some period of time, they ultimately must turn a profit at some point, or there will be exit from the marketplace. Profit-and-loss both serve important functions.

Sallet misses the point when he states the“full value of broadband lies not just in the number of jobs it directly creates or the profits it delivers to broadband providers but also in its importance as a mechanism that others use across the economy and society.” From an economic point of view, profits aren’t important because economists love it when broadband ISPs get rich. Profits are important as an incentive to build the networks we all benefit from, and a signal for greater competition and innovation.

Municipal broadband as islands of chaos

Sallet believes the lack of high-speed broadband (as he defines it) is due to the monopoly power of broadband ISPs. He sees the entry of municipal broadband as pro-competitive. But the entry of a government-run broadband company actually creates “islands of chaos” within the market economy, reducing the ability of prices to coordinate disparate plans of action among participants. This, ultimately, makes society poorer.

The case against municipal broadband doesn’t rely on greater knowledge of how to build or maintain a network being in the hands of private engineers. It relies instead on the different institutional frameworks within which the manager of the government-run broadband network works as compared to the private broadband ISP. The type of knowledge gained in the market process comes from prices, including profit-and-loss. The manager of the municipal broadband network simply doesn’t have access to this knowledge and can’t calculate the best course of action as a result.

This is because the government-run municipal broadband network is not reliant upon revenues generated by free choices of consumers alone. Rather than needing to ultimately demonstrate positive revenue in order to remain a going concern, government-run providers can instead base their ongoing operation on access to below-market loans backed by government power, cross-subsidies when it is run by a government electric utility, and/or public money in the form of public borrowing (i.e. bonds) or taxes. 

Municipal broadband, in fact, does rely heavily on subsidies from the government. As a result, municipal broadband is not subject to the discipline of the market’s profit-and-loss test. This frees the enterprise to focus on other goals, including higher speeds—especially upload speeds—and lower prices than private ISPs often offer in the same market. This is why municipal broadband networks build symmetrical high-speed fiber networks at higher rates than the private sector.

But far from representing a superior source of “competition,” municipal broadband is actually an example of “predatory entry.” In areas where there is already private provision of broadband, municipal broadband can “out-compete” those providers due to subsidies from the rest of society. Eventually, this could lead to exit by the private ISPs, starting with the least cost-efficient to the most. In areas where there is limited provision of Internet access, the entry of municipal broadband could reduce incentives for private entry altogether. In either case, there is little reason to believe municipal broadband actually increases consumer welfarein the long run.

Moreover, there are serious concerns in relying upon municipal broadband for the buildout of ISP networks. While Sallet describes fiber as “future-proof,” there is little reason to think that it is. The profit motive induces broadband ISPs to constantly innovate and improve their networks. Contrary to what you would expect from an alleged monopoly industry, broadband companies are consistently among the highest investors in the American economy. Similar incentives would not apply to municipal broadband, which lacks the profit motive to innovate. 

Conclusion

There is a definite need to improve public policy to promote more competition in broadband markets. But municipal broadband is not the answer. The lack of profit-and-loss prevents the public manager of municipal broadband from having the price signal necessary to know it is serving the public cost-effectively. No amount of bureaucratic management can replace the institutional incentives of the marketplace.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Justin “Gus” Hurwitz, (Associate Professor of Law & Co-director, Space, Cyber, and Telecom Law Program, University of Nebraska; Director of Law & Economics Programs, ICLE).]

I’m a big fan of APM Marketplace, including Molly Wood’s tech coverage. But they tend to slip into advocacy mode—I think without realizing it—when it comes to telecom issues. This was on full display earlier this week in a story on widespread decisions by ISPs to lift data caps during the ongoing COVID-19 crisis (available here, the segment runs from 4:30-7:30). 

As background, all major ISPs have lifted data caps on their Internet service offerings. This is in recognition of the fact that most Americans are spending more time at home right now. During this time, many of us are teleworking, so making more intensive use of our Internet connections during the day; many have children at home during the day who are using the Internet for both education and entertainment; and we are going out less in the evening so making more use of services like streaming video for evening entertainment. All of these activities require bandwidth—and, like many businesses around the country, ISPs are taking steps (such as eliminating data caps) that will prevent undue consumer harm as we work to cope with COVID-19.

The Marketplace take on data caps

After introducing the segment, Wood and Marketplace host Kai Ryssdal turn to a misinformation and insinuation-laden discussion of telecommunications policy. Wood asserts that one of the ISPs’ “big arguments against net neutrality regulation” was that they “need [data] caps to prevent congestion on networks.” Ryssdal responds by asking, coyly, “so were they just fibbing? I mean … ya know …”

Wood responds that “there have been times when these arguments were very legitimate,” citing the early days of 4G networks. She then asserts that the United States has “some of the most expensive Internet speeds in the developed world” before jumping to the assertion that advocates will now have the “data to say that [data] caps are unnecessary.” She then goes on to argue—and here she loses any pretense of reporter neutrality—that “we are seeing that the Internet really is a utility” and that “frankly, there’s no, uhm, ongoing economic argument for [data caps].” She even notes that we can “hear [her] trying to be professional” in the discussion.

Unpacking that mess

It’s hard to know where to start with Wood & Ryssdal discussion, such a muddled mess it is. Needless to say, it is unfortunate to see tech reporters doing what tech reporters seem to do best: confusing poor and thinly veiled policy arguments for news.

Let’s start with Wood’s first claim, that ISPs (and, for that matter, others) have long argued that data caps are required to manage congestion and that this has been one of their chief arguments against net neutrality regulations. This is simply not true. 

Consider the 2015 Open Internet Order (OIO)—the net neutrality regulations adopted by the FCC under President Obama. The OIO discusses data caps (“usage allowances”) in paragraphs 151-153. It explains:

The record also reflects differing views over some broadband providers’ practices with respect to usage allowances (also called “data caps”). … Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks. Conversely, some commenters have expressed concern that such practices can potentially be used by broadband providers to disadvantage competing over-the-top providers. Given the unresolved debate concerning the benefits and drawbacks of data allowances and usage-based pricing plans,[FN373] we decline to make blanket findings about these practices and will address concerns under the no-unreasonable interference/disadvantage on a case-by-case basis. 

[FN373] Regarding usage-based pricing plans, there is similar disagreement over whether these practices are beneficial or harmful for promoting an open Internet. Compare Bright House Comments at 20 (“Variable pricing can serve as a useful technique for reducing prices for low usage (as Time Warner Cable has done) as well as for fairly apportioning greater costs to the highest users.”) with Public Knowledge Comments at 58 (“Pricing connectivity according to data consumption is like a return to the use of time. Once again, it requires consumers keep meticulous track of what they are doing online. With every new web page, new video, or new app a consumer must consider how close they are to their monthly cap. . . . Inevitably, this type of meter-watching freezes innovation.”), and ICLE & TechFreedom Policy Comments at 32 (“The fact of the matter is that, depending on background conditions, either usage-based pricing or flat-rate pricing could be discriminatory.”). 

The 2017 Restoring Internet Freedom Order (RIFO), which rescinded much of the OIO, offers little discussion of data caps—its approach to them follows that of the OIO, requiring that ISPs are free to adopt but must disclose data cap policies. It does, however, note that small ISPs expressed concern, and provided evidence, that fear of lawsuits had forced small ISPs to abandon policies like data caps, “which would have benefited its customers by lowering its cost of Internet transport.” (See paragraphs 104 and 249.) The 2010 OIO makes no reference to data caps or usage allowances. 

What does this tell us about Wood’s characterization of policy debates about data caps? The only discussion of congestion as a basis for data caps comes in the context of mobile networks. Wood gets this right: data caps have been, and continue to be, important for managing data use on mobile networks. But most people would be hard pressed to argue that these concerns are not still valid: the only people who have not experienced congestion on their mobile devices are those who do not use mobile networks.

But the discussion of data caps on broadband networks has nothing to do with congestion management. The argument against data caps is that they can be used anticompetitively. Cable companies, for instance, could use data caps to harm unaffiliated streaming video providers (that is, Netflix) in order to protect their own video services from competition; or they could exclude preferred services from data caps in order to protect them from competitors.

The argument for data caps, on the other hand, is about the cost of Internet service. Data caps are a way of offering lower priced service to lower-need users. Or, conversely, they are a way of apportioning the cost of those networks in proportion to the intensity of a given user’s usage.  Higher-intensity users are more likely to be Internet enthusiasts; lower-intensity users are more likely to use it for basic tasks, perhaps no more than e-mail or light web browsing. What’s more, if all users faced the same prices regardless of their usage, there would be no marginal cost to incremental usage: users (and content providers) would have no incentive not to use more bandwidth. This does not mean that users would face congestion without data caps—ISPs may, instead, be forced to invest in higher capacity interconnection agreements. (Importantly, interconnection agreements are often priced in terms of aggregate data transfered, not the speeds of those data transfers—that is, they are written in terms of data caps!—so it is entirely possible that an ISP would need to pay for greater interconnection capacity despite not experiencing any congestion on its network!)

In other words, the economic argument for data caps, recognized by the FCC under both the Obama and Trump administrations, is that they allow more people to connect to the Internet by allowing a lower-priced access tier, and that they keep average prices lower by creating incentives not to consume bandwidth merely because you can. In more technical economic terms, they allow potentially beneficial price discrimination and eliminate a potential moral hazard. Contrary to Wood’s snarky, unprofessional, response to Ryssdal’s question, there is emphatically not “no ongoing economic argument” for data caps.

Why lifting data caps during this crisis ain’t no thing

Even if the purpose of data caps were to manage congestion, Wood’s discussion again misses the mark. She argues that the ability to lift caps during the current crisis demonstrates that they are not needed during non-crisis periods. But the usage patterns that we are concerned about facilitating during this period are not normal, and cannot meaningfully be used to make policy decisions relevant to normal periods. 

The reason for this is captured in the below image from a recent Cloudflare discussion of how Internet usage patterns are changing during the crisis:

This image shows US Internet usage as measured by Cloudflare. The red line is the usage on March 13 (the peak is President Trump’s announcement of a state of emergency). The grey lines are the preceding several days of traffic. (The x-axis is UTC time; ET is UCT-4.) Although this image was designed to show the measurable spike in traffic corresponding to the President’s speech, it also shows typical weekday usage patterns. The large “hump” on the left side shows evening hours in the United States. The right side of the graph shows usage throughout the day. (This chart shows nation-wide usage trends, which span multiple time zones. If it were to focus on a single time zone, there would be a clear dip between daytime “business” and evening “home” hours, as can be seen here.)

More important, what this chart demonstrates is that the “peak” in usage occurs in the evening, when everyone is at home watching their Netflix. It does not occur during the daytime hours—the hours during which telecommuters are likely to be video conferencing or VPN’ing in to their work networks, or during which students are likely to be doing homework or conferencing into their meetings. And, to the extent that there will be an increase in daytime usage, it will be somewhat offset by (likely significantly) decreased usage due to coming economic lethargy. (For Kai Ryssdal, lethargy is synonymous with recession; for Aaron Sorkin fans, it is synonymous with bagel). 

This illustrates one of the fundamental challenges with pricing access to networks. Networks are designed to carry their peak load capacity. When they are operating below capacity, the marginal cost of additional usage is extremely low; once they exceed that capacity, the marginal cost of additional usage is extremely high. If you price network access based upon the average usage, you are going to get significant usage during peak hours; if you price access based upon the peak-hour marginal cost, you are going to get significant deadweight loss (under-use) during non-peak hours). 

Data caps are one way to deal with this issue. Since most users making the most intensive use of the network are all doing so at the same time (at peak hour), this incremental cost either discourages this use or provides the revenue necessary to expand capacity to accommodate their use. But data caps do not make sense during non-peak hours, when marginal cost is nearly zero. Indeed, imposing increased costs on users during non-peak hours is regressive. It creates deadweight losses during those hours (and, in principle, also during peak hours: ideally, we would price non-peak-hour usage less than peak-hour usage in order to “shave the peak” (a synonym, I kid you not, for “flatten the curve”)). 

What this all means

During the current crisis, we are seeing a significant increase in usage during non-peak hours. This imposes nearly zero incremental cost on ISPs. Indeed, it is arguably to their benefit to encourage use during this time, to “flatten the curve” of usage in the evening, when networks are, in fact, likely to experience congestion.

But there is a flipside, which we have seen develop over the past few days: how do we manage peak-hour traffic? On Thursday, the EU asked Netflix to reduce the quality of its streaming video in order to avoid congestion. Netflix is the single greatest driver of consumer-focused Internet traffic. And while being able to watch the Great British Bake Off in ultra-high definition 3D HDR 4K may be totally awesome, its value pales in comparison to keeping the American economy functioning.

Wood suggests that ISPs’ decision to lift data caps is of relevance to the network neutrality debate. It isn’t. But the impact of Netflix traffic on competing applications may be. The net neutrality debate created unmitigated hysteria about prioritizing traffic on the Internet. Many ISPs have said outright that they won’t even consider investing in prioritization technologies because of the uncertainty around the regulatory treatment of such technologies. But such technologies clearly have uses today. Video conferencing and Voice over IP protocols should be prioritized over streaming video. Packets to and from government, healthcare, university, and other educational institutions should be prioritized over Netflix traffic. It is hard to take anyone who would disagree with this proposition seriously. Yet the net neutrality debate almost entirely foreclosed development of these technologies. While they may exist, they are not in widespread deployment, and are not familiar to consumers or consumer-facing network engineers.

To the very limited extent that data caps are relevant to net neutrality policy, it is about ensuring that millions of people binge watching Bojack Horseman (seriously, don’t do it!) don’t interfere with children Skyping with their grandparents, a professor giving a lecture to her class, or a sales manager coordinating with his team to try to keep the supply chain moving.

Monday July 22, ICLE filed a regulatory comment arguing the leased access requirements enforced by the FCC are unconstitutional compelled speech that violate the First Amendment. 

When the DC Circuit Court of Appeals last reviewed the constitutionality of leased access rules in Time Warner v. FCC, cable had so-called “bottleneck power” over the marketplace for video programming and, just a few years prior, the Supreme Court had subjected other programming regulations to intermediate scrutiny in Turner v. FCC

Intermediate scrutiny is a lower standard than the strict scrutiny usually required for First Amendment claims. Strict scrutiny requires a regulation of speech to be narrowly tailored to a compelling state interest. Intermediate scrutiny only requires a regulation to further an important or substantial governmental interest unrelated to the suppression of free expression, and the incidental restriction speech must be no greater than is essential to the furtherance of that interest.

But, since the decisions in Time Warner and Turner, there have been dramatic changes in the video marketplace (including the rise of the Internet!) and cable no longer has anything like “bottleneck power.” Independent programmers have many distribution options to get content to consumers. Since the justification for intermediate scrutiny is no longer an accurate depiction of the competitive marketplace, the leased rules should be subject to strict scrutiny.

And, if subject to strict scrutiny, the leased access rules would not survive judicial review. Even accepting that there is a compelling governmental interest, the rules are not narrowly tailored to that end. Not only are they essentially obsolete in the highly competitive video distribution marketplace, but antitrust law would be better suited to handle any anticompetitive abuses of market power by cable operators. There is no basis for compelling the cable operators to lease some of their channels to unaffiliated programmers.

Our full comments are here

In the opening seconds of what was surely one of the worst oral arguments in a high-profile case that I have ever heard, Pantelis Michalopoulos, arguing for petitioners against the FCC’s 2018 Restoring Internet Freedom Order (RIFO) expertly captured both why the side he was representing should lose and the overall absurdity of the entire net neutrality debate: “This order is a stab in the heart of the Communications Act. It would literally write ‘telecommunications’ out of the law. It would end the communications agency’s oversight over the main communications service of our time.”

The main communications service of our time is the Internet. The Communications and Telecommunications Acts were written before the advent of the modern Internet, for an era when the telephone was the main communications service of our time. The reality is that technological evolution has written “telecommunications” out of these Acts – the “telecommunications services” they were written to regulate are no longer the important communications services of the day.

The basic question of the net neutrality debate is whether we expect Congress to weigh in on how regulators should respond when an industry undergoes fundamental change, or whether we should instead allow those regulators to redefine the scope of their own authority. In the RIFO case, petitioners (and, more generally, net neutrality proponents) argue that agencies should get to define their own authority. Those on the other side of the issue (including me) argue that that it is up to Congress to provide agencies with guidance in response to changing circumstances – and worry that allowing independent and executive branch agencies broad authority to act without Congressional direction is a recipe for unfettered, unchecked, and fundamentally abusive concentrations of power in the hands of the executive branch.

These arguments were central to the DC Circuit’s evaluation of the prior FCC net neutrality order – the Open Internet Order. But rather than consider the core issue of the case, the four hours of oral arguments this past Friday were instead a relitigation of long-ago addressed ephemeral distinctions, padded out with irrelevance and esoterica, and argued with a passion available only to those who believe in faerie tales and monsters under their bed. Perhaps some revelled in hearing counsel for both sides clumsily fumble through strained explanations of the difference between standalone telecommunications services and information services that are by definition integrated with them, or awkward discussions about how ISPs may implement hypothetical prioritization technologies that have not even been developed. These well worn arguments successfully demonstrated, once again, how many angels can dance upon the head of a single pin – only never before have so many angels been so irrelevant.

This time around, petitioners challenging the order were able to scare up some intervenors to make novel arguments on their behalf. Most notably, they were able to scare up a group of public safety officials to argue that the FCC had failed to consider arguments that the RIFO would jeopardize public safety services that rely on communications networks. I keep using the word “scare” because these arguments are based upon incoherent fears peddled by net neutrality advocates in order to find unsophisticated parties to sign on to their policy adventures. The public safety fears are about as legitimate as concerns that the Easter Bunny might one day win the Preakness – and merited as much response from the FCC as a petition from the Racehorse Association of America demanding the FCC regulate rabbits.

In the end, I have no idea how the DC Circuit is going to come down in this case. Public Safety concerns – like declarations of national emergencies – are often given undue and unwise weight. And there is a legitimately puzzling, if fundamentally academic, argument about a provision of the Communications Act (47 USC 257(c)) that Congress repealed after the Order was adopted and that was an noteworthy part of the notice the FCC gave when the Order was proposed that could lead the Court to remand the Order back to the Commission.

In the end, however, this case is unlikely to address the fundamental question of whether the FCC has any business regulating Internet access services. If the FCC loses, we’ll be back here in another year or two; if the FCC wins, we’ll be back here the next time a Democrat is in the White House. And the real tragedy is that every minute the FCC spends on the interminable net neutrality non-debate is a minute not spent on issues like closing the rural digital divide or promoting competitive entry into markets by next generation services.

So much wasted time. So many billable hours. So many angels dancing on the head of a pin. If only they were the better angels of our nature.


Postscript: If I sound angry about the endless fights over net neutrality, it’s because I am. I live in one of the highest-cost, lowest-connectivity states in the country. A state where much of the territory is covered by small rural carriers for whom the cost of just following these debates can mean delaying the replacement of an old switch, upgrading a circuit to fiber, or wiring a street. A state in which if prioritization were to be deployed it would be so that emergency services would be able to work over older infrastructure or so that someone in a rural community could remotely attend classes at the University or consult with a primary care physician (because forget high speed Internet – we have counties without doctors in them). A state in which if paid prioritization were to be developed it would be to help raise capital to build out service to communities that have never had high-speed Internet access.

So yes: the fact that we might be in for another year of rule making followed by more litigation because some firefighters signed up for the wrong wireless service plan and then were duped into believing a technological, economic, and political absurdity about net neutrality ensuring they get free Internet access does make me angry. Worse, unlike the hypothetical harms net neutrality advocates are worried about, the endless discussion of net neutrality causes real, actual, concrete harm to the people net neutrality advocates like to pat themselves on the back as advocating for. We should all be angry about this, and demanding that Congress put this debate out of our misery.

It is a truth universally acknowledged that unwanted telephone calls are among the most reviled annoyances known to man. But this does not mean that laws intended to prohibit these calls are themselves necessarily good. Indeed, in one sense we know intuitively that they are not good. These laws have proven wholly ineffective at curtailing the robocall menace — it is hard to call any law as ineffective as these “good”. And these laws can be bad in another sense: because they fail to curtail undesirable speech but may burden desirable speech, they raise potentially serious First Amendment concerns.

I presented my exploration of these concerns, coming out soon in the Brooklyn Law Review, last month at TPRC. The discussion, which I get into below, focuses on the Telephone Consumer Protection Act (TCPA), the main law that we have to fight against robocalls. It considers both narrow First Amendment concerns raised by the TCPA as well as broader concerns about the Act in the modern technological setting.

Telemarketing Sucks

It is hard to imagine that there is a need to explain how much of a pain telemarketing is. Indeed, it is rare that I give a talk on the subject without receiving a call during the talk. At the last FCC Open Meeting, after the Commission voted on a pair of enforcement actions taken against telemarketers, Commissioner Rosenworcel picked up her cell phone to share that she had received a robocall during the vote. Robocalls are the most complained of issue at both the FCC and FTC. Today, there are well over 4 billion robocalls made every month. It’s estimated that half of all phone calls made in 2019 will be scams (most of which start with a robocall). .

It’s worth noting that things were not always this way. Unsolicited and unwanted phone calls have been around for decades — but they have become something altogether different and more problematic in the past 10 years. The origin of telemarketing was the simple extension of traditional marketing to the medium of the telephone. This form of telemarketing was a huge annoyance — but fundamentally it was, or at least was intended to be, a mere extension of legitimate business practices. There was almost always a real business on the other end of the line, trying to advertise real business opportunities.

This changed in the 2000s with the creation of the Do Not Call (DNC) registry. The DNC registry effectively killed the “legitimate” telemarketing business. Companies faced significant penalties if they called individuals on the DNC registry, and most telemarketing firms tied the registry into their calling systems so that numbers on it could not be called. And, unsurprisingly, an overwhelming majority of Americans put their phone numbers on the registry. As a result the business proposition behind telemarketing quickly dried up. There simply weren’t enough individuals not on the DNC list to justify the risk of accidentally calling individuals who were on the list.

Of course, anyone with a telephone today knows that the creation of the DNC registry did not eliminate robocalls. But it did change the nature of the calls. The calls we receive today are, overwhelmingly, not coming from real businesses trying to market real services or products. Rather, they’re coming from hucksters, fraudsters, and scammers — from Rachels from Cardholder Services and others who are looking for opportunities to defraud. Sometimes they may use these calls to find unsophisticated consumers who can be conned out of credit card information. Other times they are engaged in any number of increasingly sophisticated scams designed to trick consumers into giving up valuable information.

There is, however, a more important, more basic difference between pre-DNC calls and the ones we receive today. Back in the age of legitimate businesses trying to use the telephone for marketing, the relationship mattered. Those businesses couldn’t engage in business anonymously. But today’s robocallers are scam artists. They need no identity to pull off their scams. Indeed, a lack of identity can be advantageous to them. And this means that legal tools such as the DNC list or the TCPA (which I turn to below), which are premised on the ability to take legal action against bad actors who can be identified and who have assets than can be attached through legal proceedings, are wholly ineffective against these newfangled robocallers.

The TCPA Sucks

The TCPA is the first law that was adopted to fight unwanted phone calls. Adopted in 1992, it made it illegal to call people using autodialers or prerecorded messages without prior express consent. (The details have more nuance than this, but that’s the gist.) It also created a private right of action with significant statutory damages of up to $1,500 per call.

Importantly, the justification for the TCPA wasn’t merely “telemarketing sucks.” Had it been, the TCPA would have had a serious problem: telemarketing, although exceptionally disliked, is speech, which means that it is protected by the First Amendment. Rather, the TCPA was enacted primarily upon two grounds. First, telemarketers were invading the privacy of individuals’ homes. The First Amendment is license to speak; it is not license to break into someone’s home and force them to listen. And second, telemarketing calls could impose significant real costs on the recipients of calls. At the time, receiving a telemarketing call could, for instance, cost cellular customers several dollars; and due to the primitive technologies used for autodialing, these calls would regularly tie up residential and commercial phone lines for extended periods of time, interfere with emergency calls, and fill up answering machine tapes.

It is no secret that the TCPA was not particularly successful. As the technologies for making robocalls improved throughout the 1990s and their costs went down, firms only increased their use of them. And we were still in a world of analog telephones, and Caller ID was still a new and not universally-available technology, which made it exceptionally difficult to bring suits under the TCPA. Perhaps more important, while robocalls were annoying, they were not the omnipresent fact of life that they are today: cell phones were still rare; most of these calls came to landline phones during dinner where they were simply ignored.

As discussed above, the first generation of robocallers and telemarketers quickly died off following adoption of the DNC registry.

And the TCPA is proving no more effective during this second generation of robocallers. This is unsurprising. Callers who are willing to blithely ignore the DNC registry are just as willing to blithely ignore the TCPA. Every couple of months the FCC or FTC announces a large fine — millions or tens of millions of dollars — against a telemarketing firm that was responsible for making millions or tens of millions or even hundreds of millions of calls over a multi-month period. At a time when there are over 4 billion of these calls made every month, such enforcement actions are a drop in the ocean.

Which brings us to the FIrst Amendment and the TCPA, presented in very cursory form here (see the paper for more detailed analysis). First, it must be acknowledged that the TCPA was challenged several times following its adoption and was consistently upheld by courts applying intermediate scrutiny to it, on the basis that it was regulation of commercial speech (which traditionally has been reviewed under that more permissive standard). However, recent Supreme Court opinions, most notably that in Reed v. Town of Gilbert, suggest that even the commercial speech at issue in the TCPA may need to be subject to the more probing review of strict scrutiny — a conclusion that several lower courts have reached.

But even putting the question of whether the TCPA should be reviewed subject to strict or intermediate scrutiny, a contemporary facial challenge to the TCPA on First Amendment grounds would likely succeed (no matter what standard of review was applied). Generally, courts are very reluctant to allow regulation of speech that is either under- or over-inclusive — and the TCPA is substantially both. We know that it is under-inclusive because robocalls have been a problem for a long time and the problem is only getting worse. And, at the same time, there are myriad stories of well-meaning companies getting caught up on the TCPA’s web of strict liability for trying to do things that clearly should not be deemed illegal: sports venues sending confirmation texts when spectators participate in text-based games on the jumbotron; community banks getting sued by their own members for trying to send out important customer information; pharmacies reminding patients to get flu shots. There is discussion to be had about how and whether calls like these should be permitted — but they are unquestionably different in kind from the sort of telemarketing robocalls animating the TCPA (and general public outrage).

In other words the TCPA prohibits some amount of desirable, Constitutionally-protected, speech in a vainglorious and wholly ineffective effort to curtail robocalls. That is a recipe for any law to be deemed an unconstitutional restriction on speech under the First Amendment.

Good News: Things Don’t Need to Suck!

But there is another, more interesting, reason that the TCPA would likely not survive a First Amendment challenge today: there are lots of alternative approaches to addressing the problem of robocalls. Interestingly, the FCC itself has the ability to direct implementation of some of these approaches. And, more important, the FCC itself is the greatest impediment to some of them being implemented. In the language of the First Amendment, restrictions on speech need to be narrowly tailored. It is hard to say that a law is narrowly tailored when the government itself controls the ability to implement more tailored approaches to addressing a speech-related problem. And it is untenable to say that the government can restrict speech to address a problem that is, in fact, the result of the government’s own design.

In particular, the FCC regulates a great deal of how the telephone network operates, including over the protocols that carriers use for interconnection and call completion. Large parts of the telephone network are built upon protocols first developed in the era of analog phones and telephone monopolies. And the FCC itself has long prohibited carriers from blocking known-scam calls (on the ground that, as common carriers, it is their principal duty to carry telephone traffic without regard to the content of the calls).

Fortunately, some of these rules are starting to change. The Commission is working to implement rules that will give carriers and their customers greater ability to block calls. And we are tantalizingly close to transitioning the telephone network away from its traditional unauthenticated architecture to one that uses a strong cyrptographic infrastructure to provide fully authenticated calls (in other words, Caller ID that actually works).

The irony of these efforts is that they demonstrate the unconstitutionality of the TCPA: today there are better, less burdensome, more effective ways to deal with the problems of uncouth telemarketers and robocalls. At the time the TCPA was adopted, these approaches were technologically infeasible, so the its burdens upon speech were more reasonable. But that cannot be said today. The goal of the FCC and legislators (both of whom are looking to update the TCPA and its implementation) should be less about improving the TCPA and more about improving our telecommunications architecture so that we have less need for cludgel-like laws in the mold of the TCPA.

 

FCC Commissioner Rosenworcel penned an article this week on the doublespeak coming out of the current administration with respect to trade and telecom policy. On one hand, she argues, the administration has proclaimed 5G to be an essential part of our future commercial and defense interests. But, she tells us, the administration has, on the other hand, imposed tariffs on Chinese products that are important for the development of 5G infrastructure, thereby raising the costs of roll-out. This is a sound critique: regardless where one stands on the reasonableness of tariffs, they unquestionably raise the prices of goods on which they are placed, and raising the price of inputs to the 5G ecosystem can only slow down the pace at which 5G technology is deployed.

Unfortunately, Commissioner Rosenworcel’s fervor for advocating the need to reduce the costs of 5G deployment seems animated by the courageous act of a Democratic commissioner decrying the policies of a Republican President and is limited to a context where her voice lacks any power to actually affect policy. Even as she decries trade barriers that would incrementally increase the costs of imported communications hardware, she staunchly opposes FCC proposals that would dramatically reduce the cost of deploying next generation networks.

Given the opportunity to reduce the costs of 5G deployment by a factor far more significant than that by which tariffs will increase them, her preferred role as Democratic commissioner is that of resistance fighter. She acknowledges that “we will need 800,000 of these small cells to stay competitive in 5G” — a number significantly above the “the roughly 280,000 traditional cell towers needed to blanket the nation with 4G”.  Yet, when she has had the opportunity to join the Commission on speeding deployment, she has instead dissented. Party over policy.

In this year’s “Historical Preservation” Order, for example, the Commission voted to expedite deployment on non-Tribal lands, and to exempt small cell deployments from certain onerous review processes under both the National Historic Preservation Act and the National Environmental Policy Act of 1969. Commissioner Rosenworcel dissented from the Order, claiming that that the FCC has “long-standing duties to consult with Tribes before implementing any regulation or policy that will significantly or uniquely affect Tribal governments, their land, or their resources.” Never mind that the FCC engaged in extensive consultation with Tribal governments prior to enacting this Order.

Indeed, in adopting the Order, the Commission found that the Order did nothing to disturb deployment on Tribal lands at all, and affected only the ability of Tribal authorities to reach beyond their borders to require fees and lengthy reviews for small cells on lands in which Tribes could claim merely an “interest.”

According to the Order, the average number of Tribal authorities seeking to review wireless deployments in a given geographic area nearly doubled between 2008 and 2017. During the same period, commenters consistently noted that the fees charged by Tribal authorities for review of deployments increased dramatically.

One environmental consultant noted that fees for projects that he was involved with increased from an average of $2,000.00 in 2011 to $11,450.00 in 2017. Verizon’s fees are $2,500.00 per small cell site just for Tribal review. Of the 8,100 requests that Verizon submitted for tribal review between 2012 and 2015, just 29 ( 0.3%) resulted in a finding that there would be an adverse effect on tribal historic properties. That means that Verizon paid over $20 million to Tribal authorities over that period for historic reviews that resulted in statistically nil action. Along the same lines, Sprint’s fees are so high that it estimates that “it could construct 13,408 new sites for what 10,000 sites currently cost.”

In other words, Tribal review practices — of deployments not on Tribal land — impose a substantial tariff upon 5G deployment, increasing its cost and slowing its pace.

There is a similar story in the Commission’s adoption of, and Commissioner Rosenworcel’s partial dissent from, the recent Wireless Infrastructure Order.  Although Commissioner Rosenworcel offered many helpful suggestions (for instance, endorsing the OTARD proposal that Brent Skorup has championed) and nodded to the power of the market to solve many problems, she also dissented on central parts of the Order. Her dissent shows an unfortunate concern for provincial, political interests and places those interests above the Commission’s mission of ensuring timely deployment of advanced wireless communication capabilities to all Americans.

Commissioner Rosenworcel’s concern about the Wireless Infrastructure Order is that it would prevent state and local governments from imposing fees sufficient to recover costs incurred by the government to support wireless deployments by private enterprise, or from imposing aesthetic requirements on those deployments. Stated this way, her objections seem almost reasonable: surely local government should be able to recover the costs they incur in facilitating private enterprise; and surely local government has an interest in ensuring that private actors respect the aesthetic interests of the communities in which they build infrastructure.

The problem for Commissioner Rosenworcel is that the Order explicitly takes these concerns into account:

[W]e provide guidance on whether and in what circumstances aesthetic requirements violate the Act. This will help localities develop and implement lawful rules, enable providers to comply with these requirements, and facilitate the resolution of disputes. We conclude that aesthetics requirements are not preempted if they are (1) reasonable, (2) no more burdensome than those applied to other types of infrastructure deployments, and (3) objective and published in advance

It neither prohibits localities from recovering costs nor imposing aesthetic requirements. Rather, it requires merely that those costs and requirements be reasonable. The purpose of the Order isn’t to restrict localities from engaging in reasonable conduct; it is to prohibit them from engaging in unreasonable, costly conduct, while providing guidance as to what cost recovery and aesthetic considerations are reasonable (and therefore permissible).

The reality is that localities have a long history of using cost recovery — and especially “soft” or subjective requirements such as aesthetics — to extract significant rents from communications providers. In the 1980s this slowed the deployment and increased the costs of cable television. In the 2000s this slowed the deployment and increase the cost of of fiber-based Internet service. Today this is slowing the deployment and increasing the costs of advanced wireless services. And like any tax — or tariff — the cost is ultimately borne by consumers.

Although we are broadly sympathetic to arguments about local control (and other 10th Amendment-related concerns), the FCC’s goal in the Wireless Infrastructure Order was not to trample upon the autonomy of small municipalities; it was to implement a reasonably predictable permitting process that would facilitate 5G deployment. Those affected would not be the small, local towns attempting to maintain a desirable aesthetic for their downtowns, but large and politically powerful cities like New York City, where the fees per small cell site can be more than $5,000.00 per installation. Such extortionate fees are effectively a tax on smartphone users and others who will utilize 5G for communications. According to the Order, it is estimated that capping these fees would stimulate over $2.4 billion in additional infrastructure buildout, with widespread benefits to consumers and the economy.

Meanwhile, Commissioner Rosenworcel cries “overreach!” “I do not believe the law permits Washington to run roughshod over state and local authority like this,” she said. Her federalist bent is welcome — or it would be, if it weren’t in such stark contrast to her anti-federalist preference for preempting states from establishing rules governing their own internal political institutions when it suits her preferred political objective. We are referring, of course, to Rosenworcel’s support for the previous administration’s FCC’s decision to preempt state laws prohibiting the extension of municipal governments’ broadband systems. The order doing so was plainly illegal from the moment it was passed, as every court that has looked at it has held. That she was ok with. But imposing reasonable federal limits on states’ and localities’ ability to extract political rents by abusing their franchising process is apparently beyond the pale.

Commissioner Rosenworcel is right that the FCC should try to promote market solutions like Brent’s OTARD proposal. And she is also correct in opposing dangerous and destructive tariffs that will increase the cost of telecommunications equipment. Unfortunately, she gets it dead wrong when she supports a stifling regulatory status quo that will surely make it unduly difficult and expensive to deploy next generation networks — not least for those most in need of them. As Chairman Pai noted in his Statement on the Order: “When you raise the cost of deploying wireless infrastructure, it is those who live in areas where the investment case is the most marginal — rural areas or lower-income urban areas — who are most at risk of losing out.”

Reconciling those two positions entails nothing more than pointing to the time-honored Washington tradition of Politics Over Policy. The point is not (entirely) to call out Commissioner Rosenworcel; she’s far from the only person in Washington to make this kind of crass political calculation. In fact, she’s far from the only FCC Commissioner ever to have done so.

One need look no further than the previous FCC Chairman, Tom Wheeler, to see the hypocritical politics of telecommunications policy in action. (And one need look no further than Tom Hazlett’s masterful book, The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone to find a catalogue of its long, sordid history).

Indeed, Larry Downes has characterized Wheeler’s reign at the FCC (following a lengthy recounting of all its misadventures) as having left the agency “more partisan than ever”:

The lesson of the spectrum auctions—one right, one wrong, one hanging in the balance—is the lesson writ large for Tom Wheeler’s tenure at the helm of the FCC. While repeating, with decreasing credibility, that his lodestone as Chairman was simply to encourage “competition, competition, completion” and let market forces do the agency’s work for it, the reality, as these examples demonstrate, has been something quite different.

The Wheeler FCC has instead been driven by a dangerous combination of traditional rent-seeking behavior by favored industry clients, potent pressure from radical advocacy groups and their friends in the White House, and a sincere if misguided desire by Wheeler to father the next generation of network technologies, which quickly mutated from sound policy to empty populism even as technology continued on its own unpredictable path.

* * *

And the Chairman’s increasingly autocratic management style has left the agency more political and more partisan than ever, quick to abandon policies based on sound legal, economic and engineering principles in favor of bait-and-switch proceedings almost certain to do more harm than good, if only unintentionally.

The great irony is that, while Commissioner Rosenworcel’s complaints are backed by a legitimate concern that the Commission has waited far too long to take action on spectrum issues, the criticism should properly fall not upon the current Chair, but — you guessed it — his predecessor, Chairman Wheeler (and his predecessor, Julius Genachowski). Of course, in true partisan fashion, Rosenworcel was fawning in her praise for her political ally’s spectrum agenda, lauding it on more than one occasion as going “to infinity and beyond!”

Meanwhile, Rosenworcel has taken virtually every opportunity to chide and castigate Chairman Pai’s efforts to get more spectrum into the marketplace, most often criticizing them as too little, too slow, and too late. Yet from any objective perspective, the current FCC has been addressing spectrum issues at a breakneck pace, as fast, or faster than any prior Commission. As with spectrum, there is an upper limit to the speed at which federal bureaucracy can work, and Chairman Pai has kept the Commission pushed right up against that limit.

It’s a shame Commissioner Rosenworcel prefers to blame Chairman Pai for the problems she had a hand in creating, and President Trump for problems she has no ability to correct. It’s even more a shame that, having an opportunity to address the problems she so often decries — by working to get more spectrum deployed and put into service more quickly and at lower cost to industry and consumers alike — she prefers to dutifully wear the hat of resistance, instead.

But that’s just politics, we suppose. And like any tariff, it makes us all poorer.

As the Federal Communications (FCC) prepares to revoke its economically harmful “net neutrality” order and replace it with a free market-oriented “Restoring Internet Freedom Order,” the FCC and the Federal Trade Commission (FTC) commendably have announced a joint policy for cooperation on online consumer protection.  According to a December 11 FTC press release:

The Federal Trade Commission and Federal Communications Commission (FCC) announced their intent to enter into a Memorandum of Understanding (MOU) under which the two agencies would coordinate online consumer protection efforts following the adoption of the Restoring Internet Freedom Order.

“The Memorandum of Understanding will be a critical benefit for online consumers because it outlines the robust process by which the FCC and FTC will safeguard the public interest,” said FCC Chairman Ajit Pai. “Instead of saddling the Internet with heavy-handed regulations, we will work together to take targeted action against bad actors. This approach protected a free and open Internet for many years prior to the FCC’s 2015 Title II Order and it will once again following the adoption of the Restoring Internet Freedom Order.”

“The FTC is committed to ensuring that Internet service providers live up to the promises they make to consumers,” said Acting FTC Chairman Maureen K. Ohlhausen. “The MOU we are developing with the FCC, in addition to the decades of FTC law enforcement experience in this area, will help us carry out this important work.”

The draft MOU, which is being released today, outlines a number of ways in which the FCC and FTC will work together to protect consumers, including:

The FCC will review informal complaints concerning the compliance of Internet service providers (ISPs) with the disclosure obligations set forth in the new transparency rule. Those obligations include publicly providing information concerning an ISP’s practices with respect to blocking, throttling, paid prioritization, and congestion management. Should an ISP fail to make the required disclosures—either in whole or in part—the FCC will take enforcement action.

The FTC will investigate and take enforcement action as appropriate against ISPs concerning the accuracy of those disclosures, as well as other deceptive or unfair acts or practices involving their broadband services.

The FCC and the FTC will broadly share legal and technical expertise, including the secure sharing of informal complaints regarding the subject matter of the Restoring Internet Freedom Order. The two agencies also will collaborate on consumer and industry outreach and education.

The FCC’s proposed Restoring Internet Freedom Order, which the agency is expected to vote on at its December 14 meeting, would reverse a 2015 agency decision to reclassify broadband Internet access service as a Title II common carrier service. This previous decision stripped the FTC of its authority to protect consumers and promote competition with respect to Internet service providers because the FTC does not have jurisdiction over common carrier activities.

The FCC’s Restoring Internet Freedom Order would return jurisdiction to the FTC to police the conduct of ISPs, including with respect to their privacy practices. Once adopted, the order will also require broadband Internet access service providers to disclose their network management practices, performance, and commercial terms of service. As the nation’s top consumer protection agency, the FTC will be responsible for holding these providers to the promises they make to consumers.

Particularly noteworthy is the suggestion that the FCC and FTC will work to curb regulatory duplication and competitive empire building – a boon to Internet-related businesses that would be harmed by regulatory excess and uncertainty.  Stay tuned for future developments.

Unexpectedly, on the day that the white copy of the upcoming repeal of the 2015 Open Internet Order was published, a mobile operator in Portugal with about 7.5 million subscribers is garnering a lot of attention. Curiously, it’s not because Portugal is a beautiful country (Iker Casillas’ Instagram feed is dope) nor because Portuguese is a beautiful romance language.

Rather it’s because old-fashioned misinformation is being peddled to perpetuate doomsday images that Portuguese ISPs have carved the Internet into pieces — and if the repeal of the 2015 Open Internet Order passes, the same butchery is coming to an AT&T store near you.

Much ado about data

This tempest in the teacup is about mobile data plans, specifically the ability of mobile subscribers to supplement their data plan (typically ranging from 200 MB to 3 GB per month) with additional 10 GB data packages containing specific bundles of apps – messaging apps, social apps, video apps, music apps, and email and cloud apps. Each additional 10 GB data package costs EUR 6.99 per month and Meo (the mobile operator) also offers its own zero rated apps. Similar plans have been offered in Portugal since at least 2012.

Screen Shot 2017-11-22 at 3.39.21 PM

These data packages are a clear win for mobile subscribers, especially pre-paid subscribers who tend to be at a lower income level than post-paid subscribers. They allow consumers to customize their plan beyond their mobile broadband subscription, enabling them to consume data in ways that are better attuned to their preferences. Without access to these data packages, consuming an additional 10 GB of data would cost each user an additional EUR 26 per month and require her to enter into a two year contract.

These discounted data packages also facilitate product differentiation among mobile operators that offer a variety of plans. Keeping with the Portugal example, Vodafone Portugal offers 20 GB of additional data for certain apps (Facebook, Instagram, SnapChat, and Skype, among others) with the purchase of a 3 GB mobile data plan. Consumers can pick which operator offers the best plan for them.

In addition, data packages like the ones in question here tend to increase the overall consumption of content, reduce users’ cost of obtaining information, and allow for consumers to experiment with new, less familiar apps. In short, they are overwhelmingly pro-consumer.

Even if Portugal actually didn’t have net neutrality rules, this would be the furthest thing from the apocalypse critics make it out to be.

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Net Neutrality in Portugal

But, contrary to activists’ misinformation, Portugal does have net neutrality rules. The EU implemented its net neutrality framework in November 2015 as a regulation, meaning that the regulation became the law of the EU when it was enacted, and national governments, including Portugal, did not need to transpose it into national legislation.

While the regulation was automatically enacted in Portugal, the regulation and the 2016 EC guidelines left the decision of whether to allow sponsored data and zero rating plans (the Regulation likely classifies data packages at issue here to be zero rated plans because they give users a lot of data for a low price) in the hands of national regulators. While Portugal is still formulating the standard it will use to evaluate sponsored data and zero rating under the EU’s framework, there is little reason to think that this common practice would be disallowed in Portugal.

On average, in fact, despite its strong net neutrality regulation, the EU appears to be softening its stance toward zero rating. This was evident in a recent EC competition policy authority (DG-Comp) study concluding that there is little reason to believe that such data practices raise concerns.

The activists’ willful misunderstanding of clearly pro-consumer data plans and purposeful mischaracterization of Portugal as not having net neutrality rules are inflammatory and deceitful. Even more puzzling for activists (but great for consumers) is their position given there is nothing in the 2015 Open Internet Order that would prevent these types of data packages from being offered in the US so long as ISPs are transparent with consumers.

This week, the International Center for Law & Economics filed an ex parte notice in the FCC’s Restoring Internet Freedom docket. In it, we reviewed two of the major items that were contained in our formal comments. First, we noted that

the process by which [the Commission] enacted the 2015 [Open Internet Order]… demonstrated scant attention to empirical evidence, and even less attention to a large body of empirical and theoretical work by academics. The 2015 OIO, in short, was not supported by reasoned analysis.

Further, on the issue of preemption, we stressed that

[F]ollowing the adoption of an Order in this proceeding, a number of states may enact their own laws or regulations aimed at regulating broadband service… The resulting threat of a patchwork of conflicting state regulations, many of which would be unlikely to further the public interest, is a serious one…

[T]he Commission should explicitly state that… broadband services may not be subject to certain forms of state regulations, including conduct regulations that prescribe how ISPs can use their networks. This position would also be consistent with the FCC’s treatment of interstate information services in the past.

Our full ex parte comments can be viewed here.

Today the International Center for Law & Economics (ICLE) submitted an amicus brief urging the Supreme Court to review the DC Circuit’s 2016 decision upholding the FCC’s 2015 Open Internet Order. The brief was authored by Geoffrey A. Manne, Executive Director of ICLE, and Justin (Gus) Hurwitz, Assistant Professor of Law at the University of Nebraska College of Law and ICLE affiliate, with able assistance from Kristian Stout and Allen Gibby of ICLE. Jeffrey A. Mandell of the Wisconsin law firm of Stafford Rosenbaum collaborated in drafting the brief and provided invaluable pro bono legal assistance, for which we are enormously grateful. Laura Lamansky of Stafford Rosenbaum also assisted. 

The following post discussing the brief was written by Jeff Mandell (originally posted here).

Courts generally defer to agency expertise when reviewing administrative rules that regulate conduct in areas where Congress has delegated authority to specialized executive-branch actors. An entire body of law—administrative law—governs agency actions and judicial review of those actions. And at the federal level, courts grant agencies varying degrees of deference, depending on what kind of function the agency is performing, how much authority Congress delegated, and the process by which the agency adopts or enforces policies.

Should courts be more skeptical when an agency changes a policy position, especially if the agency is reversing prior policy without a corresponding change to the governing statute? Daniel Berninger v. Federal Communications Commission, No. 17-498 (U.S.), raises these questions. And this week Stafford Rosenbaum was honored to serve as counsel of record for the International Center for Law & Economics (“ICLE”) in filing an amicus curiae brief urging the U.S. Supreme Court to hear the case and to answer these questions.

ICLE’s amicus brief highlights new academic research suggesting that systematic problems undermine judicial review of agency changes in policy. The brief also points out that judicial review is complicated by conflicting signals from the Supreme Court about the degree of deference that courts should accord agencies in reviewing reversals of prior policy. And the brief argues that the specific policy change at issue in this case lacks a sufficient basis but was affirmed by the court below as the result of a review that was, but should not have been, “particularly deferential.”

In 2015, the Federal Communications Commission (“FCC”) issued the Open Internet Order (“OIO”), which required Internet Service Providers to abide by a series of regulations popularly referred to as net neutrality. To support these regulations, the FCC interpreted the Communications Act of 1934 to grant it authority to heavily regulate broadband internet service. This interpretation reversed a long-standing agency understanding of the statute as permitting only limited regulation of broadband service.

The FCC ostensibly based the OIO on factual and legal analysis. However, ICLE argues, the OIO is actually based on questionable factual reinterpretations and misunderstanding of statutory interpretation adopted more in order to support radical changes in FCC policy than for their descriptive accuracy. When a variety of interested parties challenged the OIO, the U.S. Court of Appeals for the D.C. Circuit affirmed the regulations. In doing so, the court afforded substantial deference to the FCC—so much that the D.C. Circuit never addressed the reasonableness of the FCC’s decisionmaking process in reversing prior policy.

ICLE’s amicus brief argues that the D.C. Circuit’s decision “is both in tension with [the Supreme] Court’s precedents and, more, raises exceptionally important and previously unaddressed questions about th[e] Court’s precedents on judicial review of agency changes of policy.” Without further guidance from the Supreme Court, the brief argues, “there is every reason to believe” the FCC will again reverse its position on broadband regulation, such that “the process will become an endless feedback loop—in the case of this regulation and others—at great cost not only to regulated entities and their consumers, but also to the integrity of the regulatory process.”

The ramifications of the Supreme Court accepting this case would be twofold. First, administrative agencies would gain guidance for their decisionmaking processes in considering changes to existing policies. Second, lower courts would gain clarity on agency deference issues, making judicial review more uniform and appropriate where agencies reverse prior policy positions.

Read the full brief here.

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.