The Antitrust Review of the Americas 2017

United States: Telecoms

30 August 2016

Cooley LLP

Having taken a significant step to regulate the internet in 2015, policymakers defended that position in 2016. Following the decision of the United States Court of Appeals for the District of Columbia Circuit upholding that move towards regulation, it appears that the pendulum will continue to swing in favour of regulation of the broadband internet economy.

For decades, a fundamental goal of US telecommunications policy has been to transition from a regulated monopoly to a competitive market. Since the enforcement action of the United States Department of Justice’s Antitrust Division (DOJ) against the AT&T monopoly opened long-distance markets to competition,1 antitrust enforcement has played a vital role in this effort. In subsequent years, Congress wrote the policy of relying on market principles to promote the growth and development of the modern telecommunications services such as the internet directly into the Communications Act of 1934, 47 USC section 151, et seq (the Communication Act).2 Technology has indeed flourished, but the telecommunications market also has seen significant consolidation. US policymakers have struggled with how to ensure that network providers maintain an environment that gives consumers access to all legal content and enables innovation from application developers and content providers while encouraging network provider investment in broadband deployment. This debate has assumed the monikers of ‘net neutrality’ or ‘open internet’. While some policy makers have advocated for applying an antitrust framework exclusively to net neutrality issues,3 others have argued for the FCC to impose regulations.4 In 2015, advocates for regulation have won a significant victory that will impact on the application and enforcement of the antitrust laws in the US telecommunications industry for the foreseeable future.

The Federal Communications Commission’s (FCC) Open Internet Order5 adopted regulations governing the provision of both fixed and mobile broadband internet access service. Specifically, the Open Internet Order adopted what it called ‘clear, bright-line rules’ for such services, including:

  • No blocking – to ensure consumer access to all lawful internet destinations, the FCC prohibited the blocking of lawful content, applications, services or non-harmful devices.
  • No throttling – to prevent the degradation of lawful content, the FCC prohibited the impairment of degradation of lawful content, applications, services or non-harmful devices.
  • No paid prioritisation – to prevent preferential treatment for the content of certain providers over others, the FCC prohibited preferential traffic management practices (a) in exchange for consideration or (b) favouring an affiliated entity.6

While enforcement activity has been limited, the FCC reportedly has sent letters to T-Mobile, Comcast and AT&T seeking more information about new services these firms offer that are not subject to data caps that might otherwise apply to their plans.7

In the Open Internet Order, the FCC expanded its authority over the internet by making an important legal distinction. In part to improve the chances of passing judicial review, the Open Internet Order reclassified the service of broadband providers from an ‘information service’ to a ‘telecommunications service’. This reclassification subjects broadband internet access services to common carrier regulation under Title II of the Communications Act and its gauntlet of statutory provisions and regulations. While the FCC exercised its authority to forbear from many of these obligations,8 the legal distinction has important implications for future regulation of broadband providers, which challenged the FCC’s authority in court.

In United States Telecom Association v FCC, the DC Circuit considered industry’s arguments that the FCC decision to reclassify broadband services as a ‘telecommunications service’ was unreasonable.9 Applying the deferential standard in Chevron USA Inc v Natural Resources Defense Council, Inc,10 the DC Circuit affirmed the Open Internet Order in its entirety, confirming the FCC’s broad authority to regulate competition on the internet moving forward11. This change in regulatory framework and scheme will have a significant impact on antitrust enforcement against broadband internet providers.

The open internet order abrogates the Federal Trade Commission’s authority over broadband internet service providers

The classification of broadband internet access services as telecommunications services regulated under Title II may eliminate the authority of the Federal Trade Commission (FTC) to regulate providers of broadband internet access services. Indeed, at least one now former FTC Commissioner has trumpeted the FTC’s expertise in applying US competition policy to the internet.12 The reclassification subjects broadband internet access services to common carrier regulation,13 and the FTC’s authority to regulate common carriers is limited. The common carrier exemption in section 5 of the Federal Trade Commission Act of 1914 (the FTC Act) excludes from the FTC’s jurisdiction all ‘common carriers subject to the Acts that regulate commerce,’ including the Communications Act.14

In prior enforcement actions against telecommunications companies, the FTC has sought to cabin the common carrier exemption by arguing it applies only to the services provided, not the company that provides such services. For example in 2014, the FTC sued AT&T alleging that the company had throttled the data service it had advertised and sold as ‘unlimited’ in violation of the section 5 of the FTC Act’s prohibition against unfair or deceptive acts or practices.15 AT&T filed a motion to dismiss on the grounds that the federal district court lacked subject matter jurisdiction. Because AT&T is a common carrier, the company argued the exemption should deny the FTC regulatory authority over the alleged conduct. After a full briefing cycle, the district court denied the motion to dismiss16 but certified the issue for immediate appeal to the Ninth Circuit.17 Before the Ninth Circuit, AT&T has maintained its position that application of the FTC Act’s statutory text exempts it as a common carrier.18 The FTC has disagreed, arguing that AT&T’s argument is overbroad, and the common carrier exemption only applies to common carrier activities – not to all services provided by companies that offered some common carrier services.19 The FTC argued that AT&T’s mobile wireless voice services were subject to common carrier regulations, but the company’s mobile wireless data services were not at the time of the alleged conduct and therefore outside the common carrier exemption. AT&T has argued that the Open Internet Order, and at oral argument the DC Circuit’s decision to affirm it, divests the FTC of jurisdiction to enforce the FTC Act against mobile wireless data services provided both before and after the release of the Open Internet Order.20

The Open Internet Order has expanded the application of the common carrier exemption. Both mobile and fixed broadband internet access services are now subject to common carrier regulation, and the AT&T Mobility court’s reasoning would not apply in a subsequent FTC enforcement action brought against a broadband internet access provider. The expanded application of the common carrier exemption would impact competition policy on the internet in at least two ways. First, the DOJ would assume unquestioned authority to enforce the antitrust laws against broadband internet access providers, which include not only traditional telecommunications carriers like AT&T and Verizon but traditional cable companies like Comcast or Charter. Second, because of the DOJ’s lack of consumer protection authority, enforcement against unfair acts and practices would be left to the FCC.21 Absent a statutory repeal of the common carrier exemption, for which the FTC has already advocated,22 the FTC’s role in competition policy on the internet has been significantly diminished. The Ninth Circuit’s decision later this year in AT&T Mobility will further define the scope of the FTC’s authority.

The remaining role for antitrust enforcement in broadband internet access services

The Open Internet Order expressly reserved a role for antitrust. The FCC stated that its regulations were ‘complementary to vigorous antitrust enforcement’ and that the DOJ should continue to ‘carefully monitor, review, and where appropriate, take action against any anticompetitive mergers, acquisitions, agreements or conduct’.23 Given the broad coverage of the Open Internet Order, however, there is an open question of what that role might be.

Proponents of applying an antitrust framework to net neutrality have characterised the concerns of the proponents of regulation as vertical leveraging and vertical foreclosure.24 In the net neutrality context, this might manifest itself with broadband service provider with market power imposing a vertical restraint against a rival content or application provider to gain an advantage in the content market.25 Under modern antitrust standards, a claim premised on such a theory would be difficult to prove. In the last decade, Supreme Court decisions have limited the scope of potential cases against the unilateral conduct of network providers.26 To satisfy the elements of a Sherman Act section 2 monopolisation claim,27 the plaintiff would have to show not only that the broadband service provider possessed monopoly power but that the discriminatory conduct was exclusionary and resulted in an anticompetitive effect such as driving applications from the market, preventing new entry or denying competitors minimum efficient scale.28

The broadband internet access service market does not seem conducive to such a showing. While the sales of the service are made locally to subscribers, the upstream market for applications and content is likely national, quite competitive and typified by low entry barriers and low marginal costs. Accordingly, demonstrating that any one internet service provider’s vertical restraint could harm competition would require proof that denial of access to one ISP’s customers was sufficient to prevent a rival from achieving minimum efficient scale or dissuade the provider from entering. With at least five major broadband internet service providers nationwide that often compete head-to-head in local markets, this would be a very difficult showing.29

DOJ officials have provided guidance about what they perceive as the future role of antitrust in the broadband sector. In an October 2015 speech, then Assistant Attorney General for Antitrust Bill Baer praised recent developments in the video and broadband marketplace including the proliferation of new video services and more consumer choice.30 But AAG Baer identified a ‘bottleneck’ in the provision of broadband services: many consumers can only receive high-speed broadband from their cable company that continues to derive ‘significant revenues from its cable television business.’31 Baer expressed concern that cable companies’ incentives to protect their existing cable television business would lead them to disadvantage content providers. ‘If we can prevent cable companies from exploiting their bottleneck in anticompetitive ways, a more competitive video entertainment market will also spur more broadband competition.’32 In addition to private innovation and investment, Baer said the combination of sound antitrust enforcement, and merger enforcement in particular, as well as ‘smart competitive regulation’ would ‘let competition thrive and innovation continue’ to the benefit of consumers. In 2016, the DOJ had an opportunity to apply these principles in an investigation of a significant cable company merger.

Charter-Time-Warner Cable Merger-BrightHouse approved with conditions

Seizing an opportunity created by the failure of the proposed Comcast-Time Warner merger to obtain regulatory approval, Charter announced its intention to acquire Time Warner Cable and BrightHouse Communications in deals worth approximately US$89 billion that would result in a company (New Charter) serving 23.9 million customers.33 The question for New Charter was whether the transaction would meet the same fate as the prior one. As AAG Baer subsequently explained, the Comcast-Time Warner merger ‘risked disproportionately increasing the merged firm’s bargaining leverage.’34 With nearly 60 per cent of the high-speed broadband subscribers, the Department determined the combined Comcast-Time Warner would have the ability and incentive to disadvantage over-the-top programmers and streaming services.35 Charter’s transaction appeared to present the same issues – albeit on a smaller scale.

After a review that spanned almost a year, the DOJ approved the transaction subject to certain conditions that New Charter had agreed to undertake. The DOJ alleged that Charter, Time Warner Cable and BrightHouse competed in a two-sided market for the video programming distribution.36 Distributors compete in the upstream market to acquire full-length, professional content as well as a downstream market for residential consumers.37 While Charter, Time Warner and BrightHouse generally do not compete against one another for subscribers, the complaint focused on the combined firms’ ability to foreclose competition from newer rivals. The complaint defined the relevant market broadly to include services offered by: multichannel video programming distributors (MVPDs) such as cable and satellite companies that deliver content over their own facilities to consumers; and online video programming distributors (OVDs), such as Netflix and Hulu, that provide programming over the internet. The competition from OVDs also had spurred MVPDs to innovate, including offering less expensive programming packages and increasing the content available on an on-demand basis.38

The DOJ alleged that post-transaction New Charter would have the ability and incentive to limit competition from OVDs. Because New Charter would continue to earn a significant portion of its revenue from video services, the DOJ alleged that it would take drastic steps to blunt the competitive challenges of OVDs. Indeed, the DOJ observed that Time Warner Cable had been particularly aggressive in securing ‘alternative distribution means’ clauses (ADMs) that, among other things, prohibit or severely restrict a video programmer from licensing content to OVDs. As a company that would be 60 per cent larger than Time Warner Cable, the DOJ asserted that New Charter would be able to exert ‘more leverage’ and that programmers would be under more pressure ‘to accept New Charter’s demands’ for fear of losing access to the company’s 17 million subscribers.39

The DOJ concluded, however, that these potential harms could be remedied with behavioural conditions. First, the proposed final judgment prohibits New Charter from entering any agreement with a video programmer that forbids, limits or creates incentives to limit video programmers from distributing its content to OVDs. Second, New Charter is also prohibited from entering agreements with programmers that ‘create incentives to limit’ a video programmer’s distribution to OVDs. Narrow exceptions for programming contract terms considered procompetitive, such as limitations on free distribution of content over the internet for 30 days, are permitted.40 The DOJ concluded that these protections, together with the relief obtained by the FCC, were sufficient to preserve competition. Specifically, the DOJ endorsed the FCC’s decision to make interconnection available on a non-discriminatory, settlement-free basis and required New Charter to provide the Department with copies of regular reports furnished to the FCC pursuant to its order.41 With these protections in place for a seven-year term, the DOJ concluded that the ‘proposed Final Judgment will provide a prompt, certain and effective remedy for consumers by preventing New Charter from using its leverage over programmers to harm competition.’42

The FCC’s Order went far beyond the relief obtained by the DOJ. In an order adopted on 5 May 2016, the FCC:

  • prohibited New Charter from imposing data caps or charging usage-based pricing for residential broadband service;
  • required settlement-free interconnection with qualified internet providers;
  • adopted restrictions on video programming contracts similar to the ones imposed by the proposed final judgment;
  • required New Charter to deploy high-speed broadband to 2 million more homes; and
  • required New Charter to adopt a low-income broadband plan specifying the minimum speed and price that must be offered.43

With the adoption of the Open Internet Order and the imposition of merger conditions that direct how broadband services must be marketed to consumers, the FCC has sought to exert its authority over broadband services, opening the door to further regulation rather than a strict reliance on antitrust enforcement to promote competition.

Antitrust challenge to set-top box rental policies

In long-running class action litigation against cable provider Cox Communications, Inc (CCI), plaintiffs have alleged that CCI’s practice of requiring customers that purchased premium cable services to also rent a set-top box from CCI constituted a per se illegal tying arrangement. Specifically, the plaintiffs had claimed that CCI had market power in the local market for cable television services, had tied the sale of cable services to the purchase of a second product, set-top boxes, that had affected a substantial volume of commerce in the product for the tied product. After a nine-day trial in the federal district court in the Western District of Oklahoma, a jury returned a verdict in favour of the plaintiffs awarding approximately US$6.3 million in damages.44 But CCI filed a motion for judgment as a matter of law, arguing that the plaintiff had failed to prove the required element that competition had been foreclosed by the tying arrangement. The court agreed and found that the plaintiffs had failed to produce evidence that any other potential sellers of set-top boxes had been foreclosed from competition. Further, the court found that the plaintiff failed to show any loss or injury from the defendants’ conduct that reduced competition and therefore could not ‘establish that any harm came to [the plaintiffs] because of any tying activity’.45 Accordingly, the court granted the motion for judgment as a matter of law.

The plaintiffs appealed to the Tenth Circuit. The plaintiffs’ primary argument on appeal is that the court’s requirement of proof of the specific competitors foreclosed went beyond the standard for per se tying liability, which plaintiffs contend requires only evidence of a substantial dollar volume of commerce is covered by the tie.46 CCI has argued that, despite the lax jury instructions, the court properly required the plaintiff to prove that set-top box competitors have been excluded from the market.47 The case remains pending before the Tenth Circuit. As it does, the FCC is considering rules intended to address the broader market for set-top boxes and ‘empower consumers to choose how they wish to access the multichannel video programming to which they subscribe, and promote innovation in the display, selection, and use of this programming and of other video programming available to consumers.’48 This policy reflects a further attempt at regulation rather than a pure reliance on technological and market forces.

Notes

  1. United States v Western Elec. Co., 552 F. Supp. 131, 227-28, 231 (D.D.C. 1982), aff’d mem. sub nom. Maryland v United States, 460 U.S. 1001 (1983) (requiring break up AT&T’s long distance and local exchange carrier businesses).
  2. Communications Act section 230(b)(2) (stating that the Internet should be a ‘vibrant and competitive free market ... unfettered by Federal or State regulation.’).
  3. Commissioner Joshua Wright, Federal Trade Commission, Remarks at the Information Economy Project’s Conference on U.S. Broadband Markets in 2013: Broadband Policy & Consumer Welfare: The Case for an Antitrust Approach to Net Neutrality Issues at 2 (Apr. 19, 2013) (‘I hope to make the case for why antitrust is particularly well suited for addressing the concerns raised in the longstanding debate surrounding net neutrality in a manner that best serves consumers, and to explain why I believe the FTC’s core competencies as an antitrust and consumer protection agency make it equal to the task.’), available at: https://www.ftc.gov/sites/default/files/documents/public_statements/broadband-policy-consumer-welfare-case-antitrust-approach-net-neutrality-issues/130423wright_nn_posting_final.pdf.
  4. The White House, Press Release, Statement by the President on Net Neutrality (Nov. 10, 2014) (advocating for net neutrality regulation).
  5. Protecting and Promoting the Open Internet, 30 FCC Rcd. 5601 (Mar. 12, 2015) (the ‘Open Internet Order’).
  6. Open Internet Order paragraphs 15-19.
  7. John D. MacKinnon, FCC Seeks Information From Firms on Practices and Net Neutrality, Wall Street Journal (Dec. 17, 2015), available at: www.wsj.com/articles/fcc-seeks-information-from-firms-on-practices-and-net-neutrality-1450386074.
  8. Open Internet Order paragraphs 37, 456-536 (forbearing from the requirement ‘to unbundle last-mile facilities, no tariffing, no rate regulation, and no cost accounting rules’).
  9. Opinion, Case No. 15-1063 (D.C. Cir. Jun. 14, 2016).
  10. 467 U.S. 837 (1984).
  11. United States Telecom Association v FCC, Opinion, Case No. 15-1063 (D.C. Cir. Jun. 14, 2016).
  12. Commissioner Joshua Wright, Federal Trade Commission, Remarks at the Information Economy Project’s Conference on U.S. Broadband Markets in 2013: Broadband Policy & Consumer Welfare: The Case for an Antitrust Approach to Net Neutrality Issues at 2 (Apr. 19, 2013).
  13. See Open Internet Order paragraphs 274 (‘[broadband internet access service’ is a telecommunications service subject to Title II ... This finding both removes the common carrier limitation from the exercise of our affirmative section 706 authority and also allows us to exercise authority directly under sections 201 and 202 of the Communications Act in adopting today’s rules.’).
  14. See 15 U.S.C. section 45(a)(2); see also 15 U.S.C. section 44 (defining ‘Acts to regulate commerce’ as including the Communications Act).
  15. FTC v AT&T Mobility LLC, Complaint, Case No. 14-CV-04785-EMC (N.D. Cal. Oct. 28, 2014), paragraph 43.
  16. FTC v AT&T Mobility LLC, Order Denying Defendant’s Motion to Dismiss, Case No. 14-CV-04785-EMC (N.D. Cal. Mar. 31, 2015), at 19.
  17. FTC v AT&T Mobility LLC, Order Granting Defendant’s Motion to Certify, Case No. 14-CV-04785-EMC (N.D. Cal. May 15, 2015).
  18. FTC v AT&T Mobility LLC, Opening Brief, Case No. 15-16585 (9th Cir. Nov. 18, 2015).
  19. FTC v AT&T Mobility LLC, Answering Brief, Case No. 15-16585 (9th Cir. Feb. 3, 2016).
  20. FTC v AT&T Mobility LLC, Reply Brief, Case No. 15-16585 (9th Cir. Feb. 22, 2016), at 26-28.
  21. Open Internet Order paragraphs 141, 291, 444-45 (asserting FCC’s authority under Communications Act section 201(b) to regulate ‘unjust or unreasonable’ practices to broadband internet access providers). In addition, the Open Internet Order may limit the FTC’s ability to continue its role as privacy enforcer with respect to broadband internet access services.
  22. Commissioner Terrell McSweeny, Federal Trade Commission, Prepared Statement before the United States House of Representatives Committee on the Judiciary (Mar. 25, 2015). (‘The optimum outcome for consumers is Open Internet coupled with repeal of the common carrier exemption that may hinder the FTC from protecting consumers against unfair and deceptive common carrier activities.’)
  23. Open Internet Order paragraph 203.
  24. Barbara van Schewick, Net Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like, 67 STAN. L. REV. 1, 16 (Jan. 2015).
  25. Christopher S. Yoo, What Can Antitrust Contribute to the Network Neutrality Debate?, 1 INT’L J. COMM. 493, 502-03 (2007).
  26. See Verizon Commc’ns Inc. v Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) (concluding that the antitrust laws did not compel incumbent network provider to share with a rivals); Pacific Bell Tel. Co. v linkLine Commc’ns, Inc., 555 U.S. 438 (2009) (concluding that when network provider has no duty to deal at the wholesale level and does not engage in predatory pricing at the retail level it has no obligation to set wholesale prices on terms that ensure its rival’s profitability).
  27. Trinko, 540 U.S. at 407 (requiring proof of (1) monopoly power; and (2) the acquisition, enhancement or maintenance of that monopoly power through exclusionary conduct).
  28. Barbara van Schewick, Net Neutrality and Quality of Service: What a Non-Discrimination Rule Should Look Like, 67 STAN. L. REV. 1, 19 (Jan. 2015).
  29. Leichtman Research Group, Press Release, 3.1 Million Added Broadband from Top Providers in 2015, (Mar. 11, 2016), available at: www.leichtmanresearch.com/press/-031116release.html (reporting data that at least 5 broadband providers serve at least 6 million subscribers and that none has a market share higher than 26 percent).
  30. Assistant Attorney General William Baer, Speech, Video Competition: Opportunities & Challenges, (Oct. 9, 2015, available at: https://www.justice.gov/opa/speech/assistant-attorney-general-bill-baer-delivers-keynote-address-future-video-competition (Baer Video Competition Speech).
  31. Id.
  32. Id.
  33. Time Warner Cable, Press Release, Charter Communications to Merge with Time Warner Cable and Acquire Bright House Networks (May 26, 2015), available at: http://ir.timewarnercable.com/investor-relations/investor-news/financial-release-details/2015/Charter-Communications-to-Merge-with-Time-Warner-Cable-and-Acquire-Bright-House-Networks/default.aspx.
  34. Baer Video Competition Speech at 2.
  35. Id.
  36. United States v Charter Communications, Inc. et at., Complaint, Case No. 1:16-cv-00759 (D.D.C. Apr. 25, 2016), paragraph 15.
  37. Id.
  38. United States v Charter Communications, Inc. et al., Competitive Impact Statement, Case No. 1:16-cv-00759 (D.D.C. May 10, 2016), at 10 (CIS).
  39. CIS at 13.
  40. CIS at 17-18.
  41. CIS at 20.
  42. CIS at 2.
  43. Applications of Charter Communications, Inc., Time Warner Cable Inc., and Advance/Newhouse Partnership for Consent to Transfer Control of Licenses and Authorizations, MB Docket No. 15-149, Memorandum Opinion & Order, 31 FCC Rcd __ (rel. May 10, 2016) at Appendix B.
  44. In re Cox Enters., Inc. Set-top Cable Television Box Litigation, Memorandum Opinion & Order, Case No. 12-ML-2048 (W.D. Okl. Nov. 12, 2015).
  45. In re Cox Enters., Inc. Set-top Cable Television Box Litigation, Memorandum Opinion & Order, Case No. 12-ML-2048 (W.D. Okl. Nov. 12, 2015), at 5.
  46. Healy v Cox Commc’ns, Inc., Plaintiff/Appellant’s Opening Brief of Defendant, Case Nos. 15-6219 & 15-6222 (Jun. 23, 2016), at 14.
  47. Healy v Cox Commc’ns, Inc., Reply Brief of Defendant, Case Nos. 15-6219 & 15-6222 (Jun. 23, 2016), at 14.
  48. Notice of Proposed Rulemaking, In the Matter of Expanding Consumers’ Video Navigation Choices & Commercial Availability of Navigation Devices, FCC 16-18, at paragraph 1 (Feb. 18, 2016), available at https://apps.fcc.gov/edocs_public/attachmatch/FCC-16-18A1.pdf

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