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When it granted two certiorari petitions last month in a closely watched telecommunications dispute, the U.S. Supreme Court effectively announced that it was about to delve into the complex world of high-speed Internet service. Its decision in National Cable & Telecommunications Association v. Brand X Internet Services and Federal Communications Commission v. Brand X Internet Services may go a long way toward untangling some critical questions facing this still-emerging industry. Argument is expected in March, and a decision should follow by the end of June. Brand X presents a perfect storm of issues. The court will have to decide a key question of administrative law — whether the Ninth Circuit U.S. Court of Appeals was correct when it followed its own recent precedent, or erred in refusing to grant deference to an FCC decision that came after the earlier circuit ruling. In addition, the justices will have to grapple with some of the most perplexing statutory definitions contained in the Telecommunications Act of 1996 — definitions that many, including FCC Chairman Michael Powell, consider archaic and harmful to emerging technologies. Perhaps most important, the Supreme Court’s decision could have a profound impact on the regulation of high-speed Internet service provided over cable modems and other delivery mechanisms, such as phone lines or satellites. Thus, the eventual ruling may help shape the development of crucial broadband technologies. Resolution of the underlying substantive dispute in Brand X rests on how cable modem service is classified for purposes of regulation under the Telecom Act. The statutory definitions at issue include the following: Telecommunications: “The transmission, between or among points specified by the user, of information of the user’s choosing without change in the form or content of the information as sent or received.” Telecommunications service: “The offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.” Information service: “The offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” It “includes electronic publishing, but does not include any use of any such capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.” As a general matter, all parties agree that cable modem service constitutes “telecommunications.” The question is whether cable modem service is most reasonably classified as a “telecommunications service” or an “information service.” Crucially, if cable modem service is an information service, it would be subject to minimal federal regulation. If it is a telecommunications service, like traditional telephone service, it could be heavily regulated. PRECEDENT vs. DEFERENCE On this issue, the Ninth Circuit clashed with the FCC last year in Brand X Internet Services v. FCC. The court vacated the FCC’s March 15, 2002, conclusion that high-speed Internet access over cable modems should be classified as an information service. In its decision, the Ninth Circuit found that it was bound by its own previous ruling in AT& T Corp. v. City of Portland (2000). In that case, the court determined that the Telecom Act requires that cable modem service be regulated as a telecommunications service. The Ninth Circuit also noted that the FCC was late in taking a position on the classification of cable modem service, even though it could have done so earlier. Therefore, the court found that it need not give any deference to the FCC’s stance. The FCC obviously disagrees. In its cert petition to the Supreme Court, the agency argued that the Ninth Circuit should have given deference to the FCC’s finding. (If the FCC is correct, it would appear that federal administrative agencies have the effective ability to overturn circuit court decisions within the agency’s specific area of expertise.) The FCC reasoned that Internet access services, of which cable modem is one variety, are best classified as information services because the provider offers a single, integrated service — Internet access — to the subscriber. Although cable modem providers use telecommunications in providing Internet access, they do not offer a stand-alone telecom service, such as raw transmission capability. The telecom component (i.e., transmission) is not separate from the data and information processing capabilities of the service. Accordingly, the FCC believes that cable modem service is best classified as an information service. In Brand X, the Ninth Circuit rejected all of these arguments. The court noted that cable modem service consists of two elements: a transmission pipeline and the Internet service transmitted over that pipeline. To the extent that a cable operator provides subscribers with Internet transmission, the court concluded, it is providing a telecommunications service. THE DIFFERENCE IT MAKES Although the Supreme Court’s ruling may turn primarily on the more arcane issue of agency deference, the ultimate classification of cable modem service could have a major impact throughout the telecom industry — on cable operators, telecom service providers, companies engaged in deploying VoIP (voice over Internet protocol) services, and providers of other modes of broadband service, including wireless providers and electric utilities considering deploying BPL (broadband over power lines). If cable modem service is classified as an information service, cable operators will face minimal regulatory burdens. But this could create difficulty for other providers, including those offering VoIP services. Cable operators would have stronger leverage to run their broadband networks as closed, integrated systems. This could limit consumers’ ability to run other applications of their choosing, including VoIP, over cable modems. At the same time, light regulatory treatment of cable broadband could encourage further development of other means of deploying broadband, including BPL. On the other hand, a decision to classify cable modem service as a telecommunications service could significantly change the economics of that business and would have an impact on others looking to use broadband. Providers would have a statutory duty to provide service to consumers and Internet service providers (among others) “upon reasonable request,” at rates that are “just and reasonable,” and without “unjust or unreasonable discrimination.” In addition, cable providers could be statutorily obligated to interconnect their networks with other telecom companies and to file applications outlining the rates, terms, and conditions of their offerings that would be subject to regulatory review. Perhaps most significant, federal universal service requirements would apply, increasing the cost of providing service by the “quarterly contribution factor” established by the FCC, which is currently 8.9 percent of revenue. Such an effective tax could make broadband deployment less attractive to cable operators and could potentially chill the development of other forms of broadband. At the same time, expanding the number of entities that contribute to universal service would lessen the burden on long distance carriers and other current contributors. Beyond the important issue of court deference to agency action, the problem underlying the entire Brand X dispute is how to apply old statutory definitions to new technologies. Congress last visited these definitions well before cable modem and other broadband offerings were available at any meaningful level, and many question whether the definitions are relevant today. Indeed, advocates of reforming the 1996 act, including Chairman Powell, have pointed in particular to the definitions of telecommunications and information services as constituting an obstacle to a sensible national policy. As a result, the Supreme Court’s review of Brand X will have a material effect on the ongoing deployment of advanced communications capabilities throughout American society. This is a case to watch. Michael B. Hazzard and Ross A. Buntrock are of counsel in the technology and commerce practice of the Washington, D.C., office of Womble Carlyle Sandridge & Rice. This article originally appeared in Recorder affiliate Legal Times.

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