Supreme Court Affirms FCC Nonregulation of Cable Modem Service for Broadband Internet Access:

The U.S. Supreme Court upheld yesterday the FCC’s treatment of cable modem service as a lightly regulated “information service” not subject to common carrier “telecommunications service” regulation under Title II of the federal Communications Act. The Court reversed a Ninth Circuit Court of Appeals decision to the contrary, finding that the FCC’s evolving regulatory treatment of Internet access service is entitled to judicial deference because the FCC as an expert administrative agency is entitled to judicial deference in its statutory interpretation, and its policy choices have been reasonable. The Court thus upholds the FCC’s interpretation that the signal transmission component of modem service is not “offered” to consumers as a stand-alone service which should be regulated, but is inextricably integrated with the signal processing “information services” making up the totality of broadband Internet access by cable modem service. Accordingly, cable modem/broadband Internet access service is not subject to telecom rules such as network unbundling or open network access for ISP competitors, or potential telecom rate regulation.

The Supreme Court’s decision specifically leaves to the FCC whether and how to apply similar regulatory treatment to the digital subscriber line (DSL) services of traditional telephone companies, and whether or not to “require cable companies to allow independent ISPs access to their facilities” under the ancillary Title I jurisdiction for discretionary regulation. Press statements by FCC commissioners suggest they will now be resuming consideration of appropriate DSL regulation, the potential “light” version of social obligations for Internet access service such as consumer protection, public safety, and universal service fund (USF) contributions, and other FCC rulemakings held in suspense pending the Supreme Court’s decision. Meanwhile, amidst other current policy controversies on cable franchising, the Supreme Court’s decision and its reversal of the Ninth Circuit ruling means that cable modem service is still not subject to cable franchise fees under federal law. NCTA v. Brand X Internet Services et al., U.S. Supreme Court Nos. 04-277 and 04-281, June 27, 2005.

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Supreme Court Finds Grokster Exposure for Promoting Infringement:

In another of yesterday’s widely reported decisions from the U.S. Supreme Court, Peer-to-Peer software distributors Grokster, Ltd. and StreamCast Networks, Inc. were found susceptible of trial for claims of inducing copyright infringement by the peer-to-peer network users of their software. Distinguishing this case from its Sony/Betamax decision in 1984, the Court held that when a product is capable of both lawful and unlawful use, one who distributes the product “with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties”. Thus, the defendants’ intention to promote or induce infringement by product users becomes relevant – not just the technical capabilities of the product itself. The Court gave weight to “evidence of the defendants’ words and deeds going beyond distribution as such”, reflecting “a purpose to cause and profit from third-party acts of copyright infringement”. For support services such as Internet service providers (ISPs), the case indicates solid defenses against derivative infringement claims arising from music, TV and film copying by customer/network users, particularly where (1) marketing and promotion of infringing uses is avoided, and (2) customer rules and policies recite admonition against infringing and unlawful uses. (MGM v. Grokster, Ltd., U.S. Supreme Court No. 04-480, June 27, 2005)

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California Supreme Court Weakens Class Action Waivers:

The California Supreme Court held yesterday that “class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to class wide arbitration”, in circumstances involving big-business standard-form contracts with consumers where the typical amounts involved are “individually small sums of money”. The court stretched to find that in such circumstances of form contracts and small dollar amounts, a class action waiver amounts to an invalid “exculpatory clause” if the business party “has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money . . . Under these circumstances, such waivers are unconscionable under California law and should not be enforced.”

The case arose out of the financial services business, with allegations that Discover Bank told cardholders that late payment fees would not be assessed if payment was received by a certain date, but then applied late charges if payment was received after 1:00 p.m. on that date. However, the Supreme Court’s discussion in yesterday’s case built on previous cases involving billing and service claims for Internet services (America Online, Inc. v. Superior Court, 90 Cal.App.4th 1, (2001)), and telecommunications services (Ting v. AT&T, 319 F.3d 1126, 9th Cir. 2003). The court also found that under California’s public policy of consumer protection, its position is not preempted by the arbitration-friendly terms of the Federal Arbitration Act, nor will a choice-of-law provision in the form contract necessarily be applied by California courts to block consumer class action in this state. (Discover Bank v. Superior Court (Boehr), California Supreme Court No. S113725, June 27, 2005)

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Universal Service Fund Oversight:

The FCC recently launched a formal inquiry into the management, administration and oversight of the Universal Service Fund (USF), the conduit for billions of dollars in fees which are collected on telephone bills and applied to four USF programs: supporting affordable phone service in rural areas, subsidizing school and library purchases of Internet access and telecommunications equipment and services, promoting telemedicine services in rural areas, and supporting lifeline phone services for low-income households. After recurring fraud claims involving USF funds, the FCC’s inquiry will explore better administration and management for the USF. The new proceeding, FCC 05-124, June 14, 2005 is separate from ongoing policy and legislative debates on the potential application of USF fees to newer services, such as VOIP and Internet access which are not automatically subject to the USF fees applied to “telecommunications” services.

Do-Not-Call Exception for Recalls:

The FCC also ruled this month that its rules against phone calls to residential phone customers signed up for the Do-Not-Call list, do not apply to calls “made for the limited purpose of informing consumers of recalls due to a product safety or defect concern and scheduling appointments to correct such problems at no cost to the consumer”. However, the Do-Not-Call prohibition will still be applied to any such calls which also include offers “encouraging the purchase of other goods or services” (FCC Declaratory Ruling, DA05-1667, June 15, 2005).

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