Above the Crowd

Cleaning Up After the Ninth Circuit in an Attempt to Save the Internet

December 18, 2003:

In 1998, President Clinton noted "Information technology now accounts for over a third of our economic growth, and government should follow one guiding principle: First, do no harm." This phrase, which translates from the Latin phrase, primum non nocere, is a signal to pay just as much attention to the "means" as the "ends." Often in complex political systems, the objective of an action can be honorable, yet the impact of said action can be completely at odds with the objective. This is largely because the tools we use to encourage behavior in such systems are often crude and imprecise.

On October 6, 2003, the Ninth Circuit Court of Appeals issued an opinion in the case of Brand X Internet vs. FCC that has the potential to delay the progress of the Internet in the United States by certainly years and potentially decades. Through its actions, the Ninth Court has "invited" the fifty independent and natural bureaucratic state-based public utility commissions directly into the fold of the Internet.

How the Ninth Circuit accomplished this feat is both curious and confusing. The case in question deals with whether or not cable lines that deliver Internet service can be considered a "telecommunications service." This wording is critical because Congress and the FCC have made it clear that states can regulate "telecommunications services" but must keep their hands off "information services." In 1998, the same year Clinton made his declaration, the city of Portland mandated that AT&T Cable, as a requirement for approval of its acquisition of TCI, open up its broadband lines to competitive carriers. Ruling on this in 2000, the Ninth Circuit stated that the city of Portland could not mandate this behavior as its jurisdiction was over cable franchises, and these broadband connections did not technically represent a cable franchise. But the Ninth Circuit did not stop there; it made one more historical, but seemingly unnecessary step. It declared cable modem service a "telecommunications service."

The FCC was compelled to react to the Ninth Circuit Court’s assertion, as it flew in the face of the FCC position on this matter, as well as the clear intent of Congress and the Executive Branch (both of whom had echoed their desire to keep the Internet unregulated). Therefore in 2002, in an effort to clarify and correct the decision in Portland, the FCC ruled that cable modem services are "interstate information services" and not "telecommunication services." Seven different petitions for review of the FCC’s "information services" ruling were filed in the Third, Ninth and D.C. Circuits. Under the multi-circuit rules a judicial lottery was held, and the Ninth Circuit was ironically elected to rule on the FCC’s ruling.

In its decision of October 6th, the Ninth Circuit noted that the Supreme Court had ruled in Chevron that agencies should be given the benefit of the doubt in interpreting the subtleties of their own provisions, particularly when consistent with the clear intent of Congress. Despite this, and without ever questioning the intent of Congress, the Ninth Circuit relied on two key precedents to escape this Supreme Court decision and rule against the FCC. Surprisingly (or perhaps not), these two key precedents were both previous actions by the Ninth Circuit – one being the Portland case. The argument, quite simply, is that the FCC had no business ruling on something that a prominent authority, none other than the Ninth Circuit itself, had already decided. Meanwhile, in a similar case across the country on October 16, a U.S. District Court in Minnesota unequivocally noted that "State regulation would effectively decimate Congress’s mandate that the Internet remain unfettered by regulation."

Not lacking in hubris, Ninth Circuit Judge O’Scannlain in concurring noted, "our adherence to stare decisis (the legal doctrine that courts are restricted by precedent), even in the face of subsequent agency interpretation contrary to our Portland decision, produces a result ‘strikingly inconsistent with Chevron’s underlying principles.’" He went on to note "adherence to stare decisis in the present case…appears to aggrandize, rather than limit our power over an admittedly complicated and highly technical area of telecommunications law." Judge O’Scannlain is right in that this certainly "appears" to be a jousting match of epic proportion between the Ninth Circuit and the FCC. The unsuspecting and unfortunate casualty in all of this is the Internet and everything it means to American society.

Who would benefit from increased regulation of cable modem services? The only clear answer is the fifty state public utility commissions. Perhaps fearing irrelevance as a result of the rise of the Internet, these agencies have quickly sided with the Ninth Circuit. It is not at all clear that the Internet "needs" regulation — in fact, quite the opposite. Therefore, in a day and age where everyone is fearful of rising deficits, our government should revel in the opportunity to downsize rather than increase outdated government programs.

Who would be harmed by increased regulation of the Internet? There are four constituents that are negatively impacted as a result of such action:

1) Consumers will be faced with higher prices for Internet services. Highly regulated industries typically have complex tax structures and consistently increasing prices. Competitive technology industries typically have low or no tax structures, and constantly falling prices. Apply regulation to the world of the Internet, and you lay the foundation for things such as email taxation, instant messenger taxation, VOIP taxation, per minute fees, bandwidth monitoring, and controlled pricing (once again, read "increased" pricing at something like 5% per year). Requiring Internet service companies to interact with fifty different state agencies every time they "tie their shoe" will undoubtedly add costs and complexities to their lives, which will in turn result in higher costs and slower innovation/deployment. California consumers, already accustomed to paying the highest gas prices in the country, will quickly enjoy the highest Internet fees as well.

2) The growth in information technology businesses will slow dramatically. The Ninth Circuit decision, if it stands, will have horrible consequences for Silicon Valley. The growth of the Internet and the numerous resulting businesses and services are the unquestioned drivers of our current economy. Slow the penetration of broadband through the imposition of increased regulation and all of high tech will suffer. The Ninth Circuit decision pours concrete on the number one facilitator of technological growth in the U.S.

3) American competitiveness will suffer. Household broadband penetration in the U.S. is quickly falling behind innovative countries like Korea and Japan. While we are struggling to move beyond 20% broadband penetration, Korea is soaring past 60% on its way to 70%. Moreover, the connections in Korea are built around fiber optics and are resultantly many times faster than traditional U.S. broadband. These increases in Internet performance have resulted in increased usage of the Internet for such things as telecommuting and online education. As the U.S. faces the real loss of white-collar jobs to the hard working, but lower wage connected workers of Asia, one cannot help but wonder what political leader would aim to intentionally slow the roll-out of the Internet inside the U.S. Additionally, the key driver of the U.S. economy over the past twelve months has been productivity based. Why mess with the underlying network that is essential to this important metric?

4) Competitive RBOCs object as well. While one might assume that all of the entrenched Bell monopolies would be in favor of regulation for cable modem services, this would be an erroneous perspective. Verizon, one of the most competitive of all RBOCs, was quick to point out that it believes that cable modem services should be exempt from regulation. Make no mistake, it wants regulatory parity, but it wants it through decreased regulation on DSL not increased regulation on cable services. Likewise, a spokesman for BellSouth recently noted, "The Internet, and for that matter cellular service, has thrived because of limited regulation. Economic regulation is crippling this industry (telecommunication services)."

Some will argue, as does Judge Sidney Thomas of the Ninth Circuit, that opening the cable networks to competitive carriers will directly benefit consumers. The enormous problem with this argument is the prima facie evidence suggesting the opposite. Clearly stated in the Ninth Circuit opinion, 70% of all broadband users use cable modem services as compared with 30% for DSL. Cable companies, free to compete without the shackles of regulation, represent over two-thirds of all broadband users in the U.S. DSL, supposedly advantaged by its open connectivity and therefore supposed increased competitiveness, represents less than one-third. If regulated open-access is such a great thing, why are cable modems such a compelling value proposition for consumers? And why were the RBOCs slow to roll out DSL?

The bottom line is that we tried an experiment in DSL and it failed. Attempting to increase competition by mandating that a company invest in infrastructure and then share that infrastructure with competitors is simply not a market-based solution. Companies, naturally motivated to take market share, not give it away, are simply not effective at appropriately enabling competition. If you want to increase competition, add holistic competitors, not partial ones. This type of solution had a huge positive impact when PCS licenses created a third cellular alternative in most U.S. cities. Solutions such as cable overbuilding can accomplish this as well. Notably, a WISP in Cerritos, California recently announced an eight square mile 802.11 coverage zone based on Cellular-WiFi equipment from Tropos Networks*. This solution will offer ubiquitous broadband of greater than 1MB throughout the entire city. These solutions are the ones that will successfully advantage the customer while avoiding the overt dangers of increased regulation.

We should all know by now that rather than increasing competition, regulation typically reinforces monopolies and oligopolies. Startups will not and cannot prevail in heavily regulated industries. They lack the required resources and capital to manage fifty different utility commissions on a hundred different regulatory issues. For this same reason, you will never see a startup deliver an automobile in the U.S. as the regulatory red tape swamps all efforts. Increased regulation will do nothing more than ensure that new competitors and innovative solutions are permanently locked out of the market.

There are three ways to put an end to this potentially catastrophic problem. The first is for the Ninth Circuit to clean up its own mess in an upcoming large panel review known as an en banc review. The likelihood of success here is slim. The Ninth Circuit is well known for its reputation as the most over-turned appeals court in the nation, and it is doubtful it would pick now to jeopardize its record. Luckily, there are two more solutions that exist beyond the Ninth Circuit. For starters, the Supreme Court could once again correct the Ninth Circuit. But perhaps more appropriately, Congress should step in and legislate to ensure that this type of misunderstanding never happens again. As Clinton and many others have noted, the future of the Internet is simply too essential to our national interests to suffocate it with unnecessary regulation.

Judge O’Scannlain made a peculiarly ironic but accurate warning in the Ninth Circuit opinion. "Regardless of one’s view of the wisdom of the FCC’s declaratory ruling, it cannot be denied that our holding today effectively stops a vitally important policy debate in its tracks, at least until the Supreme Court reverses us or Congress decides to act." For those in Washington that do NOT want to (1) increase the likelihood of higher Internet access rates and increased costs for incremental services, (2) dampen the growth of Internet services and all the companies that benefit from that revolution, and (3) negatively impact American competitiveness, we hope you heed his urgent call.

*Benchmark Capital has an investment in Tropos Networks.

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