Brand X and the Wireline Broadband Report and Order: the beginning of the end of the distinction between Title I and Title II services.

• Author: Rich, J. Steven

1. INTRODUCTION II. EVOLUTION OF THE BOUNDARIES BETWEEN REGULATED AND UNREGULATED SERVICES A. Basic Versus Enhanced Services: The Computer Inquiry Line of Decisions B. The Telecommunications Act of 1996 III. INITIAL DIVERGENT TREATMENT OF BROADBAND INTERNET ACCESS SERVICES A. The Stevens Report B. The Advanced Services Memorandum Opinion and Order C. The Declaratory Ruling on Cable Modem Service IV. BRAND X AND IMMEDIATE AFTERMATH A. The Decisions 1. Court of Appeals Decision 2. Supreme Court Decision B. The Wireline Broadband Report and Order. C. The Ensign Bill V. CONCLUSION I. INTRODUCTION

   At the time of writing this Article in early fall 2005, the ink is barely dry on the Supreme Court's decision in Brand X, in which the Court upheld a 2002 ruling by the Federal Communications Commission ("FCC" or "Commission") that cable modem service is properly classified as an information service and does not involve a separate offering of telecommunications service. (1) However, both houses of Congress and the FCC have already reacted in the form of proposed legislation (2) and a Report and Order, (3) respectively, in an effort to expand the deregulatory approach taken by the Commission in its Declaratory Ruling on cable modem service, (4) which the Supreme Court upheld. (5)

   This Article will examine the development of the FCC's distinction between common carrier services regulated pursuant to Title II of the Communications Act of 1934, as amended ("Act"), and those regulated--if at all--pursuant to the Commission's ancillary jurisdiction under Title I of the Act. (6) This Article will trace the evolution of this distinction from the Computer Inquiry (7) line of decisions through the Stevens Report, (8) the Telecommunications Act of 1996, (9) Brand X, (10) and the recent Wireline Broadband Report and Order. (11) This Article will conclude that the Wireline Broadband Report and Order may be vulnerable to reversal on appeal and will suggest some of the policy considerations that the Commission may wish to consider if this order is remanded.

2. EVOLUTION OF THE BOUNDARIES BETWEEN REGULATED AND UNREGULATED SERVICES

   A. Basic Versus Enhanced Services: The Computer Inquiry Line of Decisions

   Nearly forty years ago, the FCC first faced the issue of whether and how to regulate the provision of data processing services by common carriers. The Commission recognized, even at that time, that applying traditional economic regulation to data processing services might stifle the growth of the then-nascent computer industry. (12) In fact, as early as 1970, the FCC found in the Computer I proceeding that "the offering of data processing services is essentially competitive and that, except to the limited extent hereinafter set forth, there is no public interest requirement for regulation ... of such activities." (13) At the same time, the Commission also recognized that, given the growing interdependence of telecommunications and data processing, control by regulated common carriers over bottleneck facilities could give such entities an opportunity to cross-subsidize their services, thereby gaining an unfair advantage in the data processing industry. (14)

   As a result of its concerns regarding cross-subsidy and unfair competition, the FCC undertook in Computer I what would today--notwithstanding the Commission's statement in the above paragraph--hardly be considered "limited" regulation of data-processing activities by common carriers. Under the rules adopted in Computer I, the FCC elected to forbear from regulating data-processing services and to allow common carriers (15) to provide such services through affiliates. (16) However, such affiliates were subject to rigid structural separation requirements and were strictly prohibited from providing services to affiliated common carriers, even on an arm's-length basis.

   The Commission distinguished regulated communications services from unregulated data processing services by defining data processing as "[t]he use of a computer for the processing of information as distinguished from circuit or message-switching." (17) "Processing involves the use of the computer for operations which include, inter alia, the functions of storing, retrieving, sorting, merging and calculating data, according to programmed instruction." (18) Anticipating that both common carriers and providers of data processing services would provide hybrid services containing elements of communications and data processing, the Commission adopted a test for hybrid services that focused on the dominant characteristic of the overall package offering. Where a package consisting primarily of data-processing features contained communications elements that were "an integral part of and as an incidental feature" of the data processing, then the Commission determined that forbearance was appropriate with respect to the entire service. (19) Conversely, the FCC found that hybrid services that were "essentially communications" should be subject to Title II regulation. (20)

   By the late 1970s, technological advances in the computer industry had significantly blurred the boundaries drawn in Computer I. In particular, computing applications no longer resided exclusively on large mainframe computers, but also ran on mini- and microcomputers that allowed the decentralization of data processing operations. (21) In light of such developments, the FCC undertook the Computer H proceeding to reevaluate its regulatory framework governing the provision of computer processing services via common carrier telecommunications facilities. (22)

   In Computer II, while the Commission retained the notion of distinguishing between regulated, traditional common carrier services and unregulated computer processing services, it developed what was, at the time, a more workable distinction between the two. It defined "basic service" as "the common carrier offering of transmission capacity for the movement of information." (23) On the other hand, "enhanced service combine[d] basic service with computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information, or provide the subscriber additional, different, or restructured information, or involve subscriber interaction with stored information." (24) Put differently, the provision of the "pipe" by a common carrier would be subject to Title II regulation while applications carried over such pipe would not.

   In Computer II, the FCC abolished the requirement that common carriers form separate subsidiaries for the provision of enhanced services except with respect to AT&T, which the Commission found to pose a substantial threat to competition. (25) The Commission also found that AT&T's offering of enhanced services and customer premises equipment through a structurally separate subsidiary would not violate the 1956 Western Electric consent decree. (26) In the Third Computer Inquiry, the FCC replaced its structural separation requirements with nonstructural safeguards, such as comparably efficient interconnection, open network architecture, and nondiscrimination requirements. (27)

   B. The Telecommunications Act of 1996

   Section 8(b) of the Telecommunications Act of 1996 ("1996 Act") added several key definitions to Section 3 of the Communications Act of 1934. While the fundamental distinctions between enhanced services and basic services remained, these terms were replaced with information services and telecommunications services, respectively. These terms derive from, and closely track, the definitions contained in the Modification of Final Judgment that governed the Bell Operating Companies in the aftermath of the breakup of the former AT&T monopoly. (28)

   First, the 1996 Act defined "information service" as the "offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and 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." (29) The 1996 Act's legislative history shows that Congress did not contemplate a radical change in the way in which the Commission distinguishes between services that are subject to Title II regulation and those that are not. To the contrary, the Conference Committee stated that new subsection (pp) of the 1996 Act "defines 'information service' similar to the ... Commission definition of 'enhanced services.' The Senate intends that the Commission would have the continued flexibility to modify its definition and rules pertaining to enhanced services as technology changes." (30)

   The 1996 Act defined "telecommunications service" as "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." (31) The 1996 Act in turn defined the term "telecommunications" as "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 and received." (32) The Conference Committee intended the definition of "telecommunications service" to include "commercial mobile service ('CMS'), competitive access services, and alternative local telecommunications services to the extent that they are offered to the public or to such classes of users as to be effectively available to the public." (33) Notably, the examples cited by the Conference Committee are all services that either provide, or substitute for, access to the public switched telephone network ("PSTN").

   The Conference Committee also indicated that Congress intended the definition of "telecommunications service" to include only "those services and facilities offered on a common career basis...."...