Policy

Cable Has to Like 'Brand X’ Case Chances

1/02/2005 7:00 PM Eastern

Washington — The odds favor cable in the Supreme Court.

The high court has agreed to hear a case that could decide whether cable companies have to open their lines to competing Internet-service providers, just like the Baby Bells.

As cable and phone companies battle for high-speed data customers, cable companies’ ability to exclude ISP rivals while the Baby Bells could not gives MSOs a regulatory leg up that helps protect their current 60% market share.

The Brand X case, as it is informally called, reached the Supreme Court by way of the 9th U.S. Circuit Court of Appeals, which has a horrible track record on appeal in Washington.

90% TRACK RECORD

For the nine-year period ending in 2001, the Supreme Court reversed 90% of 9th Circuit cases, according to Supreme Court clerk William Suter, quoted in the newspaper Legal Times. In recent years, he said the 9th Circuit’s record improved a little bit.

“If you wait long enough, the 9th Circuit will always come up with something different — and weird,” Suter said in a fall 2003 speech reported by Legal Times.

The 9th Circuit, based in San Francisco, is considered the country’s most liberal. It is also remembered for controversial holdings, including a recent one that the words “under God” in the Pledge of Allegiance are unconstitutional.

In broadband circles, the 9th Circuit’s penchant for making headlines only continued when, in October 2002, it ruled that the Federal Communications Commission erred by classifying cable-modem service as an unregulated information service.

The 9th Circuit — relying on its June 2000 ruling that settled an ISP access dispute between AT&T Corp. and Portland, Ore., in the operator’s favor — refused to review the FCC’s March 2002 order on the merits. Instead, the court reaffirmed its holding in the Portland case that cable modem service potentially is partly a telecommunications service subject to ISP open-access rules.

The Department of Justice, the National Cable & Telecommunications Association and the FCC want the 9th Circuit’s holding reversed, arguing that regulation of cable-modem service would undermine federal policy designed to make broadband access ubiquitous and affordable — goals recently endorsed by President Bush.

Champions of open access make virtually the same claim: If the government really wants to make broadband affordable and universal, then it should open cable’s data platform to competition and make cable live by the open-access rules that have governed phone companies for decades.

Phone companies were pleased the high court took the modem case, mainly because if the court sides with cable and the federal government in Brand X, the Baby Bells think they can lobby the FCC to remove open-access mandates from their digital subscriber line (DSL) services.

BellSouth Corp. issued a statement saying that the case promises a day when cable modem and DSL “compete under the same rules.”

MARCH DATE SET

Cable attorneys said the court has scheduled oral arguments for March 23 (though that could change), and a decision is expected to be released before the court’s summer recess in late June or early July. The case is titled Federal Communications Commission and U.S. v. Brand X Internet Services. The NCTA’s appeal was consolidated with that of the FCC.

A few days before the Supreme Court announced it decision, Powell told reporters the stakes were high. If the agency were required to apply traditional telecommunications rules to cable-modem service, he said, cable-modem rates would rise 10%, adding an estimated $1 billion to the annual cost of the product.

“High-speed Internet connections are not telephones, and I’m glad the Supreme Court has agreed to review the 9th Circuit’s ruling that they are,” Powell said in a statement on Dec. 3.

Cable companies are the dominant providers of residential high-speed access, serving 18.7 million customers, according to third-quarter data released by Leichtman Research Group. DSL providers serve 12.7 million subscribers, according to Leichtman.

The cable industry has been fighting open access since 1998, when then-America Online Inc. chairman Steve Case started lobbying the FCC to condition AT&T’s purchase of Tele-Communications Inc. on commitments to carry unaffiliated ISPs.

“We are pleased by the Supreme Court’s decision to review this significant case and are optimistic that the court will affirm the FCC’s decision that cable-modem service is an interstate information service, fostering a deregulatory environment for cable high-speed Internet access,” NCTA president Robert Sachs said in a statement.

Andrew Jay Schwartzman, an attorney with Media Access Project who is representing the Center for Digital Democracy in the case, said he was disappointed that the court agreed to hear the case.

“The outcome of this case will — quite literally — determine the future of the Internet as we know it. If the Supreme Court rules against Internet open access, cable companies will be able to block content at will for political and financial reasons and deny the public the ability to choose among competing Internet providers,” Schwartzman said.

FCC REVIEW POSSIBLE

Other scenarios could emerge that fall short of a 9th Circuit reversal.

The Supreme Court could decide the case narrowly, handing an immediate victory to no one.

The DOJ and the FCC have argued that by relying on the Portland precedent, the 9th Circuit conspicuously failed to give the FCC’s cable modem order substantive review.

Thus, the Supreme Court might decline to settle the broadband policy dispute and order the 9th Circuit to review the FCC order on the merits. After such a review, the case could return to the Supreme Court a second time.

“Obviously, that is a possibility,” said an attorney for in independent ISP. But the attorney said it was unlikely that the Supreme Court took the case merely to settle a matter of administrative law.

Sanford C. Bernstein & Co. cable analyst Craig Moffett said in a recent report that the Bush Administration’s quest to wrest control of broadband policy from the 9th Circuit was the central issue.

“What’s really at issue is the role of the FCC, and by extension, other federal regulatory agencies,” Moffett said. “The case has everything to do with jurisdiction, and little — if anything — to do with cable modems.”

Moffett predicted that the “Supreme Court is unlikely to issue an opinion one way or the other about the classification of cable modems.”

As Moffett and other analysts have pointed out, the FCC holds the trump card. Under federal law, the agency is permitted to remove open-access rules from telecommunications service providers. But that process can take up to 15 months, followed by more years of litigation.

FEW 'COMMON’ CONCERNS

“I am not that worried, even under a worst-case scenario where the Supreme Court finds that modem services are [tele]communications services,” said George Reed-Dellinger, a TeleMedia analyst with Washington Analysis. “I don’t see the FCC subjecting them to common-carrier regulation.

“The FCC has got broad regulatory authority to forbear from subjecting or implementing any of its rules if it doesn’t deem these rules necessary in the public interest.”

Another wild card is the health of Chief Justice William Rehnquist, 80, who is being treated for thyroid cancer, which has kept him off the bench since late October.

If Rehnquist’s cancer forces him to leave the court within the next few months, the cable modem case would be heard by eight justices, because the Senate would likely fail to confirm a replacement quickly.

“There will not be a new justice on board before this case is decided,” the ISP attorney said.

Under an eight-justices scenario, cable would need five votes to win, but Brand X would need just four. A deadlocked Supreme Court would mean the 9th Circuit’s decision would be upheld.

But last month, Rehnquist indicated he is well enough to swear President Bush in at his Jan. 20 inauguration, an event that typically occurs outdoors in sometimes raw weather.

CITIES ARE LOSING

The only losers in the case, so far, are the country’s cities. The 9th Circuit agreed with the FCC that cable-modem service is not a cable service. Local governments are allowed to collect up to 5% of cable-service revenue, but the 9th Circuit’s ruling cut off cable-modem service as a source of local funding.

The National League of Cities and other municipal organizations — claiming the 9th Circuit’s decision has cost them nearly $500 million a year — asked the Supreme Court to review its position that cable-modem service is a cable service, if the court accepted the other appeals. On Dec. 6, the court refused the NLC’s appeal.

“I truly regret that the court has not given local governments an opportunity to present their position in this profoundly significant case,” Donald J. Borut, the NLC’s executive director, said in a statement last week.

September