COURT RULING REOPENS DATA DIVIDE

The U.S. Court of Appeals for the 9th Circuit dished out a whopper of a decision last week, rebuking years of FCC policy and threatening the long-unregulated cable TV industry with the possibility of opening their broadband data networks to competition.

If the ruling stands, cable companies could find themselves facing the same competition requirement as large incumbent telcos, a scenario that multiple systems operators are desperate to avoid. Luckily for them, however, cable regulation seems the least likely outcome. The court's ruling rests on an uneasy foundation of precedence and procedure toward which the court's own judges have expressed discomfort.

But one thing is certain: The FCC's debate over telecom vs. cable regulation has ground to a halt, and like it or not, the commission will have to accept the role of courts in its policy process.

“Regardless of one's view of the wisdom of the FCC's declaratory ruling,” Judge Diarmuid O'Scannlain wrote in the opinion, “it cannot by 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.”

A three-judge panel found that the FCC erred in interpreting cable modem service as an “information” service and not a “telecom” service, and therefore must allow competing ISPs to use their coax networks, just as the Bell companies are forced to open their own copper plants. While ISPs are naturally lauding the decision and the cable industry jeering it, both sides admit the ruling likely won't open cable networks soon.

In their written opinion, the judges said they were forced by legal precedent to rule in favor of ISPs challenging the FCC. In a previous case, AT&T vs. City of Portland, the 9th Circuit Appeals Court was faced with deciding whether telecom was an information service, requiring no regulation, or a telecom service, which falls under the Telecom Act. Normally courts defer to the FCC, but in 2000 the commission had no broadband policy so the court set its own definition, which became the precedent for the West Coast territory covered by the 9th Circuit. Since then the FCC has adopted its own broadband policies, but in the 9th Circuit, precedent prevails, and the three-judge panel that heard the case could not overturn it.

“Even though it was a unanimous decision, there was a split among the judges as if some of them wanted to defer to the FCC,” said Kelly Cameron, head of the telecom practice at the Washington, D.C., law firm of Powell Goldstein Frazer & Murphy. To do that, the court would have to overrule its own precedent, requiring an en bance panel, or 11 of the 22 judges on the circuit.

The FCC and the cable industry have no intention of letting the decision stand. If it did, the cable industry would face an entirely different set of regulations in the nine Western states covered by the 9th Circuit than in the rest of the country. Any appeal to the 9th Circuit stands a good chance of reversal, and a direct appeal to the U.S. Supreme Court might work in the cable industry's favor, since the high court is not bound by precedent and has overturned more 9th Circuit decisions than it has any other circuit court.

“This was an odd procedural hiccup,” said Mike Schooler, deputy general counsel for the National Telecommunications & Cable Association. “The court never really got into the merits of the case. As soon as a court is able to examine the merits of the case, we believe there is a great likelihood the decision will be overturned.”

Even while the ruling stands, the FCC is compelled to do little. In fact, Bell companies, which have long campaigned for level regulation between the two industries, don't believe the decision will stick. What the court didn't say is more important than what it said, according to Steve Davis, vice president of policy and law for Qwest Communications. “It didn't say the cable companies should be regulated,” he said.

The court also did not remove the FCC's forbearance authority, which gives it the option of declaring cable modem services as telecom services but declining to regulate them. Nor did the court remove the FCC's ability to declare cable modem services as private carriage services. Providers of such services are not required to serve everyone indiscriminately as are common carriers, and they are allowed to set prices and terms more discreetly than common carriers, said Ed Shakin, vice president and associate general counsel for Verizon Communications. Both omissions let the FCC continue its open proceeding on broadband, in which it has tentatively concluded that all high-speed services should be deregulated.

“Clearly the court is looking for a coherent answer that would treat both services as a single market,” Shakin said.

While not restricting the FCC from setting broadband policy, the ruling likely will delay those proceedings, predicted Dorothy Attwood, senior vice president of federal regulatory strategy for SBC Communications. “We're disappointed. The expectation is that the FCC is going to have to respond in some form,” she said. “We were hopeful the FCC would conclude the proceeding this fall. That will probably be delayed.”

While the Bells were dismissive, competitive carriers were thrilled with the ruling. Larry Williams, chairman and CEO of ITC^DeltaCom, said the court's order was long overdue. “Why should the cable guys be excused from opening their networks when they were handed franchise monopolies for years before they were allowed to have any competition?” Williams said.

However, CLEC attorneys believe there is little chance cable networks will be unbundled because of the ruling. “Though it bolsters the argument that cable modem and DSL should be regulated in the same way and reopens the open access question, the FCC has been extremely reluctant to extend telco regulation to cable,” said Christy Kunin, an attorney with Washington, D.C.-based Gray Cary Ware & Freidenrich. “They are going to want to keep things as deregulated as possible.”

Many ISPs and competitive carriers believe the decision at least gives telcos and ISPs ammunition against the cable industry. EarthLink, one of the original complainants in the court case, has been trying to negotiate cable broadband deals with the MSOs for years, but only succeeded with companies forced to open their networks by federal and local agencies, said Dave Baker, vice president of law and public policy for the ISP. Faced with more legal pressure, the MSOs might be willing to negotiate deals on their own accord. “As the Time Warner guys found out, it also benefits the cable company to open networks,” Baker said. “It drives more subscribers to their networks, and they're still getting the lion's share of the revenue.”