AT&T cannot escape the jurisdiction of the Federal Trade Commission

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A federal appeals court has ruled in favor of the Federal Trade Commission in a closely watched case that threatened to undercut the consumer watchdog’s ability to pursue certain misbehaving companies throughout the U.S. economy.

While the case nominally began as an FTC crackdown on AT&T’s marketing of “unlimited data” plans for cellphones, the legal battle soon took on much greater significance as the telecom giant sought to defend itself. Ultimately, the case has raised major questions about the extent of the FTC’s power to hold corporations accountable.

Monday’s ruling from the U.S. Court of Appeals for the 9th Circuit reaffirms the FTC’s powers, ensuring that companies cannot immunize themselves from the agency’s oversight simply by acquiring a stake, however small, in the telecom business — a loophole that analysts say would have been devastating to the FTC’s mission had it been allowed to stand.

“This is the loophole that could’ve swallowed the Internet,” said Paul Gallant, an industry analyst at the research firm Cowen & Co. “Not just net neutrality, but online privacy regulation — an area that’s becoming awfully important.”

In its ruling, the 9th Circuit held that AT&T cannot exempt its entire business from FTC oversight merely because a portion of its business is regulated by the Federal Communications Commission, a sister agency.

“AT&T repackages the failed arguments made by regulated parties in [previous] cases: it claims company-wide protection from the FTC because it engaged in some activities performed by an exempted party,” the 9th Circuit ruled.

Key to understanding the case is a snippet of vague verbiage, written by Congress decades ago, laying out the boundaries of the FTC’s powers.

Under the legislation, the FTC may investigate and sue companies that engage in unfair and deceptive business practices. It was that power the FTC cited in an October 2014 lawsuit going after AT&T; the telecom giant, regulators alleged, had misled the public in the late 2000s by slowing down its “unlimited” data plans without doing enough to inform consumers about the practice.

The FTC’s authority ends, however, at a special carveout in its charter known as the “common carrier exemption.” The exemption helps limit the legal exposure of companies that are already regulated as common carriers by other agencies. For example, telecom companies’ networks are regulated by the FCC, so the FTC does not oversee those networks.

While the FTC has historically held jurisdiction over the non-network-related aspects of telecom companies — such as marketing — AT&T argued that even those parts of its business should be exempt from FTC oversight because the purpose of those departments is to support its network business. In so doing, the company was advocating for an effective expansion of the common carrier exemption.

A court decision from the 9th Circuit agreed with AT&T in 2016, handing the FTC a major defeat. Supporters of the FTC at the time called it a “fatal blow” to consumer protections. Competition experts in Washington were flabbergasted at a ruling that — if allowed to stand  would appear to upend years of established jurisprudence.

“This surprise ruling upset a decades-long understanding,” the think tank TechFreedom said of the 2016 ruling.

The 2016 decision meant that, for example, a fast-food chain could legally escape FTC oversight by buying up a small telecom company and claiming that it was a common carrier, just like AT&T. The FCC, meanwhile, might have jurisdiction over the burger chain’s tiny telecom business but little else.

Things became even more complex when the FCC proposed doing away with its net neutrality regulations. That decision, led by FCC Chairman Ajit Pai, sought to put the FTC in control of policing misconduct by Internet providers. But, legal experts said, because many Internet providers also sell telephone service, the 2016 court ruling gave those providers a prospective way to evade the FTC on matters of net neutrality.

“Under the new net neutrality regime, it [became] theoretically possible for an ISP to be subject to only limited oversight by the FCC and no oversight by the FTC, if an ISP were a common carrier in any aspect of its business,” said Robert Cooper, an antitrust lawyer at the firm Boies Schiller Flexner.

The 9th Circuit provisionally closed the loophole as it weighed its decision. But Monday’s opinion from the appeals court shuts the door to that loophole for good and makes clear that the FTC can sue companies that mislead consumers even if those companies happen to run a telephone business regulated by the FCC.

“I welcome the 9th Circuit’s ruling as good news for consumers,” said FTC acting chairman Maureen Ohlhausen. “It ensures that the FTC can and will continue to play its vital role in safeguarding consumer interests including privacy protection, as well as stopping anticompetitive market behavior.”

But the legal battle is far from over. Now that the FTC has successfully defended its right to bring a suit against AT&T in the first place, the agency must convince judges that the wireless carrier’s use of the word “unlimited” to describe its unlimited data plans was, in fact, unfair or deceptive.

“Today’s decision on jurisdiction does not address the merits of the case,” AT&T said in a statement Monday. “We are reviewing the opinion and continue to believe we ultimately will prevail.”