Why Yoo Is So Wrong on AT&T Net Neutrality Condition

Professor Christopher Yoo of Vanderbilt sent an email to Dave Farber’s Interesting People list explaining why the inclusion of network neutrality conditions in the AT&T/BS merger agreement violates the Administrative Procedure Act (APA).

I usually disagree with Yoo on matters regulatory (he being of the neo-con deregulatory school, I being of the pragmatic regulation for a real world school). But that’s a matter of opinion. Here, however, he’s legally and factually just plain wrong. While he’s entitled to argue that he thinks “regulation by merger” sucks rocks (a point with which, no surprise, I disagree), the idea that the merger conditions run afoul of the APA is contrary to statute, contrary to case law, and contrary to the facts of the instant case (with which Professor Yoo seems surprisingly unfamiliar).

Usually, I wouldn’t bother to respond to something like this, but it got picked up by Communications Daily and seems to be making the rounds among tech folk unfamiliar with the case law in question. So while no offense to an opponent who usually knows his stuff, I explain in blistering detail what’s wrong with Yoo’s argument below….

Most of Yoo’s email (reprinted in full at the end) addresses how he feels the AT&T conditions illustrate everything wrong with using mergers to impose conditions that really amount to rules that the FCC should apply to everyone by rulemaking. I disagree, both with the philosophy and with how things played out in this case, but that’s a policy argument (which I intend to address in a later post).

Yoo then goes on to challenge the legality and enforceability of the net neutrality condition.

>The process is even more problematic when one recognizes that these conditions (along
>with similar conditions imposed in the SBC-AT&T and Verizon-MCI acquisitions)
>were imposed while the FCC was has a formal proceeding open to assess network neutrality.

>In addition, these merger conditions turn the FCC Policy Statement issued on
>September 23, 2005, (which also included language acknowledging network operators right
>to protect the network and to engage in “reasonable network management” that might also
>be regarded as loopholes) into a binding obligation even though the Policy Statement was
>never subject to notice and comment. The D.C. Circuit’s 1992 and 1993 Bechtel decisions
>has struck down previous attempts to turn policy statements into law without subjecting
>them to full notice and comment as arbitrary and capricious.

Yoo is simply wrong on both law and fact here. To explain why, however, I need to provide some background on Administrative Law and how FCC merger review fits in.

Some Tedious But Necessary Background: “Adjudications” v. “Rulemaking”

The APA provides a general framework for how agencies should create rules and adjudicate rights. Of importance here, the Act makes a distinction between “rulemakings” and “adjudications.” “Rulemakings” apply generally to all parties and regulate future conduct. Adjudications are limited to a specific set of facts and only directly impact the parties subject to the adjudication. However, rather like a court making precedent, adjudications can have binding value and provide guidance to parties engaging in conduct similar to that adjudicated. (You may find the guidance issued by the Attorney General in 1947 following passage of the act helpful on this point.)

For example, the FCC resolves indecency complaints by adjudication. So, technically, the FCC’s decision that Bono’s use of a fleeting expletive at the Golden Globes award applies only to the broadcasters who carried the transmission unedited. But other broadcasters understand that if they broadcast something similar, they will get in trouble. On the other hand, it is apparently o.k. to transmit, unedited, Saving Private Ryan provided it is on Memorial Day, as evidenced by the FCC decision that such a broadcast did not violate indecency rules.

I’m not saying its a perfect system. Many people prefer rules to adjudication because it warns people unambiguously (or, at least, less ambiguously) in advance what conduct is or isn’t prohibitted. Others observe that proceeding by adjudication lets an agency make law with precision in areas where the unique facts of each case make a huge difference. And besides, it is no worse than relying on courts to provide substance to legislative language or common law principles.

Rather my point is that, contrary to what Yoo seems to argue, the APA does not require notice and comment rule making for all legal determinations, or even for industry regulation generally. Rather, the APA permits both rulemaking by notice and comment and rulemaking by adjudication.

FCC merger decisions are adjudications pursuant to Section 214(a) and Section 310(d) of the Communications Act. Technically, these acquisitions and license transfers are supposed to take place in a “closed” proceeding with every communication done on the record and with service to participating parties and, where there is a disagreement about a matter of material fact, the Commission will refer the matter to an Administrative Law Judge for a factual determination as to whether the merger serves the public interest. Over the years, however, the FCC (consistent with its rules) has designated major transactions “permit but disclose” proceedings so that parties can keep participating. They also never refer the matter to an ALJ (the one time that happened in recent memory, the DIRECTV/Echostar merger, the parties walked away from the deal because referral to an ALJ is tantamount to a denial). Rather, the company makes “voluntary” concessions which the Commission then votes to approve in an Order that resolves the material questions raised by the merger. (Side note, some mergers are sufficiently small that they are handled by the relevant FCC bureau under “delegated authority.”)

Why Yoo Is Wrong

To the extent that Yoo argues that the FCC engaged in a rulemaking that violated the APA, he is therefore just plain wrong. The FCC acted, in accordance with its statutory mandate, pursuant to its adjudicatory authority and in accordance with the APA.

Second Argument

Yoo also states that there is an open FCC proceeding considering the question of network neutrality and that therefore the FCC should have done any regulating about NN in the open proceeding. For the life of me, I cannot determine what proceeding Yoo means. As I and others reported, Martin offered the prospect of a network neutrality notice of inquiry as a bargaining chip in the negotiations over AT&T/BS, but the Ds refused to play along and the NOI never got issued. As for the various other proceedings the FCC has had on wireline networks in the last six years, I address those in the next section.

Tedious Background Part II: “Policy Statements” v. “Legislative” Regulation

Yoo then argues his key point on why the network neutrality condition violates the APA. To requote the relevant section from above.

>In addition, these merger conditions turn the FCC Policy Statement issued on
>September 23, 2005, (which also included language acknowledging network operators right
>to protect the network and to engage in “reasonable network management” that might also
>be regarded as loopholes) into a binding obligation even though the Policy Statement was
>never subject to notice and comment. The D.C. Circuit’s 1992 and 1993 Bechtel decisions
>has struck down previous attempts to turn policy statements into law without subjecting
>them to full notice and comment as arbitrary and capricious.

Professor Yoo alludes here to a particular problem in administrative law. An agency may at any time issue a “policy statement” or other form of “interpretive rule” that alerts the public that the agency will act in a particular way under its rules. Such a statement does not have to comply with the notice and comment requirements of APA rulemaking if it is merely “interpretive” rather than “legislative.”

In the decision to which Yoo refers, the D.C. Circuit provided the basic law on what makes something a mere “policy statement” as opposed to a “legislitive rule” that requires notice and comment. that it does not substantively alter the rights of parties. Anything that substantively alters the rights of parties (i.e., is “legislative”) must comply with notice and comment rulemaking. The D.C. Circuit has overruled agencies that have sought to avoid notice and comment by calling a rule a “policy statement” when the policy statement has the effect of a real honest-to-gosh rulemaking.

Yoo argues that the merger condition has elevated the 2005 Policy Statement to a “legislative rule.” He relies on two cases: Bechtel v. FCC, 957 F.2d 873 (D.C. Cir. 1992)(Bechtel I), and it’s sequel after remand, Bechtel v. FCC, 10 F.3d 875 (D.C. Cir. 1993)(Bechtel II).

Why Yoo Is Wrong

1) This is an adjudication, and adjudication rules apply. As discussed ad naseum above, this is an adjudication. The FCC can impose any conditions rationally related to the merger that it feels, in its expert judgement, offset the potential harms to the public interest the merger might cause. Since this is an adjudication, it does not need to comply with the informal rulemaking notice and comment provisions — only with the APA rules governing adjudications and the relevant provisions of the Communications Act and the FCC’s rules.

The FCC went a heck of a lot further, for example, when it required AOL Time Warner to accept an open access condition and open up its instant messenger service to rivals. Those didn’t violate the APA because they were merger conditions. Same thing here.

Of course, as a legal matter, this condition is only enforceable against the parties because of the unique circumstances of the merger. But it arguably creates a legal precedent (although Martin and Tate dispute this) that gives a basis for subsequent adjudications.

The cases cited by Yoo provide no help. While they involve adjudications and policy statements, they do not stand for the proposition Yoo claims. Bechtel appealed a determination after awarding a broadcast license to a rival in the old “comparative hearing” days when we allocated licenses based on who could serve the public interest rather than who could pony up the most cash at auction. The FCC Admin Law Judge had awarded the license based on a 1965 Policy Statement on something called the “integration.” The details are not relevant. What is relevant is that Bechtel challenged the underlying validity of the policy statement on the grounds that technology and Commission decisions since 1965 had called the underlying justification of the policy into question. The FCC refused to address the challenges to the underlying policy, stating that the appropriate way to challenge the 1965 Policy Statement was through a petition for Rulemaking.

The D.C. Cir. reversed. In Bechtel I the D.C. Cir. required that the FCC address challenges to the policy in the context of the adjudication. As the court explained in Bechtel II:

Policy statements are exempt from the Administrative Procedure Act’s notice-and-comment
requirements, see 5 U.S.C. § 553(b), and hence may take effect without the rigors-and presumed
advantages-of that process. The price to the agency is that the policy “is subject to complete
attack before it is finally applied in future cases”. Pacific Gas, 506 F.2d at 39; Panhandle
Producers & Royalty Owners Ass’n v. Economic Regulatory Admin., 822 F.2d 1105, 1111
(D.C.Cir.1987). Sooner or later the agency must meet its obligation to respond to criticisms.
American Mining Congress v. Mine Safety & Health Admin., 995 F.2d 1106, 1111 (D.C.Cir.1993).

This does not mean that policy statements have no effect. Although the agency must respond to
challenges and be ready to consider “the underlying validity of the policy itself”, Pacific Gas, 506
F.2d at 39; see also Panhandle, 822 F.2d at 1110; Guardian Fed. Sav. & Loan Ass’n v. FSLIC, 589
F.2d 658, 666 (D.C.Cir.1978), it need not repeat itself incessantly. When a party attacks a policy
on grounds that the agency already has dispatched in prior proceedings, the agency can simply refer
to those proceedings if their reasoning remains applicable and adequately refutes the challenge.
But the agency must always stand ready “to hear new argument” and “to reexamine the basic
propositions” undergirding the policy. McLouth Steel Products Corp. v. Thomas, 838 F.2d 1317,
1321 (D.C.Cir.1988); see also FCC v. WNCN Listeners Guild, 450 U.S. 582, 603, 101 S.Ct. 1266,
1278, 67 L.Ed.2d 521 (1981).

In other words, the FCC has plenty of authority to impose the merger condition based on a policy statement. In the event AT&T ever challenges the condition (for example, in the context of an enforcement action), it can challenge the FCC’s underlying rationale and argue that the FCC was arbitrary in its enforcement. But this is simply an application of the applicable standard for explaining a merger condition or any other adjudicatory result.

By contrast, an FCC merger condition enforcing a pre-existing regulation adopted through notice and comment enjoys the benefit of a rule that has already passed muster, and therefore requires no further explanation in context. Tribune Co. v. FCC, 133 F.3d 61, 69 (1998) (FCC not required to justify why it granted a waiver of newspaper-broadcast cross-ownership ban in one merger but not another beyond simple restatement of general rule and general policy that waivers are granted only in extraordinary cases). Which brings me to my second reason why Yoo is flat out wrong here.

2) The FCC policy statement is, in fact the result of notice and comment rulemaking. The FCC adopted in the same vote the 2005 Order deregulating DSL and creating a unified regulatory framework for wireline broadand and the 2005 “Four Freedoms” Policy Statement. As demonstrated by the docket numbers on the top of the page, both items flow from the record created in five different FCC notice and comment proceedings, which the FCC combined for purposes of issuing these two framework document. In all of these proceedings, the FCC explicitly solicited comment on what safeguards or policies the it should adopt in the event it chose to classify wireline broadband as an information service rather than a telecom service.

Bluntly, I do not see how the FCC could have been “noticier and commentier” in the way it developed the policy statement. Five bleedin’ proceedings over the course of more than five years, with question of what rules or policies to adopt under a Title I “information services” regime explicitly noticed. Further, as the policy statement explains, the FCC announced it would explicitly incorporate these four principles in its “policy making activities.” As I hope I have explained above, “policy making activities” includes adjudications as well as formal and informal rulemaking proceedings.

Yes, the Commission calls it a “policy statement.” But to the extent that it is legislative (and to the extent that matters), APA notice and comment has been more than adequately fulfilled.

I hope this thoroughly and completely answers the question of whether the FCC merger condition is legal and within the scope of its authority (although God knows I don’t expect settled law to stop those Federalist Society activists on the D.C. Circuit if it comes to that). I don’t expect it to resolve whether this is wise policy, or whether the FCC should generally avoid exercising its authority to make policy in merger adjudications. But as for this specific condition here and now, the idea that it violates the APA is wrong as a matter of law and wrong on the facts.

Stay tuned . . . .

_________________________________
Yoo’s email as published on Dave Farber’s Interesting People list.

From: “Yoo, Christopher”
Date: December 29, 2006 1:00:22 PM EST
To: dave@farber.net
Subject: RE: [IP] more on AT&T/BellSouth may pass today with hollow
Net Neutrality

For IP, if you think it appropriate.

The concerns about possible loopholes in the AT&T-BellSouth merger conditions underscore the problems with using the merger clearance process as a form of shadow regulation.

The problem is that merger conditions do not go through the usual administrative process of notice and comment. Although the FCC invites interested parties to comment on the merger in general, it rarely discloses the proposed conditions until after they have been approved.

The process is even more problematic when one recognizes that these conditions (along with similar conditions imposed in the SBC-AT&T and Verizon-MCI acquisitions) were imposed while the FCC was has a formal proceeding open to assess network neutrality.

In addition, these merger conditions turn the FCC Policy Statement issued on September 23, 2005, (which also included language acknowledging network operators right to protect the network and to
engage in “reasonable network management” that might also be regarded as loopholes) into a binding obligation even though the Policy Statement was never subject to notice and comment. The D.C. Circuit’s 1992 and 1993 Bechtel decisions has struck down previous attempts to turn policy statements into law without subjecting them to full notice and comment as arbitrary and capricious.

The result is a process that is shielded from public comment and that results in obligations that are inconsistent across the industry and that only affect those firms who happen to have a merger pending before the FCC. The nongermaneness of many conditions further underscores the
manner in which the FCC can use its role in clearing mergers as a form of back-door regulation. There have been many calls to lock this back door, but to date they have largely fallen on deaf ears.

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