CASENOTE: A CRITIQUE OF BRAND X v. FCC
The Telecommunications Act sought to eliminate obstaclesthat new telecommunications companies had in order to stimulate and promotecompetition in these markets. The statute maintained significant obligations toproviders of telecommunication services but left providers of informationservices subject to much less stringent regulation. Initially, the FCC did not takea position on the regulatory classification of cable modem services. However, afterfederal courts began classifying cable modem services in different ways, theFCC issued a declaratory ruling intending to develop a national legal standard.The new ruling classified cable modem services as purely “informationservices.” Despite the FCC ruling, in Brand X the circuit court upheld conflictingcircuit precedent stating that cable modem service was a combination ofinformation services and telecommunication services. Brand X Internet Servs.v. FCC, 345 F.3d 1120 (9th Cir. 2003) at 1132. If the circuit court hadfollowed the FCC’s classification, cable operators would have been able to leveragethe less stringent provisions associated with information services, sparkingcompetition. Instead, the court adhered to its prior precedent, inhibiting newcompanies from entering the market and stopping this policy debate in itstracks. Id. at 1133.
The purpose of this casenote is to analyze the impact andadequacy of the holding in Brand X. Part II of this casenote traces thedevelopment of law and provides the background necessary to explain the impactof Brand X. Part III identifies the key issues in Brand X andthe rationale behind the court’s opinions. Part IV analyzes the outcome of thecase including whether the court applied the appropriate rule of law andwhether the issues presented were adequately resolved.
To understand the impact of the court’s holding in BrandX, it is essential to first understand how the relevant case law hasevolved.
Prior to Chevron, a court was free to impose its ownconstruction on an ambiguous, agency-administered statute. Richard L. Pierce,Jr., Reconciling Chevron and Stare Decisis, 85 Georgetown L.J. 2225, 2225(1997). However, in Chevron the Supreme Court greatly restricted theability of courts to impose their own constructions of these statutes. Chevron U.S.A., Inc. v. NRDC Inc., 467 U.S. 837 (1984). The EPA was tasked withadministering the Clean Air Act and it stated that States could treat all ofthe pollution-emitting devices within the same industrial grouping as thoughthey were in a single ‘bubble.’ Id. In deciding what deference to giveto EPA’s rule, the Court defined a two-step test. Id. Step one said thatif Congress had spoken to the precise question at issue then there was noambiguity and the court had to follow Congressional intent. Id. at 842.Step two said that if the statute was silent or ambiguous with respect to theissue, the court had to uphold the agency’s interpretation if it was a “permissibleconstruction” of the statute and was not “arbitrary, capricious or manifestlycontrary to the statute.” Id. at 843.
The Chevron test required a court to uphold anagency’s interpretation even if the court would have interpreted the ambiguitydifferently. Id. at 844. The rationale for giving this level ofdeference to agency interpretation was that an agency is better positioned tounderstand the complexities associated with the statutes they are entrusted toadminister. Id. at 845.
In Chemical Waste, the court applied the Chevrontest. Chemical Waste Management, Inc. v. U.S. Environmental ProtectionAgency, 873 F.2d 1477 (D.C. Cir. 1989). Under the Resource Conservation andRecovery Act (RCRA), operators of hazardous waste treatments being assessedpenalties for non-compliance had a right to a “public hearing.” Id. at 1478. The EPA’s interpretation of “public hearing” did not require that formaladjudication proceedings be given in all circumstances. Applying step one ofthe Chevron test, the court held that Congress had not spoken directly tothe meaning of “public hearing” in the RCRA. Id. at 1480. Applying step twoof the test, the court held that “public hearing” was ambiguous and that theEPA’s interpretation was a permissible construction of the statute. Id. at 1482. The court therefore upheld the EPA’s interpretation of the statute. Id.
In Satellite Broadcasting, the Copyright Office’sinterpretation of the term cable system conflicted with circuit precedent. SatelliteBroadcasting & Communications Ass’n of Am. v. Oman, 17 F.3d 344 (11thCir. 1994). The circuit precedent held that satellite carriers were cablesystems and were therefore entitled to subscribe to the compulsory licensingscheme entitling them to copyrighted television broadcasts in exchange forpaying royalties. Id. at 346. Afterwards, the Copyright Office modifiedits regulations finding that satellite carriers were not cable systems. Id. at 347. Applying the Chevron test, the court overruled prior precedentstating that they would follow the Copyright Office’s construction because itwas not arbitrary, capricious or contrary to the statute’s clear meaning. Id. at 347.
After Chevron, it was unclear whether Supreme Courtprecedent always trumped new agency interpretations. In Neal, theSupreme Court addressed this issue stating that a court must follow SupremeCourt precedent, regardless of conflicting agency regulations. Neal v. United States, 516 U.S. 284 (1996). In Neal, the Court had to decide how to calculate theweight of LSD for the purposes of calculating the mandatory minimum sentencedefined in the Anti-Drug Abuse Act. Id. Based on prior Supreme Courtprecedent, the calculation should include the weight of the blotter paper,regardless of the type its material. Id. 289. However, the United StatesSentencing Commission subsequently published a new way to calculate the weightof LSD. Id. 287. The Supreme Court held that its prior precedent and thedoctrine of stare decisis trumped the agency’s later interpretation ofthe statute. Id. 296. The Court rationalized this rule stating thatCongress, not the Supreme Court, has the responsibility for revising itsstatutes. Id.
While Neal made clear that Supreme Court precedenttrumped conflicting agency interpretation, courts disagreed about whether thismeant that circuit precedence did. Aguirre and Bankers Trustdemonstrated this confusion. Aguirre v. INS, 79 F.3d 315 (2d Cir. 1996);Bankers Trust N.Y. Corp. v. United States, 225 F.3d 1368 (Fed. Cir.2000). In Aguirre, the circuit court overruled circuit precedent givingdeference to the Board of Immigration Appeals rule that an alien could still beconsidered for waiver of deportation if his felonious state law offense was nota felony under federal law. Aguirre, 79 F.3d 315. The court interpretedthe rule in Neal to be that an agency cannot compel a court to forgo theprinciples of stare decisis, but that a court can voluntarily acceptsuch guidance. Id. at 317.
In Bankers Trust, on the other hand, the FederalCircuit Court of Appeals held the Court of Federal Claims erred in givingdeference to a new regulation from the IRS over existing precedent. BankersTrust N.Y. Corp., 225 F.3d 1368. The circuit court argued that thedoctrine of stare decisis should probably be even stronger at the circuitcourt level, since because poor judicial interpretations of statutes would becorrectable not only by Congress, but also by the court itself sitting en banc,as well as by the Supreme Court. Id. at 1375. The court therefore upheldits prior precedent despite the IRS’s conflicting interpretation. Id.
In Mead, the Supreme Court further limited theapplication of the Chevron test. United States v. Mead Corp.,533 U.S. 218 (2001). It held that an agency’s interpretation of a statutoryprovision only qualifies for Chevron deference when Congress explicitlyor implicitly delegates to the agency the authority to make rules that wouldcarry the full force of law. Id. In his dissent, Scalia arguedthat this holding modified the presumption in Chevron that agencies can resolveambiguity in the statutes they have been authorized to enforce to a presumptionthat they can not. Id. at 239. He argued that this would inhibit theevolution of statutory law because once a court had spoken it would be “unlawful”for the agency to take a contradictory position. Id. at 247. He notedthat this would be particularly “bizarre” when it occurs because an agencyfailed to address the issue before it was presented to the court. Id. at 247. Short of Congressional legislation, there would be no way for the agencyto modify the court’s rule. Id.
However, Heimmerman showed that the rule in Meaddid not inhibit the evolution of statutory law in situations where Congressspecifically delegated its rulemaking power to the agency. Heimmermann v.First Union Mortg. Corp., 305 F.3d 1257 (11th Cir. 2002) In Heimmerman,the circuit court gave deference to interpretations of the Real EstateSettlement Procedure Act (RESPA) made by the Department of Housing and UrbanDevelopment (HUD). Id. The court held that RESPA expressly authorizedHUD to prescribe rules and regulations necessary to further the purposes of thestatute. Id. at 1261. Therefore, the rule from Mead was satisfiedand the application of the Chevron test was appropriate. Id.
While Mead limited the application of the Chevrontest only to situations in which the agency was specifically delegatedrulemaking power by Congress, it did not address the question left open in Nealof whether circuit precedence trumped subsequent agency interpretation.
In Brand X, the court waspresented with the issue of whether circuit precedent trumped subsequent agencyinterpretation. Brand X Internet Servs. v. FCC, 345 F.3d 1120 (9th Cir.2003). The circuit precedent stated that a cable modem service was acombination of information services and telecommunication services whereas asubsequent FCC ruling stated that it was solely an information service. Id. The significance of the distinction was that the Telecommunications Actsubjected providers of telecommunication services to significant obligationswhile subjecting providers of information services to much less stringentregulation. Id. at 1126. Each of the three justices on the panelprovided a separate opinion explaining their rationale for upholding circuitprecedent. Id. This section of the casenote explores these threeopinions in more detail.
In Brand X, the majorityopinion upheld the classification defined in its circuit precedent despite theconflicting FCC ruling. Id. at 1132. While the majority opinion did notreference the Mead rule directly, it did acknowledge that the FCC was chargedby Congress with the administration of the Telecommunications Act and that Congresshad delegated its authority to enforce the provisions of the Act. Id. at 1127. The court worked from the premise that federal courts are bound bytheir prior holdings under the doctrine of stare decisis. Id. at 1130. The court said that an exception to stare decisis existed in itscircuit where precedent conflicted with subsequent agency interpretation. Id. However, it stated that the exception did not apply where the precedent representedthe only possible interpretation. Id. at 1131. The court then arguedthat the exception did not apply to Brand X without arguing that itsprevious interpretation of cable modem services was the only possibleinterpretation. Nevertheless, after dismissing this exception, the court then lookedat the rule in Neal which stated that once the Supreme Court determineda statute’s meaning, it must adhere to its ruling under stare decisisregardless of an agency’s subsequent interpretation. Id. The majorityopinion then held that they were bound by their prior precedent because therewas nothing in Neal to suggest that this rule only applied to theSupreme Court. Id. at 1132.
In his concurring opinion, JusticeO’Scannlain took a different approach to analyzing the case. O’Scannlainargued that the majority opinion, though correct, was strikingly inconsistentwith Chevron’s underlying principles. Id. at 1132. O’Scannlainargued that the precedent case “in essence, beat the FCC to the punch” becauseit was forced to rule on the meaning of “cable modem service” before the FCCitself could rule on it. Id. at 1133. He said that this case representedthe “bizarre” circumstance Scalia envisioned in his dissent in Meadwhere the evolution of statutory law would be inhibited by judicial precedent. Id. at 1134. Nevertheless, he concurred with the majority because he believed thecourt’s precedent was controlling. Id.
In his concurring opinion, JusticeThomas analyzed the case using the Chevron test without first addressingthe limitations placed on Chevron by Neal and Mead. Id.Thomas spent the bulk of his analysis explaining why its circuit precedentconcluded that a cable modem service is both an information service and atelecommunication service. Id. He found that the definitions used in theTelecommunications Act and the overall legislative context suggested that Congressclearly intended a cable modem service to be part telecommunication service. Id. at 1140. He argued that even without any precedent, the court would have to cometo the same holding because the terms used by Congress had clear meaning. Id. at 1140. Therefore, it appears Thomas found that step one of the Chevron testwas not satisfied because the agency interpretation was in conflict with theclear intent of Congress. Id.
This section analyzes whether thejustices in Brand X used the appropriate test, whether they applied thetest correctly in reaching its conclusion, and whether the resulting holdingwas adequate given its practical implications and relevant policyconsiderations.
A.The Proper Test
The circuit court in Brand Xhad to determine whether the principles of stare decisis compelled it tofollow circuit precedent or whether it should have given Chevrondeference to the conflicting ruling from the FCC. Given the legislativehistory described in Part II, the proper test for the court to follow would havebeen to first apply the test in Mead. If the court found that Congresshad not expressly authorized the FCC to prescribe rules and regulationsnecessary to further the purposes of the Telecommunications Act, the courtshould have followed circuit precedent. If the court found the FCC had beengranted this authority, it should have applied the rule in Neal. While Nealwas clear that Supreme Court precedent trumps subsequent agencyinterpretation, it left open the question of whether circuit precedent does. The court in Brand X should have addressed this issue. If it found thatNeal was limited to Supreme Court decisions, the circuit court shouldhave applied the two-step Chevron test. Otherwise, it should haveupheld circuit precedent.
B.Was the Test Applied Properly?
The majority opinion did notproperly apply the above test. While it did acknowledge that the FCC has theappropriate authority to regulate the Telecommunications Act, it did notreference this as being a requirement of Mead. Next, rather thanapplying Neal to determine whether the rule of stare decisisshould apply when circuit court precedent conflicts with subsequent agencyinterpretation, the court first assumed stare decisis applied andanalyzed whether there were any exceptions within the circuit. After thisdigression, the court correctly recognized the issue left open in Nealbut failed to adequately address it. The court’s only logic for holding that Nealshould be extended to cover circuit precedent was that there was nothing in Nealthat suggested it shouldn’t be extended. The opinion needed to justify itsstance on this issue by talking about the pros and cons of interpreting therule in Neal in this way. Additionally, the court should have explainedthat, given its interpretation of Neal, the Chevron test was notrelevant because they were compelled to follow circuit precedent. The courtdid not address Chevron at all.
O’Scannlain’s concurring opinionalso misapplied the proper test. While he recognized that the first step wasto start with Mead he applied the rule in Mead incorrectly. O’Scannlain believed this case was an example of the bizarre circumstancesScalia referred to in his dissent in Mead. However, these circumstancesonly occur when Congress has not explicitly or impliedly delegated rulemakingauthority to the agency. In Brand X, it was clear that Congress haddelegated this authority to the FCC. Therefore, Scalia’s concerns were notrelevant. O’Scannlain did not even address the issues of stare decisisin Neal or the two-step test in Chevron after misapplying therule in Mead.
Thomas also misapplied the propertest in his concurring opinion. First, he did not discuss Mead at all. However, he may have simply recognized that Congress had explicitly granted theFCC authority to regulate the Telecommunications Act and that Mead wastherefore satisfied. Next, he failed to discuss the issue of whether Nealapplies to circuit court precedent. It is possible that Thomas simply assumedthat Neal was limited to Supreme Court precedent. However, given thatsome other circuits had held that Neal did apply to circuit precedent,and the majority opinion in Brand X even claimed that it did, Thomasshould have explained his reasoning for limiting Neal to Supreme Courtprecedent. Next, Thomas applied the Chevron test finding that step onewas not satisfied because the statutory definitions combined with thelegislative context compelled a single interpretation of the meaning of cablemodem service. Therefore, he correctly found that Congress had spoken to theissue and that the court had to follow Congressional intent, regardless of agencyinterpretation.
Therefore, none of the justicesapplied the proper test in arriving at their conclusions.
C.Was the Outcome Adequate Given Policy Considerations?
The outcome of Brand X isnot adequate in light of its practical implications and relevant policyconsiderations. The primary purpose of the Telecommunications Act was toeliminate obstacles that new telecommunications companies had in order tostimulate competition in telecommunication, information and cable services. The FCC is much better positioned than a circuit court to determine what definitionof cable modem service is best to stimulate competition in the areas it hasbeen charged with administering. By upholding circuit precedent over the FCC’ssubsequent ruling, the circuit court in Brand X inhibited the naturalevolution of telecommunications law. While the court suggests this isCongress’s responsibility, the practical reality is that agencies have agrowing responsibility for interpreting Congressional legislation. This rulingprevents the FCC from proactively adapting their interpretation of theTelecommunications Act in ways that help further the goal of stimulatingcompetition. Rather, this ruling puts unnecessary burden on Congress to modifythe act as necessary over time which will be a much slower process. Given thatneither courts nor Congress could have the ability to anticipate all potentialproblems with the Telecommunications Act, this ruling will force Congress toconstantly attempt to fix problems that could have been anticipated by agencieswith more time and resources dedicated to this purpose. This is a particularlylarge problem in areas like telecommunications and information services inwhich advances in technology occur incredibly quickly and drastically alter thecompetitive landscape.
Moreover, given that differentcircuits could arrive at different conclusions as to the meaning of cable modemservices, the ruling in Brand X is likely to prevent the consistentapplication of the law. Cable modem service providers will be subject todifferent standards and rules depending on where they are brought to courtwhich will encourage horizontal forum shopping. Similarly, this will inhibitthe FCC’s ability to provide a coherent telecommunications policy because differentsections of the Telecommunications Act will be interpreted by the judges withdiffering views creating binding precedent that the FCC will be unable toadjust. While this ruling will put more pressure on Congress to create clearerlegislation, the reality is that this will simply pile more legislativecomplexity onto an Act that is already confusing and self-contradicting.
Even worse, this decision does notprotect the reliance interests of new companies providing these types of cablemodem services. This type of company will spread across geographical barriers providingservices as part of a large, interconnected network. However, this ruling willprevent these companies from relying on FCC rulings because they will neverknow when some jurisdiction has contradicting precedent. This will exposethese small companies to different rules in different areas creating a cost-prohibitive,administrative nightmare.
Nor does this ruling protect theinstitutional reputation of the American judicial system. In Brand X,Justice O’Scannlain himself said that this rule was “bizarre.” The moredecisions from American courts that the public considers bizarre and contraryto reason, the less respect they will have for the judicial institutionsthemselves.
The holding in Brand X wasbased on a misapplication of the law on the part of all three Justices. Moreover, the holding is contrary to the original purpose of theTelecommunications Act of stimulating competition and reducing barriers to entryin these markets.