Regulatory News - Court Rules Against FCC on Customer Information

Posted: 11/1999

Court Rules Against FCC on Customer Information
By Kim Sunderland

The 10th U.S. Circuit Court of Appeals has sided with Denver-based US WEST Inc. in
reviewing the Federal Communication Commission’s (FCC’s) order restricting the use,
disclosure of and access to customer proprietary network information (CPNI). An appeal is
expected.

At issue here are the FCC’s regulations clarifying the privacy requirements for CPNI.
US WEST argued that the regulations adopted by the CPNI order weren’t a correct
interpretation of Section 222 of the Telecommunications Act of 1996, and violated the
First and Fifth Amendments of the U.S. Constitution. The regulations require telecom
companies to obtain approval from a customer before the company can use that customer’s
CPNI for marketing purposes.

While the FCC maintains that its CPNI regulations don’t raise constitutional concerns
and are reasonable, US WEST claimed its First Amendment rights were violated because the
rules restrict the company’s ability to engage in commercial speech with customers. US
WEST also argued that the CPNI regulations raised Fifth Amendment Takings Clause concerns
because CPNI represents valuable property that belongs to the carriers and the regulations
greatly diminish its value. The 10th Circuit bought virtually all of US WEST’s arguments.

"The FCC failed to adequately consider the constitutional implications of its CPNI
regulations," the majority wrote in its ruling. "Even if we accept the
government’s proffered interests and assume those interests are substantial, the FCC still
insufficiently justified its choice to adopt an opt-in regime. Consequently, its CPNI
regulations must fall under the First Amendment. At the very least, the foregoing analysis
shows that the CPNI regulations clearly raise a serious constitutional question, invoking
the rule of constitutional doubt."

In February 1998, the FCC released its CPNI order, which addresses the meaning and
scope of Section 222 and adopted regulations to implement the statute’s CPNI requirements.
The regulations permit a telecom carrier to use, disclose or share CPNI for the purpose of
marketing products within a category of service to customers, provided the customer
already subscribes to that service. But the carrier can’t, without customer approval, use,
disclose or permit access to CPNI for the purpose of marketing services that a customer
doesn’t already subscribe to. The regulations also prevent telecom carriers from using
CPNI to:

The regulations also describe how a carrier must obtain customer approval. Section
222(c)(1) didn’t elaborate on what form that approval should take, the court said. The FCC
decided to require an "opt-in" approach, in which a carrier must obtain prior
approval from a customer through written, oral or electronic means before using the
customer’s CPNI. The government acknowledged that the means of approval could have taken
numerous other forms, including an "opt-out" approach, in which approval would
be inferred from the customer-carrier relationship unless the customer specifically
requested that his or her CPNI be restricted, the court ruled.

Do CPNI regulations violate the First Amendment? The court said yes. And while the text
of the First Amendment refers to legislative enactments by Congress, the court believes
it’s actually much broader in scope and encompasses, among other things, regulations made
by administrative agencies.

The government argued that the FCC’s CPNI regulations don’t violate or infringe upon US
WEST’s First Amendment rights because they only prohibit it from using CPNI to target
customers and don’t prevent the incumbent local exchange carrier (ILEC) from communicating
with its customers or limiting anything it might say to them. "This view is
fundamentally flawed," the court ruled. "Effective speech has two components: a
speaker and an audience. A restriction on either of these components is a restriction on
speech."

Supporters of the FCC’s CPNI regulations said the rules advance two substantial state
interests: protecting customer privacy and promoting competition. But the court raised
concerns about these interests. While the court believes some privacy considerations
"clearly drove the enactment of Section 222, the concept of privacy is
multifaceted." Because of that, the judges believe the concept of privacy required
them to pay particular attention "to attempts by the government to assert privacy as
a substantial state interest."

The burden was for the government to show that the dissemination of the information
desired to be kept private would inflict harm, such as undue embarrassment or
misappropriation of personal information for the purposes of assuming another’s identity.
"Although we may feel uncomfortable knowing that our personal information is
circulating in the world, we live in an open society where information may usually pass
freely," according to the court. "A general level of discomfort from knowing
that people can readily access information about us does not necessarily rise to the level
of a substantial state interest." Neither Congress nor the FCC explicitly stated what
"privacy" harm Section 222 seeks to protect against, the court ruled.

Amazingly, the court determined that while the broad purpose of the Telecom Act is to
foster competition, "the language of Section 222 reveals no such concern," its
purpose seems to be the protection of customer privacy. The court ruled that the section
is replete with references to privacy and confidentiality of customer information, and
contains no explicit mention of competition. Because of that, it found that Congress’
primary purpose in enacting Section 222 was concern for customer privacy, not the broader
purpose of increasing competition.

Also according to the court, the government presented no real evidence showing the harm
to either privacy or competition, and instead relied on "speculation that harm to
privacy and competition for new services will result if carriers use CPNI."

"The FCC faces the same problem here," the judges explained. "While
protecting against disclosure of sensitive and potentially embarrassing personal
information may be important in the abstract, we have no indication of how it may occur in
reality with respect to CPNI. Indeed, we do not even have indication that the disclosure
might actually occur."

In stark contrast to the majority, Circuit Judge Mary Beck Briscoe supported the FCC’s
CPNI regulations and the arguments explaining them. She said that neither of the
constitutional challenges asserted by US WEST warranted setting aside the FCC’s CPNI
order, "which I believe represents a reasonable interpretation of Section 222."

In Briscoe’s view, in Section 222 (c)(1) "Congress made it abundantly clear it
intended for telecommunications carriers to obtain customer approval prior to using,
disclosing or permitting access to individually identifiable CPNI." On the issue of
whether the statute indicates a precise method a carrier must use to obtain customer
approval, Briscoe agreed with the FCC that the statute is ambiguous.

Regarding US WEST’s contention that the CPNI order violates the First Amendment,
Briscoe said the carrier’s arguments "are more appropriately aimed at the
restrictions and requirements outlined in Section 222 rather than the approval method
adopted in the CPNI order." She said it’s the statute, not the order, that prohibits
a carrier from using, disclosing or permitting access to individually identifiable CPNI
without first obtaining informed consent from its customers.