The future of Internet business might rest on this court case

There’s a huge court case you need to hear about. It might not be on your radar yet because, frankly, some of it gets pretty technical. But the outcome is likely to have enormous repercussions for online privacy, net neutrality and the broader economy.

For months, policymakers have been struggling with the implications of this case, FTC vs. AT&T, in part because it overturned roughly a century of established legal practice — and, analysts say, because it appeared to open a tremendous loophole that businesses might use to evade federal oversight almost completely.

This week, the federal appeals court responsible for the ruling agreed to rehear the case, potentially opening the door to a different result. Here’s what you need to know.

In August, the U.S. Court of Appeals for the Ninth Circuit dealt the Federal Trade Commission a major blow — calling into question one of the consumer protection agency’s most important powers. Over the course of 21 pages, the court said the FTC should be banned from regulating a company if even a small part of that firm’s business is regulated by the Federal Communications Commission as a telecom service, otherwise known as a “common carrier.”

This was a major departure from the previous norm, said Harold Feld, a senior vice president at the consumer group Public Knowledge.

“It was huge because it was totally unexpected,” Feld said. “Nobody’s ever ruled that way before.”

The FTC is one of America’s foremost law enforcement agencies. In the tech sector alone, it has investigated or filed lawsuits against companies such as Apple, Amazon and Google. It has returned millions, if not billions, of dollars to Americans after moving to stop scams and fraudsters of all stripes. But it can go after companies only if they’re within its jurisdiction.

August’s ruling effectively shrank the FTC’s jurisdiction by placing a whole class of companies off limits. What’s more, it gave businesses everywhere a massive incentive to try to gain entry into that class, thus wriggling out of FTC oversight. And it wasn’t as if the FCC could pick up the slack, either; by law, the agency may regulate common carriers only to the extent that they are engaged in providing common-carrier services. Any other parts of a common carrier’s business is off limits to the FCC.

The result, legal experts say, was a new, gaping loophole in regulatory coverage that nobody anticipated.

“This decision raised the question [of] whether any company with a common carrier business could escape FTC enforcement for all other aspects of its business,” said Robin Campbell, a lawyer at Squire Patton Boggs.

This is why FTC vs. AT&T is such a big deal. Under the August ruling, virtually any company in any industry seeking lighter regulation could try to claim common carrier status to exempt the rest of its business from FTC and FCC oversight.

“Facebook could buy some dinky little telephone company, and then become totally exempt from the Federal Trade Commission,” Feld said. Replace “Facebook” with the name of any other company, he said, and you begin to see how significant this gets.

The court’s decision this week to rehear the case happens to nullify the ruling, so the loophole is temporarily closed. But it could easily be reopened if the court comes to the same conclusion, analysts say. Other possibilities include reversing the court’s prior position entirely, or perhaps coming down somewhere in the middle.

AT&T said in a statement that it looked forward to participating in the rehearing.

The outcome of the case will affect more than the FTC: It may also lend momentum to the FCC’s effort to repeal its own net neutrality rules.

FCC Chairman Ajit Pai has argued that the FTC, not the FCC, should be responsible for policing Internet service providers. Right now, the FTC has no power over Internet service providers, because the net neutrality rules consider all those providers to be common carriers.

Permanently undoing the Ninth Circuit’s August ruling would mean giving the FTC the ability once again to go after the parts of an Internet service provider’s business that aren’t common-carrier-related.

But the FCC wants to go further than that. Pai has proposed to take Internet service providers out of the “common carrier” category, which could give the FTC even greater jurisdiction over the providers.

“The court’s [decision to rehear] strengthens the case for the FCC to reverse its 2015 Title II Order and restore the FTC’s jurisdiction over broadband providers’ privacy and data security practices,” Pai said in a statement Tuesday. The FTC declined to comment.

This debate over which agency should do what may seem arcane. But it has real consequences for businesses and consumers, because it represents the difference between, on the one hand, establishing preemptive rules to prevent customer abuse — and, on the other, asking customers and the government to take action to punish corporate transgressions after they occur.

Preemptive regulation may cost businesses more in terms of extra paperwork, lawyers’ fees and lost innovation, but after-the-fact enforcement shifts those costs onto customers and smaller businesses that can’t afford to wage lengthy legal battles, according to Robert Cooper, a lawyer at Boies Schiller Flexner.

“There is a role for antitrust enforcement in this space, but it is not a substitute for prescriptive rules,” Cooper said in an earlier interview about the FCC’s net neutrality plan. “[It] is expensive and time-consuming and thus favors those with the greatest resources. Moreover, it necessarily requires that an alleged violation already has occurred.”