Monday, November 07, 2016

Thinking Things Through X - Paying the Price for Privacy Regulation

There are many grounds upon which to criticize the FCC’s newly-adopted privacy regulations. Among these: (1) it is doubtful the Commission possesses the legal authority to adopt the far-reaching regulations it has adopted; (2) given that the Internet service providers subject to the new regulations do not uniquely possess subscriber information, the imposition of more stringent regulations on them vis-à-vis edge providers is arbitrary and capricious; and (3) the new regulations almost certainly will confuse subscribers and, in the process, result in less information available to them than they otherwise might demand.

Putting those grounds aside, I want to focus briefly here on an aspect of the decision – the so-called “pay for privacy” provisions – highlighted by Commissioner Michael O’Rielly in his dissent. Here is what Commissioner O’Rielly said:

In addition, I was appalled to see a case-by-case approach imported to review mislabeled “pay for privacy” offers.  These are consumer incentives offered every day in the real world and now ISPs will need to obtain a blessing from an agency that has no privacy experience. The result is that broadband providers will be reluctant to extend, and may even forgo, valuable offers and discounts that consumers would want for fear that they will fall into another zero-rating style abyss.  From that experience, we know that the game is perpetually on hold awaiting heavenly intervention, and some players have just stopped playing.  Trying that again here in the privacy context does not make any sense, unless the real intention is to effectively ban pay for privacy offers without actually saying so in an attempt to avoid a legal challenge.

Commissioner O’Rielly is responding to the part of the FCC’s order that says the agency reserves the right to respond on “a case-by-case basis” to “financial incentive practices that are unjust, unreasonable, unreasonably discriminatory, or contrary to Section 222.” [Para. 303].

There is certainly a role for case-by-case adjudication in administering the Communications Act and enforcing the Commission’s regulations. Indeed, I have advocated the use of such case-by-case adjudication in the past if carried out properly and in proper circumstances. But Commissioner O’Rielly’s concern about the agency’s approach in this case deserves close attention. It is difficult to discount his fear that any such “case-by-case” reviews “will fall into another zero-rating style abyss.”

The FCC initiated some form of informal inquiry into the zero-rating (free data) practices of AT&T, T-Mobile, and Comcast in December 2015. Over the past year, there have been non-public responses to inquiry letters from the Commission and meetings between company representatives and agency officials. But, almost year later, as far as the public knows, there has been no resolution of the inquiries.

In other words, the fate of the Internet service providers’ zero-rating plans remains in regulatory La-La-Land, or what Commissioner O’Rielly refers to as the “abyss.” Call it what you will, the price for this particular form of “case-by-case” approach is regulatory uncertainty that unduly chills further innovation and investment.

I’m not suggesting that “regulatory uncertainty” can be eliminated entirely in a regulatory regime. Of course not. But a proper regulatory regime should be constructed and administered in a way that does not unnecessarily exacerbate such uncertainty. This is especially so in dynamic markets characterized by the emergence of new business models responsive to changing consumer demands.

In the case of the FCC’s concerns about so-called “pay for privacy” offers, the agency first should more clearly delineate the factors that it will consider in assessing the lawfulness of offers and plans that contain financial incentives. Then, the agency should require the filing of a formal complaint which addresses, with particularity, the factors delineated by the Commission and which addresses the claimed market failure and consumer harm allegedly caused by the practice at issue. The complainant should bear the burden of proof in an on-the-record evidentiary proceeding.

There is a role for case-by-case adjudication in a proper administrative regime. But the Commission’s apparent approach to assessing the lawfulness of zero-rating plans is not such a regime. If that informal approach is what the Commission has in mind with regard to assessing the lawfulness of financial incentive offers in the privacy area, the price paid by consumers in lost innovation and the unavailability of desired information will be far too high.