FCC Can Ban Customer Retention Practices

Author: Alex Harris

The DC Circuit upheld a decision of the Federal Communications Commission (“FCC”) prohibiting Verizon from continuing some of the company’s practices in trying to retain customers switching from its phone service to a competitor’s VOIP service. When a customer decided to leave Verizon for a competitor, Verizon would get a notice because it had to transfer the customer’s phone number to the new service. Verizon would then offer the customer incentives to stay, such as discounts and gift cards. The FCC banned the practice and the court upheld the FCC’s decision, reasoning that the FCC’s action survived the weak standard of Chevron deference because the FCC had rationally interpreted the relevant statute.

When a customer decides to leave Verizon for a competitor’s VOIP service, Verizon receives a request to “port” her number to the competitor (called a Local Service Request or “LSR”). Since the company knows the customer is about to leave, and since it costs much more to gain a new client than to retain an old one, Verizon was in the practice of trying to convince the customer to stay by offering incentives like gift cards and discounts. Verizon couldn’t offer the incentives before the customer actually began leaving because this would cause customers to threaten to leave in order to get incentives. Further, if Verizon waited until the customer actually completed the porting process and left, the customer and both companies would have to incur substantial additional costs to switch back. Verizon therefore used the LSR as evidence that a customer was serious about leaving, but before she actually left.

In response to a complaint filed by three cable companies, the FCC issued an order banning Verizon’s incentive practice. The FCC reasoned that the practice creates a conflict of interest: the company should be trying to get the port process completed as quickly and efficiently as possible, but it has an incentive to delay to try to get its customers to stay. The FCC based its ruling on the Telecommunications Act’s language prohibiting a telecommunications carrier “that receives or obtains proprietary information from another carrier for purposes of providing any telecommunications service” from using the information for a marketing purpose. 47 U.S.C. § 222(b). Verizon challenged the FCC’s ruling directly in the DC Circuit Court of Appeals, pursuant to the Communications Act.

Judge Williams delivered the unanimous panel’s opinion. The court first noted the extremely lenient standard of review for administrative agency determinations of law mandated by Chevron v. NRDC, 467 U.S. 837 (1984). The court then held that the statutory language was ambiguous and the FCC’s interpretation reasonable. Generally when one says “Joe received information from Mary for purposes of drafting a brief,” the court reasoned, “it is overwhelmingly likely that the speaker expects Joe to do the drafting.” Similarly, it seems like the statutory language only prohibits use by the competitor for whom the customer is leaving. But the court reasoned that the language could be read as applying to Verizon too, and so deferred to the FCC’s interpretation.

The court also held that it was permissible for the FCC to treat certain competitors as “telecommunications carriers” for the purposes of § 222(b), but left open the possibility of not treating them as such for the purposes of other sections of the statute. The court held this was not “arbitrary and capricious,” but legitimate.

Additionally, and perhaps most interestingly, the court ruled that the FCC’s ban did not violate the First Amendment. Since commercial speech only gets “intermediate scrutiny,” the court had no problem concluding that the FCC’s goal in avoiding a conflict of interest from Verizon was a “substantial interest” and that the ban was “designed carefully” to achieve that goal, since it only banned attempts to woo the customer back during (but not after) the port process.

Having addressed the arguments offered by Verizon, the court affirmed the FCC’s decision.

Verizon California v. FCC, 2009 U.S. App. LEXIS 2404 (D.C. Cir. Feb. 10, 2009).