FCC Enforcement in the Crosshairs; the 5th Circuit Invalidates FCC’s Investigative Enforcement Process

The 5th Circuit Court of Appeals recently ruled in AT&T v. FCC - in what could have been a routine review of an FCC order involving AT&T’s customer data practices under section 222 of the Communications Act - that the procedures the FCC used to determine a legal violation and resulting penalty on AT&T were constitutionally unsound.   At issue was a 2024 FCC forfeiture order affirming a prior Notice of Apparent Liability (NAL) conclusion that AT&T’s allowance of third-party access to its customers’ location data violated its obligations to secure this type of customer data from unauthorized access and to possess individual customer consent before sharing it.  Notably, the Court did not review the alleged transgressions of the wireless carrier or even the FCC’s conclusion – which AT&T had hotly contested - that the data at issue was not properly considered to be Customer Proprietary Network Information (CPNI) subject to section 222 unauthorized access/customer opt-in consent obligations.

5th Circuit Instead Jumps to Constitutional Issues with FCC Process

The Court’s focus was trained solely on the lawfulness of the process used by the FCC for investigating alleged rule violations. The FCC routinely launches investigations through its Enforcement Bureau to evaluate possible unlawful behavior by businesses covered by FCC regulations or by licensees.  Typically, the Bureau issues a letter of investigation to the entity whose actions are being reviewed, which can be followed by additional written questions, and may ultimately lead to the issuance of a Notice of Apparent Liability, which the entity under review then can contest in writing - and only in writing - prior to the issuance of a formal forfeiture order issued by the Bureau, or in some cases by the FCC itself.    

The FCC used this paper process in investigating data location information sharing practices of each of the nationwide wireless carriers, including AT&T. After issuing NALs to each national wireless carrier in 2020, forfeiture orders followed in 2024.  AT&T’s appeal of its own $57 million Forfeiture Order advanced several arguments. One of these was that the FCC’s non-hearing, paper only investigation process had denied AT&T its Seventh Amendment right to an Article III court trial. In relevant part the Constitution states: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved.”

The 5th Circuit reviewed the options entities have to argue the legality or merits of their case once the FCC initiates an investigation and follows through to the issuance of a forfeiture order.  The first option is to default on the required penalty payment, making the government receivable a debt to be collected by the Department of Justice (DOJ), which is required to make available a “de novo” trial.  Notably, this type of trial is limited to the factual basis of an order and does not include review of the agency’s legal conclusions or their validity.  The second option is for the entity to pay the forfeiture amount and then file an appeal and thus contest the legal validity of the order, but this route does not offer an opportunity for a trial.  In AT&T’s case, it elected to pay the penalty and appeal its forfeiture order to the 5th Circuit, raising the same set of arguments it presented to the FCC in response to the NAL and that the FCC rejected in its adoption of the forfeiture order.

Rather than engaging in a review of the FCC’s legal or factual conclusions, the 5th Circuit dove straight into what it viewed as an incurable constitutional problem with the FCC’s process, namely that the FCC’s investigation procedures failed to provide AT&T with access to an Article III hearing prior to imposing penalties in a forfeiture order.  Specifically, the 5th Circuit applied the analysis of SEC v. Jarkesy, 603 U.S.109 (2024) to the facts of the AT&T case.  The Court concluded that AT&T is legally entitled to have an Article III court proceeding before the FCC can apply civil penalties for alleged unlawful behavior.  Determining that the FCC’s enforcement process by its nature is an assessment of a punishment via civil penalty, rather than a proceeding in equity, the Court rejected all of the FCC’s arguments, including that the FCC’s section 222 requirements for reasonable data security measures are highly technical regulatory requirements not akin to common law concepts of negligence.  The Court stated that the nature of the requirements are similar, if not identical, and thus, in the Court’s view, requires that the party facing legal jeopardy have access to Article III options prior to imposition of a penalty.  The Court rejected the FCC’s argument that Congressional assignment of responsibilities to the FCC to oversee the Communications Act effectively exempts the FCC from Article III trial requirements. The Court also rejected FCC arguments that the DOJ trial or appeal to a circuit court of a forfeiture order satisfies the Seventh Amendment requirements.  In vacating AT&T’s forfeiture order, the Court affirmed that while the FCC has the power to enforce the law and its regulations, it must do so in a manner consistent with the “Constitution’s guarantees of an Article III decisionmaker and a jury trial.” 

Where does the FCC go from here?

The implications of this ruling are significant both for the FCC and businesses or service providers that have a range of ongoing legal obligations under the Communications Act and FCC regulations.  While courts generally go out of their way to avoid reaching and resolving constitutional issues in cases before them, the new Supreme Court interpretation of entities’ rights to particular processes before the imposition of civil penalties by the FCC appeared paramount to the 5th Circuit. 

The 5th Circuit’s determination could well affect the other national carrier appeals. For example, T-Mobile appealed its forfeiture order addressing the same general access to location data to the D.C. Circuit and it has already filed with the D.C. Circuit suggesting that that court apply the same analysis to its case.  There is a possibility that there will be a split in circuit court results on the question of FCC and Constitutional requirements, which would make resort to the Supreme Court a logical step. 

The FCC must decide whether it wants to start over on the AT&T data location investigation or pursue Supreme Court review of the 5th Circuit’s ruling.  The FCC must have serious institutional concerns about the effect of the ruling on prior forfeiture orders as well as for ongoing and future FCC investigations.  If the ruling stands, the FCC would need to revamp its process at least at the stage where the Enforcement Bureau reaches tentative conclusions as to violations of the law or rules and issues an NAL against an entity.  At that point presumably, if the entity in the crosshairs does not voluntarily waive its newly articulated rights to a hearing, the FCC could refer the NAL to its administrative law judge (ALJ) for a hearing.  The FCC, however, has no procedures in place to provide for a jury trial as it is not a tribunal.  The FCC currently has only a single ALJ, who could easily be overwhelmed with NAL hearings.  What is plain is that any entity subject to an FCC investigation now has new options to consider and new paths to pursue.