SCOTUS Healthcare Decision Indicates FCC Interoperability Mandate Unconstitutional

by on July 3, 2012 · 4 comments

The Communications Liberty and Innovation Project (CLIP) recently filed comments at the Federal Communications Commission (FCC) opposing an interoperability mandate in the 700 MHz band. CLIP argued that the proposed interoperability mandate would be manifestly unjust. The Supreme Court’s holding in the healthcare opinion issued last week indicates that the mandate could be more than merely unjust: it might be unconstitutional.

In National Federation of Independent Business v. Sebelius, the Court upheld the constitutionality of the “individual mandate” in the Affordable Care Act, but only as a tax, not as a regulation. The individual mandate requires individuals to buy a health insurance policy from a third-party. Those who do not comply must submit a “shared responsibility” payment to the federal government with their taxes. The individual mandate in intended to force healthy individuals – whose premiums on average are higher than their health care expenses – into the insurance risk pool, which allows insurers to subsidize the costs of covering the unhealthy individuals that the new law requires insurers to accept.

The Court held that Congress lacked the authority to impose the individual mandate under the Commerce Clause, which is applicable only to the regulation of existing commercial activity. According to the Court, “Construing the Commerce Clause to permit Congress to regulate individuals preciselybecause they are doing nothing would open a new and potentially vast domain to congressional authority.”

The Court rejected the government’s argument that it could enact the individual mandate under the Necessary and Proper Clause. The government claimed that the mandate is an “integral part of a comprehensive scheme of economic regulation,” i.e., a scheme that “requires regulation of inactivity to be effective.” The Court noted that the Necessary and Proper Clause is not an independent source of substantive power beyond those specifically enumerated in the Constitution, and cannot be used to create the necessary predicate to the exercise of an enumerated power (in this case, the Commerce Clause).

The interoperability mandate proposed by the FCC shares the characteristics of the individual mandate that the Court considered constitutionally objectionable. The FCC has proposed forcing AT&T (and similarly situated licensees) to buy equipment that operates on the 700 MHz A Block spectrum, which AT&T cannot legally use, in order to subsidize the costs of AT&T competitors, who are licensed to use that spectrum. That sounds remarkably similar to forcing healthy individuals to buy health insurance in order to subsidize the cost of insurance for the unhealthy.

Although they appear similar, there are several reasons why the proposed interoperability mandate would impose even greater restraints on liberty than the individual mandate, and is thus likely to be considered unconstitutional under the Commerce Clause.

First, the individuals who buy health insurance under the ACA are legally allowed to use the insurance for its intended purpose (for routine checkups, at the very least). The FCC is proposing to simultaneously compel AT&T to buy A Block equipment and prohibit AT&T from using that equipment for its intended purpose – i.e., to transmit and receive signals on the A Block spectrum – because AT&T doesn’t hold any A Block licenses. If an interoperability mandate were imposed on AT&T, it would get no benefit at all. The only beneficiaries of the mandate would be AT&T’s competitors, who might be able to buy A Block equipment for their own use at lower prices.

Second, the individual mandate imposes no costs on currently uninsured individuals beyond the cost of their health insurance or, in the alternative, the shared responsibility tax. The proposed interoperability mandate would impose costs on AT&T that go well beyond the costs of A Block equipment by causing harmful interference to its 700 MHz network. That’s like forcing people to buy health insurance that makes them sick.

It is also why AT&T elected to refrain from buying any A Block spectrum in the first place. For example, a system that uses only the B Block can avoid the harmful interference that afflicts the A Block. But, if the system is also capable of operating on the A Block, the B Block suffers harmful interference as well. Like the queen’s apple in Snow White, one bite of the A Block is enough to poison the whole system.

As a result, AT&T would suffer harm to its competitive position and, more importantly, millions of consumers who use AT&T’s new LTE network would receive poorer service.

Third, unlike the individual mandate, the interoperability mandate isn’t necessary to effectuate the regulatory scheme. FCC auctions are designed to determine the appropriate market price of the spectrum for sale. In the 700 MHz auction, the auction determined that the A Block was worth $3.96 billion, and the B Block was worth $9.1 billion. Bidders who won spectrum in the B Block thus paid $5.1 billion more for their spectrum in the aggregate than bidders who won spectrum in the A Block. This massive difference in market value reflects the potential for harmful interference that plagues the A Block. The issues the FCC would attempt to address with an interoperability mandate were thus built into the A Block’s steeply discounted price.

It is like buying a synthetic suit for less than half the price of a wool suit and complaining to the manager about the fabric quality. The manager might offer to swap a wool suit for the synthetic, if the customer were willing to pay the difference in price. The manager might even be willing to offer a discount on the wool suit to keep the customer happy. The manager would not, however, try to make another customer pay for the swap, especially when the other customer already paid full price for a wool suit.

Yet, that is in essence what the FCC has proposed to do in the 700 MHz band. The interoperability mandate would allow A Block licensees to keep their $5.1 billion interference discount while compelling their rivals, who paid full price for their spectrum, to pay the costs of that interference. That isn’t a legitimate regulatory goal, let alone necessary or proper to implement any enumerated constitutional power, and I doubt such a mandate could survive judicial review.

The FCC could argue that 700 MHz licensees “as a class are active in the market” for the provision of mobile service, and that an interoperability mandate would merely regulate how this class of licensees conducts that activity rather than compel them to engage in it.

The government made a similar argument in support of the individual mandate. According to the government, uninsured individuals are active in the market for health care, which they regularly obtain, and the individual mandate merely regulates that activity by requiring them to pay for healthcare through a third-party insurer rather than pay for it themselves (“self-insurance”). The Court held that belonging to a class that is active in the market is of no constitutional significance when the government attempts to compel one portion of the class to act in order to subsidize another. “If the individual mandate is targeted at a class, it is a class whose commercial inactivity rather than activity is its defining feature.”

The same is true for 700 MHz licensees whose defining feature is their decision not to deploy equipment capable of operating on the A Block or buy any A Block licenses. Like healthy people who have other priorities for their money, 700 MHz licensees have chosen to refrain from deploying A Block equipment to avoid harmful radiofrequency interference, which is precisely the reason the FCC is considering the interoperability mandate. If the bidders who won B Block licenses in the 700 MHz auction had known they would be required to operate on A Block spectrum as well, they may have chosen not to participate in the auction at all, and they almost certainly would not have paid the government an additional $5.1 billion to avoid the A Block.

Bidders who chose not to buy a spectrum license in the A Block had every reason to believe they would not be compelled to provide equipment in that Block. As noted above, the Communications Act prohibits mobile providers from using spectrum in the A Block without a license. And, to compensate for the inherent differences among spectrum bocks in the 700 MH band, the FCC expressly permits “licensees to make determinations respecting the services provided and technologies to be used . . . so long as those services comply with [its] technical rules.” (PDF)

Finally, because Congress has not delegated general taxing authority to the FCC, the interoperability mandate cannot be considered a tax. For the FCC, the unconstitutionality of a regulatory mandate under the Commerce Clause is fatal.

This does not mean the FCC should do nothing. It has authority to solve the A Block interference issues using its spectrum management authority, and CLIP believes the FCC should solve them. But, whatever the solution is, it should not include an interoperability mandate that distributes the costs of the interference by making them worse.

  • http://twitter.com/binarybits Timothy B. Lee

    It seems like you forgot to explain what the interoperability mandate is and why the FCC is proposing it. I assume you don’t find the FCC’s policy objectives compelling, but it would be easier to understand your argument if you could at least sketch out what the FCC is trying to accomplish. Could you please clarify? Thanks.

  • http://driveinnovation.org/home Fred Campbell

    Rather than edit the post to address Timothy’s (valid) concern, I’m providing this link to a previous post that discusses the FCC proposal in greater depth (including a spectrum band plan): http://driveinnovation.org/_blog/Blog/post/700_mhz/.

  • Ryan Radia

    I love the idea of using the NFIB ruling to go after other overreaching federal mandates, but worry that the New Deal court’s still-standing opinions on the Commerce Clause present some serious obstacles. A mobile carrier, unlike an uninsured 20-something sitting on his couch at home, is engaged in positive economic activity (as opposed to inactivity), and is also probably engaged in interstate commerce. If the federal government can permissibly compel businesses (e.g., restaurateurs, hoteliers) to provide services to racial minorities, and re-engineer existing buildings to comply with Americans with Disabilities Act, why can’t it compel AT&T to buy stuff it doesn’t want or need?

    David Rivkin and Lee Casey summed up this distinction in A Healthy Debate: The Constitutionality of an Individual Mandate, 158 U. Pa. L. Rev. PENNumbra 93, 112 (2009) (“Under the teaching of Heart of Atlanta Motel, Inc. v. United States, Congress can certainly regulate both the economic transactions which commercial establishments engage in and the refusal to engage in such transactions. . . . Congress can certainly impose all sorts of requirements on employers as well as on employees, but only to the extent that these requirements proximately relate to their employment. Thus, worker safety or wages can be regulated by the federal government.”).

  • Fred Campbell

    Ryan, I want to preface this by saying I haven’t gone back any reviewed any of those cases and it’s been some time since I’ve read them. That said, there is a significant distinction between a company that is engaged in positive economic activity excluding individuals from its services based on those individuals inherent characteristics, and such a company choosing not to buy stuff when the sole purpose of doing so would be to subsidize the choices of its competitors. In the first example, the company is not required to subsidize its competitors by allowing certain individuals to patronize its business (and, arguably, isn’t subsidizing anyone at all–the more obvious constitutional objection is the compromise of the company’s right to exclude rather than economic freedom).

    In my view, the core of the healthcare decision is the requirement to take action for the sole purpose of subsidizing someone else, which would include the proposed interoperability mandate in the 700 MHz band. I reach this conclusion based on the court’s dismissal of the fact that even healthy individuals purchase health care. The court was unmoved by that fact because purchasing self-funded healthcare is not the same as choosing not to buy health insurance, which would serve only to produce economies of scale for the unhealthy. Similarly, choosing to provide a mobile service should not mean that you have to buy equipment you cant legally use to provide that service solely to produce economies of scale for your competitors. 

    If I’m right, the healthcare decision could have profound implications for the regulatory state, as the most offensive federal regulations are those that are intended solely to subsidize companies and industries the government favors. Forcing the government to finance those subsidies directly through taxation and federal expenditures would make it much easier for the public to evaluate the cost of such regulations, which would result in far more transparent cost-benefit analyses.

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