May 11, 2015

Court Upholds FTC Jurisdiction over Common Carrier: Nonprofits Should Take Heed

5 min

Recently, a federal judge in the Northern District of California denied AT&T's motion to dismiss the Federal Trade Commission's (FTC) lawsuit against the company concerning its advertising and business practices for its mobile wireless data plans. While you might not expect it, the case has potential implications for nonprofit organizations, particularly charities that might otherwise presume they are not subject to the FTC's jurisdiction.

In 2014, the FTC accused AT&T of misleading millions of its customers by marketing "unlimited" data plans, but then "throttling," or reducing data speeds, for unlimited plan customers after they used a certain amount of data during a given billing cycle. As a result of the throttling, said the FTC, customers' smartphone applications would not function as well as they would with higher internet speeds. The FTC asserted that AT&T had been throttling data speeds for its unlimited data customers since 2011, and that it has throttled at least 3.5 million customers a total of more than 25 million times.

Although AT&T has defended the merits of its conduct—arguing that it temporarily reduces data speeds for heavy users (and is transparent when doing so) in order to preserve its network's quality for everyone else—its primary strategy was to argue that, as a common carrier, the FTC lacks the ability to regulate its conduct entirely.

Congress gave the FTC broad authority to prevent unfair methods of competition and unfair or deceptive acts or practices. However, the FTC's jurisdiction is not unlimited: banks, savings and loan institutions, federal credit unions, air carriers, meatpackers and poultry dealers, and, most relevant here, common carriers, are exempt from the coverage of the FTC Act.

According to AT&T, its status as a common carrier should place it beyond the FTC's jurisdictional reach. The FTC countered that an entity's exempt status, by itself, is not controlling. Rather, the court must look at the activity in question and allow the FTC to regulate the non-exempt conduct of a common carrier (meaning, in this case, AT&T's conduct regarding its mobile data services). The court sided with the FTC on this issue and held that "the common carrier exception applies only where the entity has the status of common carrier and is actually engaging in common carrier activity." AT&T has now asked the U.S. Court of Appeals for the Ninth Circuit to grant an interlocutory appeal of the federal district court's dismissal.

What Does This Mean for Nonprofit Organizations?

The impact of this ruling will likely reach beyond common carriers to other entities that are generally considered exempt from FTC jurisdiction, including nonprofit organizations. The Commission's authority to enforce the FTC Act applies only to corporations that are "organized to carry on business for [their] own profit or that of [their] members." The FTC therefore usually refrains from pursuing enforcement actions against corporations that have been recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code, because these entities carry on business in pursuit of their tax-exempt purposes rather than for their own profit or that of their members (it should be noted that trade and professional associations tax-exempt under Section 501(c)(6) of the Code are generally subject to the FTC's jurisdiction).

The FTC has taken action against nonprofits in certain cases and will doubtless continue to do so when it believes an investigation or enforcement action is warranted. For example, when the Commission believes that a nonprofit organization is using charitable assets for the personal benefit of its officers, directors, employees, or other insiders, when it believes an organization's business primarily benefits private pecuniary interests (such as those of a for-profit fundraiser), or when it believes an organization's tax-exempt status is a sham, the FTC will assert jurisdiction over a nonprofit corporation.

More often than not, these investigations result in a settlement in federal district court, and the nonprofit will stipulate to the facts necessary to establish jurisdiction. In some cases, though, nonprofit organizations or fundraisers working on their behalf have challenged the FTC's jurisdiction over their conduct, much like AT&T did.

In fact, AT&T supported its argument by citing two nonprofit-related court decisions that suggested an entity's status, rather than its conduct, determined whether it was exempt from the FTC's reach. See, e.g., National Federation of the Blind v. FTC, 303 F. Supp. 2d 707, 714-15 (D. Md. 2004) ("Courts have held that an entity's exemption from FTC jurisdiction is based on that entity's status, not its activity."); see also FTC v. Saja, 1997 WL 703399 (D. Ariz. 1997). However, the district court in AT&T distinguished these cases, finding them inapplicable.

Other court decisions have held that a nonprofit corporation's form of organization, by itself, will not immunize it from the FTC's grasp. For example, when the FTC sued a 501(c)(3) tax-exempt, nonprofit-incorporated credit counseling entity over its allegedly deceptive business practices, the court held that "[a]ltough [the nonprofit] is incorporated as a non-stock corporation with tax-exempt status, the Court finds this insufficient to insulate it from the regulatory coverage of the FTC Act." FTC v. Ameridebt, Inc., 343 F. Supp. 2d 451, 460 (D. Md. 2004).

Nonprofit organizations, particularly 501(c)(3) charities that raise money nationally with the assistance of for-profit fundraisers, should remember to exercise vigilance over their consumer-facing operations such as solicitation scripts and claims about the organization's programs, reach, and efficiency. The FTC continues to take a hard look at these practices, and an organization's status as a tax-exempt entity may not be enough to shield it from FTC oversight, particularly in light of this AT&T ruling. Given the increased legal risks associated with many activities surrounding nonprofit organizations, implementing a robust compliance program is crucial to minimize the risks of an enforcement action by the FTC.