By Richard T. Kaplar

A n FCC regulation intended to enhance consumer privacy violates the First Amendment right of phone companies to engage in commercial speech with their customers, the U.S. Court of Appeals for the Tenth Circuit ruled in August.

The decision, which riled privacy advocates and left FCC Chairman William Kennard "outraged," involves an FCC rule implementing a privacy provision of the 1996 Telecommunications Act. Section 222 of the act requires telecom carriers to obtain customer approval before using, disclosing, or permitting access to "customer proprietary network information" (CPNI) for marketing purposes.

The implementing rule divides phone service into three categories: (1) local; (2) interexchange (i.e., long distance); and (3) commercial mobile radio (i.e., cellular). The rule allows phone companies to use CPNI to market related services to subscribers within each class of service, but prohibits companies from marketing other classes of service without the customer's permission.

The FCC mandated an "opt-in" approach by which a customer must give explicit approval before the carrier can use the customer's CPNI. Phone companies favor an "opt-out" approach allowing them to cross-market unless a customer specifically tells them not to. U S West, Inc. petitioned the Tenth Circuit to review the rule.

"This case fits soundly within the definition of commercial speech," the court said, because the speech at issue proposes a commercial transaction: inviting customers to buy more telecom services.

The FCC rule amounts to a restriction on speech tailored to a particular audience, or "targeted speech," the court said. Such a restriction "cannot be cured simply by the fact that a speaker can speak to a larger indiscriminate audience," the three-judge panel ruled.

The Central Hudson analysis that followed questioned whether the government's asserted interests in protecting consumer privacy and promoting competition were substantial. The court made a strong showing that neither interest was compelling in this instance, yet concluded "for the sake of this appeal" that the privacy interest was substantial.

The FCC rule failed to clear the hurdle of Central Hudson Part 3, however, requiring the government to demonstrate "that the harms it recites are real and that its restriction will in fact alleviate them to a material degree" (citing Edenfield).

"The government presents no evidence showing the harm to either privacy or competition is real. Instead, the government relies on speculation," the court said.

The rule fared no better under Central Hudson Part 4, requiring a speech restriction to be "no more extensive than necessary."

"The FCC's failure to adequately consider an obvious and substantially less restrictive alternative, an opt-out strategy, indicates that it did not narrowly tailor the CPNI regulations regarding customer approval," the court noted.

Judge Briscoe, however, issued a spirited dissent, finding the opt-in method an "entirely reasonable" interpretation of Section 222 and thus meriting judicial deference.

He also noted that U S West's arguments were more appropriately aimed at Section 222 than at the FCC's regulation, but that U S West had not challenged the statute. Moreover, the CPNI Order does not directly or indirectly affect the company's expressive activity, he asserted.

The judge also reached a different conclusion on parts 3 and 4 of Central Hudson. The FCC's rule did directly and materially advance the government's interest, he said, and was a narrowly tailored means to that end in his opinion.

"I view U S West's petition for review as little more than a run-of-the-mill attack on an agency order 'clothed by ingenious argument in the garb' of First and Fifth Amendment issues," Judge Briscoe concluded, citing Zemel v. Rusk.

The FCC has petitioned the Tenth Circuit to rehear the case. The regulations are still in effect until the court rules on the petition and issues a mandate, according to John E. Ingle, FCC deputy associate general counsel.

The publicity portraying the case as a consumer privacy issue has obscured the fact that U S West is, at bottom, a rather noteworthy commercial speech case. Other commercial speech decisions have addressed the right of a third party to acquire personal information from court records for commercial purposes, or have involved restrictions on the solicitation of new clients by lawyers and other professionals.

This case, however, involves a company's ability to use information it already possesses about its customers to engage in marketing to those same customers. Moreover, the Tenth Circuit has affirmed the government's interest in privacy as the protection of individuals' proprietary data -- not merely the shielding of accident victims or arrestees at times when they may be vulnerable to marketing solicitations. This is a portentious point that privacy advocates, upset that the court overturned the FCC Order on narrow Central Hudson grounds, seem to have overlooked.

Thus, it is not implausible to think that an expanded concept of privacy, stemming from concerns over data manipulation in our exploding digital environment, may be lurking as the next formidable challenger to commercial speech rights. The U S West decision, while a narrow victory for commercial speech, may be a harbinger that should leave commercial speech advocates concerned rather than complacent.