The U.S. Court of Appeals for the D.C. Circuit has held that “retention marketing” practices used by Verizon violate Section 222(b) of the Communications Act. As a result, it may be more difficult for Verizon – and other incumbent carriers – to avoid losing customers in the competitive telephone market.

Telephone customers can move from one carrier to another, and they can take their telephone numbers with them. But when they do so, somebody’s got to tell the old phone company to release the customer’s number to the new phone company. That chore generally falls on the new phone company (in this particular case, the new company happened to be cable operators providing phone service), which sends the old company a local service request (LSR) to “port” the number.

Of course, when it receives an LSR, the old phone company learns that that customer is looking to defect to the competition. Attempting to make lemonade out of that particular lemon, Verizon took the opportunity to contact defecting customers (identified through incoming LSRs) and offered them incentives to stay with Verizon. This is a practice known as “retention marketing”.

But Section 222(b) of the Act prohibits a carrier from using for its own marketing efforts any proprietary information that it receives from another carrier “for purposes of providing any telecommunications service.” The Big Question, then, was whether Verizon’s use of information from the LSRs ran afoul of that prohibition.

When the issue first surfaced at the FCC in 2008, the Enforcement Bureau “recommended” that the FCC find that Verizon’s retention marketing practices were permissible. Score one for Verizon.  But the FCC ultimately declined to follow that recommendation, holding instead that Verizon’s practices were prohibited. Score one for Verizon’s competitors, primarily cable operators providing VoIP services.  At that point, we described the state of the law as “a mess on top of a mess,” and suggested that if the case were to be appealed, the Court might just throw up its hands and defer to the FCC.

And that’s precisely what happened. The Court upheld the FCC’s finding that Verizon’s retention marketing procedures were prohibited, although the decision is far from a ringing endorsement of the FCC’s analysis.  But unless the Supreme Court reverses the D.C. Circuit’s decision – an unlikely prospect – carriers should avoid using retention marketing procedures similar to Verizon’s.

The core issue is whether Verizon’s retention marketing gambit constituted a use, for its own marketing, of proprietary information that it had received from another carrier “for purposes of providing any telecommunications service.”   That last phrase, in particular, is the bugaboo. After all, in Verizon’s case, the customer information in question was technically not being provided to Verizon so that Verizon could provide any telecommunications service. Au contraire – it was being provided so that Verizon would stop being that customer’s service provider. According to Verizon, the Section 222(b) prohibition was never triggered because Verizon was not providing a telecommunications service in connection with processing the cable operator’s LSR.

The FCC didn’t buy that argument. It held instead that the statutory prohibition applies when proprietary information is given so that the new phone company (here, the cable folks) can perform a telecom service.  And, perhaps uncertain of the soundness of that reading, the Commission went further: even if Verizon’s interpretation were correct, Verizon’s retention marketing practices would still violate the statute because Verizon’s provision of local number portability is itself a telecommunications service (a novel reading, since such “service” does not involve transmission and is not provided for a fee).

The Court chose not to get sucked into the details of this debate. Instead, it acknowledged that the language of Section 222(b) is ambiguous. That acknowledgment opened the way for the Court to defer to the FCC’s interpretation, in accordance with well-established precedent mandating judicial deference toward an agency’s interpretation of ambiguities in statutory language which the agency is charged with administering. So even though the Court recognized certain “oddities” in the FCC’s approach, it upheld the Commission’s holding.

(By the way, the Court held that the LSR constitutes proprietary information, even to the receiving carrier.)

The Court also rejected Verizon’s argument that the FCC’s Order restricts Verizon’s First Amendment speech rights.  Applying an intermediate scrutiny standard of review (because the speech at issue was, in the Court’s view, “commercial”), the Court concluded the FCC’s approach was permissible because it was designed to promote “neutrality” in the losing carrier’s execution of the number port.

The Court also rejected Verizon’s argument that Section 222 should not apply because the entities sending the LSRs were not themselves telecommunications carriers. Those entities in this case were subsidiaries of the cable operators that served only the cable operators and did not hold themselves out to the public for service.  According to the Court, this was a “close” call; nevertheless, the FCC prevailed because the cable entities (1) self-certified that they operate as common carriers, (2) entered into interconnection agreements with carriers like Verizon, and (3) had obtained state certificates of public convenience and necessity.  The Court admitted that none of these facts in isolation was very compelling, but together were sufficient.  (This holding has potential for mischief in the future as the regulatory status of VoIP is established by the FCC and reviewed by courts.)

The bottom line is that Verizon’s retention marketing practices are prohibited until further notice.  Carriers should consult with communications counsel in revising or commencing any practices that could be seen as similar to Verizon’s.