March 2018 edition

FTC regains jurisdiction over broadband providers • Cryptocurrencies and initial coin offerings • Cooperation in discovery

FTC regains jurisdiction over broadband providers

The FCC’s December 2017 decision to repeal the net neutrality rules changes the regulatory landscape by shifting the regulation of data privacy and security for broadband internet access service (BIAS) providers from the FCC back to the FTC.

The FTC previously held regulatory authority over BIAS providers until 2015, when the FCC issued the Open Internet Order. The Order reclassified BIAS providers as common carrier services, bringing them under the jurisdiction of the FCC. The FTC retained regulatory authority over edge providers, a category that includes search engines and social media networks.

The FCC’s decision to move BIAS providers back under the FTC’s jurisdiction is likely to change the manner in which BIAS providers are regulated, as well as the consequences for violating rules governing data privacy and security.

The FTC’s oversight differs from the FCC’s in two key ways:

• The FTC's oversight is responsive instead of proactive. The FTC enforces the FTC Act's prohibitions on unfair and deceptive business practices, but the FTC is more restrained than the FCC in creating new rules governing business activity.
• The FTC can pursue consumer restitution (such as refunds) and injunctive relief against companies found to be engaged in prohibited practices. Unlike the FCC, however, the FTC generally does not levy fines against violators.

For more information on FTC enforcement, see Practice Note, FTC Consumer Protection Investigations and Enforcement.

Cryptocurrencies and initial coin offerings

SEC Chairman Jay Clayton recently issued a statement providing a general view on the cryptocurrency and initial coin offering (ICO) markets.

According to the SEC statement, the SEC plans to police the area of cryptocurrencies and ICO markets vigorously and recommend enforcement actions against ICOs that are offered in violation of federal securities laws. The SEC statement comes as the cryptocurrency market has experienced exponential growth and immediately follows the SEC’s issuance of a cease and desist letter to stop an ICO after the company failed to register certain ICO tokens as securities with the SEC.

Cryptocurrencies, such as bitcoin, are designed to be items of inherent value that are intended to provide many of the same functions as long-established currencies, without the backing of a government or other body. Cryptocurrencies can provide:

• The ability to make transfers without an intermediary and without geographic limitation
• Finality of settlement
• Lower transaction costs compared to other forms of payment
• The ability to publicly verify transactions
• Personal anonymity and the absence of government regulation or oversight

ICOs provide an opportunity for individual investors to exchange currency or cryptocurrencies in return for a digital asset labeled as a coin or token. According to the SEC, ICOs may involve the offer and sale of securities and therefore require registration and other investor protections under the federal securities laws.

Brokers, dealers, and other market participants that deal in cryptocurrencies should:

• Avoid promoting or touting an offer and sale of coins without first determining whether the securities laws apply
• Ensure that their cryptocurrency activities do not undermine their anti-money laundering and know-your-customer obligations

The CFTC also recently published a statement on virtual currencies. Similar to the SEC statement, the CFTC statement recognizes the significant opportunities and challenges underlying virtual currency and highlights the actions that the CFTC has taken to enable fraud- and manipulation-free commodities trading.

For more information on the SEC’s and CFTC’s statements, see Legal Update, SEC and CFTC Issue Statements on Cryptocurrencies and Initial Coin Offerings.

Cooperation in discovery

A recent district court decision underscores the importance of cooperating with opposing counsel when searching and producing electronically stored information (ESI) in response to discovery requests.

In United States v. New Mexico State University, the court ordered the parties to confer on search terms that the defendant should use to collect ESI. Instead, the defendant moved for a protective order to prevent additional disclosure of its ESI. The court denied the defendant’s motion and ordered the defendant to conduct additional searches using search terms requested by the plaintiff. This resulted in a large, overly inclusive production, which is what the defendant sought to avoid.

The court relied on settled caselaw to emphasize the importance of cooperation in discovery, but did not reference the 2015 amendments to the Federal Rules of Civil Procedure (FRCP). These amendments include:

• FRCP 1, which requires the court and the parties to administer and employ the rules to accomplish the just, speedy, and inexpensive resolution of every action.
• FRCP 26(f), which requires the parties to confer and agree on a discovery plan.
• FRCP 26(g), which requires counsel to certify that discovery responses are complete and correct.

Counsel should heed the mandate of FRCP 1 in particular and be sure to:

• Use reasonableness as a guide in every discovery response.
• Avoid unilateral key word searches in producing ESI.
• Resolve discovery differences by conferring with opposing counsel, rather than resolving them through motion practice.

For resources to assist counsel in managing electronic discovery, see E-Discovery Toolkit.

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About Practical Law

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