Businessman holds modern technology in handsThe topic of net neutrality has continued to be at the forefront of public discourse over recent years.  This is the result of the FCC’s repeated attempts to impose regulations designed to protect consumers while at the same time telecom companies seek to control their product and the services they provide without what they contend is burdensome regulation. This summer, in U.S. Telecommunication Association v. FCC, the D.C. Circuit Court of Appeals dealt a blow to the telecom industry when it upheld a FCC declaration that broadband internet is a telecommunication service—essentially a public utility.  Many speculate that this decision will have a broad impact (good and bad) on internet service providers in both the short and long term.  A less considered aspect of the D.C. Circuit’s ruling is how it will be applied in the bankruptcy context.

Section 366 of the Bankruptcy Code establishes safeguards for debtors when it comes to their use of public utilities.  Under Section 366, essential utility providers are prohibited from discontinuing service upon the filing of a bankruptcy petition.  Instead, the debtor is required to provide adequate assurance of payment within short order, and if the debtor complies, the utility provider must continue service.  The Bankruptcy Code does not define what a “utility” is, but the legislative history provides some insight, noting that section 366 “is intended to cover utilities that have some special position with respect to the debtor, such as an electric company, gas supplier, or telephone company that is a monopoly in the area so that the debtor cannot easily obtain comparable service from another utility.”

Bankruptcy courts have not strictly interpreted the monopoly reference in the legislative history and have continued to hold that telephone service is a utility even after the industry has been deregulated.  In the context of cable television, rather than looking to the monopoly requirement, the Fifth Circuit Court of Appeals in Darby v. Time Warner, 470 F.3d 573, 574 (5th Cir. 2006), held that the relevant analysis was whether the provider stands in a “special positon with respect to the [debtor] such that it is a utility within the meaning of the statute.”  There the Fifth Circuit held that cable television providers did not stand in a special position with respect to the debtor and further that cable television service was not a necessity and therefore not a utility under Section 366.

We have no doubt that individual debtors will begin to test whether they can claim internet service is a utility, relying principally on the D.C. Circuit’s ruling.  However, based on the Fifth Circuit’s analysis, it is entirely conceivable that bankruptcy courts will be reluctant to extend utility status to broadband internet service providers in individual bankruptcies, as it is difficult to find that internet service is a necessity.  However, in the corporate chapter 11 context, one can easily envision a scenario where broadband internet service is necessary for a debtor to continue operating its business, for example, in the e-commerce arena or simply to connect its internal computer systems.  In these circumstances, courts have already allowed debtors to consider internet service a utility under Section 366.  The D.C. Circuit’s recent opinion in U.S. Telecommunication Association v. FCC will now provide further support for commercial debtors to claim that internet service is a utility in the event that a provider dissents.