F.C.C. Net Neutrality Rule, Struck Down by Court, May Need Major Overhaul

Note: Readers will find STLR’s earlier blog posts on “The Law and Politics of Net Neutrality,” and the discussion of net neutrality on Columbia Law Professor Tim Wu’s personal website to be extremely helpful.

On January 14th, the D.C. Circuit enjoined the F.C.C. from enforcing “net neutrality” rules on Internet Service Providers (ISPs). Unless it is appealed to the Supreme Court, the ruling in Verizon v. F.C.C., 740 F.3d 623 (D.C. Cir. 2014), brings an end to a legal and policy dispute that pitted providers of broadband internet against the federal government, with voices from the business community and the NGO sector weighing in on both sides.

Net Neutrality Explained

Internet Service Providers (ISPs), such as Comcast, Verizon FiOS and Optimum Online generally don’t connect you directly to online content providers (such as YouTube, Google and Amazon). Rather, ISPs charge their customers for the right to send and receive content to and from the “backbone,” the interconnected network of fiber optic trunk cables that form the core of the internet. Increasingly, such access is provided through a broadband connection. Thus, when person A sends content to person B, the data is first transmitted from A’s computer over A’s broadband connection to the “backbone,” and then carried from the “backbone” over B’s broadband connection to B’s computer. A and B pay their respective ISPs (who may be the same company, or may be different companies) for their broadband service.

But what if your ISP wants to make it more difficult for you to receive certain content over your broadband? For example, if you subscribe to Comcast (which owns NBC Universal), can Comcast slow down or degrade the quality of videos that you receive from NBC competitors? Alternatively, can your ISP block or interfere with the transmission of certain content over your broadband connection—say, Netflix movies—unless Netflix pays a special fee (a so-called “termination fee”)?

Under net neutrality principles, the answer is no: Once you pay your ISP for internet access, the internet service you receive should give equal access to all lawful internet traffic (subject to bandwidth constraints). Your ISP cannot selectively degrade, slow down or block your online traffic. In other words, your ISP should be neutral toward the content that you choose to receive.

The fear that ISPs will interfere with the transmission of legitimate content over their customers’ broadband service is not some hypothetical bogeyman; it has been playing out since the mid-2000’s:

  • In 2005, Madison River Communications, LCC, a telephone company subsidiary that provided broadband service, settled an F.C.C. investigation into whether it had blocked Voice over Internet Protocol (VoIP) applications, which compete with telephone companies.
  • In 2008, the Max Planck Institute for Software Systems found that thirteen ISPs were blocking the peer-to-peer (P2P) application BitTorent, with U.S. cable companies Comcast and Cox the largest offenders. The F.C.C. filed a complaint ordering Comcast to stop.
  • In 2009, AT&T objected to the use of Google Voice (which competes with AT&T as a telephone carrier) over AT&T’s 2G and 3G mobile data services on Apple devices.

“Telecommunications Service” Providers vs. “Information Service Providers”

The Communications Act of 1934, as amended by the Telecommunications Act of 1996, defines two classes of entities: “telecommunications services” providers, which transmit information in unaltered form, and “information service providers,” which process and otherwise manipulate the transmitted information. 47 U.S.C. § 153(24), (50), (51), (53). Telecommunications service providers, but not information service providers, are regulated as “common carriers” under Title II of the Act. Id. § 153(51). Essentially, common carriers must hold themselves out to interested customers on an open and nondiscriminatory basis, charging reasonable and uniform rates. See id. § 201 et. seq. Telephone companies are an example of common carriers.

The Act did not expressly indicate whether broadband providers were telecommunications service providers or information services providers. But in a series of regulations beginning in 2002, the F.C.C. designated broadband service providers as information service providers, exempting them from common carrier status under Title II.

The 2010 Open Internet Order

Even though broadband was exempt from common carrier regulation under the F.C.C.’s own rules, the F.C.C. promulgated its Open Internet Order, providing that fixed broadband providers may not block or “unreasonably discriminate” against lawful content and applications over their broadband services.

Essentially, the Order imposed a net neutrality requirement on the fixed broadband industry. It instructed fixed broadband providers to manage their network in ways that maximize transparency, preserve end-user control, conform to pre-existing industry practices, and do not “interfere with end users’ choices about which content, applications, services, or devices to use.”

The Order took particular aim at “pay-for-play” and “pay-for-priority” schemes, whereby content providers are assessed a fee by their consumers’ ISPs in exchange for access, or prioritized access, to their consumers’ broadband connections. According to the Order, such arrangements might incentivize ISPs to create artificial scarcity and disrupt the transmission of content from content providers who did not pay these fees. The Order also expressed concern over the possibility that ISPs might interfere with applications that compete with their telephone or television services, or that they might allow content providers to pay to have their own competitors excluded by the ISP.

The Verizon Case

In 2012, Verizon petitioned for a review of the Order in the D.C. Circuit. One of Verizon’s arguments was that the Order violated its First Amendment rights by “stripping them of control over the transmission of speech on their networks.” This highly counterintuitive position—that an open internet violated the right to free speech—was picked up and heavily mocked on a number of blogs, with some incorrectly reporting that the Court of Appeals struck down the Order on constitutional grounds.

In fact, Verizon’s First Amendment point was a relatively minor part of its argument, and the Court of Appeals declined to address it. The core of Verizon’s argument, instead, was jurisdictional: That the F.C.C. had no subject matter jurisdiction to impose net neutrality regulations on the broadband industry.

Because broadband providers are information service providers rather than telecommunication service providers, the F.C.C. could not claim that it was regulating broadband providers as common carriers under Title II. Instead, the F.C.C. relied on its “ancillary jurisdiction” under § 706 of the 1996 Act. Section 706(a) provides that “[t]he Commission … shall encourage the deployment on a reasonable and timely basis of [broadband] capability to all Americans … by utilizing … regulating methods that remove barriers to infrastructure investment.” 47 U.S.C. § 1302(a). Section 706(b) similarly provides that if the F.C.C. determines that broadband capability is not “being deployed to all Americans in a reasonable and timely fashion … it shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment….” Id. § 1302(b).

The F.C.C.’s rather contorted argument justifying § 706 jurisdiction was as follows: Internet openness spurs innovation among online content providers, which increases demand not only for online content, but for broadband service itself, creating a “virtuous circle” of innovation between the broadband and content-provider industries. The F.C.C. argued that this fulfilled its mandate under § 706 to encourage the deployment of broadband capability to all Americans.

Verizon, relying on the court’s previous opinion in Comcast v. F.C.C., 600 F.3d 642 (D.C. Cir. 2010), argued first that § 706 was a preambulatory statement of policy rather than an independent grant of authority. Even if § 706 were an independent grant of authority, argued Verizon, the F.C.C.’s “virtuous circle” argument was too attenuated. Finally, Verizon argued that even if the F.C.C. had § 706 jurisdiction, the Order contradicted the Communications Act because it effectively regulated broadband providers as common carriers, even though they are information service providers rather than telecommunications providers.

Judge David S. Tatel, writing the majority opinion, agreed with the F.C.C. that § 706 was an independent grant of authority. In so deciding, Judge Tatel directly overruled his own opinion from four years ago in Comcast v. F.C.C., which held that § 706 was just a statement of policy and did not endow the F.C.C. with any power not otherwise provided by the statute. Judge Tatel went on to accept the F.C.C.’s “virtuous circle” argument and held that the F.C.C. had jurisdiction under § 706 to impose net neutrality on the broadband industry.

Nevertheless, the court found that the F.C.C. had exceeded its subject matter jurisdiction because, even though it had jurisdiction under § 706, the Communications Act only permits providers of telecommunications services to be regulated as common carriers. 47 U.S.C. § 153(51). Because the F.C.C. classified broadband providers as information service providers rather than telecommunications services providers, it could not regulate broadband providers as common carriers. Since the Order regulated broadband providers as common carriers, the court found that it exceeded its jurisdiction.

Common carriers are quasi-public entities required to hold themselves out indiscriminately to any interested customers, charging reasonable and uniform rates. The F.C.C. argued that the Order did not impose this obligation on ISPs because it still allowed them to treat their end-user customers differently, even discriminately. The judges disagreed. The crucial pivot in their logic was that ISPs can be regarded as providing services not only to end-users (their paying customers) but to content providers as well by connecting them to their consumers. Thus, because the Order required ISP’s to hold themselves out indiscriminately to all content providers, it imposed common carrier-like behavior on them.

On these grounds, the court vacated the Open Internet Order to the extent that it imposed net neutrality requirements on ISPs, and remanded to the F.C.C.

Looking Forward

Does Verizon spell the end for net neutrality in the fixed broadband sector? The F.C.C. has stated that it will instead revise existing regulations to accommodate the ruling, rather than appeal it to the Supreme Court. Indeed, analysts agree that the conservative-leaning Supreme Court would not only uphold the ruling, but narrow the F.C.C.’s powers even further by reversing the portion of the ruling that found that the F.C.C. had regulatory jurisdiction under § 706.

It’s not clear how the rules will be rewritten, but F.C.C. Chairman Tom Wheeler left open the so-called “nuclear option:” reclassifying broadband providers as telecommunications service providers rather than information service providers. Recall that reclassification of broadband providers as telecommunications service providers would give the F.C.C. direct authority to regulate them under Title II. This option has particular appeal because, between 1998 and 2005, the F.C.C. actually classified DSL broadband as a telecommunications service, rather than an information service, when provided by telephone companies over their own transmission lines. Thus, the F.C.C. can argue that reclassification simply reverts to an earlier state of affairs (at least with respect to DSL broadband providers).

As former Science and Technology Law Review editor-in-chief Jeff Kao noted in a previous post, the F.C.C. has ample authority to overturn the existing classification. The rulemaking section of the Administrative Procedures Act requires only that the agency “examine the relevant data and articulate a satisfactory explanation for its action.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (citation omitted). An old rule may be overturned by a new one as long as the new rule is “permissible under the statute, … there are good reasons for it, and … the agency believes it to be better.” F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009) (emphasis in original).

Republicans would fiercely oppose such reclassification: Republican F.C.C. commissioner Ajit Pai has said that, “[u]nless Congress acts, we should stay our hand and refrain from any further attempt to micromanage how broadband providers run their networks.” Michael Powell, a former Republican chairman of the F.C.C. who is now president of the National Cable & Telecommunications Association, said that reclassification would be “exceedingly damaging—and more than most people realize. It would be the instant application of thousands of pages of decades-old regulations instantly to the internet where they heretofore have not been.”

At a minimum, the law post-Verizon will allow broadband providers to collect fees by engaging in pay-for-play and pay-for-priority schemes. Chairman Wheeler himself indicated his approval of pay-for-priority systems, even though they appear to go against the Open Internet Order. Now that they are legal, there is every reason to believe that termination fees will be introduced to the fixed broadband market; the mobile broadband market, which was never subject to the Open Internet Order’s net neutrality principles, already has them.

Proponents of increased industry regulation will find a silver lining, however. By interpreting § 706 as an independent grant of statutory authority to the F.C.C., the Court of Appeals did nothing less than empower the F.C.C. to “encourage the deployment on a reasonable and timely basis of [broadband] capability to all Americans … by utilizing … price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.” 47 U.S.C. § 1302(a). In other words, Verizon would appear to allow the F.C.C. to pass any regulation, not otherwise in conflict with the Communications Act, that tends to “encourage” the deployment of broadband in the United States. The degree to which this portion of the opinion will enlarge the scope of the F.C.C.’s power over the broadband industry should not be understated.

Update: On February 23rd, Netflix and Comcast announced a deal whereby Netflix will pay fees to Comcast in exchange for faster and more reliable service to its subscribers.

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