On March 12, 2015, the FCC released its formal written Order explaining the details of the new Open Internet (or Net Neutrality) rules that it approved (on a 3-2 party-line vote) on February 26, 2015. In addition to explaining the majority’s actions and reasoning, the order contains lengthy and vigorous dissents from Commissioners Pai and O’Rielly.

Executive Summary

What the FCC Did

We summarized the FCC’s key actions in an advisory based on an early release by Chairman Wheeler and a subsequent advisoryfollowing the Commission’s vote. The Order confirms that the FCC’s main regulatory actions are as follows:

  • It changes the regulatory classification of broadband Internet access service (BIAS), both fixed and mobile, from an “information service” to a Title II “telecommunications service.”
  • It “forbears” from applying the vast majority of traditional Title II requirements, although the true scope and ultimate effectiveness of this forbearance is in dispute. Taking the agency at face value, however, it forbears from (among other things): ex ante rate regulation; tariff filing and related requirements; network unbundling requirements; and any obligation on providers to contribute to the universal service fund – although the agency has signaled that such contributions may be required in the future. However, the agency holds that the “core” Title II provisions—Section 201 (generally requiring terms of service to be just and reasonable) and Section 202 (generally banning unreasonable discrimination)—do apply to BIAS.
  • It imposes three “bright line” rules – no blocking, no throttling, and no paid prioritization – and a general rule barring unreasonable interference with/disadvantaging of (a) end users’ ability to access lawful content or to use non-harmful devices in connection with the service, and (b) edge providers’ ability to disseminate content.
  • It defines BIAS to include interconnection arrangements between a BIAS provider and other networks, and asserts authority to review disputes regarding such arrangements on a case-by-case basis.
  • Except for the ban on paid prioritization, the rules permit a provider to engage in “reasonable network management,” defined to includetechnical aspects of running a network, but to exclude actions taken for “business” purposes. The rule against paid prioritization indicates that waivers might be available, but the discussion in the Order itself indicates that the bar for obtaining such a waiver is quite high.
  • The FCC imposes more detailed and onerous disclosure (transparency) requirements on BIAS providers, but temporarily exempts providers with fewer than 100,000 subscribers from those more detailed requirements. We discuss these new requirements in more detail here.
  • It concludes that data services that do not provide end users with access to the Internet (such as interconnected VoIP and certain IP video services) are not subject to its new rules. Instead, these services (referred to as “specialized services” in the former rules, and now designated “non-BIAS data services”) will be subject to monitoring and additional disclosures to ensure that they do not degrade BIAS quality.
  • It modifies its enforcement/complaint procedures to permit the Enforcement Bureau to seek written input from outside technical bodies to assist in resolving claims that the rules have been violated, and also permits the Enforcement Bureau to issue advisory opinions about possible future conduct.

There are a number of significant impacts from the FCC’s ruling, which we have highlighted below. That said, with one major exception—the extension of active FCC regulatory oversight of interconnection between BIAS providers and other networks—the new rules directly governing the provision of BIAS may fairly be viewed as an update (albeit, in the case of transparency/disclosure, a substantial one) of its earlier rules from 2010, with a specific process by which the Commission could render ad hoc judgments on BIAS rates, terms and conditions.

The FCC’s Justification for its Actions

1. Policy Justification

As a policy matter, the FCC justifies its new rules using the same “virtuous cycle” logic that it relied upon to promulgate its earlier rules (from 2010, described here). The D.C. Circuit subsequently affirmed that logic in Verizon v. FCC in early 2014 (described here). Under this theory, full and unfettered end user access to the Internet encourages the development of new services and applications by edge providers, which drives end user demand for BIAS. This demand, in turn, stimulates deployment of broadband facilities – which Section 706 directs the FCC to promote and encourage. In the FCC’s view, however, broadband providers have both the incentive and the ability to limit end users’ use of the Internet. Given that incentive and ability, rules banning such conduct are required, both to protect consumers and to ensure that broadband deployment continues apace.

2. Legal Justification

The court in Verizon v. FCC accepted the “virtuous cycle” logic as a policy matter. The problem was that the specific rules the FCC imposed were barred because they amounted to imposing “common carrier” regulation on BIAS providers, a class of entity that the agency had repeatedly in the past classified as “information service” providers which are, by statute, not subject to common carrier obligations. The D.C. Circuit vacated those aspects of the 2010 rules and remanded to the agency for further proceedings, resulting in the current Order.

To deal with this ruling, the Order reclassifies BIAS as a telecommunications service. That is, it continues to rely on Section 706 as a source of legal authority to act and, by reclassifying BIAS as a Title II service, eliminates the prohibition on imposing common carrier requirements that had previously existed as a consequence of having classified BIAS as an information service. By virtue of reclassification, Sections 201 and 202 (and other provisions of Title II that the agency does not forbear from) now also provide the agency with legal authority to act.

That earlier classification was based on the view that BIAS includes more than the pure transport of end user requests for information (e.g., web sites) and downloads of that information from edge providers. Instead, functions such as DNS services (converting URLs to IP addresses), email, web hosting, data storage, and local caching of web content were (a) viewed as information services, and (b) viewed as inherent in the providers’ offering. This made the entire offering an integrated information service.  The Order fundamentally rejects that earlier logic, on the following main grounds:

  • In today’s market (based on providers’ advertisements and how end users use the service), the key, core service being offered is access to the entire Internet. To the extent email, web hosting, etc. are offered as well, they are separable from the transport service. Notably, and unlike when the earlier classifications were made, the “information service” functions (email, web hosting, etc.) are widely available from third parties, indicating that they are separate from, and not integral to, the pure transport offer.
  • BIAS is now much more widely deployed than in the past and has become an essential element of the economic and social lives of a very large fraction of the population.
  • The earlier rulings failed to focus on the portion of the definition of “information service” that carves out functions used for the management of a telecommunications network or service. Focusing on that carve-out, DNS, local caching, and a variety of other functions (such as blocking harmful or unwanted traffic) are best seen as part of the management of the transport service, not as information services in and of themselves.

Since the core service being offered is transmission of packets to and from end users, offered to the public on generally standardized terms for a fee, it is now deemed a “telecommunications service” under the definitions in the Communications Act, and the providers of that service – wired and wireless, fixed and mobile – are therefore now “telecommunications carriers.”

While this clearly represents a significant change in the FCC’s reading of the Communications Act and the facts surrounding BIAS, the Order concludes that the changed circumstances in the market noted above, combined with the agency’s broad authority to interpret ambiguous provisions in its statute under the Chevron doctrine, are sufficient to permit the agency to take this step. In this regard, as widely anticipated, the Order relies in part on Justice Scalia’s dissent in the 2005 Brand X case. (In that case the majority concluded that the FCC was permitted, but not required, to treat cable-delivered BIAS as an integrated information service, while Justice Scalia, in dissent, argued that the Communications Act required recognition of a separable telecommunications service.)

While this logic applies to both fixed and mobile service, the FCC faced an additional statutory problem with respect to mobile BIAS. Section 332 states that only a mobile service “interconnected” with the “public switched network” may be treated as a common carrier service. This has long been understood to mean that the service permits end users to make and receive normal telephone calls by means of traditional 10-digit telephone numbers—which BIAS does not do. The agency solves this problem by exercising its authority to redefine what “interconnected” means in this context. (The statute says that an “interconnected” service is “service that is interconnected with the public switched the network (as such terms are defined by regulation by the Commission)”.) Specifically, the Order redefines “public switched network”—the network to which a service must be “interconnected”—to include not just the devices reachable using traditional telephone numbers, but also devices reachable using Internet Protocol (IP) addresses. We discuss the reclassification of wireless/mobile services in more detail here.

The dissenting Commissioners (Commissioners Pai and O’Rielly) contest the majority’s analysis on several grounds. First, they claim that the Commission may not reclassify BIAS because the public notice did not adequately disclose that it might do so. Second, they disagree that the “telecommunications management” carve-out applies to DNS, caching, etc. Third, they dispute that the circumstances in the market are materially different from the time of the earlier “information service” classifications, so that the Commission’s justification for changing its position is inadequate. And, with respect to wireless services in particular, the dissenters strongly object to reclassification, both because they believe it was not adequately noticed to the public, and because they reject the notion that Congress would have considered access to locations on the Internet to fall within the intended meaning of “interconnected.”

Whether these (and other) dissenting arguments ultimately carry the day in the inevitable litigation challenging the Order will be determined by the appellate court that hears the case; the dissenting Commissioners’ objections do not change the fact that the Order has been issued and (absent a stay from the courts) will take effect in the near future.

In sum, while the FCC’s new rules are based on the same legal and policy logic that supported its 2010 rules—and, indeed, in a sense the new rules can be viewed as merely an updated version of the earlier rules—the new rules clearly impose potentially very significant new obligations on BIAS providers, notably with regard to disclosures/transparency and the inclusion of interconnection arrangements with other networks under the FCC’s purview. Moreover, what is new—and a major change in the regulatory landscape—is the logic supporting reclassification of BIAS as a telecommunications service. Putting aside the political aspects of that decision, legally the agency concluded that it was a necessary step—it was the only way to adopt the key substantive rules, which the Verizon v. FCC court had said could not be imposed as long as BIAS was classified as an information service. But this new classification opens the door to subjecting BIAS providers to after-the fact, case-by-case judgments about many aspects of their services and, at least potentially, to a host of new regulatory obligations.

The Need for Forbearance

While the FCC found it necessary to reclassify BIAS as a telecommunications service in order to justify its rules, doing so creates its own problems for the agency. The 2010 rules had been based essentially entirely on the open-ended directives in Section 706 to “encourage” broadband deployment and to “take immediate action” if the pace of such deployment is inadequate. With BIAS providers now “telecommunications carriers,” the default situation is that all or essentially all provisions of Title II – from tariff filing, to keeping books of account in a form prescribed by the Commission, to having to ask permission to enter or leave the market – would apply. To avoid that result, the FCC undertook a novel and massive exercise of its authority under Section 10 of the Act to “forbear” from applying a wide swath of Title II.

Section 10 of the Act (added in 1996) permits the FCC to forbear from (that is, choose not to apply) any provision of its rules or of the Communications Act to a telecommunications carrier or service (or group of carriers or services), if certain requirements are met. The Commission has to find that enforcement is not needed to ensure that carrier practices, etc. are just, reasonable, and nondiscriminatory or to protect consumers, and that forbearance is in the public interest.

Past forbearance proceedings have arisen at the request of affected carriers, and the Commission has set out procedures, burdens of proof, etc., that apply in that context. However, the statute says that the Commission “shall” forbear if the requirements are met. In the current Order, the Commission interprets that directive as empowering it to act on its own, and without regard to the procedures that would apply to a private party’s forbearance petition.

To conduct its forbearance analysis, the Commission focused on the fact that BIAS has never been subject to Title II in the past. The question then became whether imposing particular Title II duties was needed, given that (a) the Commission does not believe that there are serious problems with the terms under which BIAS is offered now, and (b) the Commission’s new rules will apply going forward. Given that the Commission’s new rules represent its view of how providers should behave and what protections consumers need, at a high level the Commission’s basic approach to forbearance in the Order effectively guarantees that any forbearance it wished to undertake would be justified.

That said, a key aspect of the Commission’s approach is that it will not forbear from the basic provisions of Title II that require carriers to have rates, terms, practices, etc. that are just, reasonable and non-discriminatory (Sections 201 and 202), as well as the various provisions dealing with enforcement (including complaints against carriers (Sections 206-209 and 216-17)). Leaving these provisions in place allowed the Commission to generally conclude – as required by the Section 10 forbearance standard – that the service will be provided on just, reasonable, and non-discriminatory terms and that consumers will be protected. The question then becomes whether any other specific provisions of the Act should not be forborne from – that is, should be allowed to apply to BIAS and/or BIAS providers.

The Commission concluded that certain specific “consumer protection” provisions should apply—Section 222, relating to privacy of “customer proprietary network information,” and Sections 225 and 255, which deal with accessibility of services and equipment to persons with disabilities. The Commission also chose not to forbear from applying Section 224, which (among other things) grants pole attachment rights to telecommunications carriers. By leaving Section 224 in place, the Commission ensures that BIAS providers can gain access to poles and similar infrastructure on the same rates, terms and conditions as cable operators and telecommunications carriers. In addition, while the Order forbears from applying the provisions of Section 254 calling for contributions to the Universal Service Fund should not apply “for now,” other provisions of Section 254 (and Section 214(e)) relating to universal service remain in effect.

Essentially all other provisions of the Communications Act (and associated FCC rules) that would otherwise apply to BIAS service and/or BIAS providers were forborne from.

As with the Commission’s reclassification analysis, the dissenters strongly challenge the Commission’s forbearance analysis. First, they point out that the standards under Sections 201 and 202 are so vague and general that the Commission could impose almost any regulation—including price regulation, which the majority disclaims—under those standards. Second, they argue that the Commission’s approach to analyzing the power to forbear is inconsistent with precedent and likely to be reversed. Third, they argue that the public notice for this matter did not adequately advise the public that forbearance on such a large scale was contemplated. The validity of these latter two arguments, as with the dissenters’ other points, will be resolved when the order is appealed.

Other Issues

Giving short shrift to BIAS providers’ constitutional arguments, the Order rejects claims that imposing its rules on BIAS providers would violate their First Amendment rights. It holds that with respect to BIAS, the providers are not “speakers,” but instead are merely conduits for others’ speech, an approach that arguably tries to define any First Amendment rights of BIAS providers out of existence. Under this theory, the fact that BIAS providers have not in the past exercised editorial rights with respect to the content delivered over BIAS supposedly means that they have forfeited or perhaps never had such rights in the first place. Alternatively, the Order concludes that any impact on BIAS provider speech is incidental to an important government purpose, so that new regulations would survive “intermediate scrutiny,” if that test were to be applied.

The FCC also rejects claims that its rules constitute an impermissible “taking” of BIAS providers’ property, in violation of the Fifth Amendment. Specifically, the Order rejects claims that the regulations are a “per se” taking (because no physical invasion of their property is involved); it rejects claims that the regulations are a “regulatory taking” (because the unsettled state of the law on this issue, over an extended period of time, means that BIAS providers could not have had “reasonable” expectations that the regulations would not be put into place); and rejects claims that any taking is “uncompensated” (because BIAS providers can charge for their services and thereby recover from their customers any costs of compliance).

Likely Impacts of the Ruling

It seems virtually certain that one or more parties will seek judicial review of the Order. It is also possible that a party will ask an appellate court to “stay” (or temporarily suspend) the operation of some or all of the rules while legal review is ongoing. We will provide updates on any appellate activity. For now, however, affected entities should assume that the new rules will go into effect 60 days after notice is published in the Federal Register.

There are several key areas where controversy might develop in the near future. These are summarized below, with links to more detailed analysis of particular issues.

  1. State and Local Taxes The Order states that the federal Internet Tax Freedom Act bars the imposition of state or local taxes on Internet access service irrespective of whether that service is classified as a telecommunications service. The dissenters disagree. State and local governments are typically looking for additional tax revenues, and in some cases BIAS providers’ property taxes—not generally affected by the Internet Tax Freedom Act—may be affected. As a result, it seems likely that one or more taxing authorities may well claim that additional taxes of one form or another are due in light of the reclassification.

We discuss this issue in more detail here.

  1. Universal Service Assessments As of now, BIAS is not subject to Universal Service assessments, which are currently set at 16.8% of revenue. The Order states that it is not changing that arrangement. While that is literally true, the question of whether Internet access should pay Universal Service assessments is pending before a “Joint Board” of FCC and state regulators, which is expected to make its recommendation in April. It would not be at all surprising if that recommendation, in light of the Order, is that assessments should apply.

We discuss this issue in more detail here.

  1. Pole Attachment Rates Today, cable operators providing BIAS pay the so-called “cable rate” for pole attachments (in those jurisdictions that are subject to, or voluntarily follow, the federal rule). This conclusion has depended largely on the classification of BIAS as an information service. With BIAS now classified as a telecommunications service, it is likely that some pole owners will seek rate increases under the potentially higher “telecom rate” applicable in the 30 states subject to FCC pole authority, based on the fact that the facilities on the poles are being used for what is now a telecommunications service. The FCC stated in the Order that it did not want that to occur and that nothing in the reclassification ruling compelled that result. But nothing in the Order appears to directly forbid that from occurring.

We discuss this issue in more detail here.

  1. New Transparency/Disclosure Obligations As noted above, the Order significantly expands the transparency/disclosure obligations of BIAS providers (subject to a temporary exemption, from the expanded requirements only, for BIAS providers with fewer than 100,000 subscribers). The transparency regime established in the Order will require review of web postings regarding BIAS, advertising claims, more details on promotional rates and roll off rates, more geographically focused disclosures, and new “packet loss” metrics, as well as more detailed descriptions of “specialized services” (that is, services like cable-operator-provided VoIP service that, while IP-based, do not provide access to the public Internet). As a result, large BIAS providers will need to review their existing disclosures in light of the new requirements and provide updated disclosures by the time the new rules take effect or soon thereafter.

We provide more information about the expanded disclosure obligations here.

  1. Disputes About End User Privacy The Order does not forbear from the application of Section 222 of the Act, which generally protects “customer proprietary network information” (essentially, information about the nature and amount of telecommunications services a customer uses) from disclosure without customer consent. This section, and the Commission’s rules under it, has long been viewed as limited to information arising from customers’ use of telephone service, although the Commission is currently seeking to broaden the scope of its privacy jurisdiction. The Order recognizes that the FCC’s rules implementing Section 222 do not readily apply to BIAS, and forbears from applying them. The statute itself, however, will apply to BIAS. This creates a situation in which either private parties or the Commission might claim that BIAS provider practices regarding, e.g., the use of information about customers’ Internet usage, browsing histories or other habits, violate the statute.

We discuss this issue in more detail here.

  1. Role for the States The Order rules that BIAS is jurisdictionally interstate and under the authority of the FCC, not the states. While not literally foreclosing all possible state involvement with respect to the regulation of BIAS, the Order makes clear that the FCC is prepared to preempt state actions that interfere with its ruling, including actions that impose greater regulation than the FCC believes to be in the public interest. Providers will need to be vigilant in this regard should state regulators attempt to assert authority over BIAS.

We discuss this issue in more detail here.

  1. Accessibility Requirements The Order does not forbear from Section 225 (relating to Telecommunications Relay Service) or Section 255 (requiring that services be made “accessible to and usable by” persons with disabilities). Specifically, the “functional equivalent” obligations of the Telecommunications Relay Service requirements in Section 225 (and implementing regulations) were extended to BIAS providers. However, BIAS providers are not required to make contributions to support TRS, although the Order reserves the right to revisit contribution issues in the future.

The Order also subjects BIAS providers to Section 255 (and implementing regulations) that services be made “accessible to and usable by” persons with disabilities, including those with vision, hearing, speech and physical disabilities. The Order indicates that the statute’s lower “readily achievable” standard will govern initially. This means that for services not previously covered under the category of “advanced communications services,” BIAS providers must now incorporate accessibility into product design and development, ensure that all customer support is accessible, keep contemporaneous records of efforts to make covered services and products accessible and usable, and certify annually to compliance with the recordkeeping obligations. The fines for non-compliance are significant, up to $100,000 per day and $1 million per violation.

Finally, the Order does not forbear from Section 251(a)(2), meaning that BIAS providers must refrain from installing network features, functions or capabilities that impede accessibility or usability of BIAS, and must pass through industry-standard codes, translation protocols or other information necessary to provide BIAS in an accessible manner, as required by Section 251(a)(2), Section 255, and the FCC implementing regulations.

We discuss this issue in more detail here.