In an August 10, 2016 ruling, the Sixth Circuit Court of Appeals reversed the FCC’s preemption of state laws in Tennessee and North Carolina which prevented municipal broadband providers from expanding their networks beyond their territorial boundaries, and in the case of North Carolina, placed other restrictions on municipal broadband operations. The ruling reverses a 2015 FCC Preemption Order, in which the FCC relied on its authority under Section 706 of the Telecommunications Act of 1996 to find that the Tennessee and North Carolina laws resulted in barriers to broadband deployment and competition. The two state laws at issue each involved geographic restrictions on the provision of broadband service by municipalities. In Tennessee, the state authorized municipal utilities to offer cable, video and Internet services, but restricted the geographic area of service to a municipal utility’s existing electric footprint. In North Carolina, state law similarly banned municipalities from providing broadband service beyond their municipal boundaries. The North Carolina law also placed a number of additional restrictions on municipal providers that were intended to level the playing field between municipal and commercial providers. Largely taken as given the FCC’s findings on the benefits of municipal broadband and the barriers the state laws imposed on expansion of service by municipal providers, the Court nonetheless found that the FCC’s preemption order exceeded its authority under Section 706, and impermissibly encroached on the unique relationship between states and municipalities and the "core sovereignty" of the state. The court found that any preemption order by the federal government seeking to intervene in this state-municipality relationship would have to stem from a clear directive from Congress authorizing the government to preempt a power of the state, finding no such clear directive in Section 706.

The court noted that this is not a case where there were particular federal regulatory provisions that state law would have required municipalities to violate. Absent a clear statement from Congress to the contrary, which the court found absent in Section 706, states remain free to control via statute, discretionary decisions on municipal broadband service expansion, rate setting, and rollout. The court was also rejected the FCC’s argument that while the FCC might not have the authority to absolutely ban municipalities from providing telecom services, it was free to preempt state laws regulating the conduct of municipal providers once such authority had been given. This, the court concluded, would lead to the anomalous result that states can flatly prohibit municipalities from engaging in telecom, but cannot limit municipal conduct based on the governmental nature of municipalities, which, it also found, to be "intrusive on state-municipal relations."

FCC Commissioner reaction to the 6th Circuit decision was along party lines, with the Democratic commissioners generally lamenting the decision and predicting significant adverse impacts on municipal broadband, while the Republicans praised it, with Commissioner Pai reiterating concerns [Pai statement] with the lawfulness of the preemption order and its impacts on state sovereignty. Chairman Wheeler, for his part [Wheeler statement], vowed that the Commission would consider all "legal and policy options to remove barriers to broadband deployment wherever they exist", and indicated that he would be happy to weigh into the fray, supporting through testimony efforts to repeal such statutes, or opposing efforts to enact such statutes, in either case, as he termed it, "on behalf of consumer choice."