On January 14, the D.C. Circuit Court of Appeals struck down most of the FCC’s net neutrality rules (see Edwards Wildman Client Advisory, October 11, 2011 – Controversial Net Neutrality Rules Set to Go Into Effect on November 20). In ruling on a lawsuit brought by Verizon, the court vacated the FCC’s “anti-discrimination” and “anti-blocking” rules, but upheld both the transparency rule and the FCC’s authority to promote broadband deployment under Section 706 of the Telecommunications Act. This was the second time in four years that the court vacated the Commission’s net neutrality rules, the first being its 2010 decision in a suit brought by Comcast.

Background. With passage of the Telecommunications Act of 1996 (“the Act”), Congress enshrined in law the distinction between telecommunications services, covered by Title II of the Act, and information services, covered by Title I of the Act. Title II telecommunications service providers were subject to common carrier regulations, including the requirements that they charge “just and reasonable” rates and do not unreasonably discriminate in charges or services. By contrast, Title I information services were generally left unregulated. By 2007, the FCC had classified all broadband Internet services as Title I information services, effectively exempting broadband providers from common carrier obligations.

In 2005, the FCC issued a net neutrality policy statement, which laid out four principles “[t]o encourage broadband deployment and preserve and promote the open and interconnected nature of the public Internet,” including that consumers are entitled to access Internet content and run applications of their choice. Though not a set of final rules, the FCC stated that, despite being a Title I service, should a broadband service provider violate any of these principles, the Commission would take action. In 2007, in response to a complaint that Comcast restricted its customers’ ability to access certain peer-to-peer networks, the FCC issued an Order finding that Comcast violated federal policy and would be required to refrain from certain network management approaches. Comcast appealed the Commission’s decision, and in 2010 the D.C. Circuit vacated the FCC’s order, effectively cutting off the Commission’s ability to enforce the net neutrality policy statement. The court found that the FCC is permitted to take action reasonably ancillary to its statutory mandate, but that in this case, the FCC could point to no such authority.

Later in 2010, the FCC responded by adopting the “Open Internet Order,” which declined to reclassify broadband Internet as a Title II service, but broadly imposed the following three net neutrality rules on “fixed” (e.g., cable, DSL, and fiber optic) broadband providers, two of which also applied to mobile broadband providers:

  • Transparency – fixed and mobile broadband providers must “publicly disclose accurate information regarding the[ir] network management practices, performance, and commercial terms;” 
  • Anti-blocking – fixed and mobile broadband providers are prohibited from blocking their customers from accessing or using “lawful content, applications, services, or non-harmful devices, subject to reasonable network management;” and 
  • Anti-discrimination – fixed broadband providers only are prohibited from unreasonably discriminating in the transmission of lawful network traffic, meaning that discrimination based on the type or source of traffic would be prohibited, while discrimination based on network management, such as to reduce congestion, would be permitted.

The FCC cited Section 706 of the Act for its statutory authority to promulgate these rules. Section 706 states that the Commission shall encourage the deployment of broadband Internet services by promoting competition and undertaking other regulating methods. Verizon challenged the Order in the D.C. Circuit.

Discussion. The January 14 ruling by the D.C. Circuit was a mixed decision for broadband providers. The court found that two of the three net neutrality rules were adopted in contravention of the Act, but also upheld the Commission’s authority to generally regulate broadband pursuant to Section 706.

With regard to Section 706, the court noted that, as written, Section 706 of the Act is ambiguous – it is possible, as Verizon contended, that this section was merely a statement of policy, but the court found that it is also reasonable, as the FCC contended, that this section grants the FCC the authority to adopt regulations designed to promote deployment of broadband Internet service. The court noted that the FCC made the same argument in 2010’s Comcast case, which the court rejected. To explain this about-face, the court highlighted the fact that, at the time the Comcast decision was rendered, the FCC was still operating under a 1998 order in which the Commission determined that Section 706 “does not constitute an independent grant of authority.” In the present case, though, the court found that the Commission is permitted to overturn its earlier rulings and that the Open Internet Order did so with regard to the FCC’s understanding of Section 706. (The court came to this conclusion despite, as the court noted, the FCC’s claim that its Open Internet Order was consistent with the 1998 order).

The court went on to analyze whether the net neutrality rules are within the scope of Section 706. Here too the court found for the FCC. The Commission argued that the rules encourage the deployment of broadband and promote competition, because they encourage investment by “edge providers” (e.g., web-based businesses and content providers), which drives consumers to demand better broadband technology, and this in turn stimulates investment and competition in the broadband service market. The court found that this reasoning was both rational and supported by the evidence, and therefore certain regulations affecting the relationship between broadband providers and edge providers, fall within the authority granted by Section 706.

However, the court also found that the FCC cannot impose regulations under Section 706 that it is prohibited from imposing by other provisions of the Act. Specifically, the court found that the anti-blocking and anti-discrimination rules were per se common carrier regulations. And because the Commission has classified broadband Internet service as a Title I information service, not a Title II telecommunications service, broadband Internet service providers are not subject to common carrier obligations. The court held, therefore, that it violates the Act to apply common carrier obligations, such as the anti-blocking and anti-discrimination rules, to Title I information services. The transparency rule, on the other hand, the court found to be separable from the other two rules and not a per se common carrier obligation.

Judge Silberman concurred with court’s decision as to the Open Internet Order’s unlawful treatment of broadband providers as common carriers and the decision that Section 706 is an affirmative grant of authority to the Commission to regulate broadband providers, but dissented from the holding that these particular rules fall within the contours of Section 706’s grant, only failing due to their imposition of common carrier obligations. In other words, Judge Silberman disagreed with the finding by the majority that Section 706 would allow the imposition of the anti-blocking and anti-discrimination rules if the FCC had classified broadband service under Title II as a telecommunications service.

Judge Silberman wrote that Section 706 only grants the FCC the limited ability to regulate when it identifies a “barrier to infrastructure investment” or to “promotes competition” between local broadband providers, but that the FCC did not identify either in its Open Internet Order. Rather, the FCC claimed its net neutrality rules were intended to protect edge-providers, consumer choice, and end-user control. He noted that the majority’s approach means that the FCC could adopt any regulation deemed to make the Internet “better” because it would increase demand for broadband. Judge Silberman also stated that the FCC’s “failure to conduct a market power analysis is fatal to its attempt to regulate” because without a finding of market power, there is no substantial evidence to support the FCC’s economic justifications for the net neutrality rules.

Conclusion. The final ruling by the D.C. Circuit leaves the FCC with four options – (1) continuing in the courts with a request for rehearing en banc or an appeal to the Supreme Court, (2) adopting a less restrictive set of net neutrality rules under Section 706 that are not akin to common carrier regulations, (3) reclassifying broadband as a Title II service subject to common carrier regulations, or (4) reverting to a case-by-case approach as it did with its Comcast Order.

The success of a court appeal is unclear and would undoubtedly result in further delays, with no anti-blocking or anti-discrimination rules in place. Reclassification would likely trigger a highly charged political battle and would require the FCC to acknowledge and explain its decision to change its previous classification of broadband service as an information service, a determination upheld by the Supreme Court. Any such revised FCC analysis would likely be carefully scrutinized by the courts, a task made more difficult by the paucity of concrete evidence of problems under the existing classification.

Thus, adoption of revised rules may be the most likely route. As alluded to by the majority opinion, the FCC might avoid common carrier obligations by seeking to only prohibit commercially unreasonable discrimination, an approach previously upheld by the courts in the wireless context. For example, broadband ISPs might be free to establish any level of “baseline” service, while retaining flexibility to negotiate with any edge provider willing to pay for faster transmission or improved quality of service.

In response to this ruling, FCC Chairman Tom Wheeler indicated that advancing along these lines would be his preferred approach. Chairman Wheeler stated that he is inclined to revisit the rules in light of the court’s holding that Section 706 affirmatively vests the FCC with authority to enact measures to encourage the deployment of broadband infrastructure. Commissioners Rosenworcel and Clyburn also expressed support for continued Commission involvement in this area. By contrast, Commissioners Pai and O’Rielly suggested that the FCC proceed by removing regulatory barriers, rather than constructing new rules.

Finally, the FCC might revert to the case-by-case approach similar to that used to address the situation where Comcast allegedly interfered with customers’ use of certain peer-to-peer networking applications. Although the sanctions imposed by the FCC in that case were vacated by the DC Circuit, as observed by the majority opinion, that case was decided before the court ruled that Section 706 provides an affirmative grant of jurisdiction.