D.C. Circuit Vacates FCC’s Net Neutrality Rules

In a much-anticipated opinion, on January 14, 2014, the Court of Appeals for the D.C. Circuit, in Verizon v. Federal Communications Commission, vacated the anti-discrimination and anti-blocking rules contained in the Federal Communications Commission’s (the “FCC” or “Commission”) 2010 Preserving the Open Internet Order (the “Open Internet Order” or “Order”), but upheld other aspects of the Order. The oral argument in November of last year appeared to indicate some skepticism by the court about the legal underpinnings of the FCC’s revised regime. Because a number of FCC policy initiatives on Internet Protocol network transition, broadband deployment and adoption, among others, depend upon a settled understanding of broadband ecosystem rights and obligations, the court’s decision had been eagerly awaited. FCC Chairman Tom Wheeler has since indicated that the FCC will review all options to prohibit broadband provider conduct that reduces efficiency, competition, and utility. However, the Chairman stated a strong preference to exercise the jurisdiction the FCC holds in a “common law fashion.”

The 81-page Opinion contains contextual information about the functioning of the U.S. broadband market for Internet access, and the history of FCC regulation of broadband Internet access. The court then analyzes the sufficiency of the FCC’s asserted statutory authority to promulgate net neutrality rules under section 706 of the Telecommunications Act of 1996 (the “1996 Telecommunications Act”) as well as whether the rules under review effectively subject Internet access service to telecommunications service/common carriage regulation under the Communications Act of 1934, as amended (the “Act”). While the court majority expressed general agreement with the FCC’s regulatory aims on a policy basis, the court was not convinced that the agency had not exceeded its legal authority in adopting rules that delineated how broadband providers are obliged to treat edge services and content sought by end user customers.

Specifically, while the court determined that the FCC has authority under section 706 to regulate some aspects of how broadband providers treat edge providers, it also ruled that the FCC exercised that authority in a manner inconsistent with the FCC’s prior decisions about the appropriate regulatory classification of broadband Internet access and the legal limitations of that classification. Judge Silberman filed a separate opinion, agreeing with the majority’s conclusion that the Order impermissibly subjects broadband providers to treatment as common carriers. However, his dissent disagrees with the majority that section 706 otherwise provides the FCC with statutory authority to promulgate the upheld public disclosure and transparency rules.

Regulation of the U.S. Internet Market

The court identified four distinct kinds of participants in the U.S. Internet marketplace: backbone networks, broadband providers, edge providers, and end users. Backbone networks are interconnected, long-haul fiber optic links and high-speed routers capable of transmitting high-speed data. Broadband providers, such as Comcast and Verizon, furnish access to Internet users through last-mile transmission lines. Edge providers are those who provide content, services, and applications over the Internet, such as Amazon or Google, and end users are those who consume edge providers’ content, services, and applications. The court noted that these categories are not always mutually exclusive. For example, an end user may act as an edge provider by creating and sharing content that is consumed by other end users, and broadband providers may offer content, applications, and services that compete with edge providers.

The FCC’s net neutrality rules were aimed at what the agency viewed to be problematic conduct of broadband providers who control last-mile access to end users and can affect access to these users by edge service providers. The rules required openness and transparency and public disclosure of information on speeds, network management practices and commercial terms of broadband Internet access services. They also prohibited broadband providers from blocking lawful content, subject to reasonable network management practices, and from unreasonably discriminating against lawful network traffic.

The fundamental issue in Verizon’s appeal of the Order was whether the FCC’s attempted regulation of Internet access in the form of the rules adopted fell within the agency’s jurisdiction under the Act, which extends to “all interstate and foreign communications by wire or radio.” The 1996 Telecommunications Act defined two regulatory classifications and the FCC’s legal ability to regulate them: telecommunications carriers, entities which generally provide the simple transmission of information and are subject to Title II common carrier regulation; and information service providers, entities which process or manipulate information or content, as opposed to transmitting information or communications as presented, without any change. The statute directs that information service providers are not subject to Title II common carrier regulation. Title II statutory provisions and regulations include duties on covered carriers to furnish communication services upon reasonable request, to not engage in unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services, and to charge just and reasonable rates, among other things. While the FCC has statutory authority to forbear from common carrier regulations when market conditions warrant, common carrier regulation is viewed as an impediment on an information service provider’s ability to make independent judgments about how to deal with customers and content providers.

The FCC currently classifies broadband providers, including DSL, cable and wireless broadband providers, as information service providers. However, the FCC left open the possibility that it might later decide to regulate these entities under an alternate statutory framework. In 2008, following an investigation of allegations by broadband subscribers that a cable broadband provider had interfered with their use of peer-to-peer networking applications, the FCC ordered that provider to adhere to a new approach for managing its bandwidth demand and to disclose the details of its approach publicly. These rules were known as the net neutrality rules. However, in 2010, the Court of Appeals for the D.C. Circuit vacated this FCC order, holding that the FCC failed to demonstrate that it possessed the requisite legal authority to regulate broadband providers’ network management practices under its Title I “ancillary” jurisdiction.

The FCC’s response to the court’s rebuff was its adoption of the Open Internet Order, in which it relied primarily on authority it determined was granted to the agency in section 706 of the 1996 Telecommunications Act for its net neutrality rules applicable to all fixed broadband access providers. Section 706 directs the FCC to encourage the deployment of broadband telecommunications capability. The Order established rules that applied to broadband providers that furnish residential broadband service and Internet access to end users at a fixed location using stationary equipment, and rules applied in part to mobile broadband providers that serve end users primarily using mobile stations, such as smart phones. Thus, business and enterprise networks were not subject to net neutrality obligations.

The Order imposed disclosure requirements on both fixed and mobile broadband providers, requiring providers publicly to disclose accurate information regarding network management practices, network performance, and the commercial terms of broadband Internet access services. The Order imposed anti-blocking requirements on both fixed and mobile broadband providers, prohibiting fixed broadband providers from blocking “lawful content, applications, services, or non-harmful devices, subject to reasonable network management.” The Order also prohibited mobile broadband providers from blocking consumers from “accessing lawful websites” or blocking “applications that compete with the provider’s voice or telephone services, subject to reasonable network management.” Finally, the Order imposed an anti-discrimination requirement on fixed broadband providers only, prohibiting unreasonable discrimination in transmitting lawful network traffic over a consumer’s broadband Internet access service. The agency did not expressly prohibit broadband providers from granting preferred status or services to edge providers who pay for such benefits, but stated that it was unlikely that “pay for priority” arrangements would satisfy the anti-discrimination standard. Verizon challenged the Order on several grounds, including that the FCC lacked statutory authority to promulgate the rules, that its decision to impose the rules was arbitrary and capricious, and that the rules contravene statutory provisions prohibiting the FCC from treating broadband providers as common carriers.

The FCC’s Statutory Authority to Adopt Open Internet Regulations

Verizon challenged the FCC’s reliance on sections 706(a) and (b) of the 1996 Telecommunications Act as the legal basis justifying the regulations. Section 706(a) provides, in part, that the FCC “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans” utilizing, consistent with the public interest, “price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.” In a previous order, the FCC determined that this provision did not constitute an independent grant of authority. However, in the 2010 Order, the FCC adopted a different view and explained its change in interpretation in its reading of the statute. The Verizon court found that the FCC’s reasoned explanation for its departure from its past interpretation was sufficient, and that the FCC’s current interpretation of section 706(a) as a grant of regulatory authority was a “reasonable interpretation of an ambiguous statute.” This conclusion was supported by the court’s findings that section 706(a) could be reasonably read to confer such authority, that such a finding was not inconsistent with Congressional intent, and that the authority conferred was subject to the limiting principles of the FCC’s subject matter jurisdiction and the particular purpose stated in the statute.

The court also agreed with the agency that the FCC possesses regulatory authority under section 706(b). That section directs the FCC to determine whether “advanced telecommunications capacity is being deployed to all Americans in a reasonable and timely fashion,” and, if it finds that it is not, to “take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” In its 2010 Sixth Broadband Deployment Report, the FCC reversed its prior finding that broadband deployment was reasonable and timely, concluding that it no longer was. This determination was triggered, in part, by the FCC’s decision to change the definitional threshold for end-user Internet speed qualifying as broadband. The court found the FCC’s interpretation to be reasonable. It also upheld the FCC’s finding in the Sixth Broadband Deployment Report as a basis for FCC action under section 706(b), stating Verizon showed no basis for a conclusion that the FCC’s “logical and carefully reasoned determination was illegitimate.”

Even if the relied-upon provisions endowed the FCC with general authority to enact rules governing broadband providers, Verizon also challenged the specific rules by asserting that they exceeded that authority. Specifically, Verizon asserted that the net neutrality regulations would not (1) meaningfully promote broadband deployment and (2) that even if they do advance that purpose, the way they do so is “too attenuated” to fall within the scope of the FCC’s authority under section 706. The court disagreed.

The court addressed as an initial matter what Verizon called the FCC’s “triple-cushion shot,” its theory that protection of edge user broadband access encourages their innovation, which in turn increases end-user demand and ultimately encourages broadband providers’ competition and investment in infrastructure development. Verizon argued that this chain of cause and effect was too remote to support the FCC’s jurisdiction. The court, however, accepted the FCC’s reasoning, stating that “although perhaps difficult to complete, [a triple-cushion shot] counts the same as any other shot.”

Whether the framework the FCC adopted would promote broadband deployment in practice, the court acknowledged, presented a more complex question. Yet, it ultimately found the FCC’s predictions to be rational and supported by substantial evidence. The court accepted the FCC’s link between edge provider innovation and infrastructure development, noting its characterization of Internet as a “general purpose technology” that helps to stimulate the economy generally. It also found that this connection was supported by respected literature on the topic and comments filed in the FCC proceeding that lead to the adoption of the Order.

The FCC’s characterization of completely unregulated broadband providers as a potential threat to Internet openness was accepted by the court, because they could, and might in fact be motivated to, inhibit future broadband deployment. The court also accepted the FCC’s evidence that broadband providers have the technical and economic ability to discriminate between edge providers. Moreover, broadband providers, the court noted, have the technical ability to distinguish different types of traffic, and that their role as gatekeepers to end users’ Internet access puts them in a powerful position. Although Verizon had argued that the FCC’s rules could have the opposite effect of their stated purpose and stifle innovation, the court found that that assertion did not trump the FCC’s evidence and arguments to the contrary.

If Broadband Providers are Classified as Information Service Providers, Then the FCC May Not Impose Common Carrier Requirements on Them

Concluding that the FCC has authority to regulate how broadband providers treat edge providers under section 706, the court then analyzed whether the FCC exercised that power in a manner consistent with the limitations set forth in the Act. A telecommunications carrier can be treated as a common carrier only to the extent that it provides telecommunications services; because the FCC had previously determined that broadband services are not telecommunications carriers, but instead information service providers, the court determined that the regulation of broadband service providers as common carriers as to their broadband services violates this requirement of section 153 of the Act. Likewise, treating mobile broadband service providers as telecommunications carriers when offering the mobile broadband service the FCC previously determined was a “private” and not a “commercial” mobile service violates section 332 of the Act.

The Court swiftly dismissed the FCC’s argument that it was not subject to the statutory prohibitions of the 1934 Act because section 706 was enacted as part of the 1996 Telecommunications Act. Then, the Court turned to the question of whether the FCC’s interpretation of the term “common carrier,” and the agency’s conclusion that its net neutrality rules are not common carrier obligations, was reasonable.

The FCC argued that, analytically, broadband providers are not carriers with respect to edge providers but only with respect to end users. Therefore, as long as broadband providers are not prohibited from discriminating against end users, the FCC asserted that its net neutrality rules do not create common carriage. The court, however, disagreed, reiterating that a broadband provider can be a carrier with respect to both end users and edge users and, as established by National Association of Regulatory Utility Commissioners v. FCC, an entity can be a common carrier with respect to some of its activities and not others. Further, the court explained, the question is not whether broadband providers act or could act as common carriers with respect to edge providers, but whether FCC regulations require them to do so.

The court similarly rejected the FCC’s argument that broadband service providers are not common carriers under section 201(a) because edge providers generally do not request service from broadband providers and lack a relationship with the local access providers of end users. As the court explained, section 201(a) describes a duty, not a qualification, and the Order imposes this same duty to provide service upon request.

The FCC’s claim that a common carrier relationship may only exist with respect to customers purchasing service because section 153 defines a common carrier as a “common carrier for hire” did not fare any better. The court found that the fact that broadband providers have not historically charged edge providers or offered differentiated levels of service is irrelevant when determining whether compelling an entity to continue to provide service at no cost is a common carrier obligation.

The FCC also argued that because the Act imposes nondiscrimination requirements on entities other than common carriers, the net neutrality requirements fail to transform broadband service providers into common carriers. The court disagreed. It noted that while the FCC may impose common carrier obligations on those who might not otherwise operate as such, it is prohibited from imposing common carrier obligations on entities that the agency has classified as statutorily exempt from such treatment. The court relied on FCC v. Midwest Video Corp. (“Midwest Video II”), where the Supreme Court held that the FCC lacked the authority to regulate cable operators as common carriers and that the challenged regulations, which required cable television systems to operate a minimum number of channels and to hold certain channels open for specific users, imposed common carrier obligations on the operators.

The FCC advanced several grounds for distinguishing Midwest II—such as that broadband content is only delivered upon request, that the number of edge “content” providers is unlimited and that the Midwest II transferred control over the content transmitted—none of which the court found persuasive. The court stated that the way in which content is accessed in this case is not dissimilar, that the number of content providers is irrelevant, and that these regulations similarly transfer control over to the edge providers by requiring broadband service providers to carry the content that edge providers desire to transmit.

Finally, the court considered whether the challenged regulations limit on the broadband providers’ control over edge providers transmission rise to the level of common carriage per se. The court had little difficulty concluding that the anti-discrimination obligations imposed on fixed broadband providers, which apply as to all edge providers and in all circumstances, amounted to common carrier status. The court found the fact that the FCC never attempted to differentiate the Order’s nondiscrimination standard from the nondiscrimination standard in section 202 of Title II to be significant. [1] The court noted that the FCC had not provided any grounds for finding that the Order’s reasonable standards were more flexible or permissive than those applicable to telecommunications carriers. Furthermore, the court stated, the rules left no room for broadband providers to make individualized decisions about how or with whom to deal.

The court then evaluated the anti-blocking rules, recognizing that whether these establish per se common carrier obligations is a more complicated matter. As the FCC explained in oral argument, having a basic level of required service does not amount to common carriage if negotiating for different levels of service is allowed. The FCC, however, failed to advance this position in the Order or in its briefs before the court. The court stated that in that circumstance, it could not sustain the FCC’s action on those grounds. Finally, the court evaluated the transparency and disclosure requirements on broadband providers, and concluded that they were severable and, on their own, did not amount to per se common carriage.

Where the FCC Might Go from Here

While the court upheld FCC authority under section 706 for the FCC to require broadband providers to disclose aspects of their network management and terms for dealing with edge providers, the core non-discrimination provisions of net neutrality were vacated and remanded to the agency for further review. The FCC will have to decide whether to seek further judicial review, reconsider its prior regulatory classification determinations, or reformulate requirements that can pass muster. While broadband providers may be interested in implementing paid priority arrangements with some edge providers, their overall initial reaction to the Opinion was cautious. Comcast pledged to continue to honor the now-vacated net neutrality rules until 2018, a regulatory commitment it made as part of its acquisition of NBC Universal. Verizon issued a statement that it endorsed the open Internet model and presumably would wait to see what the FCC might do on review before substantially modifying its access arrangements with edge providers. While public interest groups have called upon the FCC to reclassify broadband providers as telecommunications carriers and re-impose non-discrimination and anti-blocking measures through that avenue, the current appetite at the Commission and on Capitol Hill for that approach does not appear to be strong. Taking the lead of Chairman Wheeler, the FCC surely will take a step back to look at all options before it decides how to move forward.

As noted above, the FCC’s actual authority to call balls and strikes with respect to the business models and decisions affecting Internet access through broadband connections is still unsettled; the FCC has several mutually exclusive paths it may pursue. It can attempt to adopt new rules that better distinguish the rules of the road from a common carrier regime and provide more flexibility for broadband service providers. Any new regulation coming from that effort could well be subjected to a further challenge. Depending upon the route the FCC chooses Congress could get involved by attempting to provide some legislative fix, assuming there is broad consensus as to the appropriate legal and policy result. However, that does not presently appear to be the case.

The decisions that must follow from the Verizon Opinion could have tremendous significance to every player in the Internet ecosystem, and also will affect other FCC policy discussions already ongoing, including about how to manage the transition from telephone circuit switched to Internet Protocol (IP) networks. Certainly, entities that provide enterprise networks for cloud computing and other applications may be concerned that a top-to-bottom review of access principles could implicate their business models and operations as well. Start-up application service providers may be concerned that any future paid priority business model could make propagation of their offerings more difficult. Edge providers have largely been silent as they digest the implications of the Opinion. What former FCC Chairman Genachowski in 2010 had dubbed a “third way” to regulate broadband Internet access seems to have become the FCC’s third rail, and one that is currently too hot to handle. However, the FCC has no choice but to review its legal and policy options if it wants to have a role in this evolving market.