United States: FCC Adopts Controversial "Open Internet" Regulations -- Challenges Expected

Following months of speculation and amid heavy industry lobbying and threats from Congressional Republicans to roll back any Federal Communications Commission ("FCC") rules, the FCC narrowly adopted "network neutrality" rules for fixed and wireless broadband providers at its December 21, 2010 meeting. In a party-line vote of 3-2, the Commission enacted a series of rules "designed to provide greater clarity and certainty regarding the continued freedom and openness of the Internet." The Report and Order (the "Order") sets forth three precepts to govern the provision of Internet services: (1) transparency; (2) a prohibition against blocking certain content and applications; and (3) no unreasonable discrimination.1 At the same time, these three rules are tempered by recognition of a provider's need to undertake reasonable network management to avoid outages or broadband unavailability, taking into account the constraints of a particular network architecture and the technology used to provide broadband service. The rules notably differentiate between fixed and mobile broadband providers, subjecting mobile broadband to a lighter regulatory touch than fixed broadband services. Given the controversial nature of the FCC's Order in reversing a deregulatory approach to broadband for much of the past decade, it is likely that the Order will be subject to judicial challenge and possibly legislative action by the incoming Congress. Indeed, on the first day of the new Congress, Rep. Blackburn introduced the "Internet Freedom Act," with more than 60 co-sponsors, which would reverse the Commission's network neutrality rules and mandate that only Congress can regulate the Internet.

Scope of the New Rules

The new Open Internet rules apply to entities providing "broadband Internet access services" which the FCC defined as mass-market retail service providing the capacity to transmit and receive data from all, or substantially all, Internet endpoints as well as "functionally equivalent" services.2 The term is broadly defined to apply to wired, terrestrial wireless, and satellite services, and includes a catch-all in order to ensure that providers cannot easily evade the scope of the rule's coverage. Mobile broadband, by contrast, is defined as those services provided primarily using a mobile station, such as a Smartphone, that act as a user's primary means for reaching the Internet.

The FCC carved out a limited number of services from the new rules. Specifically, the rules do not apply to "premise operations" such as coffee shops, bookstores, and airlines that provide Internet access to their patrons (although the underlying broadband services provided to premise operations are subject to the rules). The new rules also do not apply to dial-up Internet access services or to individuals who provide free access to their own personal wireless networks, even if those personal networks are intentionally made available and accessible to other users.

A New Transparency Mandate: Mandatory Disclosure of Network Management Practices; Performance Characteristics; and Service Terms & Conditions

The new rules require that both fixed and mobile broadband providers disclose their network management practices, performance characteristics, and commercial terms and conditions.3 The FCC believes that providing transparency into these elements of broadband providers' services will allow users to make more informed choices, provide startups with the technical information necessary to assess the risk and benefits of offering innovative new services, and encourage broadband providers to abide by open Internet principles. Enhanced disclosure obligations also give the Commission a means to gather the information necessary to assess and enforce the new Open Internet rules. The disclosure obligations do not extend to information that would be considered competitively sensitive or compromise network security. However, the information disclosed must be "timely and prominently disclosed in plain language" to current and prospective users, as well as to third parties who wish to monitor network management practices for violations of net neutrality rules.

The Order requires disclosure of network practices regarding congestion management practices, any favoritism or inhibition of specific applications, device attachment restrictions and approval procedures, and security practices. In addition, the new rules require transparency regarding the performance characteristics of the offered service, including a description of the service technology, its expected and actual speeds and latency, as well as the service's suitability for real-time applications. In addition, if "specialized services" such as VoIP are offered to end users, providers are required to disclose how those services may affect the capacity and performance of the broadband service. Finally, with regard to commercial terms and conditions, broadband providers are required to disclose pricing practices relating to monthly service charges, usage-based fees, and early-termination or other additional service fees as well as the provider's privacy policy and practices for resolving user complaints and questions.

The new disclosure rules require that providers make this information available on their websites and at the point of sale within 60 days after notice in the Federal Register of the Office of Management and Budget's mandatory approval of the new requirements. Thus, broadband providers can expect the FCC's new transparency mandates to go into effect by mid- to late-2011.

No Blocking of Lawful Content and Applications

The Order prohibits fixed broadband service providers from blocking lawful content, applications, services or non-harmful devices; a narrower mandate applies to mobile broadband providers who may not block lawful websites or applications that compete with their services.4 The anti-blocking rule is broadly construed to include practices that impair or degrade particular content or render them practically unusable, as well as the practice charging a fee to avoid being blocked. The rule protects only transmissions of lawful content and, therefore, would not prevent a provider from refusing to transmit unlawful content. Further, the no-blocking rule is qualified by reasonable network management practices deemed permissible by the Order.

Fixed Broadband Providers May Not Unreasonably Discriminate In Transmitting Traffic

The new rule forbids fixed broadband service providers from unreasonably discriminating in transmitting lawful traffic over a consumer's broadband service.5 Mobile broadband providers, by contrast, are not covered by the non-discrimination rules, although the FCC will monitor developments in mobile broadband and may revisit the issue. Examples of "unreasonable" discrimination include differential treatment of traffic, although, as discussed below, tiered or usage-based pricing remains permissible. In evaluating the reasonableness of the discrimination practices, the Commission will consider: (1) the extent to which the practice harms actual and potential competitors of the broadband provider, such as VoIP providers; (2) the harm suffered by end users by being inhibited from access to the content, applications, services, and devices of their choice; or (3) the impairment of free expression by blocking or slowing traffic to content. Notably, the Order establishes that reasonable network management is not unreasonable discrimination.

Providers Permitted to Engage in Reasonable Network Management

The net neutrality rules are subject to the reasonable network management practices of broadband providers.6 Network management practices are deemed reasonable if they are "appropriate and tailored to achieving a legitimate network management purpose," taking into consideration the particular network architecture and technology used to provide the service. The FCC has deemed the following network management practices to be "reasonable:" ensuring network security and integrity, including addressing traffic harmful to the network; addressing traffic that is unwanted by end users, consistent with users' parental control and security preferences; and in order to reduce or mitigate the effects of congestion upon the network. Notably, the FCC explicitly refused to require that providers utilize the "most narrowly tailored practice theoretically available to them" when managing their networks. Thus, the standard is less exacting than the FCC had used in a similar context as recently as 2008.7 Further, the Order explicitly recognizes the differences between broadband technologies, indicating that the rules will apply differently depending upon the underlying technological platform.

"Tiered" Pricing Remains Permissible

While the Order makes clear that generalized "pay for priority" practices would be unlikely to satisfy the Order's no unreasonable discrimination standard, the FCC stopped short of prohibiting "tiered" pricing based upon a customer's bandwidth usage or speed.8 Thus, under the new regulations, broadband providers may be able to charge higher volume users of their networks higher rates than lower volume users, or provide higher speeds for higher prices.

The Commission's Legal Authority: Section 706 and Title I "Ancillary Authority"

The FCC argues that it has sufficient authority under existing law to promulgate its new net neutrality regulations. Rather than "reclassifying" broadband as a Title II telecommunications service, as the FCC had actively considered last summer, the Order grounds the Commission's authority primarily in Title I and Section 706 of the Communications Act of 1934, as amended. The FCC argues that existing statutory authority, as well as recent case law, provide authority for the Open Internet rules. However, given its novel interpretation of several statutory provisions, we expect these rules to face judicial challenge from both wired broadband providers and consumer groups.

Future Developments Expected: Congressional Scrutiny & Judicial Challenge

Given the controversial nature of the Order, the rules are likely to be subject to certain judicial challenge. Indeed, both net neutrality advocates and their opponents have expressed displeasure with the FCC's Order. The incoming Chairman of the House of Representatives Commerce Committee has already promised to closely scrutinize the Order. While legislative repeal appears unlikely at this stage, given the Democratic Senate majority and the fact that President Obama would likely veto any effort to repeal the regulations, the Order is certain to draw significant attention from the new Republican House of Representatives. Further, the use of a nebulous "reasonableness" standard means that the exact contours of the rules will only become clear once the rules are interpreted and applied to specific cases. In the meantime, the FCC announced on January 5, 2011 a "challenge" for researchers and software developers to create applications and tools to "foster, measure and protect Internet openness," such as tools to detect when a broadband provider is interfering with DNS responses, packet headers or content. SNR Denton will continue to monitor ongoing developments regarding the new regulations and keep you apprised of their implications.

Footnotes

1. Preserving the Open Internet, Broadband Industry Practices, GN Docket No. 09-191, WC Docket No. 07-52, Report and Order (rel. Dec. 23, 2010).

2. Order, ¶ 44.

3. Id., ¶ 53.

4. Id., ¶¶ 1, 62-64.

5. Id., ¶ 68.

6. Id., ¶¶ 80, 82.

7. See Comcast Network Management Practices Order, 23 FCC Rcd 13028, ¶ 47 (stating that network management practices must "further a critically important interest and be narrowly or carefully tailored to service that interest" in order to be deemed "reasonable").

8. Order, ¶ 72.

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