United States: FCC Is A Two-Time Loser In Regulating The Internet, But The DC Circuit Points The Way Forward

On Tuesday, January 14, 2014, the United States Court of Appeals for the D.C. Circuit struck down the FCC's latest effort to mandate "net neutrality"– or promote internet "openness" – under the auspices of implementing the Communications Act.  At issue in the case is the Commission's Open Internet Order, which imposed disclosure, anti-blocking, and anti-discrimination requirements on broadband providers.  These requirements were intended to promote investment in broadband deployment by guarding against possible anti-competitive conduct limiting consumer access to internet edge services (e.g., Amazon).  The Court, in a decision written by Judge David S. Tatel, noted the narrowness of the Court's inquiry—not to assess the wisdom of the FCC's net neutrality regulations, but to determine whether the Commission had proven that the rules were within the scope of the Commission's statutory grant of authority. With that in mind, the Court invalidated all but the first (and least intrusive) FCC requirement: disclosure of internet traffic management practices.

At the outset, the Court approved of the Commission's interpretation of Section 706 of the Communications Act as conferring on the agency authority to adopt regulations to spur broadband deployment.  The Court also held that the Commission could exercise that authority to adopt rules regulating broadband providers' treatment of internet traffic.  Nevertheless, the Court noted at least two limiting principles of Section 706 on the Commission's power to regulate:  any regulation must (1) fall within the Commission's subject matter jurisdiction over "interstate and foreign communication by wire and radio," and (2) "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans."

What the FCC could not do, however, was adopt regulations that were inconsistent with other express provisions of the Communications Act—namely, statutory provisions limiting common carriage regulation to telecommunications service providers.  But here, the Court concluded, the Commission was hoisted on its own prior determination, affirmed by the United States Supreme Court in Brand X, that broadband services are "information," not "telecommunications," services.  Consequently, the Commission could not use Section 706 to impose de facto common carrier obligations on broadband providers that are reserved only for telecommunications providers.  And that, the Court held, was exactly what the Commission attempted in seeking to impose classic common carriage obligations—anti-discrimination and anti-blocking requirements—on broadband providers.

In its ruling, the Court pointed to one possible way forward for the Commission: re-classify broadband services as telecommunications services.  The Court seemed to invite such a reversal, repeatedly noting that the Commission's classification of broadband services had never been reversed by the Commission and also explaining the broad discretion that the Commission has to revise prior determinations so long as fully explained.  A number of commenters had recommended classifying broadband as telecommunications services in the run up to the Open Internet Order under review, and the idea will likely be pushed again now.  It is possible that, if the Commission were to go down this road, it could use its forbearance authority to relieve broadband providers of some common carriage obligations mandated under Title II of the Communications Act.  Of course, the road to reclassification would not be easy as the Commission would effectively have to undo years of regulations built around its opposite conclusion.  And certainly there will continue to be numerous parties arguing that there is no need—at least at present—for such a result.

It is also possible that the Commission could try to take a more limited approach, adopting some narrow obligations that do not amount to common carriage requirements.  Or, having been twice-rebuffed in the courts in its effort to impose net neutrality, the Commission could  re-think its approach and leave this public policy initiative to Congress to address in any legislative overhaul of the Communications Act.

So far at least, the Commission is sending mixed signals.  FCC Chairman Tom Wheeler issued a statement that the Commission will consider all options, including petitioning the United States Supreme Court for review.  Another Commissioner, Republican Ajit Pai, however, issued a separate statement, that  "we should stay our hand and refrain from any further attempt to micromanage how broadband providers run their networks. We should focus on removing regulatory barriers to broadband deployment, not imposing unnecessary rules that chill infrastructure investment."

Commissioner's Pai's statement appears to be in synch with the dissent.  Judge Laurence Silberman wrote that Section 706 did not give the Commission the authority to take the action that it did.  The limiting principles of Section 706 upon which the majority relies, Judge Silberman wrote, are "illusory," and do nothing to prevent the Commission from having "virtually unlimited power to regulate the internet."  The dissent also found that the Commission's concerns about potential harm from a lack of net neutrality regulation was "sheer speculation."  In particular, the dissent found that the Commission's ability to cite only four potential examples of broadband providers' restricting access to be "astonishing."  Time will tell whether Judge Silberman's warning is correct, but based on the majority opinion, the Commission now has a new and expansive power to adopt robust regulations.

Ultimately  the Court avoided dealing with a final potential – and fundamental – limiting principle; it determined that, based on its ruling, it need not address the First Amendment implications of the Commission's ruling.  A number of recent court decisions have suggested that the increasingly competitive environment for wired services enhance the First Amendment arguments that may be presented in response to agency regulations.  Were the Commission to attempt to save its net neutrality regime by reclassifying broadband as a telecommunications service, a judicial resolution of a First Amendment challenge might be in the cards next time.

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