Net Neutrality Falls by the Wayside ' Again

Tatel was joined by Judge Judith Rogers in vacating and remanding the rule. Senior Judge Laurence Silberman dissented in part, concluding the commission did not have authority to issue the order from the start.

For his part, FCC Chairman Tom Wheeler in a statement said the court “correctly held” that the FCC has the authority to act. “We will consider all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform,” Wheeler said.

Verizon general counsel Randal Milch said in a written statement that the company looks “forward to working with the FCC and Congress to keep the Internet a hub of innovation without the need for unnecessary new regulations.” He added that the court rejected Verizon's position that the FCC does not have jurisdiction over broadband access, and at the same time the judges found the agency “could not impose last century's common carriage requirements on the Internet.”

Net Neutrality History

Issued in 2010, the FCC's net neutrality rules were supposed to be a “third way” according to then-chairman Julius Genachowski, to give the government a “limited but essential role” in making sure broadband providers did not block legal content or unreasonably discriminate against traffic on their networks.

Verizon first sued the FCC in 2011, arguing the agency lacked authority to issue the rules, that they were arbitrary and capricious, and that the rules ran afoul of the FCC's own, still-binding decision to classify broadband providers as more lightly regulated information services, not common carriers.

In 2010 the FCC failed in its first bid to regulate broadband, when Tatel ' writing for the D.C. Circuit in Comcast Corp. v. FCC, 600 F.3d 642 ' ruled that the agency lacked the authority to oversee Internet service providers based on its theory of ancillary jurisdiction. The FCC persisted, this time asserting the agency has the authority to issue rules under Section 706(a) and 706(b) of the Telecommunications Act of 1996. The provisions direct the agency to “encourage the development ' of advanced telecommunications” services and empower it to take steps to accelerate broadband deployment.

“We think it quite reasonable to believe that Congress contemplated that the Commission would regulate this industry,” Tatel wrote. “To be sure, Congress does not, as Verizon reminds us, 'hide elephants in mouseholes.' FCC regulation of broadband providers, the judge wrote, “is no elephant, and section 706(a) is no mousehole.”

The FCC argued that if broadband providers are free to disrupt Internet traffic, it could discourage investment and limit competition ' a plausible scenario, according to the court, which said it had “no basis for questioning the Commission's determination.”

The appeals court warned that broadband providers “may be motivated to discriminate.” The court cited the rise of Voice-over-Internet-Protocol (VoIP) services such as Vonage, which compete with traditional telephone services. Companies such as Netflix and Hulu compete with video offerings from broadband providers.

The panel also found there would be a “powerful incentive” for broadband companies to accept fees from content providers in exchange for priority access or excluding competitors.

The FCC's actual regulations, the court found, impermissibly treat broadband providers as common carriers. The FCC itself previously determined that cable broadband providers are “information service” providers and thus exempt from common-carrier requirements. The Open Internet Order does not change that classification.

The court did not embrace the FCC's argument that broadband providers are not carriers. According to the FCC, the relevant broadband customers are end users sitting in front of their computers who purchase a service. Broadband providers can decide on an individual basis what terms to offer these potential customers, the FCC argued, so they cannot be common carriers.

Tatel disagreed: “That hardly means that broadband providers could not also be carriers with respect to [content] providers” such as Amazon. As for the requirement imposed on broadband providers not to discriminate against transmitting legal content, the court found that the rule “mirrors, almost precisely ' language establishing the basic common carrier obligation.”

However, the court did uphold the portion of the rule that requires broadband providers to disclose accurate information about their network management practices.

In his 18-page dissent, Silberman said the FCC did not have “affirmative statutory authority” to move forward with the Open Internet rule in the first place. He also concluded the Commission's position in the case violates the Administrative Procedures Act.

“These differences are important since the majority opinion suggests possible regulatory modifications that might circumvent the prohibition against common carrier treatment,” Silberman wrote.

Section 706 of the federal Telecommunications Act, Silberman wrote, “does not come close to sanctioning the Commission's regulation,” which he described as “aggressive” and “prophylactic.”

“An unwarranted government interference in a functioning market is likely to persist indefinitely, whereas a failure to intervene, even when regulation would be helpful, is likely to be only temporarily harmful because new innovations are constantly undermining entrenched industrial powers,” Silberman wrote.

The FCC's Open Internet regulation, Silberman wrote, “essentially provides an economic preference to a politically powerful constituency, a constituency that, as is true of typical rent seekers, wishes protection against market forces. The Commission does not have authority to grant such a favor.”

Practical Implications

The D.C. Circuit's ruling opens the door for broadband and backbone Internet providers to develop new lines of business, such as charging Internet content companies like Netflix, Amazon or Google, access fees to their networks. Companies such as Verizon, AT&T, Time Warner Cable, Comcast and others could offer priority access over their networks to ensure streaming services from a Netflix or Amazon don't buffer when they hit network congestion, providing a better experience for end users.

Wireless providers such as AT&T have already proposed a plan in which app developers and other Internet services could pay for the data consumers use to access their services. Again, AT&T argues this service is a win for consumers since it saves them money by not requiring the use of any of the data they pay for monthly.

Broadband-service providers claim that these new services and business models will benefit consumers by offering better service quality or defraying costs. Broadband providers also claim having this freedom to establish new lines of revenue will enable them to invest more in their networks, which ultimately benefits consumers.

Bipartisan Response

The ruling attracted both support and criticism from the left and right ends of the political spectrum.

“This ruling stands up for consumers and providers alike by keeping the government's hands off the Internet,” Representatives Fred Upton (R-MI) and Greg Walden (R-OR) said in an e-mailed statement. Upton is chairman of the Energy and Commerce Committee and Walden heads its Communications and Technology Subcommittee.

Representative Henry Waxman (D-CA), the commerce committee's top Democrat, said in an e-mailed statement that the FCC should act quickly “to exercise the authority the court has recognized.”

Sen. Al Franken (D-MN), one of the most vocal lawmakers supporting open Internet rules, said that net neutrality is the free speech issue of our time. He added that it is a common-sense idea that big corporations like Verizon, Comcast and Time Warner shouldn't control who gets to innovate, communicate, or start a business on the Internet. And he is urging the FCC to find a way to make rules that will not be challenged in court.

“Getting rid of net neutrality is bad for consumers and the economy, plain and simple,” he said in a statement. “And it is a real risk to the Internet as we know it. The FCC needs to respond immediately in a way that keeps the Internet open to all of us, not just big corporate interests.”

Michael Copps, a former Democratic FCC commissioner who voted for the rejected rules, urged the commission to put broadband service under the common carrier legal framework, which explicitly restricts discrimination on the basis of charges or services. “Without prompt corrective action by the commission to reclassify broadband, this awful ruling will serve as a sorry memorial to the corporate abrogation of free speech,” Copps said in an e-mailed statement from Common Cause, for which he is an adviser.

The court did leave it up to the FCC or Congress to refashion a net neutrality regime. The new FCC chairman, Tom Wheeler, has equivocated on which side he will fall. The FCC is considering an appeal of the decision, according to Wheeler.

Samuel Fineman, Esq. is the Editor-in-Chief of Internet Law & Strategy and a Partner at Cohen Fineman, LLC. He can be reached at [email protected] and on Twitter @sfineman.

The Federal Communications Commission (FCC) failed again in its attempt to regulate broadband Internet service providers. On January 14, a unanimous three-judge panel of the DC Circuit Court of Appeals decided that the FCC lacked the legal authority to write certain rules governing the management of data on the Internet ' popularly known as the “network neutrality” rules. The decision could leave companies such as Netflix Inc. and Amazon, Inc. facing higher charges for the fastest service.

In Verizon v. Federal Communications Commission, 11-1356, the D.C. Circuit Court of Appeals gave the FCC one important victory, establishing for the first time that the agency has the authority to issue rules governing broadband providers. But the agency's Open Internet Order (Preserving Open Internet; Final Rule, 76 Fed. Reg. 59,192) was improper, the court found, because it treats broadband providers as common carriers, like telephone companies.

“Even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates,” wrote Judge David Tatel. “Given that the commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such,” Tatel wrote.

Tatel was joined by Judge Judith Rogers in vacating and remanding the rule. Senior Judge Laurence Silberman dissented in part, concluding the commission did not have authority to issue the order from the start.

For his part, FCC Chairman Tom Wheeler in a statement said the court “correctly held” that the FCC has the authority to act. “We will consider all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform,” Wheeler said.

Verizon general counsel Randal Milch said in a written statement that the company looks “forward to working with the FCC and Congress to keep the Internet a hub of innovation without the need for unnecessary new regulations.” He added that the court rejected Verizon's position that the FCC does not have jurisdiction over broadband access, and at the same time the judges found the agency “could not impose last century's common carriage requirements on the Internet.”

Net Neutrality History

Issued in 2010, the FCC's net neutrality rules were supposed to be a “third way” according to then-chairman Julius Genachowski, to give the government a “limited but essential role” in making sure broadband providers did not block legal content or unreasonably discriminate against traffic on their networks.

Verizon first sued the FCC in 2011, arguing the agency lacked authority to issue the rules, that they were arbitrary and capricious, and that the rules ran afoul of the FCC's own, still-binding decision to classify broadband providers as more lightly regulated information services, not common carriers.

In 2010 the FCC failed in its first bid to regulate broadband, when Tatel ' writing for the D.C. Circuit in Comcast Corp. v. FCC, 600 F.3d 642 ' ruled that the agency lacked the authority to oversee Internet service providers based on its theory of ancillary jurisdiction. The FCC persisted, this time asserting the agency has the authority to issue rules under Section 706(a) and 706(b) of the Telecommunications Act of 1996. The provisions direct the agency to “encourage the development ' of advanced telecommunications” services and empower it to take steps to accelerate broadband deployment.

“We think it quite reasonable to believe that Congress contemplated that the Commission would regulate this industry,” Tatel wrote. “To be sure, Congress does not, as Verizon reminds us, 'hide elephants in mouseholes.' FCC regulation of broadband providers, the judge wrote, “is no elephant, and section 706(a) is no mousehole.”

The FCC argued that if broadband providers are free to disrupt Internet traffic, it could discourage investment and limit competition ' a plausible scenario, according to the court, which said it had “no basis for questioning the Commission's determination.”

The appeals court warned that broadband providers “may be motivated to discriminate.” The court cited the rise of Voice-over-Internet-Protocol (VoIP) services such as Vonage, which compete with traditional telephone services. Companies such as Netflix and Hulu compete with video offerings from broadband providers.

The panel also found there would be a “powerful incentive” for broadband companies to accept fees from content providers in exchange for priority access or excluding competitors.

The FCC's actual regulations, the court found, impermissibly treat broadband providers as common carriers. The FCC itself previously determined that cable broadband providers are “information service” providers and thus exempt from common-carrier requirements. The Open Internet Order does not change that classification.

The court did not embrace the FCC's argument that broadband providers are not carriers. According to the FCC, the relevant broadband customers are end users sitting in front of their computers who purchase a service. Broadband providers can decide on an individual basis what terms to offer these potential customers, the FCC argued, so they cannot be common carriers.

Tatel disagreed: “That hardly means that broadband providers could not also be carriers with respect to [content] providers” such as Amazon. As for the requirement imposed on broadband providers not to discriminate against transmitting legal content, the court found that the rule “mirrors, almost precisely ' language establishing the basic common carrier obligation.”

However, the court did uphold the portion of the rule that requires broadband providers to disclose accurate information about their network management practices.

In his 18-page dissent, Silberman said the FCC did not have “affirmative statutory authority” to move forward with the Open Internet rule in the first place. He also concluded the Commission's position in the case violates the Administrative Procedures Act.

“These differences are important since the majority opinion suggests possible regulatory modifications that might circumvent the prohibition against common carrier treatment,” Silberman wrote.

Section 706 of the federal Telecommunications Act, Silberman wrote, “does not come close to sanctioning the Commission's regulation,” which he described as “aggressive” and “prophylactic.”

“An unwarranted government interference in a functioning market is likely to persist indefinitely, whereas a failure to intervene, even when regulation would be helpful, is likely to be only temporarily harmful because new innovations are constantly undermining entrenched industrial powers,” Silberman wrote.

The FCC's Open Internet regulation, Silberman wrote, “essentially provides an economic preference to a politically powerful constituency, a constituency that, as is true of typical rent seekers, wishes protection against market forces. The Commission does not have authority to grant such a favor.”

Practical Implications

The D.C. Circuit's ruling opens the door for broadband and backbone Internet providers to develop new lines of business, such as charging Internet content companies like Netflix, Amazon or Google, access fees to their networks. Companies such as Verizon, AT&T, Time Warner Cable, Comcast and others could offer priority access over their networks to ensure streaming services from a Netflix or Amazon don't buffer when they hit network congestion, providing a better experience for end users.

Wireless providers such as AT&T have already proposed a plan in which app developers and other Internet services could pay for the data consumers use to access their services. Again, AT&T argues this service is a win for consumers since it saves them money by not requiring the use of any of the data they pay for monthly.

Broadband-service providers claim that these new services and business models will benefit consumers by offering better service quality or defraying costs. Broadband providers also claim having this freedom to establish new lines of revenue will enable them to invest more in their networks, which ultimately benefits consumers.

Bipartisan Response

The ruling attracted both support and criticism from the left and right ends of the political spectrum.

“This ruling stands up for consumers and providers alike by keeping the government's hands off the Internet,” Representatives Fred Upton (R-MI) and Greg Walden (R-OR) said in an e-mailed statement. Upton is chairman of the Energy and Commerce Committee and Walden heads its Communications and Technology Subcommittee.

Representative Henry Waxman (D-CA), the commerce committee's top Democrat, said in an e-mailed statement that the FCC should act quickly “to exercise the authority the court has recognized.”

Sen. Al Franken (D-MN), one of the most vocal lawmakers supporting open Internet rules, said that net neutrality is the free speech issue of our time. He added that it is a common-sense idea that big corporations like Verizon, Comcast and Time Warner shouldn't control who gets to innovate, communicate, or start a business on the Internet. And he is urging the FCC to find a way to make rules that will not be challenged in court.

“Getting rid of net neutrality is bad for consumers and the economy, plain and simple,” he said in a statement. “And it is a real risk to the Internet as we know it. The FCC needs to respond immediately in a way that keeps the Internet open to all of us, not just big corporate interests.”

Michael Copps, a former Democratic FCC commissioner who voted for the rejected rules, urged the commission to put broadband service under the common carrier legal framework, which explicitly restricts discrimination on the basis of charges or services. “Without prompt corrective action by the commission to reclassify broadband, this awful ruling will serve as a sorry memorial to the corporate abrogation of free speech,” Copps said in an e-mailed statement from Common Cause, for which he is an adviser.

The court did leave it up to the FCC or Congress to refashion a net neutrality regime. The new FCC chairman, Tom Wheeler, has equivocated on which side he will fall. The FCC is considering an appeal of the decision, according to Wheeler.

Samuel Fineman, Esq. is the Editor-in-Chief of Internet Law & Strategy and a Partner at Cohen Fineman, LLC. He can be reached at [email protected] and on Twitter @sfineman.