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Federal Regulations Advisor Insight and Commentary on U.S. Government Regulatory Affairs

FCC “Net Neutrality” Rules Vacated by U.S. Court of Appeals for D.C. Circuit

Posted in Agency Authority, Judicial Review & Remedies

The United States Court of Appeals for the District of Columbia today vacated the Federal Communications Commission (FCC) “net neutrality” rules in Verizon v. FCC.  At the heart of the net neutrality issue is whether the FCC has authority to prohibit broadband Internet providers such as Verizon or Comcast or others from giving priority to some internet services, or to adjust fees and speeds to handle data-heavy traffic like video.  At bottom, the FCC classified broadband services as not falling within “communication services” and, therefore, could not regulate them as common carriers – dooming the anti-discrimination and anti-blocking provisions of the rule.

Net Neutrality:  The concept of “net neutrality” is deceptively simple:  The FCC sought to compel broadband providers to treat all Internet traffic the same regardless of source, i.e. the broadband provider could not discriminate between sources to favor its own or discriminate against others.  Whether the FCC can impose such a requirement and how, however, has been the source of considerable debate and involves very large amounts of money.  Although the court’s decision has nothing to do with the policy or economics, the effect of the decision shifts the balance of power between content providers and service providers toward service providers.

The Summary:  Judge Tatel succinctly and concisely stated the case:

As we explain in this opinion, the Commission has established that section 706 of the Telecommunications Act of 1996 vests it with affirmative authority to enact measures encouraging the deployment of broadband infrastructure.  The Commission, we further hold, has reasonably interpreted section 706 to empower it to promulgate rules governing broadband providers’ treatment of Internet traffic, and its justification for the specific rules at issue here – that they will preserve and facilitate the “virtuous circle” of innovation that has driven the explosive growth of the Internet – is reasonable and supported by substantial evidence.  That said, even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates.  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.  Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order.

Decoding:  Not to be confused, the FCC Order is a regulation, and a formal regulation adopted through an adjudicatory process that is unique to the FCC.  Decoding the intricacies of the FCC’s regulation of the internet requires understanding three non-mutually exclusive groups:

  1. Broadband providers – somewhat generically the cable or phone company, etc. – or ‘“internet service provider”’ – to whom an end user / consumer pays a monthly fee;
  2. Edge or content providers – from the Washington Post to this blog; and
  3. End users – you (self-explanatory).

The point of “net neutrality” is to ensure that broadband providers do not limit or degrade content from edge providers to favor their own content or other edge providers who pay them for premium transmission.

The Legal Premise:  The FCC has authority to regulate “all interstate and foreign communications by wire or radio” and that includes internet communications.  Early on (1980 – infancy in internet terms) the FCC distinguished between communications that are merely transmission of content which it regulated under Title II of the Communications Act of 1934 and “computer processing applications … used to act on the content, code, protocol, and other aspects of the subscriber’s information” which it did not.  Congress adopted the distinction in 1996 in creating the new and separate class of “information service providers” or broadband providers, or “ISPs.”

The FCC then classified cable broadband providers under the 1996 Act and not the 1934 Act requirements, a point to which the United States Supreme Court (SCOTUS) deferred in the famous decision of National Cable & Telecommunications Ass’n v. Brand X Internet Services.  SCOTUS concluded that the FCC’s ruling represented a reasonable interpretation of the 1996 Telecommunications Act’s ambiguous provision defining telecommunications service and that the FCC’s determination was entitled to deference notwithstanding its apparent inconsistency with the FCC’s prior interpretation of that statute.

Delegated Authority:  As the court of appeals notes in Verizon:

In Comcast, we vacated the Commission’s order, holding that the agency failed to demonstrate that it possessed authority to regulate broadband providers’ network management practices.  ….  Specifically, we held that the Commission had identified no grant of statutory authority to which the Comcast Order was reasonably ancillary.  ….  The Commission had principally invoked statutory provisions that, though setting forth congressional policy, delegated no actual regulatory authority.  ….  These provisions, we concluded, were insufficient because permitting the agency to ground its exercise of ancillary jurisdiction in policy statements alone would contravene the “‘axiomatic’ principle that ‘administrative agencies may [act] only pursuant to authority delegated to them by Congress.’”  …. (citations omitted)

No Mixing:  Although the court of appeals spends considerable time affirming the FCC’s authority to regulate under the 1996 Act, the key lies in the distinctions:  the FCC cannot regulate broadband providers as common carriers because the FCC retains its 1980 still-binding decision to classify broadband providers not as providers of “telecommunications services” but instead as providers of “information services,” and the Communications Act expressly provides that “A telecommunications carrier shall be treated as a common carrier under this [Act] only to the extent that it is engaged in providing telecommunications services.”  Therefore, the court needed to determine whether the requirements imposed by the FCC’s Open Internet Order subject broadband providers to common carrier treatment.

Even granted the FCC due Chevron deference, the court had “little hesitation” in deciding that the anti-discrimination and anti-blocking obligation classified, in reality, fixed broadband providers as common carriers under the long history of that status.

Further Afar:  Judge Silberman’s dissent focuses on the affirmance of the FCC’s authority to regulate and the FCC’s failure to provide statutory analysis, not the specification of provisions in which the FCC has erroneously treated broadband providers as communications providers.  The dissent suggest that the FCC’s rule is unsalvageable because it goes beyond promoting innovation under the 1996 Act after identifying a barrier to infrastructure investment or promoting competition in the broadband market to “protect[] consumer choice, free expression, end-user control,” and other things.  At bottom, the dissent suggests,

This regulation 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.

Understanding History:  The debate on the FCC regulation of net neutrality will undoubtedly continue and deepen, and that is the grist of communications lawyers.  The core lessons from the administrative law perspective are these:

  • A distinction once made will bind the agency until it is formally (and with explanation) amended or abandoned.  This is true as a principle of arbitrary and capricious agency action in violation of the Administrative Procedure Act (APA).
  • If that distinction and, in this instance Congress’ intervention, rests on the authority to regulate, the agency is limited perhaps even more to the authority later delegated.

If an agency does not understand history, it is doomed to repeat it.