A federal appeals court struck down key parts of the Federal Communications Commission’s Open Internet Order in a Jan. 14 decision, ruling that the FCC’s “net neutrality” rules improperly regulate broadband providers like “common carriers” — such as providers of traditional telephone service — even though the FCC has classified broadband providers as not subject to common-carrier obligations.   Importantly, however, the court held that the FCC has direct authority to impose restrictions on broadband providers as long as such rules do not amount to common carrier regulation. 

The FCC’s 2010 Open Internet Order generally prohibited both “fixed” and mobile broadband providers from blocking users’ access to lawful online content and services, with fixed providers — such as cable companies — subject to tighter restrictions than mobile operators.  In addition, the rules barred fixed broadband providers from “unreasonably” discriminating between different kinds of Internet traffic.

The FCC’s asserted goal was to prevent service providers from using their control of consumers’ broadband connections to prevent or discourage subscribers from using online voice, video, or other services that compete with the broadband provider’s own offerings.  The Commission concluded that such efforts would impair the spread of broadband, and the FCC found preventing such impairment was one of the mandates of the 1996 Telecommunications Act.   Verizon challenged the FCC’s rules as unnecessary, lacking in a statutory basis, and contrary to the Communications Act requirement that only traditional telephone companies can be subject to common carrier regulation. 

In Tuesday’s decision, the U.S. Court of Appeals for the D.C. Circuit upheld the FCC’s judgments on a number of points, including that the rules were a rational policy tool to promote broadband and that the rules had a statutory basis in Section 706 of the 1996 Act, which heretofore had been characterized by the FCC as simply hortatory.  However, the court concluded that the anti-blocking and anti-discrimination rules violated statutory prohibitions on imposing common carrier rules on non-carriers.   The court upheld a separate rule requiring broadband providers to disclose their network management practices.

Court Supports Some Broadband Authority

For the first time, a court of appeals held that Section 706 of the 1996 Telecommunications Act gives the FCC “affirmative authority to enact measures encouraging the deployment of broadband infrastructure.”  That statute instructs the FCC to encourage broadband deployment through, among other measures, “regulating methods that remove barriers to infrastructure investment.”

The court also accepted as reasonable the FCC’s argument that net neutrality rules would encourage broadband deployment by lowering the entry barriers for innovative “edge providers” such as Amazon and Netflix, thus driving consumer demand and, ultimately, more investment in broadband infrastructure.

Moreover, the D.C. Circuit found that the FCC had adequate evidence to support its conclusion that broadband providers have the means and motivation to discriminate against edge providers, either to promote the broadband providers’ own services or to encourage online services to pay broadband providers for better access to the providers’ subscribers.

Net Neutrality Rules Go Too Far

Nonetheless, the court ruled that federal law does not allow the FCC to treat broadband providers like “common carriers.” Common carriers generally must serve all requesting customers on standard terms. Under the federal Communications Act, providers of “telecommunications” services — such as traditional phone service — may be regulated as common carriers, but providers of “information services” may not. The FCC previously has classified broadband as an “information service.” The Open Internet Order did not change that classification.  Instead, the FCC asserted that the net neutrality rules did not amount to full “common carriage” regulation, and that the rules were within the FCC’s “ancillary authority.”

The D.C. Circuit disagreed, holding that the FCC’s ancillary authority did not allow the agency to issue rules contravening the explicit statutory bar on imposing common carriage regulations on information services.  The anti-discrimination rule, by “requiring broadband providers to serve all edge providers without ‘unreasonable discrimination,’” amounted to classic common carriage regulation, the court concluded, particularly given the Open Internet Order’s strong suggestion that the FCC would likely interpret the anti-discrimination rule as prohibiting broadband providers from charging online services for prioritized access to users.

The court suggested that the anti-blocking rule might have been permissible if it left broadband providers with sufficient room to reach individualized agreements — for example, allowing broadband providers to “charge an edge provider like Netflix for high-speed, priority access while limiting all other edge providers to a more standard service.”  However, the court found that the FCC had not distinguished its justifications for the two rules in the course of the litigation, and so the FCC could not rely on such a distinction at this stage to save the anti-blocking rule.

Next steps

The court’s ruling vacated the anti-discrimination and anti-blocking rules and sent them back to the FCC. The agency has a few options on how to proceed, if it decides it still wants to establish net neutrality obligations:

  • Appeal: Tuesday’s decision was issued by a three-judge panel of the D.C. Circuit. The FCC could ask the full appeals court — now fully staffed, following the confirmation of the last of President Obama’s four nominees — to rehear the case. Alternatively, the FCC could ask the Supreme Court to take up the case directly.

    In a statement after the decision was released, FCC Chairman Tom Wheeler said: “I am committed to maintaining our networks as engines for economic growth, test beds for innovative services and products, and channels for all forms of speech protected by the First Amendment. 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 for innovation and expression, and operate in the interest of all Americans.”

  • Re-issue: The D.C. Circuit remanded the case to the FCC for further consideration. The agency could try to respond to the D.C. Circuit’s criticisms and reenact new versions of at least some parts of the struck-down rules, using its now judicially recognized authority under Section 706.  When the D.C. Circuit struck down the FCC’s previous net neutrality order, that is the course the FCC took:  it opened a rulemaking and adopted the Open Internet Order.  However, now the agency has more clarity about the source of its authority and the outer bounds.  (Notably,  even with the new decision, Comcast still will  have to abide by the net neutrality rules until 2018, as one of the commitments it made to gain approval for its merger with NBC.) 
  • Re-classify: The most dramatic response would be to reclassify broadband Internet access as a “telecommunications” service, the kind of service that is subject to common-carrier regulation under Title II of the Communications Act. That would amount to a major  reversal after a decade of classifying broadband as a largely unregulated information service.  As the court recognized in the instant case, an agency can change its mind, but any change needs to be fully considered, well-reasoned and substantially justified.  After the 2010 Comcast decision, the FCC opened a proceeding to consider this move, including the possibility of subjecting broadband service to Title II regulation but “forbearing” from all but a small set of core Title II requirements. However, that proceeding has been essentially dormant — though not officially closed — for more than three years.