Divided D.C. Circuit Panel Upholds FCC Net Neutrality Rules

Executive Summary

On June 14, 2016, the D.C. Circuit upheld the FCC’s 2015 order adopting its Open Internet rules against a wide range of legal challenges. (Our advisory describing the FCC’s rules can be found here.) In a detailed and lengthy opinion, Judges Tatel and Srinivasan:

• Sustained the FCC’s authority to reclassify mass market broadband Internet access as a telecommunications service (as opposed to an information service);
• Sustained its authority to include interconnection between broadband ISPs and other networks within the scope of its regulations;
• Sustained its authority to treat broadband wireless Internet access the same as wired broadband;
• Sustained its decision to forbear from applying most Title II obligations to broadband ISPs;
• Sustained its specific “open Internet” rules; and
• Rejected claims that the rules violate the First Amendment.

Judge Williams partially dissented, arguing that there were fatal flaws in the economic analysis the FCC used to justify its rules.  He argued that the FCC could not logically impose its specific rules – no blocking, no throttling, and no paid prioritization – without first concluding that broadband ISPs have market power, a conclusion that the FCC seems specifically to have chosen to avoid reaching.  Judge Williams did not, however, question the legal authority of the agency to reclassify broadband Internet access as a telecommunications service.

By confirming that the FCC’s regulatory authority extends to the provision of mass market broadband Internet access, the court dealt a significant blow to claims that broadband providers either must as a legal matter, or should as a policy matter, be left to operate largely free of traditional common carrier (or “Title II”) regulation.  Those challenging the FCC’s rules may continue to pursue those claims by seeking rehearing by the entire D.C. Circuit and/or review in the Supreme Court.

The FCC’s Open Internet rules took effect a year ago, in June 2015, and in that sense the court’s ruling simply preserved the status quo.  Notably, however, the agency has not yet undertaken any high-profile enforcement actions against any major broadband ISPs for alleged violations of the rules, perhaps in part because the agency has been awaiting a ruling sustaining the rules before doing so.  Even if this is true, because additional legal challenges are quite possible, and because the issue might be politically sensitive in a contentious election year, it would not be surprising if the agency were to continue to maintain a relatively low enforcement profile, at least until after the election.

Reclassification of Broadband as a Telecommunications Service

The issue of reclassifying mass market broadband services from the category of “information service” to the category of “telecommunications service” applies to both landline and wireless broadband (although wireless presented some additional, specific issues addressed below).  On the overall issue, the court rejected several arguments that the FCC could not lawfully interpret the definition of “telecommunications service” in the Communications Act to encompass broadband Internet access: 

• First, the court rejected the claim that broadband Internet access unambiguously falls within the definition of an information service.  In Brand X the Supreme Court had held that the relevant statutory definitions were ambiguous, which gives the agency authority to adopt any reasonable interpretation of the language. 
• Second, the court rejected the argument that the FCC’s decision reflected an unreasonable interpretation of the statute, specifically upholding the agency’s conclusion that DNS and caching were best viewed as managing or facilitating the provision of broadband transmission – and thus carved out of the definition of “information service” – not as activities that converted the overall offering into an information service. (These are the key broadband-related functions on which the FCC relied to treat broadband as an information service in its original 2002 decision regarding cable modem service.) 
• Third, the court ruled that the FCC had adequately explained the change from its previous position that broadband was an information service. 
• Fourth, the court rejected Judge Williams’ argument that the FCC was required to find that broadband providers exercised market power as a prerequisite to classifying broadband as a regulated telecommunications service, holding that nothing in the language of the statute requires such a finding. 
• Fifth, the court rejected claims that the FCC had not adequately considered reliance by the industry on the previous classification of broadband. 
• Finally, the court rejected the claim that before broadband providers can be classified as “telecommunications carriers” under the Communications Act, the FCC must show that they meet the common law test for “common carriers” under NARUC v. FCC. 

The court also rejected two procedural claims: First, it ruled that the FCC had provided sufficient notice that it was considering reclassification.  Second, it ruled that complaining parties had had an adequate opportunity to address the Commission’s reliance on consumer perceptions of what ISPs offer as a basis for its ruling.

Regulating Interconnection between Broadband ISPs and Other Networks

A particularly controversial aspect of the FCC’s ruling was its decision to assert regulatory authority over interconnection arrangements between broadband ISPs and other networks.  The agency stated that if such arrangements were not subject to its authority, broadband ISPs could undermine the effectiveness of the substantive Open Internet rules by restricting or manipulating the interconnection terms available to others. 

Those challenging the FCC’s order first argued that the agency had not given adequate notice that it might regulate interconnection.  The court, however, rejected that claim, pointing to FCC statements that showed that the issue had indeed been teed up for consideration. 

On the merits, the challengers argued that, under the court’s earlier Verizon decision (see our advisory here), the FCC could not treat interconnection with other networks as regulated without finding that broadband providers were offering a telecommunications service, not just to end users, but also to “edge providers” (i.e., providers of online content, such as Google or Facebook).  Some had argued that because edge providers do not pay broadband providers for service, the functions the edge providers receive do not constitute a “telecommunications service and, therefore, cannot be subject to common carrier regulation.  The court ruled, however, that once the agency reclassified the end user offering as a telecommunication service, it was reasonable to extend regulation to interconnection as well, on the grounds that such interconnection was needed to provide the newly-regulated service.

Regulating Mobile Broadband on the Same Terms as Wired Broadband

The FCC’s decision to regulate mobile broadband on the same terms as wired broadband was controversial both because of the generally-recognized differences in the technical characteristics of wired and wireless networks and because of a number of separate statutory provisions that apply to mobile services. 

The key legal question was whether mobile broadband meets the statutory definition of an “interconnected” mobile service, which in turn depends on whether mobile broadband service permits connections to the “public switched network.”  Historically, the FCC understood the “public switched network” to refer to the “public switched telephone network.” In extending regulation to mobile broadband, the FCC changed its understanding of that term to include the Internet as well. On that basis, it concluded that mobile broadband was indeed an “interconnected” service.

The court rejected claims that the FCC had not provided adequate notice of the possibility of extending regulation to mobile broadband, noting that various wireless industry parties had debated the issues in detail in submissions to the agency.  On the merits, the court held that the FCC had acted within its authority.  It noted that Congress had specifically empowered the agency to set the definitions of both the term “interconnected” and the term “public switched network,” and rejected the claim that Congress itself required treating that term as limited to the telephone network.  In the most technically complex part of its ruling, the court upheld the FCC’s reliance on the fact that mobile broadband users can use VoIP applications to call standard mobile (and landline) telephone numbers, and vice versa, as sufficient grounds to conclude that mobile broadband was indeed “interconnected” both with the Internet at large and the traditional telephone network “because it gives subscribers the ability to communicate to all users of the newly defined public switched network.”

Forbearance from Applying Most of Title II to Broadband ISPs

Although the FCC reclassified mass market broadband service as a telecommunications service subject to Title II, it also refrained from applying most provisions of Title II to broadband providers, relying on its authority to “forbear” from applying those provisions if certain conditions are met.  One petitioner, Full Service Network (“FSN”), argued that the Commission could not exercise its forbearance authority on its own without following the same procedures the Commission had established for private party applications seeking forbearance.  The court rejected that claim, noting that the Commission had wide discretion to interpret its own procedural rules, which in any event did not, on their face, apply to Commission-originated forbearance.  The court also held that the Commission had provided adequate notice of its potential forbearance actions.

FSN also objected to the FCC decision to forbear from applying the local competition provisions of Sections 251 and 252 of the Act (notably, its unbundling obligations) to broadband ISPs.  First, FSN argued that the FCC had to make separate findings supporting forbearance for each affected statutory provision and each affected local geographic market.  The court rejected this claim, affirming an earlier holding that the statute gives the FCC discretion to act on a nationwide basis.  Second, FSN argued that in order to forbear from the interconnection requirements of Section 251, the FCC had to find that it would retain adequate authority to protect the public interest which, according to FSN, the FCC could not do because of supposed limitations on the scope of the Commission’s authority to regulate interconnection under Section 201 (which the agency left in effect).  The court rejected this argument, affirming the FCC’s authority to regulate interconnection under Section 201.  The court also rejected FSN’s claim that forbearance from Section 251 would create problems in the case of purely intrastate broadband services, over which the FCC (absent Section 251) lacks jurisdiction.  This FSN argument failed because – as the FCC held and as the court had previously affirmed – broadband Internet service is inherently interstate in nature.  Finally, the court rejected FSN’s claims that the FCC had not adequately justified its decision to forbear from applying Sections 251 and 252, citing the FCC’s extensive discussion of the rationale for its actions.

Challenges to Specific Open Internet Rules

In 2015, the FCC promulgated five Open Internet rules.  It banned blocking, throttling, and paid prioritization; it imposed a “general conduct” rule, banning any actions that unreasonably interfere with end users’ or edge providers’ ability to send and receive information; and it imposed an enhanced transparency/disclosure rule.  (See our earlier advisory discussing these rules here.)  In court, petitioners challenged the ban on paid prioritization as beyond the FCC’s authority, and the “general conduct” rule as unconstitutionally vague.

With regard to the paid prioritization ban, the court held that its earlier decision in Verizon v. FCC confirming the Commission’s authority to promulgate rules under Section 706 showed that the Commission was empowered to impose the paid prioritization ban under that provision. (The obstacle to the FCC’s prior action was that, in its 2010 Open Internet Order, the agency had not classified broadband as a Title II “telecommunications service” – which is what it did in the order addressed by the court’s ruling.)  With regard to the general conduct rule, the court held that the Commission’s discussion of the purposes of the rule, along with its articulation and discussion of seven specific factors that it will consider in assessing whether particular practices violate the rule, gave broadband ISPs enough of an understanding of what conduct was prohibited to defeat the vagueness challenge.  How the general conduct rule may be applied in the context of specific enforcement actions, of course, remains to be seen.

First Amendment Challenge

Some petitioners argued that the Open Internet rules violated the First Amendment by requiring broadband ISPs to transmit information with which they might disagree.  The court rejected this argument, noting that broadband ISPs, when acting in that capacity, were functioning as a conduit for the speech of others, and that their customers would not, therefore, attribute the views expressed in the transmitted information to the broadband ISPs.  On the other hand, nothing in the Open Internet rules in any way restricts a broadband ISP from expressing itself, via the Internet or otherwise.  Essentially, the court ruled that a common carrier’s First Amendment rights are not infringed by being required – as a common carrier – to transmit or disseminate others’ views.

Judge Williams’ Dissent

Judge Williams’ dissent raises several interlocking points:

• First, in his view, the FCC was required to determine that broadband ISPs had market power before it could impose common carrier regulation on them – something the FCC had seemingly intentionally avoided doing in its ruling. 
• Second, this failure to consider market power led to a flawed analysis by the agency of the likely effects of its rules on broadband investment and consumer welfare. 
• Third, in his view, the FCC’s decision to forbear from applying most of Title II to broadband ISPs necessarily implies that those entities lack market power, which means that applying Title II was unjustified in the first place. (Judge Williams noted that this so-called “strategic ambiguity” is “just a polite name for arbitrary and capricious decisionmaking.”) 
• Fourth, Judge Williams signaled his agreement with Judge Silberman’s concurrence in Verizon that Section 706, on which the FCC relied in part to justify the ban on paid prioritization and other rules, does not authorize the Open Internet rules.

Further Legal Challenges?

Those opposing the Open Internet rules may seek rehearing by the D.C. Circuit en banc, and may also seek Supreme Court review of the panel’s opinion.  Either option will result in the final legal status of the FCC’s rules remaining in limbo for quite some time – perhaps a year or more.  We will provide updates on any further challenges as they occur.

Practical Impact of the Ruling

This ruling is clearly an important step in the government’s shifting stance towards regulating Internet access. As noted above, the FCC’s Open Internet rules have been in effect since June 2015, and since that time the agency has not undertaken any high-profile enforcement actions against any major broadband providers under the rules; one possible reason for this is that the agency may have been awaiting a ruling sustaining its rules before undertaking any major actions under them.  It is possible, therefore, that the court’s ruling will embolden the agency to begin more aggressively enforcing its rules.

Two factors suggest that any change in the FCC’s enforcement stance may be more measured.  First, as noted, additional legal challenges are quite possible, so the FCC could reasonably conclude that prudence in pursuing enforcement actions remains a sound path.  Second, the issue of the FCC’s authority over broadband providers has been politically controversial for several years.  Given that we are in the midst of a contentious presidential election cycle, the agency may conclude that it should refrain from taking any potentially controversial enforcement action until after the election.  Thus, while enforcement actions could be underway, these political factors may work to limit their scope, at least until further court review – and the election season – concludes.

Finally, earlier this year the FCC initiated a major proposed rulemaking regarding the privacy obligations of broadband providers (see our advisory here).  That action is legally premised on the FCC prevailing on the question of reclassifying broadband as a telecommunications service under the agency’s jurisdiction. Had the court ruled against the FCC, the entire privacy rulemaking would have been placed into legal limbo.