D.C. Circuit Largely Invalidates Net Neutrality Rules: Analysis and Prospects

On Jan. 14, 2014, a D.C. Circuit panel struck down the portions of the FCC’s 2010 “Open Internet” (or “net neutrality”) rules that had banned blocking or discriminatory treatment of web sites or other online applications by retail broadband Internet access providers (“broadband providers”) such as incumbent telephone companies and cable operators.¹   At the same time, the court approved the agency’s requirement that broadband providers adequately disclose their policies regarding blocking and “network management” (that is, practices for avoiding network congestion, giving priority to some classes of traffic over others, etc.).

While the agency thus largely “lost” the case, the majority opinion’s reasoning is troubling for industry. The majority affirmed that the FCC has jurisdiction over the Internet (since it involves “communications by wire or radio,” the relevant language in the Communications Act) and thus over broadband providers; it affirmed that Section 706 of the Telecommunications Act of 1996 provides a separate and independent grant of authority to the agency to impose regulations on broadband providers, if such regulation is needed to ensure the deployment of broadband facilities and services; and it even affirmed that the specific rules the FCC had adopted were reasonable under Section 706 (considered alone) and fully justified based on the record, even though it ultimately struck them down (see below). This opinion thus establishes that broadband providers may be subject to the FCC’s regulatory authority; and here, according to the majority, the agency had a record basis for concern about the possibility of blocking and/or discrimination.

The specific no-blocking and non-discrimination regulations were struck down, however, because the FCC had ruled previously that broadband Internet access was an “information service,” not a “telecommunications service.” In statutory terms, this meant that provision of broadband Internet access did not make the broadband providers “common carriers” under the Act. Because, under the Act, an entity can only be regulated as a common carrier to the extent that it provides telecommunications services, the court struck down the no-blocking and non-discrimination rules, which it found to be clearly forms of common carrier regulation, The disclosure rules were upheld because they do not inherently constitute common carrier regulation.

Verizon Communications (which brought the case) thus achieved a clear “win” in that the key rules it opposed have been invalidated. But the D.C. Circuit decision unequivocally holding that broadband providers may be subject to the FCC’s regulatory jurisdiction presents challenging prospects for the long term. If the ruling stands, the question will no longer be whether the FCC has authority to regulate broadband providers – at least in some ways – but rather what specific regulatory restrictions it may impose. In these circumstances, it is entirely possible that both the agency and Verizon could seek rehearing en banc or Supreme Court review of the panel’s decision. Verizon in particular might be encouraged to seek en banc rehearing or Supreme Court review because it persuaded one judge to dissent from the majority’s analysis of Section 706. Judge Silberman would have rejected the agency’s claim that it had authority to regulate broadband providers, at least on the record under review. Even Judge Silberman, however, agreed that as a matter of statutory interpretation, Section 706 could reasonably be read to empower the agency to regulate in appropriate cases.

Background
Following a 2008 attempt to enforce net neutrality principles against a cable operator,² the FCC conducted a rulemaking that culminated in its December 2010 “Open Internet Order.”³ That order set forth three basic rules: (1) an antidiscrimination rule, providing that broadband providers may not “unreasonably discriminate” when transmitting “lawful network traffic” to their customers; (2) a no-blocking rule, barring broadband providers from blocking access to “lawful content, applications, services, or devices”; and (3) a transparency rule, requiring broadband providers to disclose information about their network management practices, performance, and terms of service. All three rules apply to fixed (i.e., wireline) broadband service; only the no-blocking and transparency rules apply to mobile broadband services.

Challenging the rules in the D.C. Circuit, Verizon argued that (1) the FCC lacks specific statutory authority to adopt the rules; (2) even if it had such authority, the rules run afoul of the statutory prohibition on common carrier regulation of information service providers (as the Open Internet Order never questioned the classification of broadband Internet access as an information service)⁴ and (3) the rules violate Verizon’s First Amendment rights by compelling speech, while also effecting an unconstitutional taking.

D.C. Circuit’s Ruling
The D.C. Circuit largely agreed with Verizon’s common carriage argument, concluding that the antidiscrimination and no-blocking rules ran afoul of the ban on regulating providers of information services (here, broadband Internet access service) as common carriers.⁵ In its order adopting and explaining its rules, the FCC had argued that the common carriage prohibition was no obstacle, because the rules only regulate the relationship between broadband providers and their end-user customers and, as to that relationship, there is no common carriage because broadband providers may negotiate separate agreements on individualized terms.⁶ The court rejected this argument, instead concluding that the rules sought to regulate broadband providers as common carriers in their relationships with so-called “edge providers” (i.e., content providers like Google or the New York Times). The court held that, “[in] requiring broadband providers to serve all edge providers without ‘unreasonable discrimination,’ this rule by its very terms compels those providers to hold themselves out ‘to serve the public indiscriminately.’”⁷ While the court ruled that the no-blocking rule (while presenting a closer question) suffered the same fate, it found that the transparency rule operates independently from the others and imposed no prohibited common carriage mandate. Thus, that rule still stands.

Beyond the finer nuances of the law of “common carriage,” the potential long-term effect of the court’s ruling is perhaps most interesting in what it said about the FCC’s case for affirmative authority. Significantly, the panel majority endorsed the FCC’s theory that a “virtuous cycle” supports the agency’s affirmative power to adopt net neutrality rules under Section 706. Section 706(a) directs the agency to “encourage” broadband deployment “on a reasonable and timely basis” by using (among other things) “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”⁸ Section 706(b) further directs the agency to take “immediate action” to promote broadband deployment if it finds that broadband is not being deployed “to all Americans in a reasonable and timely fashion.”⁹

Giving considerable deference to the FCC’s predictive judgment about the anticipated effects of the net neutrality rules, the court accepted the “virtuous cycle” theory – i.e., “that its regulations protect and promote edge-provider investment and development, which in turn drives end-user demand for more and better broadband technologies, which in turn stimulates competition among broadband providers to further invest in broadband.”¹⁰ Verizon mocked this approach as a “triple-cushion shot,” but the court was unimpressed, holding that, “[in] billiards, … a triple-cushion shot, although perhaps more difficult to complete, counts the same as any other shot.” Thus, as interpreted by the court, Section 706 was not merely a “policy statement” containing hortatory language about the importance of encouraging broadband; instead, it specifically empowered the FCC to enact net neutrality rules because those rules were (in the view of the FCC and the majority) calculated to remove obstacles to broadband deployment.

This is the aspect of the ruling that was unacceptable to Judge Silberman. In a strongly worded dissent, he argued that the FCC’s interpretation of Section 706, approved by the panel majority, created “a new statute granting the FCC virtually unlimited power to regulate the Internet.¹¹ While he agreed that Section 706 is “a grant of positive regulatory authority,”¹² the record evidence in his view failed to establish any “barrier[] to infrastructure investment” that the net neutrality rules were necessary to remove, or that the rules could be reasonably viewed as “promot[ing] competition” in the broadband market.¹³ In particular, Judge Silberman argued that “the Commission’s failure to conduct a market power analysis [justifying its rules] is fatal to its attempt to regulate, because it means that there is inadequate evidence to support the lynchpin of the Commission’s economic theory.”¹⁴

What Now for Industry?
The most immediate impact of the ruling is that (absent a stay pending further judicial review) “pay-for-priority” or “two-sided pricing” arrangements, under which broadband providers may charge some edge providers for faster delivery, seems to be back on the table. Indeed, Chairman Wheeler – in remarks that surprised many observers – seemed to suggest as much in a recent public appearance.¹⁵ Although the Open Internet Order did not expressly forbid such arrangements under the antidiscrimination rule, it strongly suggested that they would be rejected by the FCC under its rules. The Court appeared to accept the Commission’s reasoning that such arrangements would negatively impact broadband deployment and edge providers, even though speculative, because it was “at the very least, speculation based firmly in common sense and economic reality.”¹⁶ With the non-discrimination rule vacated, broadband providers and content providers (such as Netflix) would be permitted to explore such arrangements.

What Now For the FCC?
The FCC now faces a number of options:

• Back to the Courts. Chairman Wheeler has already announced that the FCC is considering its options regarding further judicial review – that is, a petition for en banc review before the full D.C. Circuit or a petition seeking immediate review by the Supreme Court. Both requests are uphill battles, not least because the decision does not appear to create any circuit split (one of the traditional criteria for further review) and expressly leaves the agency free to take corrective action on remand.
  
  
• Reclassify. The majority opinion, by resting its decision to set aside the no-blocking and non-discrimination rules essentially entirely on the FCC’s earlier decision to treat broadband Internet access as an information service, almost invites the FCC to revisit the highly contentious debate about whether to reclassify that service as a telecommunications service. Even so, it seems unlikely to us that Chairman Wheeler will have an appetite for doing so: In adopting what he described as “light touch” net neutrality rules, former Chairman Julius Genachowski declined to pursue reclassification following vigorous political opposition to reclassification in the wake of the Comcast Corp. v. FCC decision in 2010.
  
  
• Adjust the Rule or its Rationale. Short of reclassification, though, the majority opinion suggests that the FCC may be able to salvage its no-blocking rule if it can craft an order (perhaps with further record evidence) clearly explaining why that rule does not impose common carriage obligations and makes sense on its own. The FCC also may seek to re-craft its non-discrimination rule by, for example, attempting to align it more closely with the “data roaming” rule that the FCC successfully defended in Cellco Partnership v. FCC.¹⁷ Under the data roaming rule, the FCC requires providers of mobile data services (like wireless Internet service) to enter into roaming agreements with one another on “commercially reasonable” terms. Verizon Wireless argued that the “commercially reasonable” standard was in substance identical to a classic common-carriage non-discrimination rule and thus ran afoul of the prohibition on regulation of providers of information services as common carriers, but the D.C. Circuit (in another opinion by Judge Tatel) rejected that claim, agreeing with the FCC that the rule was sufficiently flexible to avoid imposing a full common carriage mandate to serve all customers indiscriminately on the same terms.¹⁸ If the FCC decides to go back to the drawing board, it will likely study the Cellco Partnership opinion closely indeed.
  
  In addition, the FCC (encouraged, no doubt, by public interest advocates) could consider a variety of new requirements, in the nature of consumer protection and pro-competition obligations, that it might be able to justify using its virtuous cycle/triple cushion-shot logic but that are not inherently akin to the core obligations traditionally imposed on common carriers (e.g., holding out to serve the public indiscriminately and reasonable and non-discriminatory rates, terms and conditions).
  
  
• Back to Congress. A legislative fix, in theory, could solve all of the FCC’s problems by granting it express authority to impose carrier-like regulatory obligations on broadband providers, but in our view any such proposals have no realistic prospect of success in the present political climate. That is particularly so since the House of Representatives in April 2011 issued a resolution (by a vote of 240 to 179, mostly along party lines) “[d]isapproving the rule submitted by the Federal Communications Commission with respect to regulating the Internet and broadband industry practices.”¹⁹ Particularly as the 2014 election cycle ramps up, the prospect of any successful legislative fix seems even more remote.

FOOTNOTES
1 Verizon v. FCC, --- F.3d ---, 2014 WL 113946 (D.C. Cir. Jan. 14, 2014). 
2 Formal Complaint of Free Press and Public Knowledge against Comcast Corporation, Memorandum Opinion & Order, 23 FCC Rcd 1308 (2008), vacated, Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010).
3 Preserving the Open Internet Broadband Industry Practices, Report and Order, 25 FCC Rcd 17905 (2010) (“Open Internet Order”).
4 See 47 U.S.C. § 153(51) (“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.”) (emphasis added); Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless Networks, Declaratory Ruling, 22 FCC Rcd 5901, 5919, ¶ 50 (2007) (“[A] service provider is to be treated as a common carrier for the telecommunications services it provides, but it cannot be treated as a common carrier with respect to other, non-telecommunications services it may offer, including information services.”).
5 Ruling on this ground, the Court found it unnecessary to reach Verizon’s broader constitutional arguments.  2014 WL 113946, at *30.
6 By contrast, a hallmark of common carriage is the duty to serve all customers “indiscriminately” on the same terms.  See Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir. 2012).
7 2014 WL 113946, at *27 (citation omitted).
8 47 U.S.C. § 1302(a).
9 Id. § 1302(b).
10 2014 WL 113946, at *15.
11 2014 WL 113946, at *32 (Silberman, J., concurring in part, dissenting in part). 
12 Id. at *31.
13 Id.
14 Id. at *35.
15 See TRDaily (Dec. 2, 2013) (reporting Chairman Wheeler’s comments at a public address: “He added that a two-sided market, with revenues derived both from subscribers and content providers, may develop.  ‘The marketplace is where these decisions will be made,’ he said.”); but see TRDaily (Jan. 8, 2014) (reporting Chairman Wheeler’s subsequent remarks that “‘the open Internet order is designed to encourage competition’ and ‘is designed to be different for wireline and wireless,’” and “‘if [conduct] interferes with the way the Internet works, if it has anticompetitive effects, if it is discriminatory,’ the FCC will address it.”).
16 Id. at *17.
17 2014 WL 113946, at *29.
18 Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir. 2012).
19 H.R.J. Res. 37, 112th Cong. (2011).