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Do You Know What You’re Yelling About? The D.C. Circuit and Net Neutrality

Austin Schlick, General Counsel, Federal Communications Commission. Dep't of Justice Photo, U.S. Gov't Work, Public Domain.

On 14 January, the D.C. Circuit Court of Appeals decided Verizon v. FCC, vacating aspects of an FCC regulation imposing anti-blocking and anti-discrimination requirements on broadband providers. College students hold these principles of net neutrality or Internet openness dear, but notwithstanding Stephen Colbert’s always illuminating soliloquy on the topic, the decision’s true consequences are harder to discern. The opinion is one of the most complicated this author has come across, but it is another testament to how the Circuit’s especially consequential jurisdiction makes a full bench necessary even where its caseload is less fulsome than other circuits.

In 2010, the Federal Court of Appeals in Comcast v. FCC struck down similar open network management practice requirements imposed by a preceding regulation on the grounds that the Federal Communications Commission failed to cite any statutory authority to adequately justify the regulatory action. While the FCC claimed ancillary jurisdiction to promulgate the openness requirements — a sort of Necessary and Proper Clause that empowers the agency to make all rules and regulations “as may be necessary in the execution of its functions” — the court held there was no statutory authority to which the requirements were reasonably ancillary. Most importantly, Section 706 (“§706”) of the 1996 Telecommunications Act (“The 1996 Act”) could not serve as a hook for ancillary jurisdiction because the FCC remained bound by its previous position that it delegated no regulatory authority but was merely a statement of congressional policy.

This is not to say that §706 could not reasonably constitute a delegation of regulatory authority. So, having updated its interpretation as to whether it did so, the FCC issued the regulation at issue in Verizon (“Open Internet Order,” “The Order”). The order establishes two sets of rules, with one applying to “fixed” broadband providers furnishing access primarily at fixed endpoints and another applying to “mobile” providers furnishing access to — you guessed it — mobile phones. Whereas the Order imposed transparency and anti-blocking requirements on both types, it notably excluded mobile providers from its anti-discrimination requirements because the market was more competitive and possessed higher operational constraints.

While these two sets of rules were updated to reflect modern technological developments, they largely track Congress’ distinction between telecommunications providers and information-service providers in the 1996 Act. This Act’s distinction, in turn, was informed by the FCC’s so-called Computer II regulatory regime. This regime distinguished between providers of “basic” and “enhanced” services to the extent that providers were engaged only in the transmission of information, rather than the processing of it. Basic service providers, furthermore, could be subject to “common carrier” regulation under Title II of the 1934 Communications Act, which first governed similarly transmission-focused entities with respect to power and telephone lines.

“Principles of Economics” students will understand why this regulatory history is necessary. In fact, as I recall, power and telephone lines were the paradigmatic case of oligopolistic market competition. Because start-up costs are particularly high relative to transmission costs, severe barriers to entry exist that invest suppliers with extraordinary market power. Especially in light of the public nature of the good, with the Internet serving as a “general purpose technology that enables new methods of production that have a major impact on the entire economy,” the market’s imperfections have historically demanded government intervention. Thus, if an entity is subject to Title II common carrier regulation – whether as a provider of basic services under the Computer II regime or of telecommunications services under the 1996 Act — it can be subject to quite stringent requirements, from “furnish[ing]… communication service upon reasonable request” to charging “just and reasonable rates” and engaging in “no unreasonable discrimination.”

After the 1996 Act, the FCC classified telephone companies, whose lines Internet packers were primarily transmitted over, as providers of telecommunications services subject to Title II regulation. Accordingly, the companies were required to let internet service providers such as AOL access their transmission facilities on a common carrier basis. Similarly, the FCC first classified DSL services — which furnish broadband Internet over telephone lines — as telecommunications providers. However, it reversed course just a few years later. Finding broadband to provide a “single, integrated information service,” it exempted providers from common carrier regulation altogether. Under the doctrine of Chevron deference, which defers to the interpretation of administrative agencies where the statutory language is ambiguous and the interpretation reasonable, the Supreme Court upheld this shift as a reasonable interpretation of the 1996 Act’s ambiguous definition of telecommunications services. Thereafter, the FCC exempted other providers, such as those furnishing mobile broadband, from common carrier regulation. Importantly, however, the 1996 Act also stipulates that common carrier regulation of an entity is permissible “only to the extent… it is engaged in providing telecommunications services.”

The Court of Appeals’ opinion thus hinged on two primary questions: whether the order’s regulations survived a Chevron analysis to a reasonably ancillary statutory provision and whether its regulations effectively treated providers as common carriers despite the FCC’s still binding determination that they were exempted from such regulation. Concerning the first, the agency’s change in interpretation allowed it to assert §706 of the 1996 Act as providing a hook for ancillary jurisdiction. It was this, combined with another change in agency interpretation, that made the order’s regulations survive Chevron‘s application. In particular, §706 directs the FCC to encourage the deployment of broadband capability to all Americans “on a reasonable and timely basis,” and to “take immediate action to accelerate… such capability by removing barriers to infrastructure investment and promoting competition in the environment” if such a criterion is not met. While for years the agency had determined access to be reasonable and timely, in 2010 the agency updated its definition of what bandwidth was required to satisfy the statutory requirement. Accordingly, the government argued, §706 regulatory authority existed at least where it has been activated by an agency determination that broadband access is not reasonable and timely for too many Americans.

There remains the inquiry of whether the order adequately executes that regulatory authority — that is, whether the agency’s means are reasonably related to the end of encouraging the development of reasonable and timely broadband capabilities by removing barriers to investment and promoting market competition. The government’s rationale for imposing transparency (unaffected by the ruling), anti-discrimination and anti-blocking requirements is the “virtuous cycle of innovation” so often credited with the Internet’s rapid expansion. The openness requirements drive this cycle by “protect[ing] and promot[ing] 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.” In other words, your ability to access content on the Internet openly and freely increases your demand for Internet service, which leads to a more robust development of such service, which further enhances freely and openly accessible content. Here too the court concurred with the FCC, finding the openness requirements to satisfy Chevron‘s application to §706.

Given all this, you are likely wondering how the Circuit ended up vacating the anti-blocking and anti-discrimination requirements of the order. The answer lies in the 1996 Act’s stipulation that common carrier regulation can extend only to telecommunications providers. Because the FCC has not re-reversed its position on whether broadband providers are telecommunications providers, the Order could not effectively subject broadband providers to common carrier requirements. The Court of Appeals confronted a similar question last year in Cellco v. FCC, finding an FCC regulation compelling mobile telephone companies to offer data roaming agreements to one another on “commercially reasonable” terms did not effectively regulate them as common carriers. Importantly, the Cellco court found that since this standard “left substantial room for individualized bargaining and discrimination in terms,” it did not rise to the “just and reasonable” standard for common carriage. As a result, the Court of Appeals found the order effectively imposed common carrier requirements because its anti-discrimination and anti-blocking provisions left no such room for individualized bargaining.

In so doing, however, it hinted at at least one future regulatory regime that could satisfy Cellco‘s mandate. Notwithstanding reverting to classifying broadband providers as telecommunications providers, the regulatory approach to broadband could be tranched such that basic or effectively usable access could be required as a matter of de facto common carriage, with no unreasonable discrimination and just and reasonable rates required. Further levels of access, in turn, could be subject to individualized bargaining and discrimination in terms. Fortunately, this is but one approach: contrary to all the shouting you have been hearing, the Federal Court of Appeals’ ruling leaves plenty of room for legislative, if not regulatory, action to ensure the Internet remains freely and openly accessible.

About the Author

Dan Duhaime is a senior concentrating in Political Science (American Politics) and History (Modern North America). A de jure native of Mansfield, MA and de facto product of Providence, he is currently writing an honors thesis on the legal-strategic sustainability of the 2001 Authorization for Use of Military Force. He appreciates a good footnote, his dog Maddie, and the economics of NFL roster construction.

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