FCC Net Neutrality Rules Struck Down by DC Circuit Court Appeals

By Peter Bernstein January 14, 2014

There are times in life when being correct is more sobering than celebratory. Back in early December I wrote an article that “Net Neutrality”—regulation of the Internet so that everyone had equal access to the Internet— was going to be a hot potato in 2014 around the world.  Two weeks into the New Year, the proof has hit the U.S. big time.

It happened in the form of The D.C. Circuit Court of Appeals 81-page decision ruling that the Federal Communications Commission (FCC) overstepped its authority by prohibiting Internet service providers (ISPs) from blocking or discriminating against traffic to lawful websites. This was a power the FCC exerted under its 2010 Open Internet Order (aka “Net Neutrality”) regime. This is a classic case of, “What goes around, comes around,” and “Be careful what you wish for.”

I will get to why I believe the case is a validation of the two adages in a moment. However, first some background for those, who like me, did not go to law school and want to understand the fuss.  

This is not a new problem  

While not gutting the entire net neutrality regime, the appeals court, in what will now be the infamous case of Verizon v. FCC, told the FCC that under its own rules it did not have the power to require internet service providers to treat all traffic equally. The DC circuit court vacated the FCC's anti-discrimination and anti-blocking policies, though it preserved disclosure requirements that Verizon opposed. What this means is simply that service providers can make some traffic run faster or block other services, but they have an obligation to notify customers they are doing so. 

A little historical perspective is in order.  Way back to the mid 1960s the FCC was concerned about the convergence of traditional communications and computing services.  It wished to continue to regulate the common carrier regime of regulation for the telephony side of things while deregulating the computing part.  The complication was figuring out how to prevent cross subsidization, discrimination, and anti-competitive behavior by the common carriers when they entered the computing services business which back then was called, “enhanced services.” 

What resulted were three different attempts to somehow draw a bright line between common carriage and enhanced services know as Computer Inquiries I, II and III.  What subsequent events, especially the incredible pace of technologic change has engendered in making convergence a reality, is that is such a dynamic world there cannot be such things as bright lines.

Net Neutrality is part of all this because what the court found is that the Open Internet rules could have applied if ISPs were classified as common carriers and therefore under the FCC’s rules governing such matters, but because the Internet is deemed and information service the rules of common carriage to not apply. In short, the FCC was bitten by its own inability to get congressional authority to regulate information services, specifically the Internet.  Thus, from a strictly legal standpoint the FCC and Congress need to go back to the drawing boards to get this mess cleaned up.

That last point should not be lost in looking at this topic.  The court did not say it thought Net Neutrality was illegal. In fact, the court was not opposed to the FCC’s goals but rather the improper execution of its authority. 

As has been pointed out in commentaries, Judge David Tatel had some interesting observations on the role of regulation and legislation saying: "although regulation of broadband Internet providers certainly involves decisions of great 'economic and political significance' ... we have little reason given this history to think that Congress could not have delegated some of these decisions to the Commission."

He also provided the sobering observation that: "The commission has adequately supported and explained its conclusion that absent rules such as those set forth in the Open Internet Order, broadband providers represent a threat to internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment,"

 There is an extensive, dare I say exhaustive and exhausting list, of comments already on the ruling. As to be expected, depending on which side of the bread is buttered, there is both praising and castigation. If you want the Internet to be open to all comers on an equal basis this is a dark day.  If you believe ISPs should be able to make business decisions about the use of their networks, including making major cost causers cost bearers, this is a victory.  In looking at the statements from all sides the common thread has been how strident they have been that the other side, and in some cases the court, are clueless about the market and the law. 

I think the statements from FCC Chairman Tom Wheeler and his colleague Commissioner Ajit Pai put this in some easy to understand context.

Chairman Wheeler in a statement said:

“The D.C. Circuit has correctly held that ‘Section 706 . . . vests [the Commission] with affirmative authority to enact measures encouraging the deployment of broadband infrastructure’ and therefore may ‘promulgate rules governing broadband providers’ treatment of Internet traffic.’ 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.”  

Commissioner Pai stated:

“For the second time in four years, the D.C. Circuit has ruled that the FCC exceeded its authority in attempting to regulate the Internet. It is time for the Commission to take no for an answer. Unless Congress acts, we should stay our hand and refrain from any further attempt to micromanage how broadband providers run their networks. We should focus on removing regulatory barriers to broadband deployment, not imposing unnecessary rules that chill infrastructure investment.”

What next?

To say the decision has created a tumult would be one of the great understatements of the year, and that would hold true next December as well as this January. There is not going to be an easy way out. We are well into the fifth decade of trying to get this right. 

A few point to keep in mind going forward, particularly for those who do not live in the U.S.  First, if this goes to the United States Supreme Court, and they agree to hear it, my legal scholar pals say the chances of the ruling being over-turned are “slim and none.”

Second, politically toxic Washington, D.C. these days, the odds of there being enough votes to create or move legislation on what could be a political third-rail electrocution are very long.  After all, only the pharmaceutical industry has more feet on the street and money than the cable and telecom industries. Plus, you can add the very vested interests of social media companies, other media companies, etc. to the pile looking to influence outcomes.    

As I have pointed out before, the kabuki theater that is the U.S. legislative process thrives on creating controversies that don’t get resolved, but do get pushed to the brink of altering powerful group interests. It is called campaign contribution maximization.  This is why the likelihood is yes there will be bills introduced to rewrite the Communications Act to make it a twenty-first century document and provide clear directions to the FCC on its roles and responsibilities.  It is also why despite the Obama administration’s belief in Net Neutrality, passage of any legislation is remote—the administration has bigger challenges on where it will wish to invest its own political capital. 

The problem that all of this creates is that with inertia will come a day of reckoning.  Policy makers cannot escape the facts that all communications (think for example Voice of IP on the wired side and Voice over LTE in wireless) will soon be going over all-IP networks.  In other words, under the old regulatory regime that will be out of the reach of being regulated.  The FCC is well aware of this. The Commission itself is has stated the death of the PSTN will be before the end of this decade.  

The problem is what does an unregulated world, where traffic discrimination is allowed and the potential for anti-competitive activities are real, look like? 

Despite the absolute U.S. national economic interest in having world-class ubiquitous broadband at reasonable prices as its infrastructure, is the notion of universal services going to be a non-starter?  Will the digital divide grow instead of decrease?  Will the gap between U.S. average speeds and feeds in relationship to the rest of the word (including those with nicely functioning Net Neutrality regimes get worse instead of better?  Will the infrastructure providers use their ability to not treat all traffic equally to raise prices and disadvantage competitors, especially OTTs who pose major competitive threats?

These are all imponderables.  They are also are very scary. The court instructed the FCC and Congress to get to work and figure this out.  They did not talk to the issue of urgency. While I may have been right on predicting 2014 was going to be a big one for Net Neutrality, I really hope I am wrong in thinking that it will be big because of what does not happen as opposed to the thorny issues being clarified.   




Edited by Cassandra Tucker
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