FCC Effectively Concedes Defeat on Net Neutrality

By James Tuthill [1]

On  February 19th,  the Chairman of the Federal Communications Commission, Tom Wheeler, said that the FCC would not appeal last month’s Federal Court of Appeals decision overturning the FCC’s Net Neutrality rules, Verizon v. Federal Communications Commission, (D.C. Cir., Slip Op. No. 11-1355,  Jan. 14, 2014.)  Those rules prohibited discrimination and blocking by Internet Service Providers (ISPs) who provide broadband, that is high speed, connections to the Internet.  Under that ruling, if an ISP like Comcast wants to impede Internet traffic, as it did several years ago[2], it can once again.  While asserting that the FCC supports an open Internet and will develop new rules to replace those thrown out by the court, effectively the FCC has conceded defeat.  Let’s look at what the Verizon decision did and said and then evaluate what the FCC just proposed and why its actions translate into a loss for consumers and edge providers.

In Verizon, the court said that the FCC’s Net Neutrality rules amount to regulating ISPs, such as Comcast and Verizon, as “common carriers.”  It reasoned that because the FCC’s rules obligate ISPs to act as common carriers the rules exceeded the FCC’s authority and are invalid: “[w]e think it obvious that the Commission would violate the Communications Act were it to regulate broadband providers as common carriers.  Given the Commission’s still-binding decision to classify broadband [ISP] providers not as providers of ‘telecommunications services’ but instead as providers of ‘information services’...such treatment would run afoul of …[the definition of a Telecommunications Carrier in the Communications Act of 1934 as amended by the Telecommunications Act of 1996, “the Act”]”  Slip Op. at 45.

The court reached back to Nineteenth Century legal principles defining common carriage and stated that the distinguishing characteristic of a common carrier in the Twenty First Century is the “…requirement of holding oneself out to serve the public indiscriminately.”  Slip Op. at 48.  It then stated the principal issue in the case: “…the question is whether, given the rules imposed by the [FCC’s] Open Internet Order [which established the Net Neutrality rules], broadband providers are now obligated to act as common carriers.”  Slip Op. at 52.   It concluded that the anti-discrimination and anti-blocking rules require the broadband ISPs to hold themselves out to “serve the public indiscriminately” and therefore impermissively treat them as common carriers. 

While criticizing the FCC’s logic, the court’s reasoning is itself fuzzy and confusing.  It primarily relies on Midwest Video Corporation v. FCC, 440 U.S. 689 (1979.)  That case, however, rested on the statutory declaration that “***a person engaged in ***[television] broadcasting shall not, insofar as such person is so engaged, be deemed a common carrier.”  47 USC 153 (11.)  In contrast, the definition the court here addressed is Telecommunications Carrier:  “***A telecommunications carrier shall be treated as a common carrier under this chapter only to the extent that it is engaged in providing telecommunications services****” 47 USC 153 (51.)  The difference in the wording of the two sections is significant: the first, applicable to broadcasters, fences off their broadcasting activities from regulation as a common carrier; the second says a telecom carrier will be regulated as a common carrier only to the extent that it is providing telecom services. But it is silent about whether or not the FCC may impose  some common carrier regulations on non-telecom entities.  The court either misses this distinction or ignores it.

The court of appeals here also fails to grasp the context of Midwest Video which was essential to the rationale the Supreme Court relied upon in invalidating the FCC’s rules under consideration in that case.   There the court was concerned with broadcasters’ journalistic independence which it noted was Congress’ rationale behind the prohibition in section 47 USC 153 (11): “[The] provisio[n] clearly manifest[s] the intention of Congress to maintain a substantial measure of journalistic independence for the broadcast licensee.”  Midwest Video, supra at 705, citing Columbia Broadcasting System, Inc., v. Democratic National Committee, 412 U.S. 94 at 116 (1973.)  This critical consideration is absent in the statutory definition on which the court relied in Verizon.

Although saying that it must be careful not to substitute its judgment for that of the Commission, that is exactly what the court does.  It found that the FCC has the authority to regulate ISP services, that is, Digital Subscriber Line (DSL) and cable Internet connections, but declared that its rules prohibiting discrimination and blocking exceeded its authority.  Although recognizing that the classification of common carriage is not an all or nothing determination, and that “it is at least logical to conclude that one may be a common carrier with regard to some activities but not others….” Slip Op. at 51, the court concludes that the application of the rules to broadband ISPs constitutes treating them as common carriers. The court’s explanation is confusing and unpersuasive: it fundamentally says that the FCC is wrong just because we say so. 

At its core, the principal disagreement between the FCC and the court is what should be noncontroversial: the manner in which the Internet functions and how ISPs provide services.  This different understanding of the facts is the decisive factor in this case.  One or the other is wrong.  Under the Chevron doctrine, Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), if a statute subject to agency jurisdiction is ambiguous, and the agency’s interpretation is reasonable, the court will defer to the agency’s interpretation of the statute.  But here the court doesn’t accept the agency’s explanation. This is one of the reasons Chairman Wheeler is making a grave mistake in letting Verizon remain valid law instead of seeking a reversal before the Supreme Court.

The court seems to miss the fact that both end users and edge providers, like Amazon, must purchase Internet connections from providers like Verizon and Comcast and that in a connected data transmission, the providers to the end users and the edge providers are frequently different.  That is, Amazon may purchase Internet services from Verizon to connect its data farm to the Internet backbone and Elizabeth, in San Francisco, may purchase her Internet connection from Comcast.  Internet providers such as Verizon and Comcast agree to exchange traffic under what are known as “peering” agreements and each may use other wholesale network providers to carry long-haul traffic among their switches. Thus, when Elizabeth logs onto Amazon’s site the transmission is handled by both Comcast and Verizon and probably other third party network providers too.  The court fails to take note that there are originating, transport and terminating components in Internet connections. The FCC tried to explain this, but its arguments were dismissed by the court.  

The court concludes that the FCC’s anti-discrimination and no blocking rules impose the “serve all” aspect of common carriage because it says “if Amazon were now to make a request for service, Comcast must comply.  That is, Comcast must now ‘furnish…communications service upon reasonable request therefore.’ 47 U.S.C. § 201(a).”   Slip Op. at 52.  But nowhere do the FCC’s rules explicitly require Comcast to provide service; rather, the rules apply if Comcast chooses to provide broadband Internet service to an end user or an edge provider such as Amazon or Netflix.  The No Blocking rules states “[a] person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non-harmful devices****” (Emphasis supplied.) The rule prohibiting Unreasonable Discrimination contains the same proviso.  But nowhere in its discussion does the court address this specific limitation in the rules. 

The FCC had basically five options following the court’s decision: 1) seek a rehearing or a rehearing en banc before the court of appeals; 2) reclassify broadband Internet access services as Telecommunications services and treat ISPs as common carriers; 3) appeal to the Supreme Court; 4) do nothing; or 5) promulgate new rules.  Chairman Wheeler took the fifth option.  Let’s evaluate each.

A rehearing or rehearing en banc would likely have been unsuccessful.  The panel vacated the rules, and therefore it isn’t going to be swayed that they acted in error.  And, reversals on a rehearing en banc are rare.  The FCC was right to pass on this approach.

Various stakeholders  have strongly argued that the FCC should accept the court defeat and reclassify broadband Internet access as a Telecommunications Service instead of the Information Services designation it gave Internet broadband service several years ago.  This is the reclassification argument.  Its premise is that the FCC can change the regulatory treatment of Internet broadband service and impose common carrier requirements and achieve its goals of preventing discrimination and blocking by merely reclassifying the regulatory treatment of broadband Internet services.  In a perfect world, this would be the right approach.  In his statement, Chairman Wheeler said that  he would retain this as an option for the Commission “if warranted.” He’s holding this club over the ISPs as a threat if his approach to develop new rules is unsuccessful.  But it’s a weak threat, because reclassification won’t work for several reasons.

 First, it will simply take too long: one to two years to promulgate the new rules, and two or more years in court appeals. It won’t be until near 2020 that the issue gets resolved, if ever.  (Just look at the FCC’s media ownership rules.  They have been bouncing back and forth between the Commission and the courts for over a decade.)  The Internet is morphing at light speed.  By the time the rules are in place they simply won’t matter anymore. 

Second, the FCC can expect an invasion of lobbyists and opponents as intense as anything it has recently seen. Republicans in Congress would vociferously oppose reclassification.  The argument will be the same tired and unproven statement that regulation will stifle investment and innovation.  Armies of so called “experts” will be hired to proselytize their message that reclassification will destroy the Internet.  It’s questionable whether or not the FCC will be able to take the political heat. 

Third, there is a Supreme Court case known as Brand X, (National Cable & Telecommunications Ass’n v. Brand X Internet Services, 545 U.S. 967 (2005) )which stands as a giant hurdle for the FCC to clear to successfully reclassify broadband Internet services as Telecommunications Services.  That decision held that the FCC’s determination that cable companies providing cable modem services were not providing Telecommunications Services as defined in the Act and therefore were not subject to the common carrier regulations of the Act, known as Title II, was correct.  The FCC had determined that cable companies offering cable modem service were not “offering” Telecommunications Services because of the integrated nature of Internet access and the high-speed wire used to provide Internet access and therefore they were not subject to common carrier regulation.  The Court in Brand X applied the Chevron doctrine, and accepted the FCC’s interpretation of the statute.

Of particular significance for the reclassification argument is the Court’s statement in Brand X  that “[t]he entire question is whether the products here are functionally integrated…or functionally separate….That question turns not on the language of the Act, but on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance.”  (Emphasis supplied.) Brand X at 991.

Reclassification would require the FCC to reach a contrary factual conclusion: that Internet broadband services do not involve functionally integrated services but an offering of two separate services: the connection to the Internet and the high-speed facility used to enable that connection.  While the Supreme Court has stated that an agency is free to change its policy under appropriate circumstances, FCC v. Fox Television Stations, Inc., 556 U.S. 502 at 517-518 (2009), it isn’t at all clear that an agency can change the facts on which it bases its decisions so easily.  And we can be sure that the formidable opponents of reclassification will vigorously argue this point before the courts.   It may be for this reason alone that the Chairman has decided for the moment not to seek reclassification.   

The FCC could have filed a writ of certiorari with the Supreme Court.  It is likely the Court would have taken the appeal given the significance of the case and the involvement of a federal agency.  As described above, the FCC has a number of strong arguments to make: the court misconstrued the legal consequences of its rules (they do not treat ISPs as common carriers), failed to grasp how the Internet functions, failed to defer to the agency under the Chevron doctrine, failed to provide a clear, cogent and convincing argument for its conclusion and substituted its judgment for the FCC’s on national policy.  

And given the present composition of the Court, the FCC stood a better than even chance of success.  Three justices in the majority in the Brand X decision, Justices Thomas, Kennedy and Breyer remain and would be inclined to defer to the FCC as they did in Brand X. Two new justices, Kagan and Sotomayor would be sympathetic to the FCC.   The Chief Justice might also have been inclined to defer to the agency’s expertise on complex technical matters involving network operations.  That’s at least six votes.  It isn’t clear why the Chairman choose not to pursue an appeal. 

Politically, doing nothing was not an option.  President Obama openly supported Net Neutrality and he appointed Chairman Wheeler.  Public interest and consumer groups, such as Public Knowledge, would have unleashed the wrath of the Internet and social media on the Chairman if he took no action.  And Democrats in Congress, who only last week introduced legislation to restore the rules, would have been irate.  Further, the need to do something was escalated by the just announced acquisition of Time Warner Cable by Comcast which will create a media behemoth serving 30 percent of the cable market.

The Chairman has selected the fifth option, adopting new rules, to deal with the court’s decision.  But that approach will likely be of little actual beneficial force and effect for end users and edge providers.  He said he would propose new rules to “Fulfill the ‘no blocking’ goal…[and] … Fulfill the goals of the non-discrimination rule.”  But how can he legally do this in the face of the Verizon decision?  The court has declared that imposing no blocking and antidiscrimination rules amounts to treating the ISPs as common carriers, and the Commission is prohibited from doing that.  We all know that calling a rose by any other name does not change it from being a rose. The court will see through the guise to pass new rules off as something other than the rules it struck down, and it won’t buy it.  Additionally, the two Republican members of the Commission will strongly oppose any new rules.  They both issued statements criticizing the Chairman’s approach.

Additionally, as noted with reclassification, promulgating new rules will just take too long.  The original Net Neutrality rules were proposed on October 22, 2009 after the FCC’s Net Neutrality “principles” adopted four years earlier in 2005 failed. It’s taken four years and three months to reach this point.  The future is too unpredictable to wait another four or five years more for clarity.

Chairman Wheeler also states that the Commission will “Hold Internet Service providers to their commitment” to honor the safeguards in the invalidated rules.  But there is nothing he or the Commission can now do to enforce those so called voluntary commitments except for imposing conditions in Commission orders approving mergers; but of course, those orders don’t extend to the entire industry.  As became clear when Comcast was caught red handed impeding peer to peer traffic in 2007, without valid rules, the FCC is mostly toothless.  Such is the situation now. 

Unfortunately, the Chairman seems to have taken the course of least resistance to avoid angering the various stakeholders: the ISPs and Republicans would oppose either an appeal to the Supreme Court or reclassification and public interest groups and Democrats would be furious if the Commission did nothing.  Even the court here in Verizon recognized the likely evils the rules sought to prohibit: “[e]qually important, the Commission has adequately supported and explained 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. First, nothing in the record gives us any reason to doubt the Commission’s determination that broadband providers may be motivated to discriminate against edge providers.” Slip Op. at 36-37.

But Chairman Wheeler’s course of action, to adopt new rules, places the authority of the Commission to police the Internet and protect end users and edge providers in serious jeopardy given what the appellate court held and said in Verizon. His approach cedes national policy to the court and power to control Internet practices and traffic to providers like Comcast and Verizon.  And it leaves the Commission, the nation, edge providers, end users and Internet entrepreneurs with an extremely bad judicial precedent concerning what actual, effective and practical authority the FCC has to prevent anti- consumer and anti- competitive practices by broadband ISPs.

1 James P. Tuthill received his J.D. from Northwestern University School of Law, and spent more than twenty years in the telecommunications industry. He was General Counsel of Pacific Bell Mobile Services and Vice President and General Counsel of Westwave Communications, Inc., a Silicon Valley startup. For the Past several years he has taught Telecommunications, Broadcast and Internet Law at the University of California, Berkeley, School of Law. 

2 In the Matters of Formal Complaint of Free Press and Public Knowledge Against Comcast Corporation for Secretly Degrading Peer-to-Peer Applications, Memorandum Opinion and Order, August 1, 2008, FCC 08-183, reversed Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010.)