CommLawBlog : Broadcast & Communications Lawyers & Attorneys : Fletcher Heald & Hildreth Law Firm : Telecommunications, FCC Regulation, Communications Act

Ah, the old days . . .

But first, a nagging question. The Internet has been popular for two decades. Why are we are talking about network neutrality only now? The anti-NN forces note that the stunning growth of the Internet occurred without regulation. Why not just continue?

True, there was no Internet regulation in the dial-up days, but an even stronger force was at work: competition.  The phone companies all had departments functioning as Internet service providers (ISPs). The FCC’s Computer III rules required the bigger phone companies to open their networks to competing ISPs. That gave most people dozens of ISPs to choose from. None of the ISPs dared tamper with customers’ content, because the customers could easily go elsewhere.

Then broadband appeared, and quickly became essential as web pages grew more complex. Most consumers have either one or two sources for broadband: the cable company, over the same wires that carry cable TV; and the phone company, first via DSL and later, in some areas, through fiber-optic cables. 

The DSL channel was originally subject to the Computer III sharing rules, but the cable never was. The FCC asked whether it should open the cable to competing ISPs, in the manner of Computer III.

Follow this part closely. To apply Computer III, the FCC would have to find that cable broadband is, or includes, a “telecommunications service” – that is, the pure transport of information, for payment, offered to the public. Common sense tells us that sending Internet pages over the cable has to involve a telecommunications service, among other things. But the FCC is not always bound by common sense. According to its 2002 order, the telecommunications component is not separable from the other components, such as interactive choice of content. The FCC resolved to treat the combined, non-separable service as non-telecommunications. That means Computer III does not apply. A cable operator need not open its facilities to competitors, and can require its Internet customers to use its own ISP service. Cable subscribers are not entitled to competition among ISPs.

The Supreme Court’s Brand X case subsequently upheld the FCC. But it did not say the FCC’s decision was the only right one. Rather – and this is the kind of thing that makes non-lawyers glad they picked some other line of work – the court deferred to the FCC’s right to make the decision. The distinction matters because, ruling the way it did, the Court could easily have supported even the opposite outcome from the FCC.

In the meantime, phone companies answered the FCC’s 2002 cable ruling with outraged filings about a “level playing field.” They still had to put their ISP competitors on the broadband channel, while the cable companies enjoyed the exclusive use of their own cables. In 2005, just a few weeks after the Supreme Court handed down Brand X, the FCC ruled that phone-company broadband was, like cable broadband, a combined service to be regulated as non-telecommunications. No more Computer III; no more competing ISPs.

As a result, if you have broadband Internet service, it is very likely that your ISP is the cable company or the phone company. And, if both companies serve your location, odds are your provider has tried to lock you into a long-term deal with a stiff early termination fee. Unhappy with the service? Tough luck.

Still, some people don’t want the Government intruding into the market for Internet services. Others don’t want a near-monopoly provider deciding what content they should receive. After Comcast, is there any hope for the second camp?

A possible way out

Suppose the FCC were to revisit that 2002 cable decision, the one holding the telecommunications and non-telecommunications aspects of Internet service to be inseparable. Could the FCC now change its mind, and separate out the transport-for-pay component as a telecommunications service? Then, instead of applying the full weight of common carrier rules, it could impose just one: a requirement like that in Computer III, requiring the operator to allow competing ISP on the cable. That would bring back competition among ISPs, and create a major disincentive to tampering with content.

Until last year, this would not have been workable. An agency like the FCC could not change its position without an intervening change of circumstances, such as a major shift in the industry landscape. But last year’s Supreme Court case of Fox v. FCC changed the rules on changing the rules. 

After Fox, the FCC need show only that the new policy makes sense – not that it makes more sense than the old policy. Admittedly, abrupt reversals of established policy have historically been disfavored for many good reasons, and such reversals may – as Brother Feldman observes – still be subject to attack as unjustified. But Fox appears to given the agency considerably greater leeway to change its mind.

Had the FCC chosen to regulate the cable transport back in 2002, the cable companies would have gone to court, but they probably would have lost, under the reasoning in Brand X that defers to the FCC’s judgment. And if the FCC could have required ISP competition on the cable in 2002, then the Fox case strongly suggests they could do it today. 

The argument is even better for phone company broadband, which was subject to mandatory-competition rules until 2005. If anything, the case for requiring ISP competition is stronger now, in light of abuses by the providers, followed by the Comcast court’s closing off more direct remedies.

The process has one more step. The FCC can require ISP competition, as above, but not network neutrality, after Comcast. Either one – competition or neutrality – can protect consumers against content discrimination. So why not give the provider a choice? Undo the 2002 and 2005 broadband orders; regulate data transport as telecommunications; require providers to open their facilities to competitors – but waive that rule for providers that adopt network neutrality. Competition will flourish, or content will be available without discrimination. Either way, consumers come out ahead.

Appeal to the Supreme Court.  In its Comcast arguments, the FCC relied on the Supreme Court’s 2005 Brand X decision. That case involved the Commission’s determination that cable modem Internet access service is an “information service” subject to regulation under Title I of the Act, rather than a “telecommunications service” subject to Title II. In its Brand X

opinion, the Supreme Court observed that the FCC “remains free to impose special regulatory duties on [cable Internet access providers] under its Title I ancillary jurisdiction.” In Comcast, the FCC argued to the D.C. Circuit that that Supreme Court language established that the FCC could claim ancillary jurisdiction derived from Title I.

But the D.C. Circuit felt that the Commission was reading too much into that quotation. In the Circuit’s view, just because the Supreme Court said that the FCC had jurisdiction to impose some kind of regulation on ISPs under Title I doesn’t mean that the agency had jurisdiction to impose this particular regulation (i.e., “reasonable” traffic management); rather, the Circuit held, each claim for ancillary jurisdiction must be analyzed on its own merits.

Given that, the FCC could try to convince the Supreme Court to provide a broad interpretation of its Brand X language, broad enough to support the Commission’s claim of authority to regulate ISP traffic management. This would not be an easy case for the FCC. As the D.C. Circuit’s Comcast decision makes clear, the Supreme Court itself has, in a number of decisions, treated the concept of ancillary jurisdiction as narrow. Like the Circuit, the Supreme Court has held that each new assertion of such authority must be evaluated on its own terms.  So the prospects of a broad, result-changing opinion out of the Supreme Court are not good. Additionally, a trip to the Supreme Court would not be quick: it is unlikely that a decision would be released prior to June, 2011, even if the Supreme Court agreed to take the case (which it is not required to do – indeed, the Supreme Court routinely agrees to review only about 1% of the cases presented to it).

Go to Congress. Seemingly the most direct way to fix a lack of jurisdiction is to get Congress to eliminate that lack by enacting legislation specifically providing the Commission with the authority to do what it wants to do. While legislation is perhaps the most direct route, it is neither the quickest nor the surest. Bills designed to give the FCC such authority have been introduced over the last few years – but they have not progressed significantly. While it’s difficult (if not impossible) to pinpoint precisely why proposed legislation gets stalled, in this instance that may be attributable, at least  in part, to a preference by Congressional Democrats to give the FCC a chance to take a first shot at crafting net neutrality regulations. Another factor possibly staying Congress’s hand: a desire to wait and see what the D.C. Circuit would do in the Comcast case. But now that the D.C. Circuit has ruled against the FCC’s assertion of ancillary authority in this area, those two factors have been eliminated.  

While it may be possible to get legislation authorizing very narrow FCC regulation of Internet traffic management enacted before everyone’s attention turns to the November elections, that seems unlikely. Verizon has been calling for much broader legislation to re-write the Communications Act for the “Internet Age,” but that seems even less likely to occur before November, and Verizon’s proposal probably would not provide the FCC authority to adopt net neutrality rules. Indeed, it took years of work to get the last re-write of the Communications Act enacted in 1996.  

Re-classify the Transport Component of Internet Access to be a Title II Telecommunications Service.  The FCC has recognized for some time that their 2008 Comcast Order was in trouble (as anyone who attended the oral argument at the Circuit could have surmised).  Perhaps because of that, some Commissioners have been floating a possible alternative approach: re-classify at least some aspects of Internet access (including, e.g., the transport component) as a Title II telecommunications service. Since Title II unquestionably contains “statutorily mandated responsibilities” (more so than Title I), so the thinking goes, the Commission would be better able to establish that its regulation is “reasonably ancillary” to such responsibilities, thus avoiding the jurisdictional problem identified in the Comcast decision.

But this “re-classification” approach has its own problems. 

First, re-classification would require the reversal of multiple FCC decisions made between 2002 and 2006. Those decision classified cable modem, DSL, wireless broadband and broadband-over-powerline as “information services” rather than telecommunications services. To be sure, the FCC already has a pending “Open Internet” proceeding through which a record might be built in support of re-classification of Internet transport as a telecommunications service. But what would Net Neutrality advocates use to make the case that the Internet environment has changed so radically in the last couple of years: the growth of “edge” providers and third-party Internet applications? Another difficulty: the FCC’s reasoning back in 2002, upheld by the Supreme Court in Brand X, was that even accessing the world wide web required an integrated information service, not merely telecommunications transport. 

Further complicating matters is Congress. Would a majority of Congress be happy with the FCC taking things into its own hands, when many in Congress probably believe that re-classification (at least re-classification that involves increasing regulation on the re-classified service providers) is the responsibility of Congress, not the FCC.  

And, of course, re-classification would generate very strong resistance on all fronts from across many industry segments. Further lengthy court appeals would be certain. 

Build a Stronger Case for Title I Ancillary Authority.  In Comcast, the D.C. Circuit did not rule that it was impossible for the FCC to make the case for ancillary jurisdiction, just that the Commission had failed to do so here. The Court left open the alternative possibility that the FCC could assert jurisdiction over Internet traffic management if such regulation were in fact ancillary to the Commission’s responsibilities under Section 201 of the Communications Act (which requires that common carrier charges and practices must be just and reasonable). 

The potential for such an alternative arises from the fact that the Circuit declined to consider one line of argument presented by the Commission in support of its claim of ancillary jurisdiction. In its brief, the Commission argued that it could regulate Comcast’s practices because discriminatory practices that impact VoIP traffic affect the prices and practices of traditional telephone common carriers. But the FCC had not included that as a basis for its regulation back in its 2008 Comcast Order that was on review – and the Circuit (as well as most other courts) refuses to consider justifications for an agency action which are made only at the appeal stage, and not in the original action on review. So the ultimate strength of that particular argument has not yet been tested in court.

Accordingly, the FCC could use the pending Open Internet proceeding to build a record establishing a nexus to Section 201 responsibilities. However, the FCC’s Section 201 theories seem pretty far-fetched, and it is hard to conceive of other theories that could be stronger. And while the Court also left open the possibility that the FCC could try to show a nexus to its responsibilities to protect broadcast TV stations under Title III of the Communications Act, it is unclear if and how the FCC would take on that task.

Statements released by Democratic FCC Commissioners and legislators suggest that they are determined to move forward and find a way to enact net neutrality regulations. Of the alternatives set out above, re-classification of Internet transport as a Title II service currently seems to have the most momentum, but the Obama administration may choose to push one of the other alternatives, or perhaps to work on multiple paths at the same time.   Either way, we are sure to see the struggle over this issue continue.

The FCC’s position was a little shaky from the start. It never had a rule prohibiting the Comcast action that caused all the trouble, just a loosely-worded policy statement. And nothing in the Communications Act, from which the FCC derives all of its authority, specifically authorizes control over Internet traffic. The FCC thus had to fall back on a claim of “ancillary authority,” based on a catch-all statutory provision that allows the FCC to do pretty much anything “as may be necessary in the execution of its functions.” 

But as the Court had previously held on a number of occasions, ancillary authority applies only if (1) some other statutory provision covers the subject matter, and (2) the challenged action is “reasonably ancillary” to the FCC’s exercising of its authority under (1). The FCC passed the first test, but not the second. The “other provisions” on which the FCC relied, said the Court, were either mere statements of congressional policy (which cannot support ancillary authority) or statutory provisions that miss the specific topics involved in Comcast’s behavior.

As a result, the FCC is legally barred from imposing or enforcing network neutrality.

The FCC still has a few options.  For example, it can ask the same court for a hearing en banc (Latin for “lots more judges”) or appeal to the Supreme Court. Or it can ask Congress for a law that gives it the authority it needs. There may be other alternatives as well, involving adjustments to the existing regulations for a better fit with the existing statutes, but their likelihood of success in court remains to be seen.

But right now, the view from the broadband mountaintop is a little murky. For the time being, at least, Internet providers are free to favor or block content as they choose. And no use complaining to the FCC.

The judges seemed to feed “softballs” to the attorney for Comcast, while giving the FCC lawyer a much harder time. We noted three particularly telling moments:

• The Chief Judge asking the FCC lawyer, “How would you prefer to lose – [on due process or on jurisdiction]?”
• Another judge pointedly asking the FCC lawyer, “Are there any limits” to the FCC’s jurisdictional claim? The lawyer seemed unable to come up with an answer that both satisfied the court and squared with his own theory.
• The Chief Judge remarking, “The impact of our decision [on the FCC’s pending network neutrality rules] will be perfectly clear,” in a context suggesting the court expects to undercut the FCC’s ability to adopt those rules.

But even if the FCC loses this case, it would be a mistake to suppose that marks the end of network neutrality. There are two points to remember.

First, the FCC believes it has a decent argument for jurisdiction based on the Supreme Court’s Brand X decision, which has language supporting the FCC’s authority to regulate at least some aspects of Internet service.  The Comcast court appeared uninterested in hearing about Brand X. But the FCC could ask the Supreme Court to rule in its favor under that precedent.

Second, a loss here on jurisdictional grounds will be an invitation to Congress to step in and give the FCC whatever authority it needs to impose network neutrality. Recent congressional proposals have been a lot tougher than the FCC’s proposed rules.

Either way, an FCC loss in this court will only set off the next stage of the dispute.

Some noteworthy details:

• While the proposed rules would apply to broadband Internet access, they would not apply to dial-up Internet access, or to private “intranets.” The exemption for dial-up may offer some comfort to small and rural Internet service providers.
• Unlike the FCC’s existing Internet Principles – which state what “consumers are entitled to” – the proposed rules are phrased as obligations imposed on IASPs. But this raises the issue of what sorts of entities the rules should apply to. AT&T has called on the FCC to apply Net Neutrality rules to application service providers such as Google, as well IASPs. While the NPRM seeks comments on that idea, the rules as proposed would apply only to IASPs.
• The proposed Non-Discrimination Rule would prohibit IASPs from charging content, application, and service providers for enhanced or prioritized access to subscribers, but makes no mention of charges to the end users. This might allow, for example, the end user to subscribe to a service that increases throughput (and hence quality) for a video channel, even if it reduces throughput to the same user’s other applications. The Chairman did say at the meeting that users should have the final say on their own Internet experience.
• The NPRM tees up the issue of whether so-called “managed services” should be exempt from some or all of the Net Neutrality rules. Examples include IP-enabled cable television-like services (AT&T’s U-verse, Verizon’s FIOS video), facilities-based VoIP services, and telemedicine applications. These are delivered over the same network facilities as Internet access, but are not themselves traditional Internet services. This issue will almost certainly be hotly contested.
• The NPRM asks whether only “unreasonable” discrimination should be prohibited. Such a limitation would allow forms of discrimination that may be desirable for end users (e.g., to promote quality of service for a particular application). While the IASPs can be expected to support that approach, there may be a catch: the concept of prohibiting “unreasonable discrimination” has traditionally be a fundamental component of common carrier regulation, and IASPs do not want to be treated as common carriers. Additionally, drawing the line that defines “unreasonable” will be a contentious task.
• In exploring the “transparency” rule, the NPRM seeks comment on the proper balance between giving consumers the information that they need and overwhelming them with detail. The NPRM also asks whether the transparency rule should require IASPs to give details of network management to content/application/service providers, and/or to the FCC. While the IASPs may have limited concerns about providing this information to consumers, they will likely fight this extension of the concept.
• There will be numerous FCC “workshops” in this proceeding, and more importantly, a formal process of technical outreach led by the FCC’s Office of Engineering and Technology. The latter seeks details on what is reasonable network management, what is workable in terms of transparency, and how the FCC can prevent the rules from having detrimental impact.
• Commissioners McDowell and Baker dissented in part, laying down their “markers” as to how they would oppose the Chairman’s proposal with the “factual and legal predicates” of the NPRM. Commissioner McDowell agreed on the need to preserve an open Internet, but wanted it done through non-government management entities such as ICANN and other voluntary entities – a “bottom up” rather than a “top down” approach. He argued that countries that regulate the Internet more than the U.S. tend to be less free than the U.S., and are waiting for the U.S. to enact more regulation in order to justify their own more intrusive and political regimes. And while the Chairman has stated that a goal of Net Neutrality is to protect innovation at the “edge” of the network, McDowell noted an unprecedented overlap between “edge” applications and “core” ISPs. He also suggested that any anti-competitive conduct by IASPs could be addressed by anti-trust laws.

Comments on the NPRM are due to be filed by January 14, 2010. Reply comments are due March 5, 2010.

Recent history suggests that the proceeding will be a titanic battleground. Time to strap on your armor, grab your lance, and head to the field of combat.  Let the tilting begin!

First, the IPS acknowledged the need for Internet service providers to engage in “reasonable network management” on their networks to minimize congestion and to limit illegal activities on the Net. Second, the FCC chose to give itself maximum flexibility by announcing only “policies”, rather than rules, in light of the rapidly developing nature of the Internet and the market for Internet services. This choice would come back to haunt the FCC in its first major network neutrality enforcement action. In a 2008 Order, the FCC held that Comcast’s practice of blocking consumers’ use of peer-to-peer applications violated the principles of the IPS. The Commission required Comcast to alter its network management techniques, and make its new techniques known to subscribers. While Comcast claimed to have already complied with those requirements, it nonetheless appealed the FCC’s Order to the D.C. Circuit, arguing that the Commission lacks the authority to regulate Internet traffic generally, and specifically with use of “policies” rather than “rules.” Comcast’s appeal is still pending – the FCC’s brief to the Court was filed today – and no decision is likely until the first part of 2010, at the earliest. (For some history on the Comcast dust-up, read our previous post here.)

One motive for the Chairman’s launch of a new proceeding may be to beef up the FCC’s enforcement abilities by enacting actual rules, in case the Comcast Court holds that “policies” alone just don’t cut it.  And the proposed “Sixth Principle” seems designed to prevent Internet service providers from engaging in discrimination disguised as traffic management, as Comcast may have done. Still, there will be serious debate as to the level of “transparency” that best balances consumer interests with legitimate operator requirements for network security and prevention of harmful or illegal use of the Internet.  

The debate will be even more heated over the proposed rule embodying the “Fifth Principle” of non-discrimination.  As summarized by the Chairman today, “broadband providers cannot discriminate against particular Internet content or applications.This means they cannot block or degrade lawful traffic over their networks, or pick winners by favoring some content or applications over others in the connection to subscribers’ homes. Nor can they disfavor an Internet service just because it competes with a similar service offered by that broadband provider.” But even the Chairman acknowledged that the inquiry will reveal difficult policy issues.  For example, what if a consumer wants to use an application that maximizes the through-put and thus the quality of streaming music or video, but that application reduces the quality of the consumer’s other Internet applications while in use? Should this be prohibited “discrimination,” even if it is openly chosen by the consumer? One could easily answer “no.”

Similarly difficult questions will be triggered regarding the FCC’s legal authority to regulate an “information service” such as broadband Internet. There will be complex technical issues involved in defining “reasonable network management.” And, in light of the core role of the Internet in personal and political speech, First Amendment issues could get a rigorous work-out. But, as Bruce Springsteen has sung, “sooner or later it all comes down to money,” and that’s what the real battle will be fought over.

Some will argue that heavy regulation of Internet operations threatens the current business models under which large ISPs invest the funding necessary to expand and maintain a high-speed network. Large Internet application and content providers, as well, have their own marketing and financial interests in how traffic is transmitted. Many of these parties will argue that innovation in the network requires the government to keep its hands off. But the Chairman has already anticipated these arguments. He argued in his speech that truly transformative innovation has historically come from small entrepreneurs operating on the “edges” of the Internet. Non-discrimination is required, according to the Chairman and his supporters, in order to make possible the next Facebook, eBay or YouTube. 

Things have already begun to move quickly after the Chairman’s speech:  the Republican Commissioners, McDowell and Baker, have already fired back their critique of the Chairman’s approach.  (You can read it here.)  They express concerns that “factual and legal conclusions may have already been drawn” prior to the release of the NPRM.  They also stress their views that rules should not be based merely on “anecdotes” of problems, and that innovation and investment need to be protected in the core of the network, as well as at the edges. It appears that the battle is on!

The Commission is to be commended for opening up the debate, and making it accessible through new media. Check out the FCC’s new web site at www.openinternet.gov, which contains a video blog from the Chairman and space debating the issues. But even the best technology will not, by itself, yield easy answers to complex questions.