On January 14, 2014, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit issued its decision in Verizon v. Federal Communications Commission, No 11-1355, in which it vacated several key FCC rules governing the regulation of Internet traffic.  Those rules were promulgated by the FCC in 2010 in a proceeding commonly referred to as the “Net Neutrality” or “Open Internet” proceeding.  The 2010 FCC proceeding arose out of a prior attempt by the FCC in 2008 to impose sanctions on a broadband provider for favoring certain Internet traffic, specifically, interfering with consumers’ use of certain peer-to-peer applications.  That 2008 action by the FCC led to a court challenge and a reversal by the D.C. Circuit in 2010.  Having been rebuked by the appeals court in its efforts to regulate Internet traffic, the FCC responded commencing another proceeding in which it would determine whether to establish rules governing Internet traffic.  That FCC proceeding culminated in a decision often referred to as the “Open Internet Order.” 

In the Open Internet Order, the FCC did two things of significance.  First, it concluded that a provision of the Telecommunications Act of 1996 (Section706) empowered it to encourage the deployment of “advanced telecommunications capability” (i.e., broadband Internet access) and to establish rules governing broadband providers’ treatment of Internet traffic.  Second, the FCC purported to exercise that authority by promulgating rules prohibiting blocking and imposing non-discrimination requirements on broadband providers.  The appeals court reviewing the FCC’s Open Internet Order, affirmed the FCC’s authority under Section 706 to enact rules for the treatment of Internet traffic.  However, the court vacated the blocking prohibition (applicable to all Internet access providers – wireline and wireless) and the non-discrimination rule (applicable only to wireline broadband providers, such as telephone companies and cable companies) on the basis that they constituted “common carrier” regulation in disregard of the FCC’s prior 2002 determination that broadband Internet access services are not telecommunications services, and therefore not subject to regulation as common carrier services. 

The Communications Act provisions regulating common carriers date back to the Communications Act of 1934 and were themselves lifted from the Interstate Commerce Act of 1887, applicable to railroads and later to motor carriers.  Common carrier rules are based on a public utility model of regulation – a government-franchised regulated monopoly (such as the nation’s telephone companies prior to the breakup of the Bell System in 1984) and government supervision of their rates.  Requirements that rates and service conditions be “just and reasonable” and “not unreasonably discriminatory” are hallmarks of traditional common carrier regulation.

Now that the court of appeals has determined that the FCC may not impose common carrier regulatory requirements on broadband Internet access services, legal scholars, academics, and others will spend considerable effort penning law review articles, blogs and other postings analyzing the legal questions addressed by the court.  From a consumer perspective and from an Internet service provider’s perspective, the most important questions are, 1) what, if anything, will the FCC do in response to the ruling; and 2) what changes, if any, will occur in the Internet service marketplace as a result of the January 14th decision.

The FCC has several options:  it could seek further legal review of the decision, either by asking the full appeals court to re-hear the decision of the three judge panel; or it could ask the Supreme Court to review the case.  Alternatively, the FCC could go back to the proverbial drawing board and try again to craft regulations which would pass court muster.  Since the court held that the FCC does have authority to adopt rules to regulate Internet traffic, it could try again to develop rules which stop short of common carrier regulation.  Alternatively, it could revisit the question of whether broadband Internet access service is a telecommunications service – a conclusion which would subject such service to rules prohibiting blocking and discriminatory treatment.  Such a reclassification would be easier said than done.  In 2002, the FCC concluded that broadband Internet access services when provided by cable companies are not telecommunications services; rather that they are information services thereby not subject to common carrier requirements.  The FCC successfully defended that decision in the U.S. Supreme Court.  Having expended so much effort to reach a determination that broadband service is an information service, and then to persuade the court of appeals and the Supreme Court that its determination was correct, it would be difficult for the FCC a decade later to change its mind and re-classify Internet access as telecommunications service and subject it to common carrier requirements whose roots go back more than a century.  Agencies like the FCC can – and sometimes do – change their minds, and they are permitted to do so by reviewing courts, on the condition that they provide a reasoned explanation for the change and identify the changed circumstances which underlie the change in position.  Losing a case in the court of appeals is not, by itself, a sufficient basis for a change in agency position.

Of more immediate concern to consumers and businesses, is what will happen in the marketplace in the wake of the FCC’s ruling.  By eliminating the non-discrimination rule, it will be theoretically possible for broadband providers to impose charges on so-called “edge” providers (entities who provide content, services, or applications over the Internet) and/or to provide inferior (i.e., slower) access to other “edge” providers who are unwilling or unable to pay the fees imposed by the broadband companies.  Of course, whether such conduct will occur and whether such conduct, if it does occur, will impact the growth of the Internet, discourage investment by new entrepreneurs or impose costs or deny services to consumers is speculative.  It is also possible, perhaps even probable, that with a proliferation of broadband providers – wireline and wireless – competing to provide consumers with access to the Internet and to the “edge” providers who deliver content, services, and applications over the Internet, the marketplace will resolve these issues without the FCC imposing regulations.

We will continue to follow this matter and will update clients and friends on further developments.