In a decision that was widely predicted by those who have been following the case, the Court of Appeals for the D.C. Circuit has invalidated the FCC’s Open Internet Rules (so-called net neutrality regulations), which imposed non-discrimination and anti-blocking requirements on broadband Internet access providers. The rules were challenged by Verizon as soon as they were enacted in 2010. The court held that, given the FCC’s past (and never reversed or modified) regulatory choice to classify broadband providers under the Telecommunications Act of 1996 as “information services” rather than “telecommunications services,” it cannot now impose on them common carrier obligations that apply under the statute only to services classified as telecommunications. Verizon argued in the case that the Open Internet Rules were not common carrier regulations, but the court didn’t buy it.
A threshold issue in the case was whether the FCC has authority from Congress to regulate broadband providers at all. The court held that it does, under a provision of the Telecommunications Act that directs the FCC to encourage nationwide broadband deployment. (In prior litigation, the FCC had unsuccessfully argued that it had jurisdiction to regulate under a different provision of the statute.) In its analysis of the jurisdictional question, the court accepted Verizon’s analysis of the broadband market with respect to the likely negative impact of a two-way pricing model (i.e., a model that allows broadband providers to charge both users and edge providers) on broadband deployment. The FCC argued that non-discrimination and non-blocking rules encourage broadband deployment through the operation of a “virtuous cycle” in which low barriers to entry for edge providers (like Google, Netflix, and Amazon) drive the creation of innovative services, which drives consumer demand for better and faster broadband, which drives broadband providers to improve infrastructure, which drives more creation of innovative edge services. Absent those rules, the FCC argued, broadband providers will move to maximize revenue by charging not only users but also edge providers, thus driving up entry costs for developers of innovative web-based applications, flattening consumer demand, and stifling further expansion and improvement of network infrastructure.
If the jurisdictional question had been the only issue in the case, the “virtuous cycle” rationale would have been an ace in the hole for the FCC. Unfortunately, however, for the FCC and proponents of a “neutral net,” including myself, the FCC’s past regulatory choices continue to haunt it. Following the court’s decision, which certainly comes as no surprise to lawyers at the FCC, the ball is back in the FCC’s court to do what it proposed to do back in 2010 but has so far not had the political will to do: separate, for regulatory purposes, the connectivity component of broadband, which consists of functions that enable the transmission of data, from the information component, which consists of services such as e-mail, access to online newsgroups, and the ability to create a personal Web page. By reclassifying the connectivity component as a telecommunications service, the FCC would be operating squarely within the bounds of its statutory authority to impose anti-blocking and non-discrimination obligations on broadband providers. The FCC has the authority to modify its previous classification, as long as it gives a good reason for doing so, which it can do, if only it has the will. This is an opportunity for the FCC’s new Chairman, Tom Wheeler, to make good on President Obama’s past promises to support net neutrality.