D.C. Circuit Rejects FCC’s Net Neutrality Nondiscrimination and Anti-Blocking Rules

January 14, 2014

The D.C. Circuit today issued its opinion in Verizon v. FCC, finding that the FCC’s Open Internet rules (Net Neutrality) prohibiting broadband providers from discriminating against third party content and prohibiting the blocking of third party content exceed the FCC’s authority under the Communications Act. Because the Court struck down the blocking prohibition and not just the nondiscrimination provision, the decision applies both to wireline carriers and also to wireless carriers, who were not subject to the nondiscrimination rule. The Court found that otherwise, the FCC has the authority to regulate broadband internet services generally, upheld the Open Internet order’s disclosure rule and hinted at the possibility that the FCC, on remand, might be able to adopt an anti-blocking rule that survives judicial review.

Because the FCC has classified broadband internet service providers as information service providers, and not telecommunications carriers subject to the common carrier obligation of serving the public indifferently, the Court’s decision regarding the anti-blocking and anti-discrimination rules hinged on whether such rules allowed network operators sufficient room to negotiate individualized agreements or were prohibited as per se common carriage obligations. While, as discussed below, the FCC has authority generally regarding the practices of broadband providers, its rules cannot conflict with limits of the Communications Act. The Act states that telecommunications carriers can only be subject to common carriage obligations when they are offering telecommunications services. Essentially, the FCC’s earlier decisions to classify broadband as an information service rather than a Title II telecommunications service deprives it of the authority to impose common carriage type obligations on broadband.

The Court found that the anti-discrimination rule effectively required broadband providers to serve the public indifferently. The Court gave little weight to the FCC’s argument that broadband providers could still discriminate among their direct customers — their end users — and instead found that absent the anti-discrimination rule edge providers could be customers of broadband providers as well. The Court then found that in requiring broadband providers to serve all edge providers without “unreasonable discrimination” the FCC’s rules compels broadband providers to serve the public indifferently. The Court noted the similarity between the language in the anti-discrimination rule (unreasonable discrimination) and the text of Section 202(a) prohibiting common carriers from “unjust or unreasonable discrimination.” The Court noted in promulgating its wireless data roaming requirement - which requires availability of data roaming on a “commercially reasonable” basis and which the same Court found did not impose a per se common carriage obligation — the FCC laid out a number of factors it would use in evaluating whether the roaming terms were commercially reasonable. By contrast, in the Open Internet Order, when discussing the meaning of “unreasonable discrimination” the FCC cited the 75 years of decisions it has interpreting the standard under section 202 as applied to common carriers. The Court was also troubled by the declaration in the Open Internet Order that “pay for priority” type agreements between edge providers and broadband providers would likely run afoul of the FCC’s Open Internet rules, finding that this effectively prohibits broadband providers from charging edge providers and forcing them to sell their service to all edge providers at a rate of zero, leaving no room for bargaining.

The FCC’s anti-blocking rule failed for largely the same reasons. But the Court appears to consider the possibility that it would not be per se common carriage to have an anti-blocking rule without the anti-discrimination rule. Under such a rule, edge providers and broadband providers would be free to negotiate pay for priority agreements on an individualized basis but would have to refrain from blocking edge providers who elected to forego such pay for priority deals. While the Court mentions this possibility, because the FCC did not discuss this either in the Order or its briefs the rule is vacated on the same grounds as the anti-discrimination rule.

The Court did however, give the FCC a partial victory by finding that the FCC has general authority over broadband Internet services under Section 706 of Telecommunications Act of 1996 which directs the FCC to encourage broadband deployment on a reasonable and timely basis and take steps to accelerate broadband deployment when such deployment is lagging. The Court also found that the FCC’s reasons for adopting the Open Internet rules were sufficiently related to hastening broadband deployment. The FCC had claimed that protecting edge providers against network operator blocking and discrimination promotes investment and innovation in edge providers, which then drives demand for broadband which then fosters investment and innovation in broadband networks. The Court cited the development of the online video market as an example of that cycle at work and found the FCC’s decision to regulate network operator behavior a reasonable method of protecting that cycle, even if there were only a small number of examples of network operators attempting to interfere with edge providers delivery of services to broadband users. These conclusions might prove useful if the FCC attempts to revise its Open Internet rules or decides to take other measures to foster broadband deployment.

The FCC’s Chairman has released a preliminary statement that the FCC is considering all options, including an appeal. The FCC can seek a rehearing by the entire D.C. Circuit or can petition for review to the Supreme Court.

This article was originally published by Bingham McCutchen LLP.