Net Neutrality in the Wake of Verizon v. FCC

Author: Jon Kelly, Associate Member, University of Cincinnati Law Review

One of the greatest benefits of the internet is the seemingly endless supply of content and information available to users. Indeed, people have the ability to download or stream any type of media or purchase any type of product thanks in part to the openness of the internet. The Federal Communications Commission (FCC) is responsible for regulating this massive amount of content and the companies that provide access to it. However, the growth of the internet and the enforcement of the Telecommunications Act of 1996 has sparked legal disputes over the FCC’s right to enforce net neutrality—the idea that quality and speed of access should not depend on content or its source.[1] Earlier this year in Verizon v. FCC, the D.C. Circuit struck down the FCC’s key rules in its enforcement of net neutrality.[2] In this case, FCC “net neutrality” regulations prevented internet providers from withholding proper user access to content providers like Amazon or Netflix.[3] Given the structure of the Telecommunications Act, the decision by the Circuit is well-grounded. However, considering the importance of free and open internet, Congress should amend the Act to allow the FCC to enforce net neutrality rules on internet service providers.

Background on Broadband

The key parties in the internet marketplace are backbone networks, broadband providers, edge providers, and end users. Backbone networks are the large, long-distance networks of cables connecting local computer networks across the country that transmit huge amounts of data, much like highways. Broadband providers are the local delivery networks, which act as intermediaries that connect the edge providers and end users with the backbone networks and ultimately to each other, like regular roads. Edge providers are like factories, adding content to the web or providing services through it. End users are those accessing the information and services, much as you are now as you read this article.[4] These categories are not exclusive; for example, end users can also upload content, making them edge providers, and broadband providers can create their own edge provider services.[5] Because internet service was originally delivered, for the most part, through phone lines (digital subscriber lines, or DSL), most broadband providers administer both internet and telephone services, although the two are not delivered through the same infrastructure today.

Common carrier status was first established under the Communications Act of 1934 and is applied to service providers like telephone operators. As a result, common carriers must provide services to customers upon request and without restriction as to who may connect with who or at what rate.[6] The Telecommunication Act of 1996 assigned common carrier status to any service classified as a telecommunication service, but not to those classified as “information service” providers.[7] Since 2005, the FCC has classified broadband, DSL, and mobile internet service as “information services” and thus not subject to common carrier regulation under the 1934 Telecommunication Act.[8] However, the FCC has attempted to preserve net neutrality by regulating broadband providers’ business practices.[9]

The Open Internet Order

The Open Internet Order was the FCC’s most recent attempt to regulate broadband providers under principles of net neutrality.[10] The FCC promulgated the order under its authority granted by § 706 of the Telecommunications Act of 1996, which authorized the FCC to further the goal of deploying broadband across America.[11] The FCC explained the need for net neutrality—which it prefers to call “open internet”—with its “virtuous cycle” theory.[12] The theory posits that by allowing edge providers indiscriminate access to broadband, edge providers are incentivized to innovate continually, and the quality and quantity of content online improves as a result. Increased innovation, the FCC claimed, spurs increased demand by users, which prompts further investment in expanding and improving broadband across the country.[13]  The FCC claimed that broadband providers have the incentive to favor their self-produced edge provider content and thus to charge other edge providers for higher quality access, or any access at all, to end users. If broadband providers were allowed to discriminate in this way, the FCC argued, then edge providers would lose the incentive to innovate and the broadband industry would not develop its infrastructure at a rate sufficient to keep the United States competitive in a global economy.[14] According to the FCC, the danger of stagnating innovation on the internet was enough to justify regulating broadband providers under § 706.

The Open Internet Order adopted three general rules that the FCC tried to enforce on the broadband industry: (1) “transparency”, (2) “no blocking,” and (3) “no unreasonable discrimination.”[15] Transparency obliges fixed and mobile broadband providers to disclose business practices and the terms and conditions of their services.[16] No Blocking forbids fixed and mobile broadband providers from blocking user access to any lawful content from edge providers or services that compete with telephony services offered by the broadband provider. The provision also prohibits broadband providers from impairing the quality of edge providers’ content so as to make it inaccessible.[17] No Unreasonable Discrimination forbids fixed broadband providers from unreasonably discriminating against the transmission of lawful internet traffic. The rule against unreasonable discrimination allows for only reasonable limitations on broadband based on managing the overall network traffic, as opposed to managing content type.[18] For instance, the Order stated that broadband providers requiring edge providers to pay for priority broadband access would likely fail to satisfy the rule.[19]

The Verizon v. FCC Decision

The D.C. Circuit’s opinion in this case focused on the statutory authority of the FCC to regulate broadband providers under § 706 and on the appropriateness of the Open Internet Order rules under that section. The court found that the FCC’s authority to regulate broadband providers under § 706 was appropriate given its “virtuous cycle” theory. However, the court ultimately found that the FCC’s No Blocking and No Unreasonable Discrimination rules created an unenforceable per se common carrier status on broadband providers that was not warranted given their classification as information service providers.

First, the court accepted the FCC’s interpretation of § 706 in the Open Internet Order because it was reasonable despite the ambiguous wording of § 706 and because the Order was well-supported by the history of the Act’s passage.[20] However, the court did acknowledge two limitations to the FCC’s regulatory power under § 706(a): (1) regulations are limited to the FCC’s subject matter jurisdiction, and (2) any regulation must be narrowly tailored to the goal of “encouraging deployment . . . of advanced telecommunication capability to all Americans.”[21] Thus, although any threat to the deployment of broadband to all Americans would authorize the FCC to regulate the threat, that regulation is limited in scope.

Despite its finding that the “virtuous cycle” theory justified FCC regulation under § 706, the court still struck down the No Blocking and No Unreasonable Discrimination rules because those rules exceed the FCC’s authority.[22] Specifically, the court found that the rule against unreasonable discrimination actually regulated broadband providers (service providers) as common carriers by forcing them to provide service upon request.[23] The court struck down the anti-blocking rule as well, finding that because the requirement essentially set a minimum carriage service with a price of zero dollars, it effectively established a common carrier obligation.[24] The only rule to survive the court’s decision was the transparency requirement, which is still in force. The holding demonstrates that the FCC’s ability to regulate broadband is limited, as any restraint imposing common carrier obligations on broadband providers will overreach the limitations of § 706 as explained by the court.

Maintaining Net Neutrality

The decision handed down by the D.C. Circuit was considered a loss by net neutrality proponents, especially when the FCC declined to petition the Supreme Court for certiorari. On its face, the court’s order rejected the two most important rules found in the Open Internet Order. In a broader sense, however, the ruling simply teased out exactly how the FCC should approach a valid enforcement of open internet rules. One main lesson from the court’s decision is that the FCC would have no problem enforcing net neutrality if cable modem providers were re-classified as telecommunications providers, thus relegating them to common carrier status.[25] However, the FCC is unwilling to take that step.

Since the case was decided, the FCC has engaged in a public discussion to amend the open internet rules. From late May to mid-September, the FCC received more than 3.7 million public comments regarding the preservation of net neutrality.[26] The FCC chairman has expressed continued support for net neutrality, but his statements call for making the no blocking and no unreasonable discrimination rules fit within the FCC’s authority under § 706 rather than a reclassification of broadband providers as common carriers.[27]

Members of Congress are also attempting to preserve net neutrality. On September 9, 2014, Representative Peters of California introduced a bill that would specifically amend § 706 to allow the FCC to reinstate the rules vacated by the Verizon v. FCC decision.[28] If the bill passes, the immediate concerns facing net neutrality would fade because the FCC could simply re-promulgate its rules. However, the bill would not resolve ambiguity over the FCC’s authority to regulate broadband. The internet’s importance to citizens’ everyday lives and in the future of the international economy calls for a broader and simpler answer: reclassification of broadband providers as common carriers.[29]

The FCC’s “virtuous cycle” is a key concept; it lays out net neutrality’s ability to guarantee fair broadband for all American internet users. Equally important is why Americans need quality internet, both today and into the future. People access the internet in unprecedented numbers; it is estimated that 3 billion people will be connected to the internet by 2016.[30] These numbers also translate into money: the internet produces $2.3 trillion in economic output and is expected to hit $4.2 trillion by 2016.[31] American citizens and businesses need to stay competitive as the world economy increasingly moves to the Web. Growth in the vital field of technology has especially benefitted from the internet’s successful business generation. Projects like Google’s self-driving car require significant investment and would not be available without Google’s online advertising revenue stream.[32] Enforcing anything other than full common carrier status will allow broadband providers to raise the transaction cost of online business. Imagine trying to do business on the telephone if you had to pay for access to each area of the country. Raising these transaction costs for online businesses slows industry growth and dissuades further investment in online companies. For the United States to remain competitive the internet must remain open so that businesses in this industry and the industry as a whole can flourish, rather than allowing broadband providers to pick and choose the winners.

The Future of Net Neutrality

The court’s decision in Verizon was a loss for net neutrality, but there is still time to save this policy. The FCC is currently limited to transparency enforcement, which is not enough to stop broadband providers from extorting competitor edge providers or from reducing quality and access to certain content. The internet’s greatest gift is its limitless access to knowledge, and its vast potential for generating economic output. Leaders in the federal government are working to preserve net neutrality, but they are working either within the confines of the Verizon decision or directly against it. Internet service should be offered on a common carrier basis and regulated as such; in turn, the United States will remain an economic and technological leader in the world.

 

[1] While the FCC had exercised authority over the internet prior to the Telecommunications Act of 1996, the Act served to codify the FCC’s exclusive jurisdiction over that realm.

[2] Verizon v. Fed. Commc’n Comm’n., 740 F.3d 623 (D.C. Cir. 2014).

[3] Id. at 629.

[4] Id. at 628-629.

[5] Id. at 629.

[6] Communications Act of 1934, 47 U.S.C.A. § 153 (2010).

[7] Telecommunications Act of 1996, 47 U.S.C.A. § 1302 (2010).

[8] Verizon, 740 F.3d 623, 631.

[9] For two helpful background cases for the legal battle leading up to the FCC’s Open Internet Order, see National Cable and Telecommunications Assoc. v. Brand X Internet Servs., 545 U.S. 967 (2005) and Comcast Corp. v. FCC. 600 F.3d 642 (2010).

[10] In the Matter of Preserving the Open Internet Broadband Indus. Practices, 25 F.C.C.R. 17905 (2010).

[11] 47 U.S.C.A. § 1302(a)(2010).

[12] Verizon, 740 F.3d at 644-645.

[13] In the Matter of Preserving the Open Internet Broadband Indus. Practices, 25 F.C.C.R.. 17905 (2010).

[14] Id. at 17909.

[15] Id. at 17906.

[16] Id.

[17] Id.

[18] An example of reasonable limitations under the Open Internet Order would be when broadband providers must sacrifice the data transmission speed at times when traffic is too heavy for the “roads” to handle. Id.

[19] Id. at 17947.

[20]  637

[21] Verizon, 740 F.3d 623, 640

[22] Id. at 649, 655.

[23] Id. at 656

[24] Id. at 658

[25] Id. at 650.

[26] Julie Veach, Exploring New Ideas for Protecting and Promoting the Open Internet, Federal Communications Commission (Sept. 22, 2014), http://www.fcc.gov/blog/exploring-new-ideas-protecting-and-promoting-open-internet.

[27] Tom Wheeler, Statement of Chairman Tom Wheeler, Federal Communications Commission (May 15, 2014), http://www.fcc.gov/article/doc-327104a2.

[28] Open Internet Act of 2014, H.R. Res. 5429 113th Cong. (2014).

[29] President Obama has recently announced a similar opinion that broadband service providers should be reclassified as common carriers. Obama: Regulate Broadband Internet Like a Utility So It ‘Works for Everyone,’ CNET (Nove. 10, 2014, 6:56 AM), http://www.cnet.com/news/president-obama-calls-on-fcc-to-keep-internet-free-and-open/.

[30]David Dean, Sebastian DiGrande, Dominic Field, Andreas Lundmark, James O’Day, John Pineda, and Paul Zwillenberg, The Internet Economy in the G-20: The $4.2 Trillion Growth Economy, Boston Consulting Group (Mar. 19, 2012), https://www.bcgperspectives.com/content/articles/media_entertainment_strategic_planning_4_2_trillion_opportunity_internet_economy_g20/#chapter1.

[31] This would put fifth among national economies (ahead of Germany). Id.

[32] Approximately 62% of Google’s total revenue is derived from internet advertising. Brad Reed, Three Charts Explain Everything You Need to Know about Apple, Google and Microsoft, BGR (Feb. 26, 2014), http://bgr.com/2014/02/06/apple-google-microsoft-revenue-sources.

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