Showing 9 of 204 Publications by Kristian Stout

SEPs: The West Need Not Cede to China

TL;DR TL;DR Background: Policymakers on both sides of the Atlantic are contemplating new regulations on standard-essential patents (SEPs). While the European Union (EU) is attempting to . . .

TL;DR

Background: Policymakers on both sides of the Atlantic are contemplating new regulations on standard-essential patents (SEPs). While the European Union (EU) is attempting to pass legislation toward that end, U.S. authorities like the Department of Commerce and U.S. Patent and Trademark Office are examining the issues and potentially contemplating their own reforms to counteract changes made by the EU.

But… These efforts would ultimately hand an easy geopolitical win to rivals like China. Not only do the expected changes risk harming U.S. and EU innovators and the standardization procedures upon which they rely, but they lend legitimacy to concerning Chinese regulatory responses that clearly and intentionally place a thumb on the scale in favor of domestic firms. The SEP ecosystem is extremely complex, and knee-jerk regulations may create a global race to the bottom that ultimately harms the very firms and consumers they purport to protect.

KEY TAKEAWAYS

EUROPEAN LEGISLATION, GLOBAL REACH

In April 2023, the EU published its “Proposal for a Regulation on Standard Essential Patents.” The proposal seeks to improve transparency by creating a register of SEPs (and accompanying essentiality checks), and to accelerate the diffusion of these technologies by, among other things, implementing a system of nonbinding arbitration of aggregate royalties and “fair, reasonable, and non-discriminatory” (FRAND) terms. 

But while the proposal nominally applies only to European patents, its effects would be far broader. Notably, the opinions on aggregate royalties and FRAND terms would apply worldwide. European policymakers would thus rule (albeit in nonbinding fashion) on the appropriate royalties to be charged around the globe. This would further embolden foreign jurisdictions to respond in kind, often without the guardrails and independence that have traditionally served to cabin policymakers in the West.

CHINA’S EFFORTS TO BECOME A ‘CYBER GREAT POWER’

Chinese policymakers have long considered the SEPs to be of vital strategic importance, and have taken active steps to protect Chinese interests in this space. The latest move came from the Chongqing First Intermediate People’s Court in a dispute between Chinese firm Oppo and Finland’s Nokia. In a controversial December 2023 ruling, the court limited the maximum FRAND royalties that Nokia could charge Oppo for use of Nokia’s SEPs pertaining to the 5G standard.

Unfortunately, the ruling appears obviously biased toward Chinese interests. In calculating the royalties that Nokia could charge Oppo, the court applied a sizable discount in China. It’s been reported that, in reaching its conclusion, the court defined an aggregate royalty rate for all 5G patents, and divided the proceeds by the number of patents each firm held—a widely discredited metric.

The court’s ruling has widely been seen as a protectionist move, which has elicited concern from western policymakers. It appears to set a dangerous precedent in which geopolitical considerations will begin to play an increasingly large role in the otherwise highly complex and technical field of SEP policy.

TRANSPARENCY, AGGREGATE ROYALTY MANDATES, AND FRAND DETERMINATIONS

Leaving aside how China may respond, the EU’s draft regulation will likely be detrimental to innovators. The regulation would create a system of government-run essentiality checks and nonbinding royalty arbitrations. The goal would be to improve transparency and verify that patents declared “standard essential” truly qualify for that designation.

This system would, however, be both costly and difficult to operate. It would require such a large number of qualified experts to serve as evaluators and conciliators that it may prove exceedingly difficult (or impossible) to find them. The sheer volume of work required for these experts would likely be insurmountable, with the costs borne by industry players. Inventors would also be precluded from seeking out injunctions while arbitration is ongoing. Ultimately, while nonbinding, the system may lead to a de facto royalty cap that lowers innovation.

Finally, it’s unclear whether this form of coordinated information sharing and collective royalty setting may give rise to collusion at various points in the value chain. This threatens both to harm consumers and to deter firms from commercializing standardized technologies. 

In short, these kinds of top-down initiatives likely fail to capture the nuances of individualized patents and standards. They may also add confusion and undermine the incentives that drive affordable innovation.

WESTERN POLICYMAKERS MUST RESIST CHINA’S INDUSTRIAL POLICY

The bottom line is that the kinds of changes under consideration by both U.S. and EU policymakers may undermine innovation in the West. SEP entrepreneurs have been successful because they have been able to monetize their innovations. If authorities take steps that needlessly imbalance the negotiation process between innovators and implementers—as Chinese courts have started to do and Europe’s draft regulation may unintendedly achieve—it will harm both U.S. and EU leadership in intellectual-property-intensive industries. In turn, this would accelerate China’s goal of becoming “a cyber great power.”

For more on this issue, see the ICLE issue brief “FRAND Determinations Under the EU SEP Proposal: Discarding the Huawei Framework,” as well as the “ICLE Comments to USPTO on Issues at the Intersection of Standards and Intellectual Property.”

Continue reading
Intellectual Property & Licensing

Navigating the AI Frontier, Part I

TOTM The European Union is on the verge of enacting the landmark Artificial Intelligence Act (AI Act), which will—for better or worse—usher in a suite of . . .

The European Union is on the verge of enacting the landmark Artificial Intelligence Act (AI Act), which will—for better or worse—usher in a suite of new obligations, and hidden pitfalls, for individuals and firms trying to navigate the development, distribution, and deployment of software.

Over the coming months, we will be delving into the nuances of the proposed text, aiming to illuminate the potential challenges and interpretive dilemmas that lie ahead. This series will serve as a guide to understanding and preparing for the AI Act’s impact, ensuring that stakeholders are well-informed and equipped to adapt to the regulatory challenges on the horizon.

Read the full piece here.

Continue reading
Innovation & the New Economy

ICLE Amicus to US Supreme Court in Murthy v Missouri

Amicus Brief INTEREST OF AMICUS CURIAE[1] The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan global research and policy center aimed at building the . . .

INTEREST OF AMICUS CURIAE[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, nonpartisan global research and policy center aimed at building the intellectual foundations for sensible, economically sound policy.  ICLE promotes the use of law-and-economics methods and economic learning to inform policy debates.

ICLE has an interest in ensuring that First Amendment law promotes the public interest, the rule of law, and a rich marketplace of ideas.  To this end, ICLE’s scholars write extensively on social media regulation and free speech.  E.g., Int’l Ctr. for Law & Econ. Am. Br., Moody v. NetChoice, LLC, NetChoice, LLC v. Paxton, Nos. 22-277, 22-555 (Dec. 7, 2023); Ben Sperry, Knowledge and Decisions in the Information Age: The Law & Economics of Regulating Misinformation on Social-Media Platforms, 59 Gonzaga L. Rev. ___ (2024) (forthcoming); Geoffrey Manne, Ben Sperry & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Computer & Tech. L. J. 26 (2022); Internet Law Scholars Am. Br., Gonzalez v. Google LLC, 21-1333 (Jan. 19, 2023); Ben Sperry, An L&E Defense of the First Amendment’s Protection of Private Ordering, Truth on the Market (Apr. 23, 2021), https://bit.ly/49tZ7XD.

ICLE is concerned about government meddling in—and the resulting impoverishment of—the marketplace of ideas.  That meddling is on display in this case—and another case before the Court this Term.  See No. 22-842, Nat’l Rifle Ass’n of Am. v. Vullo (state official coerced insurance companies not to partner with gun-rights organization to cover losses from gun use).  But this case and Vullo merely illustrate a larger problem.  See Backpage.com, LLC v. Dart, 807 F.3d 229 (7th Cir. 2015) (sheriff campaigned to shut down Backpage.com by pressuring Visa and Mastercard to stop processing Backpage transactions); Heartbeat Int’l, Inc. Am. Br. at 4–10, Vullo, supra (collecting examples); Will Duffield, Jawboning Against Speech: How Government Bullying Shapes the Rules of Social Media, Cato Inst. (Sept. 12, 2022) (collecting examples), bit.ly/41NEhjb; Victor Nava, Amazon “censored” COVID-19 vaccine books after “feeling pressure” from Biden White House: docs, New York Post (Feb. 5, 2024), https://bit.ly/3Sq5152.  With this brief, ICLE urges the Court to enforce the Constitution to protect the marketplace of ideas from all such government intrusions.

SUMMARY OF ARGUMENT

The First Amendment protects a public marketplace of ideas free from government interference.

“The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.” Sorrell v. IMS Health Inc., 564 U.S. 552, 577 (2011) (citation omitted).

“Our representative democracy only works if we protect the ‘marketplace of ideas.’  This free exchange facilitates an informed public opinion, which, when transmitted to lawmakers, helps produce laws that reflect the People’s will.  That protection must include the protection of unpopular ideas, for popular ideas have less need for protection.”  Mahanoy Area Sch. Dist. v. B.L., 594 U.S. ___, 141 S. Ct. 2038, 2046 (2021).

Without a free marketplace of ideas, bad ideas persist and fester.  With a free marketplace of ideas, they get challenged and exposed.  When we think of the marketplace, we think of Justice Holmes dissenting in Abrams v. United States, 250 U.S. 616, 630 (1919).  But the insight behind the concept dates back thousands of years, at least to the Hebrew Bible, and has been recognized by, among others, John Milton, the Founders, and John Stuart Mill.  The insight is that the solution for false speech is true speech.  The government may participate in the marketplace of ideas by speaking for itself.  But it ruins the marketplace by coercing speech.

This Court has long stressed the danger of restricting speech on public health, where information can save lives. Several respondents here are elite professors of medicine who dissented from the scientific judgments of government officials. The professors were just the kind of professionals whose views the public needed to make informed decisions.  Instead, the government pressured social media websites to suppress the professors’ views, which the government –at least at the time—saw as outside the mainstream.

Government intervention like this undermines the scientific enterprise.  The goal of science is not to follow the current consensus, but to challenge it with hard data.  For that challenge to happen, the government must not interfere with the open marketplace of ideas, where the current consensus can always yield to a new and better one.

As the “purchasers” in the marketplace of ideas, the people—including respondents here—were stripped of their First Amendment right to make informed decisions on crucial matters of public health. The right to speak includes a corresponding right to receive speech.  Based on the record here, respondent states can likely show that petitioners trampled on their right to receive information and ideas published by websites.  Similarly, respondent individuals will likely be able to show that they have been robbed of their right to hear other suppressed speakers. Today, the marketplace of ideas is stocked, in part, by social media companies exercising editorial discretion. What distinguishes one site from another is what it will, and will not, publish.  As commentators have noted, in the online world, content moderation is the product.  Social media companies are what economists call multi-sided platforms, which connect advertisers with users by curating third-party speech.  The better platforms become at curating speech, the more users engage, and the more valuable advertising becomes to advertisers and users alike.

At times, keeping users engaged requires removing harmful speech or even disruptive users.  But platforms must strike a balance in their content-moderation policies—allowing enough speech to attract users, but not so much speech that users are driven away.  Operating in the marketplace, social media companies are best placed to strike this balance.

Even if the online marketplace did not operate very efficiently (it does), it could not permissibly be controlled by the government.  The First Amendment forbids any abridgement of speech, including speech on the internet.  The way a website adjusts to the market shows what it thinks deserves “expression, consideration, and adherence,” or is “worthy of presentation” (phrases this Court has used to describe protected editorial discretion).  Pressuring social media companies to take down content changes the content of the platforms’ speech, intrudes on their editorial discretion, and violates the Constitution.

Given the record respondents have compiled, it is likely that they can show coercion by federal officials. The Fifth Circuit agreed, but its test for coercion fell short of the test applied in Bantam Books.  The focus of Bantam Books is not on the subjective understanding of the private actor, but on what the state actors objectively did—namely, was it reasonably understood as attempting to coerce private action?

Here it was.  Indeed, the allegations here include (a) many threats to have social media companies investigated, prosecuted, and regulated if they fail to remove disfavored speech, coupled with (b) extensive use of private meetings, emails, and digital portals to pressure social media companies to remove speech.  That was attempted coercion, and it was unlawful.

The remedy for unlawful coercion is an injunction against, or in some cases, damages from, government actors.  The court below focused the injunction on federal officials.  That was correct.  The marketplace of ideas—now freed from impermissible government intervention by the injunction—leaves its participants free to exercise their editorial discretion as they see fit.  The judgment should be affirmed.

ARGUMENT

I.       The First Amendment protects the marketplace of ideas from government meddling.

A.     A marketplace offering only government-approved ideas is no marketplace, logically and as historically understood.

The First Amendment protects an open marketplace of ideas.  “By allowing all views to flourish, the framers understood, we may test and improve our own thinking both as individuals and as a Nation.”  303 Creative LLC v. Elenis, 600 U.S. 570, 143 S. Ct. 2298, 2311 (2023).  “‘[I]f there is any fixed star in our constitutional constellation,’ it is the principle that the government may not interfere with ‘an uninhibited marketplace of ideas.’”  Id. (quoting West Virginia Bd. of Ed. v. Barnette, 319 U.S. 624, 642 (1943) and McCullen v. Coakley, 573 U.S. 464, 476 (2014)).

“[U]ninhibited” means uninhibited. “[T]he First Amendment protects an individual’s right to speak his mind regardless of whether the government considers his speech sensible and well intentioned or deeply ‘misguided,’ and likely to cause ‘anguish’ or ‘incalculable grief.’” 303 Creative, 143 S. Ct. at 2312 (quoting Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, Inc., 515 U.S. 557, 574 (1995) and Snyder v. Phelps, 562 U.S. 443, 456 (2011)).  “The First Amendment directs us to be especially skeptical of regulations that seek to keep people in the dark for what the government perceives to be their own good.”  Sorrell, 564 U.S. at 577 (citation omitted).  Without zealous protection, unpopular speech may be “chill[ed],” “would-be speakers [may] remain silent,” and “society will lose their contributions to the ‘marketplace of ideas.’”  United States v. Hansen, 599 U.S. 762, 143 S. Ct. 1932, 1939–40 (2023) (quoting Virginia v. Hicks, 539 U.S. 113, 119 (2003)).  Nor do speakers “shed their First Amendment protections by employing the corporate form to disseminate their speech.”  303 Creative, 143 S. Ct. at 2316.

When the marketplace of ideas is impoverished, it is not only “society” that loses (Hansen, 143 S. Ct. at 1939–40); it is democracy itself.  “Our representative democracy only works if we protect the ‘marketplace of ideas.’  This free exchange facilitates an informed public opinion, which, when transmitted to lawmakers, helps produce laws that reflect the People’s will.  That protection must include the protection of unpopular ideas, for popular ideas have less need for protection.”  Mahanoy Area Sch. Dist., 141 S. Ct. at 2046.  “A democratic people must be able to freely generate, debate, and discuss * * * ideas, hopes, and experiences.  They must then be able to transmit their resulting views and conclusions to their elected representatives[.]  Those representatives can respond by turning the people’s ideas into policies.  The First Amendment, by protecting the marketplace and the transmission of ideas, thereby helps to protect the basic workings of democracy itself.  City of Austin v. Reagan Nat’l Advert. of Austin, LLC, 596 U.S. 61, 142 S. Ct. 1464, 1476–77 (2022) (Breyer, concurring) (internal citations and quotation marks omitted).  In short, “[t]he First Amendment was fashioned to assure unfettered interchange of ideas for the bringing about of political and social changes desired by the people.”  Meyer v. Grant, 486 U.S. 414, 421 (1988) (internal citation and quotation marks omitted).

Without a free marketplace of ideas, bad ideas flourish, unchallenged by competition. “[T]ime has upset many fighting faiths”; and “the ultimate good desired is better reached by free trade in ideas—that the best test of truth is the power of the thought to get itself accepted in the competition of the market[.]  That at any rate is the theory of our Constitution.”  Abrams, 250 U.S. at 630 (Holmes, J., dissenting).  With a free marketplace, however, people enjoy the liberty to be wrong—even as their mistaken ideas tend to get exposed.  For this reason, after the divisive presidential election of 1800, winner Thomas Jefferson urged toleration of dissenters.  Even those in favor of changing our form of government, he urged, should be left “undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it.”  First Inaugural Address (Mar. 4, 1801), https://bit.ly/42tAxUt.

Of course, neither Holmes nor Jefferson was the first to recognize that the best ideas emerge from the crucible of competition.  Thousands of years before the American republic, the Hebrew Bible observed that  “[t]he one who states his case first seems right, until the other comes and examines him.”  Prov. 18:17.   Much later, John Milton and John Stuart Mill would sound similar themes.  “Even a false statement may be deemed to make a valuable contribution to public debate, since it brings about ‘the clearer perception and livelier impression of truth, produced by its collision with error.’”  N.Y. Times Co. v. Sullivan, 376 U.S. 254, 279 n.19 (1964) (quoting Mill, On Liberty 15 (1947) and citing Milton, Areopagitica, Prose Works, Vol. II 561 (1959)).

In sum, “[t]he remedy for speech that is false is speech that is true.  This is the ordinary course in a free society.  The response to the unreasoned is the rational; to the uninformed, the enlightened; to the straight-out lie, the simple truth.”  United States v. Alvarez, 567 U.S. 709, 727–28 (2012) (plurality).  “And suppression of speech by the government can make exposure of falsity more difficult, not less so.  Society has the right * * * to engage in open, dynamic, rational discourse.  These ends are not well served when the government seeks to orchestrate public discussion through content-based mandates.”  Id. at 728.  “If there be time to expose through discussion the falsehood and fallacies, to avert the evil by the processes of education, the remedy to be applied is more speech, not enforced silence.”  Whitney v. California, 274 U.S. 357, 377 (1927) (Brandeis, J., concurring).

Of course, the government itself may participate in the marketplace of ideas. Government agencies concerned about health or election misinformation may use social media platforms to broadcast their message.  Those agencies may even amplify and target their counter-speech through advertising campaigns tailored to those most likely to share or receive misinformation—including by creating their own apps or social media websites.

All these steps would combat alleged online misinformation in a way that promotes the marketplace of ideas rather than restricting it.  What is more, presidents may always directly use the bully pulpit to advocate their views.  Pet. Br. 24–25 (listing examples of presidential statements criticizing protected speech).  What the government may not do, as petitioners necessarily concede, is “use its authority to suppress contrary views.”  Id. at 23.  As the record shows, that is exactly what happened in this case.

Finally, protecting the marketplace of ideas from government interference of course does not guarantee that the best ideas win. To the contrary, the marketplace will still see a “good deal of market failure”—if success is measured by the truth winning out. Ronald Coase, The Market for Goods and the Market for Ideas, 64 Am. Econ. Rev. 384, 385 (1974).  But “that different costs and benefits must be balanced does not in itself imply who must balance them,” much less how the balance should be struck.  Thomas Sowell, Knowledge and Decisions 240 (1996).

In the First Amendment, the Founders struck the balance in favor of liberty.  However flawed an open marketplace of ideas may be, they decided, it is better than censorship.  “The liberal defense of free speech is not based on any claim that the market for ideas somehow eliminates error or erases human folly.  It is based on a comparative institutional analysis in which most state interventions make a bad situation worse.”  Roger Koppl, Expert Failure 217 (2018).

B.     As this Court instructs, it is especially crucial that the marketplace of ideas be uninhibited on matters of public health.

It is precisely this judgment of the Founders—that state interventions in the marketplace of ideas “make a bad situation worse” (Koppl, supra, at 217) —that petitioners here ignored.  White House officials pressured websites to take down “[c]laims that have been ‘debunked’ by public health authorities.”  J.A. 98.  So-called misinformation was itself dubbed an “urgent public health crisis.”  J.A. 113.  Indeed, said the Surgeon General, “misinformation poses an imminent threat to the nation’s health and takes away the freedom to make informed decisions.”  J.A. 125 (emphasis added).  These assertions are dead wrong—backwards even.  Public health is the last area in which the government should be deciding “which ideas should prevail.”  Nat’l Inst. of Family & Life Advocates v. Becerra, 138 S. Ct. 2361, 2375 (2018) (“NIFLA”).  “[T]his Court has stressed the danger of content-based regulations ‘in the fields of medicine and public health, where information can save lives.’”  Ibid. (quoting Sorrell, 564 U.S. at 566 (striking down statute restricting publication of pharmacy records)).

Several respondents here are professors of medicine at elite institutions who disagreed with the scientific judgments of government officials.  In other words, they were just the kind of professionals whose views the public needed “to make informed decisions.” J.A. 125.  Instead, the government pressured social media websites to suppress these professionals’ views, which the government at the time viewed as outside the mainstream.

“As with other kinds of speech, regulating the content of professionals’ speech ‘pose[s] the inherent risk that the Government seeks not to advance a legitimate regulatory goal, but to suppress unpopular ideas[.]’”  NIFLA, 138 S. Ct. at 2374 (quoting Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 641 (1994)).  “Take medicine, for example.  Doctors help patients make deeply personal decisions, and their candor is crucial.”  NIFLA, 138 S. Ct. at 2374.  Yet “[t]hroughout history, governments have ‘manipulat[ed] the content of doctor-patient discourse’ to increase state power and suppress minorities”:

For example, during the Cultural Revolution, Chinese physicians were dispatched to the countryside to convince peasants to use contraception. In the 1930s, the Soviet government expedited completion of a construction project on the Siberian railroad by ordering doctors to both reject requests for medical leave from work and conceal this government order from their patients.  In Nazi Germany, the Third Reich systematically violated the separation between state ideology and medical discourse. German physicians were taught that they owed a higher duty to the ‘health of the Volk’ than to the health of individual patients. Recently, Nicolae Ceausescu’s strategy to increase the Romanian birth rate included prohibitions against giving advice to patients about the use of birth control devices and disseminating information about the use of condoms as a means of preventing the transmission of AIDS. – Ibid. (quoting Thomas Berg, Toward a First Amendment Theory of Doctor-Patient Discourse and the Right To Receive Unbiased Medical Advice, 74 B. U. L. Rev. 201, 201–202 (1994) (footnotes omitted)).

None of this government interference makes sense if the goal is to discover the truth.  And that is the goal of the scientific enterprise:  to discover the truth by testing hypotheses.  The goal is not to follow the current consensus.  “The notion that scientists should agree with a consensus is contrary to how science advances—scientists challenge each other, ask difficult questions and explore paths untaken.  Expectations of conformance to a consensus undercuts scientific inquiry.  It also lends itself to the weaponization of consensus to delegitimize or deplatform inconvenient views, particularly in highly politicized settings.”  Roger Pielke, Jr., The Weaponization of “Scientific Consensus,” American Enterprise Institute (Feb. 5, 2024), https://bit.ly/3OBH3Tj.

We saw just this politicization during the recent pandemic.  “Reputable scientists and physicians have questioned—and in many cases debunked—the ‘official’ narratives on lockdowns, school closures, border testing, vaccine mandates, endless boosters, bivalent COVID shots, epidemic forecasting, natural immunity, vaccine-induced myocarditis, and more.  * * *  But it’s become untenable for those in charge to defend many of their initial positions.”  Matt Strauss, Marta Shaw, J. Edward Les & Pooya Kazemi, COVID dissent wasn’t always misinformation, but it was censored anyway, National Post (Mar. 1, 2023), https://bit.ly/3SQZ6Yb.  Yet that did not stop many of those in charge, in the meantime, from using government power effectively to censor dissenters.  That is what happened in this case.  As one liberal member of Congress said of the “lab leak” theory of COVID’s origin—itself a key exhibit in the shifting of accepted thinking about COVID—“If you take partisan politics and you mix that with science * * *, it’s a toxic combination.”  Sheryl Gay Stolberg & Benjamin Mueller, Lab Leak or Not? How Politics Shaped the Battle Over Covid’s Origin, New York Times (Mar. 19, 2023) (quoting U.S. Rep. Anna Eshoo).

In sum, “[p]rofessionals might have a host of good-faith disagreements, both with each other and with the government, on many topics in their respective fields.  Doctors and nurses might disagree about the ethics of assisted suicide or the benefits of medical marijuana; lawyers and marriage counselors might disagree about the prudence of prenuptial agreements or the wisdom of divorce; bankers and accountants might disagree about the amount of money that should be devoted to savings or the benefits of tax reform.  ‘[T]he best test of truth is the power of the thought to get itself accepted in the competition of the market,’ and the people lose when the government is the one deciding which ideas should prevail.”  NIFLA, 138 S. Ct. at 2374–75 (quoting Abrams, 250 U.S. at 630 (Holmes, J., dissenting)).  The people lost here.

C.     A marketplace offering only government-approved ideas violates the rights of speakers and listeners, the overlooked “purchasers” in the marketplace.

The people’s loss is constitutionally cognizable.  As the “purchasers” in the marketplace of ideas, the people—including respondents here—were robbed of their First Amendment right to make informed decisions.  After all, the right to speak includes a “reciprocal” right to receive speech.  Va. State Bd. of Pharm. v. Va. Citizens Consumer Council, 425 U.S. 748, 757 (1976); see First Amend. and Internet Law Scholars Am. Br., Moody v. NetChoice LLC, NetChoice LLC v. Paxton, Nos. 22-277, 22-555, at 4–5 (Dec. 6, 2023) (collecting authorities).  “To suppress free speech is a double wrong.  It violates the rights of the hearer as well as those of the speaker.  It is just as criminal to rob a man of his right to speak and hear as it would be to rob him of his money.”  Frederick Douglass, Address: A Plea for Free Speech in Boston (1860), in Great Speeches by Frederick Douglass 48, 50 (2013) (quoted in First Amend. and Internet Law Scholars Am. Br, supra, at 4–5).

Stated differently, “[t]he First Amendment protects ‘speech’ and not just speakers.”  Eugene Volokh, Mark Lemley & Peter Henderson, Freedom of Speech and AI Output, 3 J. Free Speech L. 653, 656 (2023).  As a result, “th[is] Court has long recognized First Amendment rights ‘to hear’ and ‘to receive information and ideas.’”  Id. at 657 & n.11 (citing, among other cases, Kleindienst v. Mandel, 408 U.S. 753, 762–763 (1972) (“In a variety of contexts this Court has referred to a First Amendment right to receive information and ideas”) (internal quotation marks omitted); Stanley v. Georgia, 394 U.S. 557, 564 (1969) (“It is now well established that the Constitution protects the right to receive information and ideas.”); Thomas v. Collins, 323 U.S. 516, 534 (1945) (“That there was restriction upon Thomas’ right to speak and the rights of the workers to hear what he had to say, there can be no doubt.”)).

Based on the record respondents have built, Missouri and Louisiana can likely show that petitioners have trampled on their right to “hear” and to “receive information and ideas” published by websites.  Volokh, supra, at 656–657; Resp. Br. 25–27.  And by the same token, respondent individuals will likely be able to show that they have been robbed of their right to hear other suppressed speakers, “whom [respondents] follow, engage with, and re-post on social media.”  Resp. Br. 22.  The judgment should be affirmed.

II.    Websites stock the online marketplace of ideas by exercising editorial discretion.

By effectively forcing websites to take down certain content, the government here “alte[red] the content of [the websites’] speech.”  NIFLA, 138 S. Ct. at 2371 (internal citation omitted).  Such laws “are presumptively unconstitutional and may be justified only if the government proves that they are narrowly tailored to serve compelling state interests.”  Reed v. Town of Gilbert, 576 U.S. 155, 163 (2015).  “This stringent standard reflects the fundamental principle that governments have no power to restrict expression because of its message, its ideas, its subject matter, or its content.”  NIFLA, 138 S. Ct. at 2371 (internal citation and quotation marks omitted).  Nor is government control necessary in the competitive marketplace of ideas stocked by social media companies.

What distinguishes one site from another is what it publishes and refuses to publish. “[C]ontent moderation is the product.” Thomas Germain, Actually, Everyone Loves Censorship. Even You., GIZMODO (Feb. 22, 2023) (emphasis added), http://bit.ly/3Rge8pI.  As private participants in the marketplace of ideas, social media firms set their own editorial policies and choose which ideas to publish.  “The Free Speech Clause does not prohibit private abridgment of speech.”  Manhattan Cmty. Access Corp. v. Halleck, 139 S. Ct. 1921, 1928 (2019) (emphasis in original).  Even as they openly publish the speech of others, social media platforms do not “lose the ability to exercise what they deem to be appropriate editorial discretion,” because then they would “face the unappetizing choice of allowing all comers or closing the platform altogether.”  Id. at 1931.  In turn, users participate in the marketplace of ideas by choosing which social media website best meets their needs, including through its respective moderation policies.

Social media firms are what economists call “matchmakers” or “multi-sided” platforms.  David Evans & Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms 10 (2016).  “[M]atchmakers’ raw materials are the different groups of customers that they help bring together.  And part of the stuff they sell to members of each group is access to members of the other groups.  All of them operate physical or virtual places where members of these different groups get together.  For this reason, they are often called multisided platforms.”  Ibid.  Social media firms bring together advertisers and users—including both speakers and listeners—by curating third-party speech.  Curating speech well keeps users engaged so advertisers can reach them.

At times, keeping users engaged requires removing harmful speech, or even removing users who break the rules.  See David Evans, Governing Bad Behavior by Users of Multi-Sided Platforms, 27 Berkeley Tech. L.J. 1201, 1215 (2012).  But a social media company cannot go too far in restricting speech that users value.  Otherwise, users will visit the platform less or even abandon it for other companies in the “attention market”—which includes not only other platforms, but newspapers, magazines, television, games, and apps.  Facing the prospect of fewer engaged users, advertisers will expect lower returns and invest less in the platform.  Eventually, if too many customers flee, the social media company will fail.

Social media companies must also consider brand-conscious advertisers who may not want to be associated with perceived misinformation or other harmful speech.  To take just one example, advertisers reportedly left X after that company loosened its moderation practices.  Ryan Mac, Brooks Barnes & Tiffany Hsu, Advertisers Flee X as Outcry Over Musk’s Endorsement of Antisemitic Post Grows, N.Y. Times (Nov. 17, 2023).  In other words, platforms must strike a balance in their content-moderation policies.  This balance includes creating rules discouraging misinformation if such speech drives away users or advertisers.  As active participants in the marketplace, social media firms are best positioned to discover the best way to serve their users.  See Int’l Ctr. for Law & Economics Am. Br. at 6–11, Moody v. NetChoice LLC, NetChoice LLC v. Paxton, Nos. 22-277, 22-555 (Dec. 7, 2023).  As competition plays out, though, consumers can deliver surprises—and platforms must adjust.  This is the marketplace of ideas in action.

All these product changes happen without government intervention, which, again, would be forbidden in any event. After all, the First Amendment forbids any “abridg[ement]” of speech, no matter where that speech is “publish[ed]” or “disseminat[ed]”—including the online marketplace of ideas. Reno v. ACLU, 521 U.S. 844, 853 (1997); 303 Creative, 600 U.S. at 594.  The way a social media company adjusts to the market shows what it deems “deserving of expression, consideration, and adherence,” or “worthy of presentation.”  Turner, 512 U.S. at 641; Hurley, 515 U.S. at 575.  By forcing platforms to take down content, government coercion “alte[red] the content of [the platforms’] speech.”  NIFLA, 138 S. Ct. at 2371 (internal citation omitted).

When a company “exercises editorial discretion in the selection and presentation of its programming, it engages in speech activity.”  Arkansas Ed. Television Comm’n v. Forbes, 523 U.S. 666, 674 (1997).  “[E]ditorial control” encompasses the “choice of material,” “decisions made as to limitations on the size and content,” and “treatment of public issues[.]”  Miami Herald Pub. Co. v. Tornillo, 418 U.S. 241, 258 (1974).  Any governmental “compulsion to publish that which reason tells them should not be published”—or vice versa—“is unconstitutional.”  Id. at 256 (internal citation and quotation marks omitted).

III. The online marketplace of ideas was impoverished by federal coercion here, and the Court should affirm the injunction insofar as it binds federal officials.

Although social media companies are private actors with a right to editorial discretion, the facts adduced so far in this case, if ultimately established, show coercion by federal officials, and not the exercise of discretion by websites. Relying on an extensive record, “the district court concluded that the officials, via both private and public channels, asked the platforms to remove content, pressed them to change their moderation policies, and threatened them—directly and indirectly—with legal consequences if they did not comply. And it worked—that ‘unrelenting pressure’ forced the platforms to act and take down users’ content.”  J.A. 16–17.

The Fifth Circuit agreed, holding that federal officials likely “ran afoul of the First Amendment by coercing and significantly encouraging social-media platforms to censor disfavored [speech], including by threats of adverse government action like antitrust enforcement and legal reforms.”  J.A. 32 (internal citations and quotation marks omitted).  In reaching this conclusion, the Fifth Circuit adopted a four-part test, ostensibly derived from Bantam Books, Inc. v. Sullivan, 372 U.S. 58 (1963), to tell when government actions aimed at private parties become coercive: “(1) the speaker’s word choice and tone; (2) “?whether the speech was perceived as a threat?”; (3) “?the existence of regulatory authority?”; and, “perhaps most importantly, (4) whether the speech refers to adverse consequences.”  J.A. 42 (internal citations and quotation marks omitted)

But the Fifth Circuit’s test falls short of the test applied in Bantam Books.  The focus of Bantam Books is not on the subjective understanding of the private actor, but on what the state actors objectively did—namely, was it reasonably understood as attempting to coerce private action.  The Bantam Books test is about the efforts of the state actor to suppress speech, not whether the private actor is in some hyper-literal sense “free” to ignore the state actor.  Surreptitious pressure in the form alleged by respondents is just as much an intervention into the marketplace of ideas as overt censorship.

Consider what happened in Bantam Books.  A legislatively created commission notified book publishers that certain books and magazines were objectionable for sale or distribution.  The commission had no power to sanction publishers or distributors, and there were no bans or seizures of books.  372 U.S. at 66–67.  In fact, the book distributors were technically “free” to ignore the commission’s notices.  Id. at 68 (“It is true * * * that [the distributor] was ‘free’ to ignore the Commission’s notices, in the sense that his refusal to ‘cooperate’ would have violated no law.”).  Nonetheless, this Court held, “the Commission deliberately set about to achieve the suppression of publications deemed ‘objectionable’ and succeeded in its aim.”  Id. at 67.  Particularly important was that the notices could be seen as a threat of prosecution.  See id. at 68–69 (“People do not lightly disregard public officers’ thinly veiled threats to institute criminal proceedings against them if they do not come around[.]  The Commission’s notices, phrased virtually as orders, reasonably understood to be such by the distributor, invariably followed up by police visitations, in fact stopped the circulation of the listed publications[.]  It would be naive to credit the State’s assertion that these blacklists are in the nature of mere legal advice, when they plainly serve as instruments of regulation.”).

Ignoring this lesson of Bantam Books, petitioners focus on the subjective response of social media companies rather than the objective actions of the government.  Petitioners emphasize that media companies did not always censor speech to the degree that federal officials asked.  Br. 39.  But under Bantam Books, that is not the question.  The question is whether the government’s communications could reasonably be seen as a threat.  372 U.S. at 68–69.

They could.  Indeed, the allegations here include (a) many threats to have social media firms investigated, prosecuted, and regulated if they failed to remove disfavored speech, coupled with (b) extensive use of private meetings, emails, and digital portals to pressure firms to remove speech.  Resp. Br. 2–16.  As a result of this pressure, social media firms removed speech against their policies and changed their policies.  Ibid.  Much as in Bantam Books, government pressure suppressed lawful speech.

All this government coercion is a first-order infringement of speech and an impermissible intervention into the marketplace of ideas.  It also destroys the business model of social media websites.  As multisided platforms, these companies must carefully balance users, advertisers, and speech.  Government intervention disrupts this careful balance.  Again, the value proposition of social media websites is that they—as actors in the market—are best situated to curate forums attractive to their users.  Destroying these privately curated forums will chill speech for all Americans.  The Court should find that respondents are likely to succeed on the merits of their First Amendment claim.

As noted, the government is free to use the bully pulpit to persuade—and even to argue publicly that certain content on social media platforms is misinformation that should be demoted or removed. Pet. Brief 23–25 (listing examples of presidential statements criticizing protected speech).  But this does not mean the First Amendment allows coercing private actors into shutting down speech, which is what is shown by the facts adduced here.

The remedy for unlawful government coercion is an injunction against, or in specific cases, damages from, government actors. Here, the District Court and Fifth Circuit rightly focused the injunction against federal officials.  That was correct.  The marketplace of ideas, now freed from impermissible government intervention, leaves its participants free to exercise their editorial discretion as they see fit.  There is no need to enjoin private actors; and, indeed, doing so would undermine the same freedom of expression that enjoining coercive government actors protects.  On remand, the injunction should continue to make clear that social media companies may continue to engage in the marketplace of ideas by exercising editorial discretion.  But the government may not press its thumb on the scale by compelling them to censor.

CONCLUSION

The judgment should be affirmed.

[1] No party or counsel for a party authored this brief in whole or in part.  No one other than amicus or its counsel made a monetary contribution to fund preparation or submission of this brief.

Continue reading
Innovation & the New Economy

The FTC’s Misguided Campaign to Expand Bayh-Dole ‘March-In’ Rights

TOTM The Federal Trade Commission (FTC) has now gone on record in comments to the National Institute of Standards and Technology (NIST) that it supports expanded “march-in rights” . . .

The Federal Trade Commission (FTC) has now gone on record in comments to the National Institute of Standards and Technology (NIST) that it supports expanded “march-in rights” under the Bayh-Dole Act (Act). But if NIST takes the FTC’s (unexpected, but ultimately unsurprising) contribution seriously, such an expansion could lead to overregulation that would ultimately hurt consumers and destroy the incentives that firms have to develop and commercialize lifesaving medicines.

Read the full piece here.

Continue reading
Intellectual Property & Licensing

ROI Regarding the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights

Regulatory Comments I. Introduction This comment is submitted in response to the National Institute of Standards and Technology’s (NIST) request for information (RFI) on the Draft Interagency . . .

I. Introduction

This comment is submitted in response to the National Institute of Standards and Technology’s (NIST) request for information (RFI) on the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights.[1]

The U.S. patent system has been a major driver of innovation, and provides an important foundation for the nation’s technological leadership around the world. Undoubtedly, there are cases at the margins where one could find some invention has not been optimally commercialized. But the measure of the system’s success is not in isolated anecdotes, but rather, in data demonstrating it has been a major driver of economic growth and consumer welfare—both in general and particularly in the consistent development of lifesaving and life-enhancing medicines and medical devices.

This suggests that the integrity of the current patent rights framework under the Bayh-Dole Act is crucial for sustaining innovation, promoting commercialization, and ultimately enhancing consumer welfare. As such, any proposal to expand “march-in rights” must be treated with caution.

Further, while the administration’s focus in this draft guidance appears to be centered primarily on the pharmaceutical sector,[2] the proposed modifications have the potential to trigger extensive spillover effects across various other patent-reliant industries. For instance, industries such as biotechnology, software development, and advanced manufacturing—which rely fundamentally on strong patent protections to secure investments for research and development—could face unforeseen challenges. These sectors are driven by innovation underpinned by intellectual property. Increased uncertainty regarding the longevity and security of patent rights could lead them to experience a slowdown in the pace of that innovation, as venture capitalists may become more reluctant to fund new ventures. Of particular concern is that march-in petitions brought under a more liberal standard may become a useful tool for firms looking to stymie their competition.

The proposed changes are clearly unnecessary, given the history of success that characterizes the post-Bayh-Dole era. Indeed, these suggested modifications threaten to undermine a substantial portion of the U.S. economy and to harm both consumer health and general welfare. Apart from being ill-advised from an economic perspective, the proposed changes also appear to be at odds with the Bayh-Dole Act’s very legal and policy basis. As Adam Mossoff has observed, “the text of the Bayh-Dole Act and its consistent interpretation by federal officials militates against” the view that it authorizes imposing price controls on patented inventions produced with support from federal funding.[3]

In summary, the ongoing debate about modifying march-in rights under the Bayh-Dole Act touches on fundamental aspects of innovation, economic growth, and public welfare. This is not merely about adjusting a legislative framework; it is about preserving the delicate balance that has propelled the United States to the forefront of global innovation, particularly in life-saving pharmaceuticals and technologies. Any alterations to the Act’s implementation risk distorting this balance, potentially stifling innovation and undermining the economic and health benefits that have been realized. As such, it is imperative to carefully consider any proposed modifications to ensure that they support, rather than hinder, the Act’s foundational goal of fostering innovation and delivering tangible benefits to society.

II. Success of the Bayh-Dole Act and the Importance of Patent Rights

The Bayh-Dole Act, formally known as the University and Small Business Patent Procedures Act of 1980 (Act),[4] is a landmark piece of intellectual-property legislation. The Act allows universities, small businesses, and nonprofit organizations to retain and exercise patent rights to inventions developed under federally funded research programs. This legislative framework was designed to:

  • Facilitate the transfer of federally funded research from academic and research institutions to the private sector for further development and commercialization;
  • Encourage the practical application of these inventions for public benefit;
  • Stimulate collaboration between public research entities and the private sector; and
  • Enhance the contribution of federally funded inventions to the market, thereby boosting economic growth and public welfare.[5]

The Act has been a pivotal catalyst in advancing U.S. technological innovation, primarily by establishing a property-rights framework that creates incentives for the commercialization of scientific developments that received some degree of government funding. These property rights empower entities to license their inventions for more extensive applied research and development, thereby enhancing their accessibility and application for the broader public good.

The Act has been paying dividends since its inception in 1980. One important effect has been that, by enabling private companies to benefit from R&D that they (co-)fund at publicly supported universities, it has led to a dramatic increase in private-sector sponsorship of R&D at such universities. A report from the General Accounting Office (now known as the U.S. Government Accountability Office) found that, between 1980 and 1985 alone:

total business sponsorship of university research grew 74 percent, from $277 million in fiscal year 1980 to $482 million in fiscal year 1985 (in constant 1982 dollars). For 23 of the 25 universities we surveyed… industrial sponsorship of research more than doubled from $70 million in fiscal year 1980 to $160 million in fiscal year 1985 (in constant 1982 dollars).[6]

The Association of University Technology Managers (AUTM) estimates that, between 1996 and 2010, academic licensors contributed between $86 billion and $338 billion to U.S. gross domestic product (in 2005 dollars), in addition to supporting between 900,000 and 3 million person-years of employment over that that period.[7] In a survey of the 2019-2020 period, AUTM found that innovations of the sort that are at the core of the Bayh-Dole Act’s focus led to a 7% increase in startups; a 7% increase in invention disclosures; an 11% increase in net patent applications; a 3% increase in licenses executed; and a 31% increase in new products introduced to market based on academic research.[8]

Along with many other pro-innovation policies enacted over the last several decades, one of the Act’s enduring legacies is the fundamental shift it initiated in relocating innovative activity from Europe and Asia to the United States, with the latter now firmly established as the most important locale for producing new medicines:

In the last decade, while the U.S. had 111 [new chemical entities] discovered, Switzerland-headquartered companies were second with 26. This means that actual [new chemical entities] discovered that had a significant U.S. nexus for research and development is much higher than the 57 percent of total [new chemical entities] discovered, perhaps closer to 65 percent. One other point worth noting… is the reduction in overall [new chemical entities] discovered from the decade of the 1980s to now. The U.S. has the vast majority of clinical trials. A similar trend has taken place for medical devices.[9]

The United States has continued to develop a large number of new chemical entities in absolute terms, and in relative terms, has come to completely dominate the field.[10] This boom of patented innovations has also given rise to numerous transformative products we now consider commonplace, such as various cancer treatments,[11] prosthetics and medical devices,[12] a variety of web technologies, and improved foods.[13]

Nevertheless, the Act and the patent system are not without critics. Some have challenged the idea that the patent system does not sufficiently stimulate the production of inventions at universities,[14] or that, when such inventions occur, “large portion of those royalties… are derived from a few sizeable inventions at a handful of academic institutions.”[15] Thus, according to these critics, the Act does not promote widespread welfare gains, so much as enable large gains to a small number of parties.

Proposed changes to federal policy have also threatened to pare back the gains the Act has helped to facilitate. In addition to this draft guidance, which would introduce de facto price controls on any industry substantially reliant on patented invention, the U.S. Energy Department has been imposing more stringent domestic-manufacturing requirements on licensees—an obligation that makes little sense in our globalized economy and that is more likely to impose red tape without substantially improving domestic production.[16] In a 2021 letter to the Pentagon, Sen. Elizabeth Warren (D-Mass.) and Rep. Lloyd Doggett (D-Texas) noted that “[r]ecognizing the high prices of medical products developed, in part, with DOD funding, the Senate Armed Services Committee directed DOD to utilize march-in rights to lower prices.”[17] That is to say, at least some members of Congress have called explicitly for diminution of property rights and imposition of price controls.

But critics of the current patent system take far too dim a view of the Bayh-Dole Act’s legacy. Both the patent system and the Act provide important incentives not just to spur invention, but also to encourage commercialization. As noted above, the Act has performed remarkably well at opening opportunities for the commercialization of inventions, and it is this commercialization function that helps to ensure that crucial discoveries are not left to gather dust. Indeed, one of the main drivers of the Act’s success is its harmony with the economic theory of patent rights.

A. The Centrality of Strong Patent Protections

The biotechnology sector historically has depended on patents as a means to organize collaboration among universities, startups, and larger corporations. The costly and complex process of moving a discovery from the laboratory to the marketplace depends heavily on the temporary exclusivity granted by patent rights, as well as the data-protection rights of biologics subject to regulatory approval.[18] Such property rights are fundamental for attracting investors to commit resources to these ventures, which are fraught with high risks and significant costs.

Nobel laureate Kenneth Arrow observed that the product of inventive activity is knowledge.[19] This distinguishes knowledge from other goods or services, in that knowledge is costly to produce, but nearly costless to distribute.[20] In addition, information is often indivisible.[21] Indivisibility means that the information cannot be divided or allocated across producers, products, or outputs—e.g., once a drug’s chemical structure is known, this knowledge does not vary with how many doses are produced, or who produces them.[22] In addition, unlike most products and services, once knowledge is obtained, it is known forever. Those in possession of it can often utilize it with relatively little or no further expenditure. While a bicyclist may need to buy a new bicycle, his knowledge of how to ride will, once acquired, remain with him throughout his life. Likewise, once one knows how to produce a new drug, copies can often be reproduced at relatively low cost.

Another feature of knowledge is that consumers may not know its value until considerable resources have been expended to uncover it.[23] Consumers of a new drug do not know its safety and efficacy of until investigations have established how it performs biologically, which requires extensive modeling, as well as animal and human trials—the latter of which is especially costly.[24]

All these factors place drugs in the category of goods that are expensive to research, develop, and bring to market, but relatively cheap to imitate, as explained by Kip Viscusi and his co-authors:

Suppose the inventor discovers an important drug, Panacea. The inventor could keep the chemical structure secret and try selling the drug as a cure for certain diseases. But a rival could easily buy a few pills, hire a chemist to figure out the structure, and begin selling exact copies at a lower price.[25]

These rivals would benefit from the inventor’s investment in researching the new discovery at little expense of their own. In what is likely the most-cited empirical research on imitation costs, Edwin Mansfield et al. find that 6o% of the patented innovations in their sample were imitated much more quickly and at much lower cost than the initial innovation:

In the ethical drug industry [i.e., the part of the industry involved in researching, developing and bringing drugs to market with regulatory approvals], patents had a bigger impact on imitation costs than in the other industries, which helps to account for survey results indicating that patents are regarded as more important in ethical drugs than elsewhere. … Without patent protection, it frequently would have been relatively cheap (and quick) for an imitator to determine the composition of a new drug and to begin producing it. However, for many of these electronics and machinery innovations, it would have been quite difficult for imitators to determine from the new product how it is produced, and patents would not add a great deal to imitation cost (or time).[26]

If the benefits of the costly investment can be easily appropriated by rivals, then the incentives for invention evaporate. This leads to reduced investment, as explained in a section titled “Imitation Discourages Research” in Dennis Carlton and Jeffrey Perloff’s textbook:

Without a patent, anyone could use new information and imitations of new inventions could be sold legally. Suppose you discovered a cure for AIDS. You could sell your new drug for large sums of money if a patent gave you exclusive rights. Without a patent, other companies could duplicate your drug, and competition would drive the price to the competitive level. You would incur all the research costs, but not all the private benefit.[27]

Commenting on a 1990s-era proposal to regulate the pricing of “breakthrough” drugs, Viscusi et al. conclude that the proposal would ripple through companies’ R&D portfolios:

If one regards R&D investment as somewhat like a lottery—with low probabilities of achieving huge returns—top decile regulation changes completely the nature of the game. Winning the lottery now provides only a reasonable or breakeven return, with other outcomes worse![28]

Not only would such regulations affect companies’ expected returns, but they would also increase the variation in those returns. The added regulatory uncertainty would reduce firms’ confidence in the reliability of their return-on-investment projections. Because of the well-known and widely accepted risk-return tradeoff, firms that face increased uncertainty in investment returns will demand higher expected returns from the investments they pursue.[29] In other words, policies such as the proposed “march-in” rights simultaneously reduce expected investment returns and increase the required rate of return to invest in R&D, thereby reducing investment.

The history of patent commercialization supports the economic theory above. Prior to enactment of the Bayh-Dole Act, the federal government had a patchwork of often-stringent requirements on patenting and licensing agreements for projects it had funded.[30] The result was that many firms were hesitant to make large investments in the basic discoveries that were necessary to create commercial products.[31] Indeed, this makes sense, as a key feature of the patent system is that it can ensure the stability needed to attract investment and the large-scale diffusion of innovations across the market.

The evidence abundantly demonstrates that robust property-rights systems have been crucial to economic growth and prosperity.[32] These rights facilitate specialization and trade, which lead to innovation and growth. Intellectual property plays a crucial role in this dynamic. While there may be debates over the exact parameters of any patent-protection regime, strong evidence supports the idea that robust patent protection is vital for economic growth. Stephen Haber highlights that enforceable patent rights correlate with significant GDP increases.[33] Patricia Schneider’s research indicates that intellectual property substantially fosters innovation in developed countries.[34] Similarly, Yee Kyoung Kim and colleagues conclude that intellectual property boosts innovation.[35] Theoretical work by Daron Acemoglu and Ufuk Akcigit underscores the importance of patents, especially where inventors are significantly advanced technologically.[36] Yum Kwan and Edwin Lai suggest that inadequate intellectual-property protection causes greater welfare losses than does overprotection.[37]

Relatedly, Nobel laureate economist William Nordhaus has found that, even with patented discoveries, only a tiny fraction of the social returns from technological advancements is captured by producers, while the majority of benefits accrue to consumers.[38]

Patents are particularly important for startups, whose ability to exercise enforceable patent rights is key to market entry. There are three primary reasons for this: 1) injunctions protect startups from being copied by established firms, who might otherwise copy startups’ discoveries and pay court-set royalties; 2) patents serve as collateral to secure startup funding; and 3) patents attract venture-capital investment.

Diminishing patent rights by removing exclusion rights would allow larger firms to imitate startup innovations, reinforcing their market dominance. Without the threat of copying, established companies are forced to either innovate independently or acquire innovative startups. This aspect is particularly crucial for startups, as it protects their inventions from being misappropriated by larger rivals. The literature on firms’ strategies to prevent rivals from copying their inventions suggests that, while patents are not the only method, they are crucial in certain industries, most notably in pharmaceuticals and chemicals. [39]

Another key aspect of strong intellectual property rights is that they can allow firms to raise funds through the process of collateralization. This is particularly relevant for startups that lack tangible assets, as they can offer patents as security for funding.[40] As Gaétan de Rassenfosse puts it:

SMEs can leverage their IP to facilitate R&D financing…. [P]atents materialize the value of knowledge stock: they codify the knowledge and make it tradable, such that they can be used as collaterals. Recent theoretical evidence by Amable et al. (2010) suggests that a systematic use of patents as collateral would allow a high growth rate of innovations despite financial constraints.[41]

But the complexity in valuing patents,[42] particularly in the face of infringement risks, underscores why reliable IP rights are so important to maintaining patents’ value as collateral. As Jayan Kumar observes (in the parallel context of copyright):

Infringement action (most obviously music piracy) can seriously erode revenue streams and plans for combating infringement through litigation must be in place in order to protect the value of IP. Given the above risks and complexities, due diligence on IP before securitization is more expensive than with traditionally securitized assets.[43]

This last point becomes crucial to consider for the draft guidance, given that liberalizing march-in rights will almost certainly lead to increased litigation exposure across all industries that rely on patented technologies.

Lastly, as suggested above, intellectual-property protection influences venture-capital activity significantly. Patents impede imitation, can be used as collateral, and can help facilitate specialization, thereby fostering the entry of new specialized firms. Additionally, patents often signal to investors a company’s potential success and value. Empirical studies show that patent filings have significant positive effects on investor valuations, especially for early-stage companies, and play an important role as a “commitment device,” protecting entrepreneurs from investor expropriation.  For example, David Hsu and Rosemarie Ziedonis find:

a statistically significant and economically large effect of patent filings on investor estimates of start-up value…. A doubling in the patent application stock of a new venture [in] this sector is associated with a 28 percent increase in valuation, representing an upward funding-round adjustment of approximately $16.8 million for the average start-up in our sample.[44]

They also note that the effect is more pronounced in earlier financing rounds, when uncertainty surrounding the value of the underlying company is greater.[45]  Along similar lines, Carolin Häussler, Dietmar Harhoff, and Elisabeth Mueller show that “companies’ patenting activities have consistent and cogent effects on the timing of VC financing. Having at least one patent application reduces the time to the first VC investment by 76%.”[46] Other authors argue that patents may serve as a commitment device to protect entrepreneurs from the risk of expropriation by their early investors.[47]

The conclusion is clear: intellectual property is a significant contributor to innovation and should be a central element of growth strategies. This view is widely accepted among economists, particularly in industries with very large upfront costs and steeply declining marginal costs of production—of which, pharmaceuticals is perhaps the most extreme example.

Having said that, it would be naïve to think that U.S. intellectual-property law has reached a state of perfection. Intellectual-property protection must strike a delicate balance between guarding knowledge that could otherwise be replicated at minimal cost—thereby encouraging the creation of such knowledge—and ensuring that the knowledge is disseminated to the public. Even a minor shift in that balance toward dissemination and away from protection could have disproportionate effects, making copying (i.e., free-riding on the innovations of others) a more attractive strategy. This could lead to underinvestment and economic stagnation. Thus, when thinking about making changes to the status quo, policymakers should proceed with utmost care. The world preeminence that the current U.S. patent system has helped bring to fruition could easily be destroyed.

III.    March-In Rights and the Danger to Innovation

The proposed changes to the Bayh-Dole Act’s march-in rights[48] pose serious threats to the successful innovation regime that has propelled the United States to the forefront of global innovation.  In particular, the proposed revisions would expand the criteria for federal agencies to exercise march-in rights, potentially allowing for broader interpretation and application. Most concerning is that the proposed framework would allow agencies to consider such factors as the pricing of commercial goods and services arising from federally funded inventions.[49] Tellingly, the proposed framework would grant agency regulators authority to determine when a price is “extreme and unjustified given the totality of circumstances” and to decide, on that basis, whether to exercise march-in rights.[50]

These proposed changes raise concerns about their potential impact on the incentives for private-sector investment in the commercialization of federally funded research. Such changes threaten to disrupt the delicate balance of incentives that the Bayh-Dole Act has successfully established for more than four decades, potentially hindering innovation and diminishing consumer welfare in the long run.

But more importantly, one fundamental flaw in the draft framework would return us to a pre-1980 status quo ante. One of the primary questions that needs to be brought into focus in this proceeding is: what method of price discovery leads to the optimal commercialization of new patented inventions? Since much of this proceeding is focused on pharmaceutical products, we will restrict our discussion to the pricing of these products. Much of the economics of pricing patented medicines, however, transfers well to other contexts involving patent protections. As we discuss below, regulators are fundamentally incapable of matching, on average, the market’s efficiency in setting prices.

To understand the pricing of new pharmaceuticals, it’s helpful to begin with standard neoclassical price theory. The most basic model assumes that patented pharmaceuticals establish a monopoly, and that the monopolist sets different prices for different consumers based on their willingness to pay. In principle, such a “price-discriminating monopolist” will charge each consumer a different price and the lowest price paid will be equal to the drug’s marginal cost of production. In other words, those consumers least willing to pay will pay the same price as in a “perfectly competitive” market. Moreover, the amount of the drug produced will be the same as under perfect competition. The big difference is that the producer receives all the consumer surplus. In practice, pharmaceutical companies are not perfectly discriminating monopolists, but they do typically set different prices in different countries and for different patient groups.[51]

In reality, very few—if any—new pharmaceuticals actually enjoy a monopoly. At best, they represent a new class of drug for treating a condition. Even in such cases, they typically compete with older products that are either less effective or have more side effects for some proportion of patients.[52] This competition introduces a dynamic interplay between the new and old products, influencing the innovator’s pricing strategy.

The neoclassical model shows that even a profit-maximizing monopolist has incentives to offer products at a range of prices to different consumers. But when the “monopolist” assumption is relaxed—reflecting the reality of competitive dynamics both within and between classes of drugs for any particular condition­–it becomes even more difficult, if not impossible, to determine whether a particular drug price is “extreme and unjustified.” There is thus a high likelihood that any such intervention would be arbitrary and capricious.

Unfortunately, if given such a mandate, regulators are likely to have incentives to intervene for political reasons. In essence, regulators gain little by declining to intervene in the presence of an alleged “extreme and unjustified” drug price.[53] Meanwhile, the consequences of (practically ubiquitous) improper intervention would not be borne by the regulator, but by the innovators and patients.

When a private firm misjudges demand and sets its prices incorrectly, it faces punishment by the market. This, in turn, leads the firm to correct its pricing strategy. Liberalized march-in rights, by contrast, create incentives for a one-way ratchet, whereby regulators—themselves insulated from market discipline—are driven by political pressures to demand price reductions, regardless of the effect on firms’ incentives to develop new medicines.

A.      Intrinsic Complexities

The economics of drug development and pricing in the pharmaceutical industry present unique challenges that set it apart from many other sectors. While the fundamental principles of the price system apply to patented inventions in this field, the intricacies of pharmaceutical development necessitate more complex pricing strategies.

One of the defining characteristics of pharmaceutical R&D is the very long time it takes to bring a drug to market. From initial discovery to market launch, the process of developing a new drug typically takes between 12 and 15 years.[54] This extended timeframe is due largely to the rigorous clinical trials and associated regulatory approvals that each new drug must undergo to ensure safety and efficacy. This prolonged development period represents a significant commitment of time and resources, often with no guarantee of success.[55]

Many potential drugs that enter the development pipeline do not make it to market, either due to inefficacy, safety concerns, or other factors discovered during the development process.[56] This high attrition rate means that successful drugs must not only cover their own development costs but also compensate for the expenses incurred by those that failed.[57] A 2016 study found that the likelihood of a molecule selected for clinical trials successfully concluding all three phases of trials and going to market is around 12%.[58] Taking into account this low success rate, the authors estimate the average cost of developing a new approved drug to be $2.8 billion.[59]

Given these unique challenges­—long development times, substantial upfront investments, and a high rate of failure—pharmaceutical pricing must be carefully calibrated. Pricing strategies must account for recouping large investments while also considering the competitive market landscape, regulatory environment, and patient access.

B.      Regulatory Complexities

The challenge is magnified when one considers the complex regulatory environment that exerts significant distortionary pressures on drug pricing. For example, there are several federal programs—including Medicaid,[60] the 340B Drug Pricing Program,[61] and the regulations for the coverage gap for Medicare Part D[62]—that impose price controls on pharmaceuticals. While these controls aim to make medications more affordable for certain groups, the challenges they inadvertently create for pharmaceutical companies include potential distortions of downstream pricing for drugs outside of these programs.

For example, among these policies’ unintended consequences is to penalize companies that offer drugs at lower prices. The mandated discounts and rebates for government programs often mean that pharmaceutical companies receive less revenue for the same product, relative to the open market.[63] To compensate for revenue losses incurred in these programs, pharmaceutical companies are often compelled to raise prices for patients not covered by these federal programs.[64] This situation creates a disparity in drug pricing, where the burden of subsidizing the cost for government programs falls indirectly on other consumers, often resulting in higher overall healthcare costs.

Furthermore, this regulatory thicket complicates drugmakers’ pricing strategies. Instead of pricing based strictly on market demand or research and development costs (which is complicated enough on its own), companies must navigate a maze of regulations and mandatory discounts. This distorts natural market dynamics, often leading to higher prices for some consumers to balance the reduced revenue from government-mandated pricing. This approach can also stifle innovation, as pharmaceutical companies may redirect resources from research and development to regulatory compliance and strategic-pricing management.

C.      The Fraught Nature of Intervening in Market-Based Drug Pricing

It’s worth noting that march-in rights have not, to date, been exercised. This fact serves as an implicit acknowledgment of the pharmaceutical industry’s effective functioning within the constraints noted above. Moreover, it reflects regulators’ prudent reluctance to intervene in a complex and delicately balanced ecosystem. Indeed, any intervention in such a nuanced sector runs the risk of arbitrariness, given the intricacies involved in drug development and pricing. The restraint regulators have shown underlines their understanding of the unique economic dynamics of the pharmaceutical industry and the potential unintended consequences of intervention.

Further, the economics of the pharmaceutical industry also reveal the role that successful, high-revenue drugs have played in cross-subsidizing those discoveries that generate lower revenues.[65] This interplay between different segments of a pharmaceutical company’s portfolio is another crucial factor that militates against pricing interventions. The inherent support that successful patented medicines offer to the research and development of less profitable drugs (and total failures) is a vital component of the industry’s ecosystem.

So-called “blockbuster” drugs are a boon not just for the pharmaceutical companies, but also for the broader healthcare system. Some of the profits from these successful drugs are reinvested into further research and development, fueling the discovery and production of new medications.[66] This cycle of profit and reinvestment is critical to sustain the development of drugs that may have a smaller absolute market but are vital for treating rarer conditions. In this way, the big winners in a pharmaceutical company’s portfolio underpin the development and continued availability of lower revenue drugs and experiments with seemingly promising, but ultimately unfruitful, lines of research.

Therefore, any intervention in pharmaceutical pricing must be approached with caution. The cross-subsidization model represents a delicate balance essential not just for pharmaceutical firms’ financial health, but also to ensure the availability of a wide range of medications that meet diverse health-care needs. Unfortunately, this balance has already been weakened by price controls both in the United States and internationally, and could be substantially harmed by new price controls or other regulatory interventions.

Intervening in the pharmaceutical industry’s complex, carefully balanced, intricate, and multifaceted domain of drug development and commercialization risks creating an environment in which outcomes are dictated by centralized agencies, rather than by decentralized, bottom-up processes. In such a system, regulators’ necessarily limited knowledge will inevitably result in inferior outcomes. Moreover, it will lead to picking winners and losers in an arbitrary and capricious manner.

The issue’s complexity is compounded by the fact that the vast majority of drugs that are developed receive some federal funding.[67] While it is impossible to know whether the same drugs would be developed without such funding, the fact is that such funding crowds out private investment in basic R&D. Moreover, it means that the proposed expansion of march-in rights would apply to nearly every patented drug currently on the market and in development. Therefore, such interventions would not only be arbitrary and capricious, in ways that raise constitutional questions, but also ominous and all-encompassing.

Moreover, the error costs associated with such interventions cannot be overlooked. In the pharmaceutical industry, the journey from lab to market is fraught with uncertainties and high failure rates. For instance, only a quarter of drugs that complete Phase 3 clinical trials proceed to Phase 4.[68] Reasons for this can include a lack of efficacy in larger populations or commercial non-viability.[69] A regulatory body attempting to override these decisions would need to possess better knowledge than the compound’s own developers and commercializers regarding what will ultimately prove viable in the market. This prospect is clearly absurd and would lead to misallocation of resources, with companies being perversely encouraged to chase a higher number of unsuccessful endeavors.

Thus, any regulatory intervention in this space must be undertaken with a deep understanding of the inherent complexities and uncertainties of drug development. A regulator’s decision to intervene in the commercialization process could result in significant wasted resources and could potentially impede the development of truly effective and needed medicines. The challenge lies in striking the right balance between encouraging innovation and ensuring access to effective and affordable medications, without falling into the trap of overregulation that could stifle progress in this vital field.

IV.    Conclusion

In short, the narrative that drives the conversation around altering march-in rights is deeply flawed. The Bayh-Dole Act does not unjustly deprive taxpayers of the innovations they partially funded through their contributions to the federal government. In fact, the Act has fostered an explosion of innovative activity that yields enormous benefits, both seen and unseen, to American consumers. The observable benefits are evident in the ever-expanding access to new medicines and devices that improve health outcomes for consumers.[70] The unseen—or rather, the easy to miss—benefits include the economic growth that has resulted from the United States serving as a major hub for innovative research and development.[71] The status quo is wildly successful and any perceived failures should be addressed with targeted solutions, not with a wholesale alteration to the framework that has been responsible for driving these changes.

Further, it’s crucial to understand the effects that expanding march-in rights to address instances of “extreme” pricing could have on the nature of the Act itself. Originally designed as a pro-innovation policy, the Bayh-Dole Act could inadvertently transform into a regulatory tool for market manipulation.

Regulations are often complex and challenging to navigate. This complexity creates opportunities for incumbent firms to leverage regulations to their advantage, and to the detriment of competition and consumer welfare.  In the context of the Bayh-Dole Act, expanding march-in rights to tackle “extreme” pricing could lead to just such a perverse outcome. Such a scenario would mark a significant shift from the Bayh-Dole Act original intent of fostering innovation toward a landscape where regulatory manipulation becomes a key competitive strategy. This potential transformation underscores the need for careful consideration and a balanced approach in any amendments to the Act. Addressing the issue of pricing should not compromise the Act’s ability to stimulate innovation and healthy market competition.

Finally, expanding march-in rights under the Bayh-Dole Act, although primarily targeted at pharmaceutical producers, sets a precedent with far-reaching implications for all patent-reliant industries, including computers, biotech, and manufacturing. Industries that thrive on intellectual property to develop and safeguard their innovations will be watching this development closely. This potential for regulatory and legal manipulation could alter the competitive landscape, where gaining an upper hand might no longer depend solely on innovation and market strategies, but increasingly on the ability to navigate and exploit expanded march-in rights.

[1] Request for Information Regarding the Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights, 88 FR 85593 (Dec. 8, 2023), https://www.federalregister.gov/documents/2023/12/08/2023-26930/request-for-information-regarding-the-draft-interagency-guidance-framework-for-considering-the [hereinafter “RFI”]

[2] For example, five of the eight “scenarios” presented in the RFI focus on biotechnology.

[3]  Adam Mossoff, The False Promise of Breaking Patents to Lower Drug Prices, 97 St. John’s L. Rev. (forthcoming 2023) (manuscript at 18), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4348499.

[4] 35 U.S.C. § 200, et seq. (2011).

[5] Id. at § 202.

[6] U.S. General Accounting Office, Patent Policy Recent Changes in Federal Law Considered Beneficial, GAO Report No. RCED-87-44 (1987), available at https://www.gao.gov/products/rced-87-44.

[7] Lori Pressman et al., The Economic Contribution of University/Nonprofit Inventions in the United States: 1996–2010, Biotechnology Industry Organization (Jun. 20, 2012) at 13,  available at https://archive.bio.org/sites/default/files/Pressman%2520BIO%25202012%2520Final%2520r1%2520w%2520cover%2520sheet_0.pdf.

[8] Joseph Allen, A Pandemic Can’t Stop Bayh-Dole—But Politicians Might, IPWatchdog (Aug. 31, 2021), https://ipwatchdog.com/2021/08/31/pandemic-cant-stop-bayh-dole-politicians-might/id=137235.

[9] Shanker Singham, Improving U.S. Competitiveness; Eliminating Anti-Competitive Market Distortions, at 12 (Int’l Roundtable Trade & Competition Pol’y., Nov. 15, 2011), available at https://shankersingham.com/2019/10/05/on-improving-us-competitiveness.

[10] Id.

[11] See, e.g., Molecular Biomarkers Improve Treatment of Colorectal Cancers, AUTM (2008), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/medical-diagnostic-predictors-of-therapy-response (last visited Feb. 1, 2024); 3-D Virtual Colonoscopies: Changing Attitudes, Reducing Cancer, AUTM, https://autm.net/about-tech-transfer/better-world-project/bwp-stories/3-d-virtual-colonoscopy (last visited Feb. 1, 2024).

[12] See, e.g., Increasing Mobility for Amputees, AUTM (2016), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/all-terrain-knee-(1) (last visited Feb. 1, 2024); Innovative Bandage Saves Lives, AUTM (2008), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/alphabandage (last visited Feb. 1, 2024); Cochlear Implant Brings Sound and Language to Thousands, AUTM (2006), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/cochlear-implant (last visited Feb. 1, 2024).

[13] Honeycrisp: The Apple of Minnesota’s Eye, AUTM (2018), https://autm.net/about-tech-transfer/better-world-project/bwp-stories/honeycrisp-apple (last visited Feb. 1, 2024).

[14] See, e.g., Lisa Larrimore Oullette & Andrew Tutt, How Do Patent Incentives Affect University Researchers?, 61 Int’l Rev. L. & Econ. 1 (2020), https://doi.org/10.1016/j.irle.2019.105883.

[15] David Orozco, Assessing the Efficacy of the Bayh-Dole Act Through the Lens of University Technology Transfer Offices (ITOS), 21 N.C. J.L. & Tech. 115, 142 (2019)

[16] See Frequently Asked Questions (FAQs) for Applicants and Awardees of DOE Financial Assistance and R&D Contracts Regarding the Department’s Determination of Exceptional Circumstances (DEC) for DOE Science and Energy Technologies Issued in June of 2021, U.S. Department of Energy (2021), available at https://www.energy.gov/sites/default/files/2022-03/FAQs_03092022.pdf; see also Joseph Allen, DOE’s Misuse of Bayh-Dole’s ‘Exceptional Circumstances’ Provision: How Uniform Patent Policies Slip Away, IPWatchdog (May 26, 2022), https://ipwatchdog.com/2022/05/26/misuse-bayh-doles-exceptional-circumstances-provision-uniform-patent-policies-slip-away/id=149275.

[17] See Elizabeth Warren & Lloyd Doggett, Letter to the Secretary of Defense Regarding Reducing Drug Prices (Jul. 22, 2021), available at https://www.warren.senate.gov/imo/media/doc/Letter%20to%20DOD%20about%20Reducing%20Drug%20Prices%20Final%207.22.21.pdf.

[18] Dana P. Goldman, Darius N. Lakdawalla, & Tomas Philipson, The Benefits From Giving Makers Of Conventional ‘Small Molecule’ Drugs Longer Exclusivity Over Clinical Trial Data, 30 Health Affairs 1, 84-90 (2011), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3804334.

[19] Kenneth J. Arrow, Economic Welfare and the Allocation of Resources for Invention, at 609, in The Rate and Direction of Inventive Activity (R. R. Nelson, ed., 1962).

[20] See id. at 614 (“The cost of transmitting a given body of information is frequently very low.”).

[21] See id.. at 615.

[22] See id. (“[T]he use of information about production possibilities, for example, need not depend on the rate of production.”)

[23] Id.

[24] Joseph A. DiMasi, Henry G. Grabowski, & Ronald W. Hansen, Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs, 47 J. Health Econ. 20 (2016), https://pubmed.ncbi.nlm.nih.gov/26928437.

[25] W. Kip Viscusi, John M. Vernon & Joseph E. Harrington, Jr., Economics of Regulation and Antitrust (2d ed., 1995) at 832.

[26] Edwin Mansfield, Mark Schwartz, & Samuel Wagner, Imitation Costs and Patents: An Empirical Study, 91 Econ. J. 907, 913 (1981). [emphasis added]

[27] Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization (4th ed., 2005) at 532. For a numerical example, see, Richard A. Posner, Economic Analysis of Law (4th ed., 1992) at 38.

[28] Viscusi, Vernon &  Harrington, Jr., supra n. 25, at 863.

[29] See Edwin J. Elton & Martin J. Gruber, Modern Portfolio Theory and Investment Analysis (4th ed, 1991).

[30]  See, e.g., Jonathan Barnett, The Great Patent Grab, in The Battle Over Patents: History and Politics of Innovation (Stephen H. Haber & Naomi R. Lamoreaux eds., Oxford University Press 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3909528; Mossoff, supra n. 3, at 18-20 (“Government ownership of patents proved to stifle, rather than to promote distribution of new innovations.”)

[31] Id.

[32] Stephen Haber, Patents and the Wealth of Nations, 23 Geo. Mason L. Rev. 811, 811 (2016) (“There is abundant evidence from economics and history that the world’s wealthy countries grew rich because they had well-developed systems of private property”); see also, Zorina Khan & Kenneth L. Sokoloff, Institutions and Democratic Invention in 19th-Century America: Evidence from “Great Inventors” 1790-1930, 94 Am. Econ. Rev. 400 (2004); Josh Lerner, The Economics of Technology and Innovation: 150 Years of Patent Protection, 92 Am. Econ. Rev. 221 (2002); Albert G.Z. Hu & Ivan P.L. Png, Patent Rights and Economic Growth: Evidence from Cross-Country Panels of Manufacturing Industries, 65 Oxford Econ. Papers 675 (2013) (finding faster growth and higher value in patent-intensive industries in countries that improve the strength of patents); Bronwyn H. Hall & Rosemarie Ham Ziedonis, The Patent Paradox Revisited: An Empirical Study of Patenting in the US Semiconductor Industry, 1979-1995, 32 RAND J. Econ. 101, 125 (2001) (identifying “two ways in which the pro-patent shift in the U.S. legal environment appears to be causally related to the otherwise perplexing surge in U.S. patenting rates, at least in the semiconductor industry”); Nikos C. Varsakelis, The Impact of Patent Protection, Economy Openness and National Culture on R&D Investment: A Cross-country Empirical Investigation, 30 Res. Pol’y 1059, 1067 (2001) (“Patent protection is a strong determinant of the R&D intensity, and countries with a strong patent protection framework invest more in R&D.”); David M. Gould & William C. Gruben, The Role of Intellectual Property Rights in Economic Growth, in Dynamics Of Globalization & Development 209 (Satya Dev Gupta & Nanda K. Choudhry eds., 1997) (“The evidence suggests that intellectual property protection is a significant determinant of economic growth. These effects appear to be slightly stronger in relatively open economies and are robust to both the measure of openness used and to other alternative model specifications.”)

[33] Haber, supra note 32, at 816. (“Figure 1 therefore presents a graph of the strength of enforceable patent rights and levels of economic development for all non-petro states in 2010. There is nothing ambiguous about the resulting pattern: there are no wealthy countries with weak patent rights, and there are no poor countries with strong patent rights. Indeed… as patent rights increase, GDP per capita increases with it. Roughly speaking, for every one-unit increase in patent rights (measured from zero to fifty) per capita income increases by $780. A simple regression of patent rights and patent rights squared on GDP indicates that roughly three-quarters of the cross-sectional variance in per capita GDP around the world is explained by the strength of patent rights.”) (emphasis added); see also Ronald A. Cass & Keith N. Hylton, Laws Of Creation: Property Rights In The World Of Ideas 45-46 (2013) (discussing results of regression analysis providing evidence that “countries with stronger intellectual property rights tend to grow economically more than those with weak intellectual property rights.”)

[34] Patricia Higino Schneider, International Trade, Economic Growth and Intellectual Property Rights: A Panel Data Study of Developed and Developing Countries, 78 J. Dev. Econ. 529, 539 (2005) (“The results suggest that IPRs have a stronger impact on domestic innovation for developed countries. This variable is positive and statistically significant in all OLS regressions in Table 4 (developed countries).”)

[35] Yee Kyoung Kim, Keun Lee, Walter G. Park, & Kineung Choo, Appropriate Intellectual Property Protection and Economic Growth in Countries at Different Levels of Development, 41 Res. Pol’y 358, 367 (2012) (“[T]he impact of patenting intensity on growth is much larger in high income countries, as can be seen from the positive coefficient of the interaction term between the high income country dummy and patenting intensity – this coefficient being statistically significant at the 1% level of statistical significance. From column 6, the measured net effect of patent intensity on growth in high income countries is 0.0683 (=−0.027 + 0.953, where the former is the coefficient of the patenting intensity of middle-to-low-income countries and the latter the coefficient of the interaction term between the high income country dummy and patenting intensity).”)

[36] Daron Acemoglu & Ufuk Akcigit, Intellectual Property Rights Policy, Competition and Innovation, 10 J. Eur. Econ. Ass’n. 1, 1 (2012) (“[O]ptimal policy involves state-dependent IPR protection, providing greater protection to technology leaders that are further ahead than those that are close to their followers.”)

[37] Yum K. Kwan & Edwin L-C Lai, Intellectual Property Rights Protection and Endogenous Economic Growth, 27 J. Econ. Dynamics & Control 853, 854 (2003) (“The calibration results indicate that there is under-protection of IPR (relative to the optimal level) within plausible range of parameter values, and that under-protection of IPR is much more likely than over-protection. More complete computation indicates that in the case of over-protection, the welfare losses are trivial; whereas in the case of under-protection, the welfare losses can be substantial. One interpretation of this result is that the US should protect IPR much more than it currently does.”)

[38] William D. Nordhaus, Schumpeterian Profits in the American Economy: Theory and Measurement at 1 (Nat’l Bureau of Econ. Res. Working Paper No. 10433 Apr. 2004), http://www.nber.org/papers/w10433.

[39] See, e.g., Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 Mgmt. Sci. 173, 175-176 (1986) (Mansfield shows through surveys that patent protection only had a limited impact on innovation in industries other than the pharmaceutical industry and, to a lesser extent, the chemical industry. Mansfield argues that this is because the effectiveness of patents depends on the extent to which they increase imitation costs; and that this increase is more substantial in the chemical and pharmaceutical industries). Note that this study largely predates standard-reliant industries, such as mobile-communications technology, where patents likely play a very important role in creating appropriability. See also Richard C. Levin, Alvin K. Klevorick, Richard R. Nelson, Sidney G. Winter, Richard Gilbert, & Zvi Griliches, Appropriating the Returns from Industrial Research and Development, 3 Brookings Papers On Econ. Activity 783, 797 (1987). Levin et al.’s findings are broadly in line with Mansfield’s. More recently, these findings were supported by Cohen et al. See Wesley M. Cohen, Richard R. Nelson, & John P. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why US Manufacturing Firms Patent (or Not) (Nat’l Bureau of Econ. Res. Working Paper 7552, Feb. 2000), https://www.nber.org/papers/w7552.

[40] See, e.g., Mario Calderini & Maria Cristina Odasso, Intellectual Property Portfolio Securitization: An Evidence Based Analysis, Innovation Studies Working Paper (ISWOP), NO. 1/08, at 33 (2008) (“[I]t seems that patent securitization should be more suitable for small and medium companies with a consistent IP portfolio but that have not easy access to capital market or have a higher financial risk and few possibility to raise unsecured financing.”); see also Dov Solomon & Miriam Bitton, Intellectual Property Securitization, 33 Cardozo Arts & Ent. L.J. 125, 171-73 (2015) (“Among the famous securitization transactions in the field of IP rights are the securitizations of the copyrights of the singer David Bowie, the trademark of the Domino’s Pizza chain, and the patent on the HIV drug developed by Yale University.”); Nishad Deshpande & Asha Nagendra, Patents as Collateral for Securitization, 35 Nature Biotechnology 514, 514 (2017) (“Patents are important assets for biotech organizations, not only for protecting inventions but also as assets to raise monies.”); Tahir M. Nisar, Intellectual Property Securitization and Growth Capital in Retail Franchising, 87 J. Retailing 393, 393 (2011) (“A method of raising finance particularly suited to retail franchisors is intellectual property (IP) securitization that allows companies to account for intangible assets such as intellectual property, royalty and brands and realize their full value. In recent years, a number of large restaurant franchisors have securitized their brands to raise funds, including Dunkin Brands and Domino’s Pizza (Domino’s). We use property rights approach to show that IP securitization provides mechanisms that explicitly define ownership of intangible assets within the securitization structure and thus enables a company to raise funds against these assets.”)

[41] Gaétan De Rassenfosse, How SMEs Exploit Their Intellectual Property Assets: Evidence from Survey Data, 39 Small Bus. Econ. 437, 439 (2012).

[42] See Solomon & Bitton, supra note 40 (discussing the difficulties in evaluating patents as a barrier to securitization); see also Aleksandar Nikolic, Securitization of Patents and Its Continued Viability in Light of the Current Economic Conditions, 19 Albany L.J. Sci. & Tech. 393, 491 (2009) (“Anyone attempting to accurately assess the value of a patent portfolio faces numerous challenges including potential invalidity proceedings, potential infringement and infringement proceedings, obsolescence, or lack of demand for a license or the invention itself.”)

[43] Jayant Kumar, Intellectual Property Securitization: How Far Possible and Effective, 11 J. Intellectual Prop. Rights 98, 98 (2006).

[44] David H. Hsu & Rosemarie H. Ziedonis, Patents as Quality Signals for Entrepreneurial Ventures, Acad. Mgmt. Proceedings, Vol. 1, at 6 (2008), available at https://faculty.wharton.upenn.edu/wp-content/uploads/2015/07/11.pdf.

[45] Id.

[46] Carolin Häussler, Dietmar Harhoff & Elisabeth Müller, To Be Financed or Not… — The Role of Patents for Venture Capital-Financing, at 3 (ZEW-Centre for European Economic Research Discussion Paper 09-003, Mar. 28, 2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1393725; see also De Rassenfosse, supra note 41, at 441.

[47] See Ronald J. Mann & Thomas W. Sager, Patents, Venture Capital, and Software Start-Ups, 36 Research Pol’y 193, 207 (2007). (“We note one additional possibility suggested by the data, that portfolio firms obtain the patents not because they increase the value of the firm to its investors, but because they protect the contributions of the firm from expropriation by the investors. The idea here is that by giving the portfolio firm a cognizable property right in its technology, the patents increase the value of the firm by decreasing the costs of moral hazard and hold-up in the relations between the entrepreneurs and their investors. Shane (2002) proposes a similar mechanism to explain patterns in licensing of patents assigned to MIT.”)

[48] 35 U.S.C. 203 allows for a limited number of conditions under which federal agencies can grant licenses to inventions at least partially funded by federal money. These conditions include when a contractor or assignee is not expected to commercialize an invention in a reasonable amount of time, or when health or safety concerns are not expected to be reasonably satisfied by a contractor or assignee. Id. at (a)(1)-(2). To date, march-in rights have never been exercised. It should also be noted that “price” is not mentioned anywhere in § 203 as a basis for “march in,” which could lead to the possibility of a valid Supreme Court challenge to such a change under the “major questions doctrine.” See, e.g., The Major Questions Doctrine, CRS Report No. IF12077 (Nov. 2, 2022), https://crsreports.congress.gov/product/pdf/IF/IF12077. (“Under the major questions doctrine, the Supreme Court has rejected agency claims of regulatory authority when (1) the underlying claim of authority concerns an issue of “vast ‘economic and political significance,’” and (2) Congress has not clearly empowered the agency with authority over the issue.”) Moreover, the claim that the act was intended to be used to impose price controls is, at best, a stretch of statutory interpretation and, more realistically, a completely ill-fated enterprise that depends on taking statutory terms out of context. See Mossoff, supra n. 3, at 22-33.

[49] RFI at 85599.

[50] Id.

[51] See Paul Krugman & Robin Wells, Economics (4th ed., 2015) at 391 (Regarding pricing of patent-protected drugs, “A monopolist will maximize profits by charging a higher price in the country with a lower price elasticity (the rich country) and a lower price in the country with a higher price elasticity (the poor country). Interestingly, however, drug prices can differ substantially even among countries with comparable income levels.”)

[52] For example, the H2 antagonist Tagamet (cimetidine) was developed by Smith, Kline & French to prevent and treat gastroesophageal reflux disease (GERD) and gastric ulcers. In response, Glaxo developed a similar but more effective H2 antagonist, Zantac (ranitidine) (See Viscusi et al., supra note 25 at 851-852). This within-class competition was followed by the development of a new, more-effective, and longer-lasting class of anti-GERD drugs known as proton-pump inhibitors (PPI), starting with omeprazole and soon followed by a slew of others, including lansoprazole and pantoprazole. See Daniel S. Strand, Daejin Kim, & David A. Peura1, 25 Years of Proton Pump Inhibitors: A Comprehensive Review, 15 Gut Liver. 11(1), 27-37 (2017), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5221858. The development of treatments for Alzheimer’s has followed a similar trajectory. Biogen’s Aduhelm (aducanumab), was recently retired, but the drug, which works by clearing the amyloid plaques that block neurotransmission in people with Alzheimer’s, has been hailed as a “groundbreaking discovery that paved the way for a new class of drugs and reinvigorated investments in the field.” See Editorial Board, Requiem for an Alzheimer’s Drug, Wall St. J. (Jan. 31, 2024), https://www.wsj.com/articles/aduhelm-biogen-alzheimers-treatment-drug-development-pharma-fda-1d866bd7. The development of Aduhelm thus served as both a foundation for other drugs in the same class of anti-amyloid monoclonal antibody treatments, such as Leqembi (lecanemab) (see Christopher H. Van Dyck et al., Lecanemab in Early Alzheimer’s Disease, 388 N. Engl. J. Med. 9-21 (2023), https://www.nejm.org/doi/full/10.1056/NEJMoa2212948) as well as continued within-class competition for those later drugs, until its retirement. Similarly, Cognex (tacrine)—the first in an earlier class of ameliorative drugs for Alzheimer’s (acetylcholineesterase inhibitors, AChEIs), which work by preventing the breakdown of the neurotransmitter acetylcholine—was, like Aduhelm, ultimately deemed relatively ineffective and withdrawn (See Nawab Qizilbash et al., WITHDRAWN: Tacrine for Alzheimer’s Disease, 18 Cochrane Database Sys. Rev. 3 (2007), https://pubmed.ncbi.nlm.nih.gov/17636619) because it had been superseded by other AChEIs, such as Aricept (donepezil). See Sharon L. Rogers et al., Donepezil Improves Cognition and Global Function in Alzheimer Disease, 158(9) Arch Intern Med. 1021-1031 (1998), available at https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/205223.

[53] See, e.g., Eric Fruits, The Oregon Health Plan: A “Bold Experiment” That Failed (Cascade Policy Institute, Sep. 2010), https://ssrn.com/abstract=1680047 (describing how covered treatments under Oregon’s Medicaid program was originally based on objective “cost-effectiveness” criteria, but quickly transitioned to subjective criteria based on public pressure).

[54] AI’s Potential to Accelerate Drug Discovery Needs a Reality Check, Nature (Oct. 10, 2023), https://www.nature.com/articles/d41586-023-03172-6.

[55] Duxin Sun, Wei Gao, Hongxiang Hu, & Simon Zhou, Why 90% of Clinical Drug Development Fails and How to Improve It?, 12 Acta Pharm. Sin. B 3049 (Jul. 2022); see also, Krugman & Wells, supra note 51 at 264 (“there is a huge failure rate along the way, as only one in five drugs tested on humans ever makes it to market.”)

[56] Sun et al., supra note 55.

[57] Research and Development in the Pharmaceutical Industry, Congressional Budget Office (Apr. 2021), https://www.cbo.gov/publication/57126 (“For established drug companies, current revenue streams from existing products also provide an important source of financing for their R&D projects.”)

[58] DiMasi, Grabowski, & Hansen, supra n. 24.

[59] Id.; see also, CBO, supra note 57 (“average R&D expenditures per new drug range from less than $1 billion to more than $2 billion”).

[60] See The Medicaid Prescription Drug Rebate Program, established by the Omnibus Budget Reconciliation Act (OBRA) of 1990, 42 U.S.C. 1396r-8 (c)(1)(C). This program requires drug manufacturers to provide rebates for medications dispensed to Medicaid patients. The amount of rebate is determined by a formula that takes into account the average manufacturer price (AMP) and the best price (or lowest price) offered to any other buyer; see also Ramsey Baghdadi, Medicaid Best Price, Health Affairs (Aug. 10, 2017), https://www.healthaffairs.org/do/10.1377/hpb20171008.000173 (“Program participation by drug manufacturers is essentially mandatory; companies declining to participate are excluded from all federal programs, including Medicare.”).

[61] The 340B Drug Pricing Program, established by the Veterans Health Care Act of 1992, requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations and covered entities at significantly reduced prices. 42 U.S.C. § 256b (1993).

[62] Under the Affordable Care Act, a significant provision was introduced that directly affects the Medicare Part D coverage gap, commonly known as the “donut hole.” See 42 U.S.C. § 1395w-114a (2018). This provision mandates pharmaceutical manufacturers to offer a 50% discount on drugs for beneficiaries during this coverage gap. Id.

[63] See, e.g., Mark Duggan & Fiona M. Scott Morton, The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing (Nat’l Bureau of Econ. Res. Working Paper w10930, Feb. 2000), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=622874 (demonstrating that Medicaid pricing pressure on pharmaceuticals leads to downstream distortions in the price of pharmaceuticals purchased outside of the Medicaid program).

[64] Id.

[65] See, e.g., Sun et al., supra note 55. (discussing the fact that 90% of clinical trials fail, which means that the 10% of successful candidates effectively fund the experiments with the other 90%). As the authors note: Drug discovery and development is a long, costly, and high-risk process that takes over 10–15 years with an average cost of over $1–2 billion for each new drug to be approved for clinical use. For any pharmaceutical company or academic institution, it is a big achievement to advance a drug candidate to phase I clinical trial after drug candidates are rigorously optimized at preclinical stage. However, nine out of ten drug candidates after they have entered clinical studies would fail during phase I, II, III clinical trials and drug approval. It is also worth noting that the 90% failure rate is for the drug candidates that are already advanced to phase I clinical trial, which does not include the drug candidates in the preclinical stages. If drug candidates in the preclinical stage are also counted, the failure rate of drug discovery/development is even higher than 90%.

[66] John LaMattina, Pharma R&D Investments Moderating, But Still High, Forbes (Jun. 12, 2018), https://www.forbes.com/sites/johnlamattina/2018/06/12/pharma-rd-investments-moderating-but-still-high (Noting that R&D investment has typically been at 15% for the pharmaceutical industry).

[67] See Ekaterina Galkina Cleary, Matthew J. Jackson, Edward W. Zhou, & Fred D. Ledley, Comparison of Research Spending on New Drug Approvals by the National Institutes of Health vs the Pharmaceutical Industry, 2010-2019, 4(4) JAMA Health Forum (2023), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC10148199. (“Funding from the NIH was contributed to 354 of 356 drugs (99.4%) approved from 2010 to 2019 totaling $187 billion, with a mean (SD) $1344.6 ($1433.1) million per target for basic research on drug targets and $51.8 ($96.8) million per drug for applied research on products.”)

[68] FDA, Step 3: Clinical Research (Jan. 4, 2018), https://www.fda.gov/patients/drug-development-process/step-3-clinical-research.

[69] Id.

[70] See, e.g., What’s Driving the Improvement in U.S. Cancer Survival Rates?, City of Hope (Jan. 26, 2023), https://www.cancercenter.com/community/blog/2023/01/cancer-survival-rates-are-improving Cancer death rates are down 33% since 1991. This is, in large part, due to the development of increasingly effective means of treating cancer and improving survivability odds.

[71] See supra notes 5-8 and accompanying text.

Continue reading
Intellectual Property & Licensing

RE: Promoting Competition in the American Economy: Cable Operator and DBS Provider Billing Practices

Regulatory Comments I.        Introduction Writing on behalf of the International Center for Law & Economics (“ICLE”), we thank the Federal Communications Commission (“FCC” or “the Commission”) for . . .

I.        Introduction

Writing on behalf of the International Center for Law & Economics (“ICLE”), we thank the Federal Communications Commission (“FCC” or “the Commission”) for the opportunity to respond to this notice of proposed rulemaking (“NPRM”). The Commission is considering whether to prohibit cable operators and direct-broadcast satellite (“DBS”) providers from imposing or enforcing fee for the early termination of a cable or DBS video-service contract, known as “early-termination fees” or “ETFs.”[1] The Commission also proposes requiring cable and DBS-service providers to grant subscribers a prorated credit or rebate for the remaining whole days in a monthly or periodic billing cycle after the cancellation of service.[2]

Nearly every U.S. household and organization likely has copious interactions with ETFs as a part of their daily lives. Your mortgage loan may have an ETF described as a “prepayment penalty.”[3] Your gym membership may have an ETF.[4] When you pay for your morning latte at the local coffee shop with your debit card, the shop owner likely has an ETF on the point-of-sale service that runs your card, as well as the merchant services that process the payment.[5] If you drive to work, your auto insurance likely has an ETF.[6] If you lease your car, there may be an ETF.[7] When you book your travel, you’ll find that most hotels charge a late-cancellation fee, which is just another name for an ETF.[8] Likewise, your doctor may charge a late-cancellation fee.[9]

Put simply, ETFs are ubiquitous. Consumers regularly consider and sign contracts with ETFs. In most cases, these consumers are fully aware of the ETF, because contracts with an ETF often have lower prices or rates than agreements without ETFs.[10] It’s a quid pro quo in which the consumer pays a lower rate in exchange for a promise to maintain purchases over a contracted time period. An ETF is the cost of breaking that promise.

In these comments, we focus on the economics of ETFs in the cable and DBS industries. In Section II, we discuss the contractual nature of ETFs, and why consumers benefit from—and willingly choose—contracts with ETF provisions. In Section III, we examine the relationship between ETFs and cable and DBS rates. We identify a direct link through the quid pro quo, and an indirect link through subscriber-acquisition costs, revenue projections, and investment returns. Because of these direct and indirect links, we conclude that ETFs are inextricably connected to rates to such a degree that they are central element of the rate structure, and cannot be disentangled from that structure.

Under this economic reasoning, the Commission should refrain from regulating cable-television ETFs. Moreover, even if the Commission has authority to ban ETFs, it would be harmful to consumers and providers to do so. Consumers who enter contracts with ETFs do so willingly with an expectation that they will pay a lower price over the term of their agreement than if they did not have such a contract. Producers benefit from reduced subscriber churn and uncertainty. Banning ETFs removes one dimension of consumer choice and provider competition. More importantly, a ban on ETFs will almost certainly lead to higher prices for cable and DBS consumers, the costs of which likely would swamp any speculated benefits of avoiding an ETF.

II.      Consumer Choice, Contracts, and Early-Termination Fees

Critics of early-termination fees claim they are unpopular with consumers. Even so, many companies across many competitive industries offer services with ETF terms. Many consumers also purchase services with ETF terms, even when the seller offers an alternative with no ETF. Appearing before the FCC, a National Cable & Telecommunications Association (“NCTA”) representative testified that cable plans with ETFs are “always optional.”[11] At the time, NCTA estimated less than 10% of cable customers had minimum-term agreements.[12] DIRECTV’s representative testified that its DBS customers have a choice of plans either with or without an ETF.[13]

This raises the question of why consumers would enter into agreements with an ETF when non-ETF options are readily available, even from the same provider. The short answer is “different strokes for different folks.”[14] For consumers who enter an agreement with an ETF, the expected net benefits of such an agreement outweigh the expected net benefits of an agreement without an ETF. For consumers who choose a non-ETF agreement, the calculus is reversed.

One widely acknowledged consumer benefit of ETFs is that plans with an ETF typically have lower billing rates than plans without such a provision.[15] In 2020, New America and the Open Technology Institute calculated that the monthly cost of plans with ETFs were about $17 less costly than those without an ETF.[16] NCTA reported that “the amount many providers charge for ETFs is significantly less than the discount the customer is provided for agreeing to a term contract.”[17] Thus, all other things equal, a consumer who expects to remain with the same provider over the next 12 or 24 months would benefit from entering a contract with an ETF. On the other hand, a consumer who anticipates switching providers within that time period may benefit from a month-to-month agreement with no ETF.

The source of complaints about ETFs likely arises from a disconnect between expectations and actuality. That is, consumers who complain about having to pay an ETF may have been unaware of that provision in the agreement; had not anticipated that they would terminate the agreement early; had hoped that the ETF would not be enforced when triggered; or anticipated that a third party (such as a rival provider or employer) would pay the fee.

Some critics of ETFs suggest that many consumers subject to an ETF are unaware of these contractual provisions or of their terms. For example, a 2010 FCC survey reported that slightly more than half of respondents indicated they either didn’t know if their broadband provider charged an ETF or what the amount of the fee was.[18] These survey results, however, are unhelpful for the issue at-hand, as they do not address what share of households are subject to an ETF but unaware of it. If the key criticism of ETFs is consumer confusion or provider obfuscation, then the survey provides no useful information in answering whether this is the case.

The NPRM cites the 2008 testimony of consumers Harold Schroer and Molly White before the FCC’s hearing on ETFs.[19] Schroer testified that he never signed a contract with his provider and was unaware he agreed to an ETF provision.[20] In contrast, White testified that she knew when she entered her agreement with her provider that the contract specified an ETF, yet attempted to breach this provision.[21] Both White and Schroer were named plaintiffs in a class-action lawsuit regarding mobile ETFs.[22] In that matter, the judge noted that a California jury ruled in a previous class-action case that class members’ early termination was a breach of contract with their provider.[23] Based on these examples, there appears to be little evidence of widespread unawareness of contracts with ETF provisions.

Even if there were widespread consumer unawareness of, or confusion with, ETF provisions, recent FCC rules are expected to address this problem. This year, the Commission’s broadband “Nutrition Labels” rule will apply to all internet-service providers,[24] including cable and DBS providers.[25] The rules require that providers disclose any ETFs, when the fee is triggered, the maximum fee payable, and any pro-rationing of the fee, as well as a link providing details of early-termination policies.[26] FCC Chair Jessica Rosenworcel asserted the rules were a step toward ending “unexpected fees.”[27]

Many complaints about ETFs stem from unanticipated events that trigger the early termination.[28] White testified to the FCC that she terminated her mobile plan with Verizon because she accepted a job in a different state that provided her with mobile service.[29] DIRECTV briefly made national headlines for charging an ETF to a 102-year-old woman who died in the middle of her contract—although the provider quickly apologized and waived the fee.[30] Comcast attracted attention for charging ETFs to several business owners who cancelled their services after a flash flood destroyed their businesses.[31] Comcast remedied the issue by waiving the ETF and halting billing while the customers were without service.[32]

Most providers do not charge ETFs if a customer under contract moves to an address that is serviced by the provider and the customer maintains service with that provider at the new address.[33] We are not aware of any provider that charges an ETF in the event of a subscriber’s death.[34] NCTA reports that “[p]roviders also often waive ETFs for a variety of reasons.”[35] The examples of the 102-year-old woman and the flooded business are better characterized as idiosyncratic customer-service mishaps, rather than an indictment of ETFs generally.

Conversely, White’s ETF experience is an example of an ETF policy working as designed. She was aware of the ETF at the time she entered into the contract, moved to another state serviced by her existing provider, received a superior mobile plan through her employer, broke her contract, and paid a fee for doing so—despite her efforts to “dispute or reverse” the fee.[36]

III.    ETFs Are an Inextricable Component of Cable and DBS Rates

The NPRM concludes that the Commission has wide discretion “to regulate the provision of direct-to-home satellite services” and “to impose ‘public interest or other requirements for providing video programming’ on DBS providers.”[37] In contrast, the FCC generally is prohibited from regulating cable-television rates.[38] As a workaround, the Commission claims it has authority to ban cable ETFs under its authority “to establish standards by which cable operators may fulfill their customer service requirements” which includes “communications between the cable operator and the subscriber (including standards governing bills and refunds).”[39]

Thus, whether the Commission has authority to regulate cable ETFs hinges on the crucial question of whether its proposal is a form of rate regulation (which is forbidden) or customer-service regulation (which is permitted). Unfortunately, Congress has provided no guidance, as the Commission notes: “The statute does not define the term ‘rates’ or explain the meaning of the phrase ‘rates for the provision of cable service.’”[40]

Nevertheless, the FCC has a lengthy history of using an expansive definition of rates when it has suited the Commission’s goals. For example, in the mobile market, the FCC has concluded that “the term ‘rates charged’ in [section 332(c)(3)(A)] may include both rate levels and rate structures for [cellular providers] and that the states are precluded from regulating either of these.”[41]

Perhaps because of this history, the Commission is now perplexed as to whether its proposed ETF regulations amount to rate regulation. On the one hand, the Commission “tentatively conclude[s] that Commission practice and precedent supports the notion that ETF regulations [] are not rate regulation.”[42] On the other, the NPRM asks whether “the elimination of ETFs alter the price of long term contracts,” specifically by “offer[ing] them at higher prices.”[43] It seems the Commission is seeking it have it both ways: acknowledging its proposed ban on ETFs could be tied to higher prices, while claiming that connection does not amount to regulating rates.

We expect numerous comments addressing the legal and plain0language definitions of what constitutes “rates for the provision of cable service.” In these comments, however, we focus on the economics of cable and DBS pricing. Put simply, the existence or absence of an ETF in an agreement is tied directly to the rates paid by the subscriber, as summarized by Ben Everard:

If nothing else, evaluating “rates” is a far more complicated undertaking than merely referencing cost per unit of time. “Rates … do not exist in isolation. They have meaning only when one knows the services to which they are attached.” It is therefore important to examine the context of the fee and the rate. In context, a fee which would otherwise seem to be isolated from the rate charged may in fact become a component of the rate if the fee is attached to a service reflected in the rate. The ETF is a “central element of the rate structure that compensates defendants for the upfront services they provide to their customers.” Without the ETF, the rate goes up. In this way, the ETF is part of the fee charged for a service rendered.[44]

Consumers who opt for a contract with an ETF receive valuable consideration in the form of discounted monthly rates, among other things. As noted above, NCTA testified that contracts with ETFs have a lower combined price over the life of the term.[45] One study estimates savings of about $17 a month on contracts with an ETF.[46] These lower rates are inextricably “attached” to the ETF. In the competitive MVPD and broadband environment, it would be impossible to eliminate ETFs without affecting rates. The ban on ETFs would therefore raise providers’ marginal cost per-subscriber, which would be expected to result in higher prices. Providers facing competitive pressures to avoid raising prices may instead exit unprofitable markets, reducing competition in those markets and leading to higher prices.

The Commission asserts that ETFs “mak[e] it costly for consumers to switch services during the contract term.”[47] Nearly a decade ago, then-FCC Chair Tom Wheeler recalled the fleeting period of aggressive long-distance pricing (when long-distance pricing mattered), hoping those giddy days would come to the broadband market:

Some of you are old enough—like me—to remember the long-distance telephone wars of the 1990s. Sign up with Sprint in April, switch to MCI in May, and then to AT&T in June. Choose any one of them, or others, in July. That is what a truly competitive telecommunications marketplace looks like. That is not the reality—even for “competitive broadband”—today.[48]

But yesteryear’s Wheeler and today’s Commission both miss the point. The purpose of ETFs is to make it costly to switch during the contract term. Providers base their pricing and investment decisions on their subscriber projections. They have a keen business and competitive interest in minimizing consumer switching, or churn. For long-term investments, providers need a greater degree of certainty than for short-term projects. Moreover, unlike long-distance service—which was as easy to switch as dialing 10-10-321, 10-10-345, or 1-800-COLLECT—switching cable or DBS providers typically requires the installation of costly equipment specific to the provider. For example, NCTA testified before the Commission:

Churn can have several costly effects on providers. There are advertising and marketing costs to recruit new customers. There are transaction costs associated with signing up and cancelling subscribers. There may be truck rolls to disconnect and connect service. And in the case of new services like Internet and telephone service, there may be more substantial installation costs than compared to traditional cable service. Moreover, churn results in uncertainty regarding the expected revenue and profit from particular customers.

Long-term contracts can reduce these costs and uncertainty, promoting efficiency and investment. They can also enable operators to attract new customers and retain existing customers for their services.[49]

In its latest quarterly report to the Securities and Exchange Commission, DISH Network reported that it incurs “significant upfront costs to acquire Pay-TV” subscribers, amounting to subscriber-acquisition costs of $1,065 per new DISH TV subscriber.[50] The company also reported that it incurs “significant” costs to retain existing subscribers. These retention costs include upgrading and installing equipment, as well as free programming and promotional pricing, “in exchange for a contractual commitment to receive service for a minimum term.”[51]

In addition to substantial subscriber-acquisition costs, as NCTA noted above, churn creates uncertainty in expected revenues and profits. By imposing a cost for early termination, ETFs reduce the likelihood that consumers will break their contract during the term of the agreement. This, in turn, increases the reliability of providers’ longer-term revenue projections, upon which they make investment decisions.

In contrast, the Commission is clear that it expects—and hopes—that a ban on ETFs will increase churn.[52] Yet the NPRM draws no conclusions, nor solicits any comments,  regarding whether and how a ban on ETFs would affect revenue projections, the reliability of those projections, and how those lower and less-reliable projections would affect investment.[53]

Banning ETFs can turn profitable customers into unprofitable customers, thus reducing providers’ expected revenues and placing pressure on providers to raise rates to maintain profitability. By increasing churn, a ban on ETFs increases the uncertainty in those projections and reduces providers’ confidence in their reliability. Because of the well-known and widely accepted risk-return tradeoff, firms facing increased uncertainty in investment returns (i.e., risk) will demand higher expected returns from consumers—through higher prices—to account for that higher risk.[54] Thus, the increase in uncertainty by itself will pressure providers to raise rates to improve risk-adjusted returns.

In summary, the economics of ETFs demonstrates that ETFs are so inextricably linked to rates that they cannot be disentangled into separate components. This linkage is made direct through the quid pro quo of offering lower rates to consumers to choose a contract with an ETF provision. The linkage is also indirect, through providers’ revenue projections and, in turn, investment decisions, which factor into rate calculations. Under this economic reasoning, the Commission should be prohibited from regulating cable television ETFs. But even if the Commission has authority to ban ETFs, it should not do so, because of the harms to both providers and consumers.

[1] Notice of Proposed Rulemaking, In the Matter of Promoting Competition in the American Economy: Cable Operator and DBS Provider Billing Practices, MB Docket No. 23-405 (Nov. 22, 2023) [hereinafter “NPRM”] ¶ 7.

[2] NPRM, ¶ 8.

[3] What Is a Prepayment Penalty?, Consumer Financial Protection Bureau (Sep. 9, 2020), https://www.consumerfinance.gov/ask-cfpb/what-is-a-prepayment-penalty-en-1957 (“A prepayment penalty is a fee that some lenders charge if you pay off all or part of your mortgage early. If you have a prepayment penalty, you would have agreed to this when you closed on your home.”)

[4] Diana Kelly Levey, How to Cancel Your Gym Membership: 11 Things to Know About Contracts, Men’s Journal (May 6, 2022), https://www.mensjournal.com/health-fitness/how-to-cancel-your-gym-membership-11-things-to-know-about-contracts (“Many gyms charge a fee to cancel a membership. The cost can vary widely and is worth knowing about when you sign the contract.”).

[5] What Is an Early Termination Fee in a Merchant Agreement?, Host Merchant Services (2024), https://www.hostmerchantservices.com/articles/early-termination-fee (“Early termination fees come into play whenever a merchant terminates an agreement before the initial contract term has ended. These fees are meant to cover costs the vendor has already incurred by securing the merchant’s business and any upfront payments, setup fees, or ongoing minimums the merchant has committed to. The fees aim to compensate the vendor for losing that revenue early and potentially having to find a replacement merchant.”).

[6] Lizzie Nealon, When and How to Cancel Your Car Insurance Policy, Bankrate (Jun. 2, 2023), https://www.bankrate.com/insurance/car/get-refund-cancel-car-insurance, (“For example, some providers may require you to pay a cancellation fee or give a 30-day notice ahead of your cancellation date.”)

[7] Turning in a Lease Early? Here’s What You Need to Know, Chase (2024), https://www.chase.com/personal/auto/education/leasing/turning-in-a-lease-early (“An early termination fee is standard and, depending on the lessor’s standards and the terms of your lease agreement, may require payment of remaining lease payments, an amount equal to the difference between the remaining balance of your lease and the realized value of the car after sale, or other charges.”)

[8] Shine Colcol, Hotel Cancellation Policy: Complete Guide, Little Hotelier (Aug. 28, 2023), https://www.littlehotelier.com/blog/running-your-property/hotel-cancellation-policy.

[9] Alan A. Ayers, Are There Any Restrictions on an Urgent Care Provider Charging a No-Show or Cancellation Fee?, J. Urgent Care Med. (Feb. 28, 2021), https://www.jucm.com/are-there-any-restrictions-on-an-urgent-care-provider-charging-a-no-show-or-cancellation-fee (“Many primary care and specialty practices have a policy of charging a fee for missing an appointment (or a fee for cancelling with less than 24 hours’ notice). This fee can range from a modest $25 to upwards of $100.”).

[10] Indeed, this type of contract has long been a part of the common law. For example, a 2,200-year-old rental agreement from the Greek city of Teos in what is now modern-day Turkey specifies a steep penalty for a tenant backing out of the agreement. See, Translations of Hellenistic Inscriptions: 206, Rental Agreement for Precinct of Dionysas at Teos, Attalus (May 26, 2021), https://www.attalus.org/docs/other/inscr_206.html (“If the tenant does not ratify the contract on the day on which he is chosen or on the following day, we shall choose another tenant, and if the bid price is less, he shall owe ten times the difference to the lessors.”). Economically speaking, an ETF functions identically to an options contract, which protects an optionor from untimely revocation by the optionee, and typically prescribes damages in the event of such a breach. See, e.g., the Restatement (Second) of Contracts: An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.  § 25 (1981) The Restatement notes that in these contexts, disregarding the terms for future performance would “extend the option contract to subject one party to greater obligations than he bargained for.” Id. at comment D.

[11] Open Commission Meeting, Statement of Daniel Brenner, Sr. Vice President, Law & Regulatory Policy, National Cable & Telecommunications Association, FCC (Jun. 12, 2008), available at https://transition.fcc.gov/realaudio/presentations/2008/061208/brenner.pdf (“And most importantly, residential offers that may include ETFs are always optional, and they always convey value, in the form of lower combined price over the life of the term, to the customer. Whether it’s voice, video or data, a customer can always choose instead to go on a month-to-month basis—with the ability to change service providers whenever they choose, without charge. And more often than not, the advertised cable rates are month-to-month rates rather than rates offered only when a minimum term contract is required.”).

[12] Id. (An informal survey of our larger members indicates that only around 5 to 7% of triple play customers have elected minimum term agreements.)

[13] Open Commission Meeting, Testimony of John F. Murphy, Senior Vice President, Controller & Chief Accounting Officer, DIRECTV, FCC (Jun. 12, 2008), available at https://transition.fcc.gov/realaudio/presentations/2008/061208/murphy.pdf (“Among other options, consumers can currently choose to pay full retail price for equipment and installation with no ECF [early cancellation fee], or they can opt for free equipment and installation with either an 18 or 24 month commitment and a pro-rated ECF. When presented with this choice, consumers have given their answer—they overwhelmingly prefer no upfront payment. Clearly, our customers believe our ECF policy represents a significant value.”)

[14] See, George J. Stigler & Gary S. Becker, De Gustibus Non Est Disputandum, 67 Am. Econ. R. 76 (1977).

[15] Brenner, supra note 1. See also Ex Parte Comments of NCTA, MB Docket No. 23-405 (Dec. 6, 2023) [hereafter, “NCTA Ex Parte Comments”] (“ETFs are a term of a common business arrangement in which a customer receives a discounted offering for a specified period of time in exchange for a reasonable cancellation fee ….”).

[16] Becky Chao, Claire Park, & Joshua Stager, The Cost of Connectivity 2020, New America & Open Technology Institute (Jul. 2020) at 50, available at https://d1y8sb8igg2f8e.cloudfront.net/documents/The_Cost_of_Connectivity_2020__.pdf.

[17] NCTA Ex Parte Comments, supra note 14 at 2

[18] John Horrigan & Ellen Satterwhite, Americans’ Perspectives on Early Termination Fees and Bill Shock: Summary of Findings, FCC (May 2010), available at https://docs.fcc.gov/public/attachments/DOC-298414A1.pdf. (Reporting “38% said did not know whether they would have to pay a fee or not” and “[a]mong the 21% of home broadband subscribers who are subject to an ETF, nearly two-thirds (64%) do not know what their fee would be.”)

[19] NPRM, n. 33.

[20] Open Commission Meeting, Testimony of Harold Schroer, FCC (Jun. 12, 2008), available at https://transition.fcc.gov/realaudio/presentations/2008/061208/schroer.pdf.

[21] See, Open Commission Meeting, Testimony of Molly White, FCC (Jun. 12, 2008), available at https://transition.fcc.gov/realaudio/presentations/2008/061208/white.pdf (“I knew when I signed up for cellular service with Verizon that I was obligated to agree to the early termination fee” but “tried to dispute or reverse the charges.”)

[22] Cellphone Termination Fee Cases, 186 Cal.App.4th 1380, 1382 n.1 (Cal. Ct. App. 2010) (“Plaintiffs/respondents are Molly White, Christina Nguyen, Patricia Brown and Harold Schroer and are collectively referred to as ‘plaintiffs.’”)

[23] Id. at 1393 (Cal. Ct. App. 2010) (“She ignores, however, the verdict returned by the same jury on Sprint’s cross-complaint, finding that the plaintiffs had breached their contracts with Sprint” resulting in actual damages to Sprint caused by early termination.).

[24] Empowering Broadband Consumers Through Transparency, 37 FCC Rcd 13686 (15) (2022), available at https://docs.fcc.gov/public/attachments/FCC-22-86A1_Rcd.pdf [informally “Nutrition Labels” rule].

[25] Id., ¶ 16.

[26] Id., ¶ 34 and template at 13691.

[27] Empowering Broadband Consumers Through Transparency, CG Docket No. 22-2, Report and Order and Further Notice of Proposed Rulemaking (Jessica Rosenworcel statement, Nov. 14, 2022), available at https://docs.fcc.gov/public/attachments/FCC-22-86A2.pdf (“[B]y requiring that providers display introductory rates clearly, we are seeking to end the kind of unexpected fees and junk costs that can get buried in long and mind-numbingly confusing statements of terms and conditions.”)

[28] See, NPRM n. 29 (noting complaints to the FCC about ETFs triggered by subscribers moving to a new address or state).

[29] White, supra note 5.

[30] DirecTV Sends Family of Deceased 102-Year-Old Woman “Early Termination” Fee, Good Day Sacramento (Oct. 8, 2019), https://www.cbsnews.com/gooddaysacramento/news/102-year-old-directv-early-termination-fee.

[31] Ethan McLeod, After Complaints, Comcast Waives Termination Fees for Destroyed Ellicott City Business, WBFF (Aug. 4, 2016), https://foxbaltimore.com/news/local/after-complaints-from-destroyed-ellicott-city-businesses-comcast-waives-termination-fees.

[32] Id.

[33] See, e.g., XfinityMarcos, Reply to Early Termination Fee for Moving to a Non Service Area, Xfinity Community Forum (Feb. 2022), https://forums.xfinity.com/conversations/customer-service/early-termination-fee-for-moving-to-a-non-service-area/620c2368d5ffd22c1b568793?commentId=620c2907d5ffd22c1b5687b9.

[34] See, e.g., Again, Reply to Early Termination Fee for Moving to a Non Service Area, Xfinity Community Forum (Feb. 2022), https://forums.xfinity.com/conversations/customer-service/early-termination-fee-for-moving-to-a-non-service-area/620c2368d5ffd22c1b568793?commentId=620c3e4fd5ffd22c1b568826.

[35] NCTA Ex Parte Comments, supra note 5.

[36] White, supra note 5.

[37] NPRM, ¶ 5 citing 47 U.S.C. § 303(v) and 47 U.S.C. § 335(a).

[38] 47 U.S. Code § 543 (“No Federal agency or State may regulate the rates for the provision of cable service except to the extent provided under this section and section 532 of this title.”).

[39] NPRM, ¶ 9. See also, 47 U.S.C. § 552.

[40] NPRM, ¶ 12.

[41] Ball v. GTE Mobilnet, 81 Cal.App.4th 529, 538 (Cal. Ct. App. 2000), citing In re Southwestern Bell Mobile Systems, Inc. F.C.C. 99-356 (November 24, 1999), ¶ 20. [emphasis added] See 47 U.S.C. § 332(c)(3)(A) (“no State or local government shall have any authority to regulate the … rates charged by any commercial mobile service or any private mobile service, except that this paragraph shall not prohibit a State from regulating the other terms and conditions of commercial mobile services”). See also, In re AT&T, 84 F.C.C.2d 158, 182 n.52 (1980) (“The pricing mechanisms employed to determine rates and charges as well as any interrelationships which exist among rate elements are part of rate structures.”) and Ibid.; accord AT&T, 74 F.C.C.2d at 235 (“Individual ‘[r]ate elements are the basic building blocks of rate structures.”)

[42] NPRM, ¶ 12.

[43] NPRM, ¶ 20.

[44] Ben Everard, Early Termination Fees: Fair Game or Federally Preempted?, 77 Geo. Wash. L. Rev. 1033 (2009), citing AT&T v. Cent. Office Tel. Inc., 524 U.S. 214, 223 (1998) and Joint Reply Memorandum of Points and Authorities in Support of Defendants’ Demurrers Re Early Termination Fee Claims at 3-7, In re Cellphone Termination Fee Cases, No. 4332, 2006 WL 3256037 (Cal. Super. Ct. June 9, 2006), rev’d, No. A115457, 2008 WL 2332971 (Cal. Ct. App. June 9, 2008). [emphasis added]

[45] Brenner, supra note 1.

[46] Chao, et al., supra note 6

[47] NPRM, ¶ 2.

[48] Tom Wheeler, Prepared Remarks of FCC Chairman Tom Wheeler “The Facts and Future of Broadband Competition,” FCC (Sep. 4, 2014), https://docs.fcc.gov/public/attachments/DOC-329161A1.pdf.

[49] Brenner, supra note 1.

[50] DISH Network Corporation, Quarterly Report (Form 10-Q) (Nov. 6, 2023), https://www.sec.gov/ix?doc=/Archives/edgar/data/1001082/000155837023017649/dish-20230930x10q.htm (“DISH TV SAC was $1,065 during the three months ended September 30, 2023 compared to $1,029 during the same period in 2022, an increase of $36 or 3.5%. This change was primarily attributable to higher installation costs due to an increase in labor and other installation costs, and a lower percentage of remanufactured receivers being activated on new subscriber accounts, partially offset by a decrease in advertising costs per subscriber.”)

[51] Id. (“We incur significant costs to retain our existing DISH TV subscribers, generally as a result of upgrading their equipment to next generation receivers, primarily including our Hopper® receivers, and by providing retention credits. As with our subscriber acquisition costs, our retention upgrade spending includes the cost of equipment and installation services. In certain circumstances, we also offer programming at no additional charge and/or promotional pricing for limited periods to existing customers in exchange for a contractual commitment to receive service for a minimum term. A component of our retention efforts includes the installation of equipment for customers who move.”)

[52] NPRM, ¶ 2, citing Executive Order 14036, 86 FR 36987 (July 9, 2021), §(l)(iv), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy (“prohibiting unjust or unreasonable early termination fees” would “enable[e] consumers to more easily switch providers”).

[53] The words “invest” or “investment” are absent from the NPRM. The closest the NPRM gets to expressing any interest in investment is its inquiry, “would a ban on ETFs limit entry by new providers by limiting their ability to recoup upfront costs through an ETF?” (NPRM, ¶ 22)

[54] See, Edwin J. Elton & Martin J. Gruber, Modern Portfolio Theory and Investment Analysis (4th ed, 1991).

 

 

 

 

Continue reading
Telecommunications & Regulated Utilities

ICLE Reply Comments to FCC on Title II NPRM

Regulatory Comments I.        Introduction We thank the Federal Communications Commission (“FCC” or “the Commission”) for the opportunity to offer reply comments to this notice of proposed rulemaking . . .

I.        Introduction

We thank the Federal Communications Commission (“FCC” or “the Commission”) for the opportunity to offer reply comments to this notice of proposed rulemaking (“NPRM”) as the Commission seeks, yet again, to reclassify broadband-internet-access services under Title II of the Communications Act of 1934.[1]

As our previous comments, these reply comments, and the comments of others in this proceeding repeatedly point out, the idea of an “open internet” is not incompatible with business-model experimentation, which could include various experiments in pricing and network management. This is particularly apparent, given the lengthy history of broadband deployment reaching ever more consumers at ever lower cost per megabit, even in the absence of Title II regulation.

As repeatedly noted in this docket, U.S. broadband providers were able to support large increases in network load during the COVID-19 pandemic, and have been pressing forward to provide hard-to-reach potential customers with service tailored to their needs, whether through cable, fiber, satellite, fixed-wireless, or mobile connections, all without a Title II regime.

By contrast, applying Title II to broadband providers risks ossifying the existing set of technical and business-model parameters and undermining the internet’s fundamental dynamism. The ability to adapt to new applications and users has long driven the internet’s success. Declaring the current network architecture complete and frozen under Title II is at odds with this reality. In essence, openness requires embracing ongoing change, not freezing the status quo.

As noted extensively by multiple commentators in this proceeding, the rationale for applying Title II is rooted in the precautionary principle. This weak basis does not warrant preemptively imposing blanket prohibitions. A better approach would be to employ an error-cost framework that minimizes the total risk of either over- or under-inclusive rules, and to eschew proscriptive ex ante mandates.

Technology markets tend to be highly dynamic and to evolve rapidly. Which technology best fits particular deployment and usage needs, particular network designs, and the business relationships among different kinds of providers is determined by context, and by complex interactions between long-term investment and fast-changing exigencies that demand flexibility.

What this means here is that the Commission should not promulgate policies that would presumptively disallow so-called blocking, throttling, and paid prioritization. As detailed below, in most instances, there is no way to prohibit these practices ex ante without the risk of inducing a chilling effect on many pro-consumer business arrangements. Similarly, the General Conduct Standard threatens to foster an open-ended, difficult-to-predict regulatory environment that would chill innovation and harm consumers.

Going forward, the Commission should avoid Title II reclassification and instead hew to the policy that has guided it since the 2018 Order. Where problems occur, ex post enforcement of existing competition and consumer-protection laws provides enforcers with the tools sufficient to guarantee a truly open internet.

II.      The Commission Fails to Offer Sufficient Justifications for a Change in Policy

The Commission imposed Title II regulations on broadband internet with its 2015 Open Internet Order.[2] Title II regulation was repealed with the 2018 Restoring Internet Freedom Order.[3] Thus, it would be reasonable to see this latest Title II proposal as a do-over of the 2015 Order. Indeed, the Commission describes its proposal as a “return to the basic framework the Commission adopted in 2015.”[4] Attorneys at Davis Wright Tremaine say the proposed rules are “effectively identical” to the Open Internet Order.[5] The American Enterprise Institute’s Daniel Lyons invokes the late Justice Antonin Scalia’s observation of bad policy as a “ghoul in a late night horror movie that repeatedly sits up in its grave and shuffles abroad, after being repeatedly killed and buried.”[6]

In ex parte meetings with FCC commissioners in 2017, ICLE concluded that the 2015 Order was not supported by a “reasoned analysis.”

We stressed that we believe that Congress is the proper place for the enactment of fundamentally new telecommunications policy, and that the Commission should base its regulatory decisions interpreting Congressional directives on carefully considered empirical research and economic modeling. We noted that the 2015 OIO was, first, a change in policy improperly initiated by the Commission rather than by Congress. Moreover, even if some form of open Internet rules were properly adopted by the Commission, the process by which it enacted the 2015 OIO, in particular, demonstrated scant attention to empirical evidence, and even less attention to a large body of empirical and theoretical work by academics. The 2015 OIO, in short, was not supported by reasoned analysis.

In particular, the analysis offered in support of the 2015 OIO ignores or dismisses crucial economics literature, sometimes completely mischaracterizing entire fields of study as a result. It also cherry picks from among the comments in the docket, ignoring or dismissing without analysis fundamental issues raised by many commenters. Tim Brennan, chief economist of the FCC during the 2015 OIO’s drafting, aptly noted that “[e]conomics was in the Open Internet Order, but a fair amount of the economics was wrong, unsupported, or irrelevant.”[7]

With the current Title II NPRM, it appears the Commission is again ignoring or dismissing fundamental issues without conducting sufficient analysis. Moreover, the see-sawing between imposition, repeal, and possible re-imposition of Title II regulations invites scrutiny under the Administrative Procedures Act, especially in light of the 5th U.S. Circuit Court of Appeals’ decision in Wages & White Lion Invs. LLC v. FDA.

The change-in-position doctrine requires careful comparison of the agency’s statements at T0 and T1. An agency cannot shift its understanding of the law between those two times, deny or downplay the shift, and escape vacatur under the APA. As the D.C. Circuit put it in the canonical case: “[A]n agency changing its course must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored, and if an agency glosses over or swerves from prior precedents without discussion it may cross the line from the tolerably terse to the intolerably mute.”[8]

As the NCTA notes in its comments:

“[A]n agency regulation must be designed to address identified problems.” Accordingly, “[r]ules are not adopted in search of regulatory problems to solve”; rather, “they are adopted to correct problems with existing regulatory requirements that an agency has delegated authority to address.” And because the reclassification of broadband would reverse previous agency decision-making, the Commission is obligated to show not only that it is addressing an actual problem, but that it reasonably believes the new rules “to be better” and has not “ignore[d] its prior factual findings” underpinning the existing rules or the “reliance interests” that have arisen from those rules. That is not possible here.[9]

The NPRM identifies two reasons for re-imposing Title II classification on broadband internet that mirror the reasons in the 2015 Order: (1) ensuring “internet openness” and (2) consumer protection. The NPRM also identifies several new justifications for reimposing Title II:

  1. Increased use and importance of broadband internet during and after the COVID-19 pandemic;[10]
  2. Federal spending on provider investments and consumer subsidies;[11]
  3. Safeguarding national security[12] and preserving public safety;[13] and
  4. The need for a uniform national regulatory system.[14]

As we discuss below, these justifications do not stand up to scrutiny.

A.      Increased Importance of Broadband Internet During the COVID-19 Pandemic

Beyond the obvious national-comparison data demonstrating that U.S. networks already outperform other countries, there are many problems with relying on internet-usage patterns during and subsequent to the COVID-19 pandemic as justification for imposing Title II regulations on broadband providers.

The NPRM concludes: “While Internet access has long been important to daily life, the COVID-19 pandemic and the rapid shift of work, education, and health care online demonstrated how essential broadband Internet connections are for consumers’ participation in our society and economy.”[15] It further notes: “In the time since the RIF Order, propelled by the COVID-19 pandemic, BIAS has become even more essential to consumers for work, health, education, community, and everyday life,”[16] and that this importance “has persisted post-pandemic.”[17] The Commission “believe[s] the COVID-19 pandemic dramatically changed the importance of the Internet today, and seek[s] comment on our belief.”[18]

In our initial comments on this matter, ICLE reported that, by most measures, U.S. broadband competition is already vibrant, and has improved dramatically since the COVID-19 pandemic.[19] For example, since 2021, more households are connected to the internet; broadband speeds have increased while prices have declined; more households are served by more than a single provider; and new technologies—such as satellite and 5G—have served to expand internet access and intermodal competition among providers.[20]

In these reply comments, we agree with the Commission’s assertion that internet access “has long been important to daily life.” We do, however, disagree in some key respects with the Commission’s conclusion that internet access “has become even more essential,” and we question whether the pandemic has actually “dramatically changed the importance of the Internet today.” At the risk of splitting hairs, the Commission is unclear in how it defines “post-pandemic.” On April 10, 2023, President Biden signed H.J. Res. 7, terminating the national emergency related to the COVID-19 pandemic effective May 11, 2023. Thus, by the administration’s reckoning, the United States is only about nine months into the “post-pandemic” era. It is mind-boggling how the Commission could draw any firm conclusions about post-pandemic internet usage, given the dearth of information regarding internet usage over such a short period.

The NPRM attempts to support the Commission’s conclusion by citing a 2021 Pew Research Center survey “showing that high speed Internet was essential or important to 90 percent of U.S. adults during the COVID-19 pandemic.”[21] While we do not dispute Pew’s research, it seems the Commission has cherry picked from only this single report. Notably, an earlier Pew survey reported in 2017 that 90% of respondents also said high-speed internet access was essential or important.[22] By this measure, it appears the importance of the internet has not changed since 2017, let alone changed dramatically. Moreover, a COVID-era Pew survey reported that 62% of respondents said “the federal government does not have” responsibility to ensure all Americans have a high-speed internet connection at home.[23]

To support its assertion that this heightened internet usage “has persisted post-pandemic,” the Commission cites research from OpenVault, reporting that the share of subscribers using 533 GB or more of bandwidth per-month increased from 10% to almost 50% between 2017 and 2022.[24] The report cited in the NPRM, however, concludes that one factor driving the acceleration of data usage is the trend among many usage-based billing operators to provide unlimited data to their gigabit subscribers.[25] It’s more than a little ironic that providers have rolled out a policy that encourages increased data usage, only to see the FCC invoke the increased usage as a justification for regulating the policies that increased that usage. Such reasoning suggests that the Commission’s overworked “virtuous cycle” concept is nothing more than a shibboleth to be invoked only to buttress the Commission’s proposals.[26]

There are other areas in which the Commission seems to misunderstand the available data and how it affects its conclusions. Table 1 provides average U.S. broadband data usage reported by OpenVault for the third quarter of the years 2018 through 2023.[27] While it is true that internet usage increased by 40% in the first year of the pandemic, the increase in subsequent years (11-14%) was smaller than the average pre-pandemic increase of 20%. The average annual increase over the six years in Table 1 is 19%. It is simply too soon to tell whether COVID-19 caused a permanent shift in the rate of increase of internet usage.

To further support its assertion, the Commission reports that usage per-subscriber smartphone monthly data rose by 12% between 2020 and 2021.[28] But these years were directly in the middle of the pandemic, rendering this information useless for assessing post-pandemic mobile data usage. Information from CTIA indicates that, from 2016, wireless data traffic increased an average of 28% annually, from 13.7 trillion MB to 37.1 trillion MB.[29] By contrast, from 2019 to 2022, traffic increased by an average of only 19% a year, to 73.7 trillion MB. It appears that, rather than COVID-19 being associated with mobile data use increasing at a faster rate, the pandemic was actually associated with usage increasing at a slower rate.

Thus, not only did the performance of U.S. broadband providers during the pandemic demonstrate that Title II regulations were unnecessary, but the data that the Commission cites in this proceeding on this point completely undermine its case.

B.      Recent Federal Spending on Broadband Deployment Undermines the Case for Title II

The Commission invokes “tens of billions of dollars” of congressional appropriations on internet deployment and access as a reason to impose utility-style regulation on the industry.[30] The NPRM identifies the following bills that appropriated such funds:[31]

  • Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. No. 116-136, 134 Stat. 281 (2020) (appropriating $200 million to the Commission for telehealth support through the COVID-19 Telehealth Program);
  • Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, § 903, 134 Stat. 1182, (2020) (appropriating an additional $249.95 million in additional funding for the Commission’s COVID-19 Telehealth Program) and § 904, 134 Stat. 2129 (establishing an Emergency Broadband Connectivity Fund of $3.2 billion for the Commission to establish the Emergency Broadband Benefit Program to support broadband services and devices in low-income households during the COVID-19 pandemic);
  • American Rescue Plan Act of 2021, Pub. L. No. 117-2, § 7402, 135 Stat. 4 (2021) (establishing a $7.171 billion Emergency Connectivity Fund to help schools and libraries provide devices and connectivity to students, school staff, and library patrons during the COVID-19 pandemic);
  • Infrastructure Act, § 60102 (establishing grants for broadband-deployment programs, as administered by NTIA); § 60401 (establishing grants for middle mile infrastructure); and § 60502 (providing $14.2 billion to establish the Affordable Connectivity Program).

As we note in our comments, the legislative process would have been a perfect time for Congress to legislate net neutrality or Title II regulation, as it debated four bills that proposed spending tens of billions of dollars to encourage internet adoption and broadband buildout for the next decade or so.[32] But no such provisions were included in any of these bills, as noted in comments from the Advanced Communications Law & Policy Institute:

The Congressional record for each of these bills appears to be devoid of discussion about the inadequacy of the prevailing regulatory framework or a need to reclassify broadband. In addition, it does not appear that any bills or amendments were proposed that sought to impose common carrier regulation on broadband ISPs. An amendment that was included in the final IIJA prohibited the NTIA from engaging in rate regulation as part of BEAD. Rate regulation is not permitted under the Title I regulatory framework but would be theoretically possible under Title II. This provides additional evidence that Congress was cognizant of the regulatory environment in which it was legislating.[33]

The fact that Congress had numerous opportunities in recent years to mandate Title II regulations suggests the Commission’s proposal is likely at odds with congressional intent and that the FCC should refrain from such excessive regulatory intervention. At the very least, the pattern of congressional spending in no way supports the presumption that Title II reimposition is important, given federal outlays.

C.      There Have Been No New Developments in National Security or Safety to Support Reclassification

The Commission asserts that Title II reclassification “will strengthen the Commission’s ability to secure communications networks and critical infrastructure against national security threats.”[34] The NPRM concludes, “developments in recent years have highlighted national security and public safety concerns … ranging from the security risks posed by malicious cyber actors targeting network equipment and infrastructure to the loss of communications capability in emergencies through service outages.”[35] The Commission “believe[s] that blocking, throttling, paid prioritization, and other potential conduct have the potential to impair public safety communications in a variety of circumstances and therefore harm the public.”[36]

Comments from the Free State Foundation point out the obvious: The Commission has not identified any specific national-security threats and has not articulated any way in which Title II regulations would address these threats.

Unsurprisingly, the Notice fails to articulate any specific threats of harm to national security and public safety that Title II regulation would alleviate. And the Notice provides no basis for concluding that such regulation will improve broadband cybersecurity. If security and safety truly are vulnerable, why has the Commission kept that from public knowledge until the rollout of its regulatory proposal.[37]

Comments from the CPAC Center for Regulatory Freedom suggest that the Commission’s assertions regarding national-security threats are likely based on the Annual Threat Assessment of the U.S. intelligence community.[38] The latest Threat Assessment identifies potential cyber threats from China, Russia, Iran, North Korea, and transnational criminal organization (TCOs).[39] The 2017 Threat Assessment, however, identified the same sources of potential threats, with TCOs divided into terrorists and criminals.[40] Broadly speaking, the United States faces cyber threats from the same sources today that it did when Title II was repealed with the RIF Order.

The “developments” identified by the Commission are not new. The 2017 Threat Assessment reported that: “Russian actors have conducted damaging and disruptive cyber attacks, including on critical infrastructure networks.”[41] The assessment also reported an Iranian intrusion into the industrial control system of a U.S. dam and criminals’ deployment of ransomware targeting the medical sector.[42] The Commission offers no evidence that these threats have changed sufficiently since the 2018 Order to justify a change in national-security posture with respect to regulating broadband internet under Title II.

The Free State Foundation criticizes the Commission’s national-security and public-safety justifications as mere speculation:

But now the Notice suddenly makes national security and public safety into primary claimed justifications for reimposing public utility regulation on broadband Internet services. Over a dozen paragraphs in the draft notice address speculated future vulnerabilities in network management operations, functionalities, and equipment.[43]

Not only are the Commission’s asserted network vulnerabilities speculative, but so are the conclusions regarding Title II regulation’s ability to address them. The NPRM “tentatively” concludes reclassification would “enhance” the FCC’s ability and efforts to safeguard national security, protect national defense, protect public safety, and protect the nation’s communications networks from entities that pose threats to national security and law enforcement.[44] Yet, it is mute on exactly how imposing Title II obligations on broadband providers would grant or enhance its powers to combat cyber-crime.

Indeed, as noted by CTIA, it is likely that many data services used in public safety would not be subject to Title II regulations:

Public Safety: The 2020 RIF Remand Order demonstrated that public safety entities often use enterprise-level quality-of-service dedicated public safety data services rather than BIAS. Title II regulation of BIAS therefore would not reach many of the data services relied on by public safety. In contrast, as the 2020 RIF Remand Order showed, the Title I framework for BIAS benefits virtually all services that advance public safety—including consumer access to information and to first responders over BIAS connectivity—as a result of the additional network investment that is better driven by Title I.[45]

FirstNet is one such service that would not be subject to Title II regulation.

FirstNet is public safety’s dedicated, nationwide communications platform. It is the only nationwide, high-speed broadband communications platform dedicated to and purpose-built for America’s first responders and the extended emergency response community. Today, FirstNet covers all 50 states, the District of Columbia, and the five U.S. territories. As of September 30, 2023, 27,000 public safety agencies and direct-support organizations use FirstNet, representing more than 5.3 million connections on the network. FirstNet is designed for all first responders in the country—including law enforcement, EMS personnel, firefighters, 9-1-1 communicators, and emergency managers. It enables subscribers to maintain always-on priority access; FirstNet users never compete with commercial traffic for bandwidth, and the network does not throttle them anywhere in the country in any circumstances.

FirstNet is built and operated in a public-private partnership between AT&T and the First Responder Network Authority—an independent agency within the federal government. Following an open and competitive RFP process, the federal government selected AT&T to build, operate, and evolve FirstNet for 25 years. Custom FirstNet State Plans were developed for the country’s 56 jurisdictions, which ultimately all chose to opt in.[46]

TechFreedom also notes that Title II does not apply to data services marketed to government users.[47] The group’s comments dispel the myth that, if only the FCC had Title II authority, the legendary and nearly apocryphal Santa Clara fire-department saga could have been avoided.

For this rationale, FCC Chair Jessica Rosenworcel relies heavily on a single incident. In 2018, the Republican-led FCC returned broadband to Title I, the lighter regulatory approach. Months later, “when firefighters in Santa Clara, California, were responding to wildfires they discovered the wireless connectivity on one of their command vehicles was being throttled,” Rosenworcel claims. “With Title II classification, the FCC would have the authority to intervene,” she said separately.

She is mistaken. Title II doesn’t apply to data plans marketed to government users; both the 2015 Order and the NPRM define BIAS as a “mass-market retail service” offered “directly to the public.” Even if Title II had applied, the FCC’s rules wouldn’t have addressed the unique confusion that occurred in Santa Clara, which involved the fire department buying a plan that was obviously inadequate for its needs, Verizon recommending a better plan, and the department refusing. But that isn’t really the point. The point is that the FCC needed to shift its speculation about the possible impacts of blocking, throttling, or discrimination to something that seemed more tangible than abstractions like “openness.” Invoking the Santa Clara kerfuffle may make the stakes seem higher, but it won’t change how courts apply the major question doctrine.[48]

It beggars belief that the Commission would impose regulations with vast economic and political significance based on speculative threats and only tentative inklings about whether and how Title II could “enhance” the FCC’s ability and efforts to address those threats. In short, before asserting public safety as a basis for imposing Title II, the Commission needs to produce evidence demonstrating both the existence of such a problem (beyond the weak anecdote of the Santa Clara incident), as well as evidence demonstrating that the vast majority of services necessary for public safety would even be subject to Title II.

D.     The Commission Must Work to Establish a National Standard for Broadband Regulation

The NPRM reports that, following the 2018 Order, “[a] number of states quickly stepped in to fill that void, adopting their own unique regulatory approaches” toward broadband internet.[49] The Commission claims “establishing a uniform, national regulatory approach” is “critical” to “ensure that the Internet is open and fair.”[50] Toward that end, the FCC now indicates it intends to pre-empt these state laws with Title II regulation and “seek[s] comment on how best to exercise [its] preemption authority.”[51] Crucially, the NPRM asks whether the proposed Title II regulations should be treated as a “floor” or a “ceiling” with respect to state or local regulations.[52]

While we believe that Title II regulation is unnecessary, unwarranted, and likely harmful to both providers and consumers, we agree with NCTA’s conclusion that, if the Commission imposes Title II regulations, those rules should be imposed and enforced uniformly nationwide as both a “floor” and a “ceiling”:

At the same time, the NPRM appropriately recognizes that broadband is an inherently interstate service, and it is critical that the states be preempted from adopting separate requirements addressing ISPs’ provision of broadband. The Commission has long recognized, on a bipartisan basis, that broadband is a jurisdictionally interstate service regardless of its regulatory classification—and the Commission can and should confirm that determination. Consistent with the initial draft of the NPRM, and contrary to any suggestion in the released version, the federal framework should not serve as a “floor” on top of which states may layer additional requirements or prohibitions. Rather, it should serve as both a floor and a ceiling. A uniform national approach is particularly vital today, as states have shown a growing desire to adopt measures that conflict with federal broadband regulation precisely because they disagree with and wish to undermine federal policy choices.[53]

If the Commission imposes Title II regulation as only a “floor,” rather than both a “floor” and a “ceiling,” then the rules will do little to eliminate the “patchwork” of state regulations about which the Commission has “expressed concern.”[54] Indeed, it is likely that the “patchwork” would become even more “patchy.” It is also likely a two-tier system of regulation would arise, much as with motor-vehicle emissions, where Environmental Protection Agency rules govern emissions for some states, but 18 other states follow California’s more stringent standards.[55] The result is a patchwork of state laws with a mishmash of emissions standards. This would be unacceptable, as the Second Circuit ruled in American Booksellers Foundation:

[A]t the same time that the internet’s geographic reach increases Vermont’s interest in regulating out-of-state conduct, it makes state regulation impracticable. We think it likely that the internet will soon be seen as falling within the class of subjects that are protected from State regulation because they “imperatively demand[] a single uniform rule.”[56]

We continue to oppose the imposition of Title II on broadband providers. With that said, whatever regulatory course the Commission charts, it is crucial that it fully preempt state law so as to avoid creating a thicket of contradictory, economically inefficient requirements that will generate unnecessary red tape on broadband providers and ultimately lead to slower deployment.

III.    Title II Will Commoditize Broadband Services and Stifle Innovation

Before discussing the NPRM’s particulars, it is important to note that regulatory humility is crucial when dealing with industries and firms that develop and deploy highly innovative technologies.[57] It remains a daunting challenge to forecast the economics of technological innovation on the economy and society. The potential for unforeseen and unintended consequences—particularly in hindering the development of new ways to serve underserved consumers—is considerable. Such regulatory actions could have profound and far-reaching effects. In particular, it can serve to eliminate many of the dimensions across which providers compete. The result would be to remove much of the product differentiation among competitors and turn broadband service into something more like a commodity service.

The Commission’s proposed Title II regulation of broadband internet seeks to prohibit blocking, throttling, or engaging in paid or affiliated prioritization arrangements, and would impose a “general conduct standard” that it claims would prohibit “interference or unreasonable disadvantage to consumers or edge providers.”[58] But the Commission has not identified any actual harms from these practices or any actual benefits that would flow from banning or limiting them, or from placing deployment under a broad discretionary standard. Indeed, the NPRM identifies only four concrete examples of alleged blocking or throttling.[59]

  1. A 2005 consent decree by DSL-service provider Madison River requiring it to discontinue its practice of blocking Voice over Internet Protocol (VoIP) telephone calls.[60] At the time, Madison River had fewer than 40,000 DSL subscribers.[61]
  2. A 2008 order against Comcast for interfering with peer-to-peer file sharing.[62] Comcast claimed intensive file-sharing traffic was causing such severe latency and jitter that it made VoIP telephony unusable.[63]
  3. A study published in 2019, using data mostly from 2018, that “suggested that ISPs regularly throttle video content.”[64] Several commenters note that this study has been “debunked.”[65] We note in our comments that the study found that, whatever throttling ISPs engaged in, the authors concluded it was “not to the extent in which consumers would likely notice.”[66]
  4. In 2021, a small ISP in northern Idaho planned to block customer access to Twitter and Facebook; responding to public pressure, the provider backtracked on the policy.[67]

The first two examples are now more than 15 years old and provide no useful information regarding current or future conduct by broadband-internet-service providers. The third example is of questionable reliability. The fourth example is of a policy that was never fully implemented and was, indeed, rectified because of the pressures of market demand.

The Commission seems to be missing, ignoring, or dismissing a key fact: The powers it seeks under Title II are unnecessary and unwarranted, and—in many cases—it already has the power to deter harmful conduct. For example, Scalia Law Clinic finds “no credible evidence of internet service providers engaging in blocking, throttling, or anticompetitive paid prioritization.”[68]

TechFreedom notes:

The FCC could still police surreptitious blocking, throttling, or discrimination among content, services, and apps—but then, the Federal Trade Commission can already do that; it just hasn’t needed to.[69]

ITIF’s comments explain how the 2018 Order’s transparency requirements have stifled incentives to engage in undisclosed blocking, throttling, or paid prioritization, to the point that the largest providers have publicly indicated they don’t—and won’t—engage in such practices:

Harmful violations of basic net neutrality principles are exceedingly rare, and there is no evidence of them since the 2018 reapplication of the Title I regime the FCC now looks to unwind. Much of the heavy lifting of the bright line requirements is already functionally in practice. Many major ISPs have publicly foresworn blocking, throttling, or paid prioritization. The RIF’s transparency requirements ensure that these practices cannot happen in secret. Therefore, to the extent a flat ban might deter the few harmful attempts that might get through, its benefits would likely be counterbalanced by the broader chilling effects of Title II.[70]

As much as the Commission would like to expand its reach across other agencies, CTIA notes that the Federal Trade Commission (FTC) has been “active” in monitoring providers’ practices:

In any event, BIAS providers have made meaningful commitments to their customers, in keeping with the transparency rule, not to block or throttle or engage in paid prioritization, which the Federal Trade Commission (“FTC”) can enforce under many circumstances. And the FTC has been active in scrutinizing broadband provider practices following adoption of the 2018 RIF Order.[71]

As we note in our comments, the U.S. broadband industry is both competitive and dynamic. This vigorous competition forces providers to align their interests with those of their customers, both consumers and edge providers, as noted by CTIA:

Despite the Notice’s suggestion, regulation in a handful of states has not affected what these thousands of BIAS providers do, because it remains in their interest to offer customers service that does not block, throttle, or engage in paid prioritization. In addition, the Notice does not identify a list of harms arising since the 2018 RIF Order, and even Internet openness allegations against BIAS providers are, for all practical purposes, non-existent.[72]

More broadly, a survey of the research summarized by Roslyn Layton and Mark Jamison concludes that, with the exception of some bans on blocking, “net neutrality” regulations would do more harm than good to both consumers and providers:

But in general, the literature finds that regulations would hinder investment and harm consumers, but not under all conditions. The exception is for traffic blocking, where there is broad agreement that consumers are worse off with blocking. The literature supported the conclusion that paid prioritisation would lead to lower retail prices for broadband access and provide financial resources for network expansion. Jamison concludes that because the scenarios that give different answers are each feasible and may exist at different times, it seems that policy should favour applying competition and consumer protection laws, which can be adapted to individual cases, rather than ex ante regulations, which necessarily apply broadly[73]

And as CTIA notes:

The practical benefit of rules banning blocking, throttling, and paid prioritization would be negligible, as no such behavior exists, but the costs of reclassification to Title II would be substantial, as the switch to Title II regulation raises the specter of further regulation at the Commission’s whim, generating regulatory uncertainty that harms the Commission’s stated goals.[74]

In summary, the Commission has only speculated about whether blocking, throttling, or paid or affiliated prioritization currently exists, or would exist in the future without Title II regulation. It further speculates with respect to potential harms, and ignores or dismisses the benefits from these practices. In reality, there is no evidence to suggest that there is systematic abuse along these lines.

A.      Economic Logic and the Economic Literature Support Non-Neutral Networks[75]

Tim Wu, widely credited with coining the term “net neutrality,” has argued that even a “zero-pricing rule” should permit prioritization:

As a result, we do not feel as though a zero-pricing rule should prohibit this particular implementation, as here content providers are not forced to pay a termination fee to access users.[76]

Moreover, it is important to note that not all innovation comes from small, startup edge providers. As economists Peter Klein and Nicolai Foss have pointed out:

The problem with an exclusive emphasis on start-ups is that a great deal of creation, discovery, and judgment takes place in mature, large, and stable companies. Entrepreneurship is manifest in many forms and had many important antecedents and consequences, and we miss many of those if we look only at start-up companies.[77]

Adopting a regulatory schema that prioritizes startup innovation (although, as noted, it likely doesn’t even do that) at the expense of network innovation—in part, because network operators aren’t small startups—may materially detract from consumer welfare and the overall rate of innovation.

In effect, net neutrality claims that the only proper price to charge content providers for access to ISPs and their subscribers is zero. As an economic matter, that is possible. But it most certainly needn’t be so.

At the most basic level, it is simply not demonstrably the case that content markets themselves are best served by being directly favored, to the exclusion of infrastructure. The two markets are symbiotic, in that gains for one inevitably produce gains for the other (i.e., increasing quality/availability of applications/content drives up demand for broadband, which provides more funding for networking infrastructure, and increased bandwidth enabled by superior networking infrastructure allows for even more diverse and innovative applications/content offerings to utilize that infrastructure). Absent an assessment of actual and/or likely competitive effects, it is impossible to say ex ante that consumer welfare in general—and with regard to content, in particular—is best served by policies intended to encourage innovation and investment in one over the other.

To the extent that new entrants might threaten ISPs’ affiliated content or services, the Commission’s proposal is on somewhat more solid economic ground. But such a risk justifies, at most, only a limited rule that creates a rebuttable presumption of commercial unreasonableness. Even then, the logic behind such a rule tracks precisely the well-established antitrust law and economics of vertical foreclosure, which neither justifies a presumption (even a rebuttable one), nor the imposition of a targeted regulation beyond the antitrust laws themselves.[78]

1.        Economic literature

The use of paid prioritization as a means for ISPs to recover infrastructure costs raises the fundamental empirical question that has largely remained unaddressed: whether the benefits of mandated “openness” outweigh the forsaken benefits to consumers, infrastructure investment, and competition from prohibiting discrimination.

A related question was considered by Tim Wu, who acknowledged that there were inherent tradeoffs in mandating neutrality. Among other things, prohibiting content prioritization (thus precluding user subsidies) raises consumer prices:

Of course, for a given price level, subsidizing content comes at the expense of not subsidizing users, and subsidizing users could also lead to greater consumer adoption of broadband. It is an open question whether, in subsidizing content, the welfare gains from the invention of the next killer app or the addition of new content offset the price reductions consumers might otherwise enjoy or the benefit of expanding service to new users.[79]

Policy advocates that support net neutrality routinely misunderstand this dynamic, and instead seem to presume that discrimination by ISPs can only harm networks. As Public Knowledge has claimed, for instance:

If Verizon – or any ISP – can go to a website and demand extra money just to reach Verizon subscribers, the fundamental fairness of competing on the internet would be disrupted.  It would immediately make Verizon the gatekeeper to what would and would not succeed online.  ISPs, not users, not the market, would decide which websites and services succeed.

* * *

Remember that a “two-sided market” is one in which, in addition to charging subscribers to access the internet, ISPs get to charge edge providers on the internet to access subscribers as well.[80]

And elsewhere:

Comcast’s market power affords it advantages vis-à-vis recipients of Internet video content as well as creators of Internet video content. For example, Comcast will be able to distribute NBC content through its Xfinity online offering without having to pay itself license fees.

This two-sided market advantage results from Comcast’s position as a gatekeeper: it provides access to customers for content creators and it provides access to content for customers. Control over both directions of this transaction allows Comcast the opportunity for anticompetitive behavior against either content creators or consumers, or both simultaneously.[81]

These comments fundamentally misunderstand the economics of two-sided markets: Rather than facilitating anticompetitive conduct or enabling greater exploitation of both sides of the market, two-sided markets facilitate efficient but otherwise-difficult economic exchange, and nearly all such markets incorporate subsidies from one side of the market to the other—not excessive profiteering by the platform.[82] The “two-sidedness” of markets does not inherently confer increased ability to earn monopoly profits. In fact, the literature suggests that the availability of subsidization reduces monopoly power and increases welfare. In the broadband context, as one study notes:

Imposing rules that prevent voluntarily negotiated multisided prices will never achieve optimal market results, and…can only lead to a reduction in consumer welfare.[83]

Business models frequently coexist where different parties pay for the same or similar services. Some periodicals are paid for by readers and offer little or no advertising; others charge a subscription and offer paid ads; and still others are offered for free, funded entirely by ads. All of these models work. None is necessarily “better” than another. Indeed, each model may be better than the others under each model’s idiosyncratic product and market conditions. There is no reason the same wouldn’t be true for broadband and content.

What’s more, the literature directly contradicts the assumption that net neutrality improves consumer welfare or encourages infrastructure investment. In fact, the opposite appears to be true, and non-neutrality actually generally benefits both consumers and content providers:

Our main result is that a switch from the net neutrality regime to the discriminatory regime would be beneficial in terms of investments, innovation and total welfare. First, when ISPs offer differentiated traffic lanes, investment in broadband capacity increases. This is because the discriminatory regime allows ISPs to extract additional revenues from CPs [Content Providers] through the priority fees. Second, innovation in services also increases: some highly congestion-sensitive CPs that were left out of the market under net neutrality enter when a priority lane is proposed. Overall, discrimination always increases total welfare….[84]

Another paper finds the same result, except in a small subset of cases:

Our results suggest that investment incentives of ISPs, which are important drivers for innovation and deployment of new technologies, play a key role in the net neutrality debate. In the non-neutral regime, because it is easier to extract surplus through appropriate CP pricing, our model predicts that ISPs’ investment levels are higher; this coincides with the predictions made by the defendants of the non-neutral regime. On the other hand, because of platforms’ monopoly power over access, CP participation can be reduced in the non-neutral regime; this coincides with the predictions made by the defendants of the neutral regime. We find that in the walled-garden model, the first effect is dominant and social welfare is always larger in the non-neutral model. While this still holds for many instances of the priority-lane model, the neutral regime is welfare superior relative to the non-neutral regime when CP heterogeneity is large.[85]

The economic literature does, however, provide some support for imposing a minimum-quality standard:

We extend our baseline model to account for the possibility that ISPs engage in quality degradation or “sabotage” of CP’s traffic. We find that sabotage never arises endogenously under net neutrality. In contrast, under the discriminatory regime, ISPs may have an incentive to sabotage the non-priority lane to make the priority lane more valuable, and hence, to extract higher revenues from the CPs that opt for priority. Any level of sabotage is detrimental for total welfare, and therefore, a switch to the discriminatory regime would still require some regulation of traffic quality.[86]

Even here, however, the analysis does not consider disclosure-based (transparency) restraints on quality to be degradation, and it is entirely possible that a transparency rule (or simply the risk of public disclosure, even without such a rule) would be sufficient to deter quality degradation.

In the end, the literature to date supports, at most, a minimum-quality requirement and perhaps only a transparency requirement; it does not support mandated nondiscrimination rules.

B.      Paid Prioritization

The Commission “does not dispute” that there may be benefits associated with paid prioritization.[87] Yet it “tentatively” concludes that the “potential” harms “outweigh any speculative benefits.”[88] To be blunt, the Commission is just guessing, as summarized by TPI:

The argument that paid prioritization was necessarily a net harm to society was always an unproven hypothesis. The test still has not been conducted, making it impossible to draw the conclusion that it would necessarily be bad.[89]

Indeed, both the economics of nonlinear pricing, and the evidence already added to the record, demonstrate that the Commission should not ban paid prioritization.

1.        Paid prioritization is a necessary feature of providing internet service

First, as we have previously noted before the Commission, simply banning paid prioritization does not remove the need to ration broadband in a resource-constrained environment:

Scarcity on the Internet (as everywhere else) is a fact of life — whether it arises from network architecture, search costs, switching costs, or the fundamental limits of physics, time and attention. The need for some sort of rationing (which implies prioritization) is thus also a fact of life. If rationing isn’t performed by the price mechanism, it will be performed by something else. For startups, innovators, and new entrants, while they may balk at paying for priority, the relevant question, as always, is “compared to what?” There is good reason to think that a neutral Internet will substantially favor incumbents and larger competitors, imposing greater costs than would paying for prioritization. Far from detracting from the Internet’s value, including its value to the small, innovative edge providers so many net neutrality proponents are concerned about, prioritization almost certainly increases it.[90]

Essentially, banning “paid prioritization” does nothing to actually remove the need for prioritization. Instead, it merely moves the locus of decision-making out of the scope of a market made of arm’s-length transactions, and puts it into the hands of a few individuals at the Commission.

Broadband-internet access is a valuable service that requires ongoing investments and maintenance. Determining who pays for broadband access is a complex economic issue. In multi-sided markets like broadband, rigid one-size-fits-all pricing models are often inadequate. Instead, experimentation and flexibility are needed to find optimal and sustainable cost allocations between consumers and industry. Multiple business models can reasonably coexist, with costs shared in various ways.[91] Overall, broadband pricing should balance economic sustainability, consumer affordability, and the public interest.

Pricing models across industries demonstrate that there is no single best approach. For example, as with periodicals (discussed above), some websites rely entirely on subscription fees, others use a mix of subscriptions and advertising, and some are given away for free and supported solely by ads. All of these models can work, and all may appeal to different consumer segments. Similarly, for emerging data and content services that intend to attract new users, pricing flexibility and experimentation are needed. There is no one-size-fits-all model inherently superior in reaching consumers or promoting consumer welfare. The optimal strategy depends on market dynamics and consumer demand, which are uncertain and evolving in new markets. Rigid pricing mandates risk stifling innovation and growth.

Moreover, the assumption that paid prioritization inherently favors incumbents over new entrants is flawed. In many cases, new entrants are at a disadvantage with respect to incumbents. Incumbents may have any number of many advantages, including brand loyalty, mature business processes, economies of scale, etc. But prioritization can reduce the scope and scale of some of these advantages:

[P]remium service stimulates innovation on the edges of the network because lower-value content sites are better able to compete with higher-value sites with the availability of the premium service. The greater diversity of content and the greater value created by sites that purchase the premium service benefit advertisers because consumers visit content sites more frequently. Consumers also benefit from lower network access prices.[92]

Thus, there must be some evidence presented that paid prioritization benefits incumbents at the expense of new entrants before this claim can be taken seriously. There may be some cases where this is so, but it’s absolutely not a warranted presumption, and  should be demonstrated as a realistic harm before it is categorically forbidden.

As noted, non-neutrality offers the prospect that a startup might be able to buy priority access to overcome the inherent disadvantage of newness, and to better compete with an established company. Neutrality, on the other hand, renders that competitive advantage unavailable; the baseline relative advantages and disadvantages remain—all of which helps incumbents, not startups. With a neutral internet, the incumbent competitor’s in-built advantages can’t be dissipated by a startup buying a favorable leg-up in speed. The Netflixes of the world will continue to dominate.

Of course, the claim is that incumbents will use their huge resources to gain even more advantage with prioritized access. Implicit in this claim must be the assumption that the advantage a startup could gained from buying priority offers less potential return than the costs imposed by the inherent disadvantages of reputation, brand awareness, customer base, etc. But that’s not plausible for all startups. Investors devote capital there is a likelihood of a good return. If paying for priority would help overcome inherent disadvantages, there would be financial support for that strategy.

Also implicit is the claim that the benefits to incumbents (over and above their natural advantages) from paying for priority—in terms of hamstringing new entrants—will outweigh the cost. This, too, is unlikely to be true, in general. Incumbents already have advantages. While they might sometimes want to pay for more, it is precisely in those cases where it would be worthwhile that a new entrant would benefit most from the strategy—ensuring, again, that investment funds will be available.

Finally, implicit in these arguments is the presumption that content deserves to be subsidized, while networks need neither subsidy nor the flexibility to adopt business models that increase returns or help to operate their networks optimally. But broadband providers, equipment makers, and the like have spent trillions of dollars to build internet infrastructure. The “neutrality for startups” argument holds that content providers shouldn’t be the ones to pay for it, but it maintains this without evidence that mandating subsidies to content providers (in the form of zero-price internet access) will actually lead to optimal results.[93]

While paid prioritization does carry risks, the impacts on competition are nuanced. Claims that it necessarily harms new entrants and benefits only incumbents oversimplify a complex issue. The real impacts likely depend on the specifics of how prioritization is implemented in a given market.

The notion that businesses’ internet-access costs should be zero reflects flawed thinking. Access is never truly zero-cost—all businesses have costs. Early-stage startups, in particular, need capital to cover expenses as they grow. Singling out broadband access as uniquely important for price parity is questionable. One could make equivalent arguments for controlling other business costs like rent, advertising, personnel, etc. Businesses rationally factor the costs of key resources into their planning and investments. Some enjoy cost advantages in certain areas, and disadvantages in others. Whether “equal” pricing is mandated across businesses is often irrelevant to long-term investment decisions. While fair-access policies have merits, the costs of resources like internet access are just one factor among many that businesses must weigh.

This is not an argument unique to broadband service pricing. “Paid prioritization” is a pricing technique that occurs in many other areas, and frequently is useful for solving rationing problems. And where it is banned, this yields downstream effects that we would similarly expect to occur in the broadband market. As the Nobel Laureate economist Ronald Coase pointed out, banning paid prioritization for radio airplay (i.e., payola) actually benefits large record labels at the expense of smaller artists.[94] Simply banning payola, however, did nothing to rectify the underlying problem: airtime on radio was scarce and radio stations had to resort to other ways to ration it. As with insider trading, [95] the de facto practice necessarily is reconstituted elsewhere. The dollars previously spent on payola simply end up somewhere else, such as in advertising.[96] On the radio, this meant more ads taking up airtime, creating more scarcity and less music of any kind. While the specific mix of actual songs played may be different, there is no reason to believe it is in any way “better” or even more diverse without payola, and every reason to believe that there will simply be less of it.

Retail-store slotting contracts provide another helpful analogy:

Retailer supply of shelf space can therefore be thought of as creating incremental or “promotional” sales that would not occur without the promotion. The promotional shelf space provided by retailers induces these incremental sales by increasing the willingness of “marginal consumers” to pay for a product that they would not purchase absent the promotion. The generation of these promotional sales may occur by more prominently displaying a known brand, for example, in eye-level shelf space or a special display, or by providing shelf space for an unknown or new product.[97]

As with prioritization on the internet, an intuitive fear about such arrangements is that they will be used by established content providers to hamstring their rivals:

The primary competitive concern with slotting arrangements is the claim that they may be used by manufacturers to foreclose or otherwise disadvantage rivals, raising the costs of entry and consequently increasing prices. It is now well established in both economics and antitrust law that the possibility of this type of anticompetitive effect depends on whether a dominant manufacturer can control a suf?cient amount of distribution so that rivals are effectively prevented from reaching minimum ef?cient scale.[98]

The problem with this argument is that:

[S]lotting fees are a payment that must be borne by all manufacturers. Competition for shelf space that leads to slotting may raise the cost of obtaining retail distribution, but it does so for everyone…. However, competition between incumbents and entrants for retail distribution generally occurs on a level playing field in the sense that all manufacturers can openly compete for shelf space and it is the manufacturer willing to pay the most for a particular space that obtains it.[99]

While not a violation of antitrust law, the NPRM’s approach would ban this practice without evidence of harm. So long as there are minimum-service guarantees in place, however, there is no reason to believe that the practice would actually harm startups or consumers. Moreover, these sorts of arrangements are usually tailored to the firms in question, with larger firms that demand more service also drawing higher prices for that service. Thus, in practice, the opportunity to pay for prioritization is relatively less attractive to large firms.

A blanket ban on paid prioritization risks locking in inefficient and suboptimal pricing models. It would restrict the very experimentation and innovation in business models that could help expand internet access. Rather than a one-size-fits-all ban, tailored oversight and monitoring of prioritization practices through the existing transparency rules would better balance the complex tradeoffs involved.

In the NPRM, the Commission notes that “In adopting a ban on paid prioritization in 2015, the Commission sought to prevent the bifurcation of the Internet into a ‘fast’ lane for those with the means and will to pay and a “slow” lane for everyone else.”[100] It then tentatively concludes that this concern remains valid today. But this framing makes as little sense now as it did in 2015.

The concept of “fast lanes” is a gross oversimplification, even apart from paid-prioritization schemes. In most cases, prioritization involves applying network-management strategies to guarantee certain content meets minimum-performance levels appropriate for its data type. For example, this could include prioritizing video-conferencing data for lower latency, or streaming video for better throughput. Technically, this creates a “fast lane,” but it is highly misleading to refer to it as such.

The costs and benefits of prioritization are nuanced and context-dependent. Whether prioritization is beneficial or harmful depends heavily on the presence of congestion. Prioritization matters most when congestion exists, since it inherently involves improving service for some content at the expense of other content.[101] While prioritization schemes risk worsening service for non-prioritized content, they also can improve quality for higher-value applications. Congestion levels, minimum standards, and other factors combined to determine the impact. Overly simplistic “fast lane” rhetoric should be avoided in favor of careful analysis of the tradeoffs, given technical and market conditions. What works as a better default is to provide minimum-performance guarantees for internet service.

A minimum-performance guarantee means that prioritized services cannot degrade non-prioritized content below a certain level. It also limits the extent to which prioritized content can receive better service, given the bandwidth needed to satisfy the minimum guarantees. As a result, ISPs that offer prioritization may actually increase total network capacity to deliver meaningful priority benefits without violating minimums. [102]

Even without expanded capacity, prioritization with minimum guarantees does not necessarily create starkly differentiated service levels. During congestion, “slower” service becomes a reality for non-prioritized content. But simultaneously, the meaningfulness of “faster” service decreases in proportion to congestion levels. The practical difference between prioritized and non-prioritized traffic is less than is often assumed, and varies based on fluctuating traffic volumes. With appropriate safeguards, the fears of dramatic disparities created by “fast lanes” are overblown. For latency-insensitive content, even degraded “slow lanes” would have minimal effect. Thus, even if prioritization were to become widespread, its value and price would likely decrease. More content providers could thereby afford priority, further lessening any differentiation. With marginal speed differences and cheap priority access, dramatic impacts are unlikely.

We see the same dynamic even within edge providers’ operations with respect to what are glibly deemed “slow” and “fast” lanes on the open internet. For example, it was discovered in 2015 that Netflix had been throttling its own transmission rate in certain situations, likely in order to optimize customers’ viewing experience.[103] But under the framing presented in this NPRM, the incentive for this sort of self-disciplining behavior—which optimally rations scarce network resources—would disappear.

2.        The record reflects that the Commission should not ban paid prioritization

As we discuss below, the Commission asserts that “minimal” compliance costs are associated with a ban on blocking and a “minimal” compliance “burden” is associated with a ban on throttling. The Commission has no principled means to make this determination.

CEI’s comments point out the obvious: Paid prioritization is ubiquitous, even in the federal government, with TSA PreCheck and USPS Priority Mail,[104] as well as paid priority (i.e., “expedited service”) for passports.[105] The Federal Highway Administration not only condones paid prioritization of roadways (e.g., high-occupancy toll lanes, or “HOT lanes”), it encourages them, concluding that:

HOT lanes provide a reliable, uncongested, time saving alternative for travelers wanting to bypass congested lanes and they can improve the use of capacity on previously underutilized HOV lanes. A HOT lane may also draw enough traffic off the congested lanes to reduce congestion on the regular lanes.[106]

In our comments on this matter, we note that the Commission fails to distinguish between instances where so-called “paid prioritization” has pro-consumer benefits and where it may constitute an anticompetitive harm.[107] For example, Netflix’s collocation of data centers within different networks to expedite service and reduce overall network load are unequivocally pro-consumer.[108] In addition, AT&T’s Sponsored Data program and T-Mobile’s Binge On offerings provide more choices, potentially lower prices, and introduce competitive threats to other providers in the market.[109]

Under the Commission’s proposed Title II regulations, these innovations would be illegal. As a result, as ITIF points out, firms and potential entrants would have reduced incentives to experiment with and roll out new and innovative services to a wide range of consumers, especially lower-income consumers:

In the case of paid prioritization there would be significant harm to presuming conduct unlawful. The 2017 RIF order found that banning all paid prioritization chilled general innovation and network experimentation. These harms disproportionately fall on potential new entrants who are most likely to want to differentiate their service, perhaps by “zero-rating” popular services, but who are also least able to afford the cost of lawyers and consultations. It might also preclude practices that could have increased equity. For example, an agreement between an ISP and a content provider to guarantee a certain service quality for an application across varying network speeds would likely benefit subscribers to lower speeds most of all. ISPs have an incentive to provide the type of service consumers value, but insofar as limited competition in some areas of the country might prevent consumers from switching providers if they are unhappy with their ISP’s practices, the Commission should have expected those risks to have been greatest when competition was lowest. Since competition is increasing over time as more technologies emerge, the fact that ISPs have so far not required bright-line prohibitions to keep them from engaging in specifically harmful behaviors suggests that they are no more likely to in the future.[110]

We agree with several commenters who conclude that the proposed ban on paid prioritization may be at odds with the Commission’s desire to “preserve” and “advance” public safety. For example, the Free State Foundation says:

[T]he Notice does not even appear to directly permit any form of traffic prioritization for serving public safety purposes. And to the extent that such an omission is inadvertent, it might suggest the Commission has not adequately carried out its duty to consider the negative effects that a ban on paid prioritization can have on “promoting safety of life and property through the use of wire and radio communications.”[111]

NCTA points out that public safety during emergencies is one of the key instances in which prioritization is clearly beneficial:

If anything, retaining a light-touch regulatory regime for broadband would benefit public safety users by allowing ISPs to prioritize such critical traffic in times of emergency without fear of becoming subject to enforcement action for being “non-neutral.”[112]

A recurring theme throughout this rulemaking process is that the U.S. broadband industry is both competitive and dynamic. This vigorous competition forces providers to align their interests with those of their customers, as noted by CEI:

A bright line prohibition is also unneeded because the market will impose rationality on prioritization practices. If an ISP engaging in paid prioritization provides an inferior consumer experience, its customers are empowered to take their business elsewhere because most consumers have multiple options in ISPs. This is exactly how the market functions throughout the economy.[113]

The broadband market’s competitiveness and dynamism are demonstrated by two seemingly contradictory, but completely consistent statement from WISPA. First, it notes that anticompetitive paid prioritization can harm smaller providers:

WISPA is concerned that preferential traffic management techniques that are anti-competitive can be used to disadvantage providers that are unable to secure access to certain content or lack the leverage to obtain commercial terms afforded to broadband access providers with regional and national scope.[114]

At the same time, WISPA reports that there is no evidence of such anticompetitive conduct, and that if such conduct were found, it could be addressed under existing regulations:

These open internet principles can be preserved by maintaining the current light-touch regulatory approach. There is no market failure or evidence of blocking, throttling, paid prioritization or bad conduct from smaller providers that justifies saddling them with monopoly- based common carrier regulations.[115]

Comments in this proceeding reinforce our conclusions that, in nearly every case, paid prioritization benefits ISPs, consumers, and edge providers. To date, there has been no evidence of the anticompetitive use of paid prioritization or any harms to consumers or edge providers from the limited instances of above-board paid or affiliated prioritization arrangements. Thus, the Commission’s proposal to ban such arrangements is based on mere speculation, rather than “reasoned analysis.”

C.      Blocking

The Commission proposes a “bright-line rule” prohibiting providers from “blocking lawful content, applications, services, or non-harmful devices.”[116] The Commission “tentatively” concludes that providers “continue to have the incentive and ability to engage in practices that threaten Internet openness.”[117] But, just two paragraphs later in the NPRM, the Commission reports:

As far back as the Commission’s Internet Policy Statement in 2005, major providers have broadly accepted a no-blocking principle. Even after the repeal of the no-blocking rule, many providers continue to advertise a commitment to open Internet principles on their websites, which include commitments not to block traffic except in certain circumstances.[118]

At a conceptual level, issues like blocking and throttling could raise valid legal concerns when they are not done for valid network-management reasons. To date, however, there hasn’t even been a potential harm raised that would, if proven, not be remediable under existing antitrust law. Thus, arrogating more power to itself will do little to enhance the FCC’s ability to deter this conduct. the Providers’ behavior is already scrutinized under the Commission’s transparency rules, and any anticompetitive behavior can be pursued by antitrust enforcers.

But in practice, as the Commission notes, the providers have all committed to refrain from blocking and throttling unrelated to reasonable network management. This is akin to the old joke about clapping to keep away elephants.[119] We not aware of any comment in this matter that offers reliable evidence that any provider currently blocks lawful content, applications, services, or non-harmful devices. As noted above, the NPRM does not identify any examples of blocking in the last 15 years since the Madison River and Comcast peer-to-peer matters, and most providers have adopted explicit no-blocking policies.[120] The Commission concludes “this principle is so widely accepted, including by ISPs, we anticipate compliance costs will be minimal.”[121]

In comments on the 2015 Order, ICLE and TechFreedom noted that (1) many internet users are tech-savvy, (2) blocking is easily detectable by even those users who are not tech-savvy, and (3) blocking is widely unpopular. Therefore, providers likely have more disincentives to block content than incentives to do so:

There are already millions of tech-savvy Americans on the web, and the tools necessary to detect a blocking or serious degradation of service are widely available, so there is every reason to suspect that any future instances of such blocking will also be detected. If they are truly nefarious (i.e., the ISP is blocking a legal service/application that its customers are trying to access), then public outcry by the affected subscribers should likely be sufficient to convince the ISP to change its practices, rather than bear the brunt of public backlash, in hopes of pleasing its customers (and its investors).[122]

Even so, the Commission nonetheless also asserts that Title II regulation is necessary to ban a practice in which no one engages. Such assertions venture far away from “reasoned analysis” territory and deep into “arbitrary and capricious” territory.

D.     Throttling

The Commission proposes to prohibit providers from “throttling lawful content, applications, services, and non-harmful devices.”[123] This is because the FCC “believe[s] that incentives for ISPs to degrade competitors’ content, applications, or devices remain”[124] even though the Commission also “believes” providers “have had a strong incentive to follow their voluntary commitments to maintain service consistent with certain conduct rules established in the 2015 Open Internet Order” during and after the COVID-19 pandemic.[125] TechFreedom concludes, “There is no real debate over these principles; everyone has agreed that blocking and throttling is such a bad idea that the marketplace has rejected it.”[126] Moreover, the Commission reports that the incidence and likelihood of provider throttling is so low that there will be “a minimal compliance burden” associated with the proposed ban:

Even after the repeal of the no-throttling rule, ISPs continue to advertise on their websites that they do not throttle traffic except in limited circumstances. As a result, we anticipate that prohibiting throttling of lawful Internet traffic will impose a minimal compliance burden on ISPs.[127]

Consistent with ICLE’s comments in this matter, 5G Americas reports that the change in the competitive broadband landscape, along with existing transparency rules, render blocking and throttling prohibitions unnecessary:

Blocking and throttling prohibitions are not needed, because internet business models require delivering the lawful content consumers want, at the speeds they expect. There have been no instances of mobile broadband providers engaging in discriminatory conduct since the 2017 RIF Order. This is because the internet ecosystem is dramatically different from when Title II regulation was first discussed in the early 2000’s. Today it is widely understood that content providers have more market power than ISPs. Reimposition of the 2015 rules is a proposal in search of a problem that doesn’t exist in the vastly differentiated marketplace of today.

In addition, the existing transparency rule is sufficient to protect against unlikely discriminatory conduct, making the general conduct rule, as well as the blocking and throttling prohibitions, unnecessary. It is notable that the Notice of Proposed Rulemaking makes no attempt to argue that since the 2017 RIF Order broadband providers have engaged in anticompetitive or non-transparent conduct that would justify regulating the entire industry as common carriers subject to ex ante oversight.[128]

The NPRM cites a study published in 2019, using data mostly from 2018, that “suggested that ISPs regularly throttle video content.”[129] We urge the Commission to be skeptical of relying on this study. As we report above, several commenters report that it has been “debunked.”[130] Moreover, we note in our comments that, to the extent the study found throttling, the authors concluded it was “not to the extent in which consumers would likely notice.”[131] In other words, the study does not reliably demonstrate “regular” throttling of content and any throttling detected was de minimis. CTIA’s comments provide a detailed summary of the study’s shortfalls:

The Notice also asserts that a study “suggested that ISPs regularly throttle video content,” but the Commission makes no findings and the Notice does not recognize the thorough rebuttal debunking the claims in the paper. The Li et al. Study purported to show throttling of video sites by wireless providers, but as CTIA noted at the time, the study used simulated traffic between artificial network end points and failed to account for basic network engineering, consumer preference, or how mobile content is distributed. Consumers, for example, have the ability to alter video resolution settings or sign up for steaming service plans that offer varying levels of resolution. Additionally, many video applications take actions themselves to automatically adjust to a network’s available bandwidth to improve the user experience. What the study identified, if found in a real-world setting, would be either reasonable network management, consumer choice, or data management practices used by content providers. allegation was therefore without merit and does not show harm to Internet openness.[132]

As with its proposed ban on blocking, the Commission asserts that Title II regulation is necessary to ban throttling—a practice in which no one engages. Such assertions venture far from “reasoned analysis” territory and deep into “arbitrary and capricious” territory.

IV.    General Conduct Standard[133]

In this NPRM, the Commission seeks to revive the General Conduct Standard (also known as the Internet Conduct Standard) that was removed in the 2018 Order.[134] The General Conduct Standard is a catch-all rule that would allow the Commission to intervene when it finds that an ISP’s conduct generally threatened end users or content providers under some principle of net neutrality.[135] As “guidance,” the Commission proposes a non-exhaustive list of factors that could possibly (but not necessarily) be used to prove a violation.[136] The factors comprise an uncertain mashup of competition law, consumer-protection law, and First Amendment law and include 1) the effect on end-user control; 2) competitive effects; 3) effect on consumer protection; 4) effect on innovation, investment, or broadband deployment; 5) effects on free expression; 6) whether the conduct is application-agnostic; and 7) whether the conduct conforms to standard industry practices.[137]

The U.S Circuit Court of Appeals for the D.C. Circuit rejected US Telecom’s arguments that the 2015 General Conduct Rule should be invalidated.[138] Notwithstanding that decision, the Commission should be wary in moving forward with this provision. While the court may have found the General Conduct Standard was not vague in all its applications, the Court did not consider that, under State Farm, the Commission’s choice to implement such a far-reaching, ambiguous standard lacked a rational connection with FCC’s proffered facts.[139]

In the 2015 Order, the FCC claimed it had not created a novel, case-by-case standard, but rather that it was taking an approach similar to the “no unreasonable discrimination rule,” which was accompanied by four factors (end-user control, use-agnostic discrimination, standard practices, and transparency).[140] While the “no unreasonable discrimination rule” was grounded in Section 706 of the Telecommunications Act of 1996, basing the General Conduct Standard in Sections 201 and 202 of the Communications Act (in addition to Section 706) enabled an unprecedented expansion of FCC authority over the internet’s physical infrastructure.[141] Then-Commissioner Ajit Pai noted at the time:

The FCC’s newfound control extends to the design of the Internet itself, from the last mile through the backbone. Section 201(a) of the Communications Act gives the FCC authority to order “physical connections” and “through routes,” meaning the FCC can decide where the Internet should be built and how it should be interconnected. And with the broad Internet conduct standard, decisions about network architecture and design will no longer be in the hands of engineers but bureaucrats and lawyers. So if one Internet service provider wants to follow in the footsteps of Google Fiber and enter the market incrementally, the FCC may say no. If another wants to upgrade the bandwidth of its routers at the cost of some latency, the FCC may block it. Every decision to invest in ports for interconnection may be second-guessed; every use of priority coding to enable latency-sensitive applications like Voice over LTE may be reviewed with a microscope. How will this all be resolved? No one knows. 81-year-old laws like this don’t self-execute, and even in 317 pages, there’s not enough room for the FCC to describe how it would decide whether this or that broadband business practice is just and reasonable. So businesses will have to decide for themselves—with newly-necessary counsel from high-priced attorneys and accountants—whether to take a risk.”[142]

In the 2015 Order, the FCC relied on its 2010 findings, without advancing new evidence from the intervening five years of internet innovation to justify taking vastly greater authority over the physical infrastructure of the internet than it had in the 2010 Order.[143] In this NPRM, the Commission again advances no new evidence to justify such a massive takeover. The Commission contemplates using Sections 201 and 202 as the basis for the General Conduct Standard.[144] But when it previously invoked those sections and added more factors to the General Conduct Standard than were in the “no unreasonable discrimination rule,” it merely addressed the reason the rule was overturned by the D.C. Circuit in Verizon, rather than articulate a dire need to grab power.[145] Thus, the Commission again fails to articulate its need.

Vastly expanding the FCC’s authority to implement a vague list of non-exhaustive factors is a terrible way to determine rules of conduct for firms that necessarily invest billions of dollars in infrastructure over the course of decades. Even on the relatively shorter timescale required to offer innovative new service packages to consumers, a tremendous volume of negotiations are required among the broadband networks, rights holders, and any other third parties. The only practical way to comply with the General Conduct Standard would be to involve the FCC in business decisions at every level. For providers, such a “standard” cannot help but chill innovation and ultimately harm consumers through higher prices, reduced quality, and limited choice.

In addition, unlike the General Conduct Standard, which applies to both fixed and mobile broadband providers, the “no unreasonable discrimination rule” adopted in the 2010 Order only applied to fixed broadband providers.[146] The D.C. Circuit in US Telecom did not consider the FCC’s failure to create a rational connection between the facts the Commission found and its choice to establish a conduct standard for mobile in the 2015 Order. First, the FCC’s reliance on the 2015 Broadband Progress Report to demonstrate that the “virtuous cycle” was in peril did not consider mobile broadband. Second, the FCC attempted to sidestep the need to perform competitive analysis for imposing the standard on mobile by stating, “even if the mobile market is sufficiently competitive, competition alone is not sufficient to deter mobile providers from taking actions that would limit Internet openness.”[147] Instead, the FCC stated that the General Conduct Standard could apply to mobile based on a handful of “incidents.”[148] Closer inspection of the examples cited, however, critically undermine the foundation of the FCC’s argument.

One such example stated that “AT&T blocked Apple’s FaceTime iPhone and iPad applications over AT&T’s mobile data network in 2012.”[149] Already operating on Wi-Fi, Apple made FaceTime available over mobile operators’ networks starting with iOS 6, which launched in September 2012 and was designed to handle more data than previous iOS versions.[150] Sprint and Verizon announced that they would make the service available to mobile data subscribers of all data plans.[151] AT&T maintained that it was taking a more cautious approach and only made FaceTime available on shared data plans, because it could not sufficiently model how much subscribers would use the app and thus its network impact.[152]

If FaceTime use were to exceed modelled expectations, AT&T claimed that its network data usage may have adversely impacted voice quality.[153] In November 2012—two months after the release of a cellular version of FaceTime and without threat of FCC action—AT&T announced its network would support FaceTime on all tiered data plans with an LTE device, and would continue to monitor its network to expand the availability of FaceTime to customers on other billing plans.[154] An additional plausible explanation for AT&T’s actions is that it made FaceTime available over its mobile network four months after competitors Sprint and Verizon also announced they would make FaceTime available over on all data plans. On balance, in a year in which AT&T doubled its nationwide 4G LTE coverage, this example hardly seems the nefarious “they’ve done it before and will do it again” rationale trotted out in this and the handful of other examples cited by the FCC as justification for including mobile broadband under the Internet Conduct Standard.[155]

Theoretically, such a case-by-case standard should focus on the market’s ability to mitigate any alleged harms through competition. The General Conduct Standard is instead a novel, catch-all standard established without input from Congress.[156] It contains no insight as to which factor is most important, how the FCC will resolve the inevitable conflicts among factors, or even if the factors are dependent on one another or disjunctive.

This General Conduct Standard, in short, provides no meaningful guidance for firms or consumers, and leaves regulation up to the Commission’s whim.

V.      Data Caps and Usage-Based Pricing

The NPRM is virtually silent on the topic of data caps, asserting only that individuals with disabilities “increasingly rely” on internet-based communications that are “particularly sensitive to data caps,”[157] and asking whether the Commission should require more detailed disclosures regarding the “requirements, restrictions, or standards for enforcement of data caps.”[158]

But this near silence in the NPRM appears to belie the Commission’s deep interest in regulating data caps. In June 2023, Chair Rosenworcel announced she would ask her fellow commissioners to support a formal notice of inquiry to learn more about how broadband providers use data caps on consumer plans.[159] The same day, the FCC launched a “Data Caps Stories Portal” for “consumers to share how data caps affect them.”[160] It would not be a stretch to surmise that the Commission intends to regulate data caps under the “general conduct” rules in its proposed Title II reclassification.

The NPRM is similarly silent on the issue of usage-based pricing and zero rating, with only a passing reference in a footnote[161] and a request for comments regarding whether “any zero rating or sponsored data practices that raise particular concerns under the proposed general conduct standard.”[162] Nevertheless, since the 2015 Order, at least some members of the Commission appear to have maintained keen interest in scrutinizing providers’ zero-rating offerings, with an eye toward regulating them. For example, in the last days of the Obama administration, the Commission released a report of a staff review of sponsored data and zero-rating practices in the mobile-broadband market.[163] In a letter to Sen. Edward Markey (D-Mass.), the Commission summarized its conclusions:

While reiterating that zero-rating per se does not raise concerns, it finds that two of the programs reviewed, AT&T’s “Sponsored Data” program and Verizon’s “FreeBee Data 360” program. present significant risks to consumers and competition. In particular, these sponsored data offerings may harm consumers and competition by unreasonably discriminating in favor of downstream providers owned or affiliated with the network providers. The Commission has long been concerned about the ability and incentives of network owners to thwart their downstream competitors’ ability to serve consumers.

In the early days of the Trump administration, the Commission announced it would end its inquiry into zero rating.[164] Chair Rosenworcel has added her view that: “A lot about zero net rating is about data caps.”[165] She also had expressed her concerns with zero rating:

But over the long haul, what that does is it constrains where you can go and what you can do online. Because you’ll get a fast lane to go to all of those sites that your broadband provider has set up a deal with, and you’ll get consigned to a bumpy road if you want to see anything else. And that erodes net neutrality over time.[166]

AT&T, probably more familiar than most with the Commission simultaneously declaring that it abjure rate regulation only to shoehorn such regulation into catch-all General Conduct rules, notes in comments to this proceeding:

For example, the proposed conduct rule raises the investment-killing specter of rate regulation, despite the Commission’s empty assurances to the contrary. ISPs have seen this movie before. The Commission similarly forswore rate regulation in 2015, yet it followed up a year later with threats to punish ISPs under the conduct rule for the rate structure of their sponsored data programs, which offered consumers the economic equivalent of bundled discounts and thus provided more broadband for less. Indeed, even while denying plans for rate regulation, the NPRM itself vows to scrutinize the structure of broadband pricing plans for evidence of “prohibit[ed] unjust and unreasonable charges.” Long-term revenues are difficult enough to project even in the absence of such unpredictable regulatory prohibitions. But the prospect of creeping rate regulation would further imperil the business case for investment by threatening to upend assumptions about future revenue streams.[167]

The Commission appears to be playing coy. It gives the impression that it has little interest in regulating data caps or zero rating, yet it also has a long and ongoing history of making moves to regulate such practices. In the remainder of this section, we explain that, in most cases, nonlinear pricing models like zero rating are pro-competitive and benefit ISPs, consumers, and edge providers alike.

A.      Nonlinear Pricing Models Are Pro-Consumer

Forbidding usage-based pricing for internet service can actually frustrate consumer demand for data and content. With so-called “neutral” pricing, consumers have little ability or incentive to prioritize their own internet use based on preferences, beyond simply consuming or not consuming the service altogether. This creates deadweight loss, as users forgo benefits from services they cannot afford under an all-or-nothing full-access model. It also encourages inefficient network-usage patterns since consumers cannot signal their priorities. Additionally, restricting pricing models limits innovation in offerings that could leverage more nuanced pricing approaches. The rigid one-size-fits-all nature of “neutral” pricing can negatively impact consumer welfare and network efficiency.

With undifferentiated pricing, the cost to users is the same for high-value, low-bandwidth data (e.g., telehealth) as it is for low-value, high-bandwidth data (e.g., photo hosting), so long as the user’s total bandwidth allotment is not exceeded. Undifferentiated pricing can lead consumers to overconsume lower-value data like photo sharing while under-consuming higher-value uses like telehealth. Content developers respond by overinvesting in the former and underinvesting in the latter. The end result is a net reduction in the overall value of both available and consumed content, along with network underinvestment.

The notion that consumers and competition benefit when users lack incentives to consider their own usage runs counter to basic economic principles. Evidence does not support the proposition that preventing consumers and providers from prioritizing high-value uses leads to optimal outcomes. More flexibility in pricing and service tiers could better align investment and usage with true value.

The goal of broadband policy should be to optimize internet use in a way that maximizes value for consumers, while offering incentivizes for innovation and investment. This requires usage-based pricing and prioritization models tailored to address congestion issues efficiently. Since consumer preferences are diverse, a flexible approach is needed, rather than one-size-fits-all mandates. ISPs should have room to experiment with options that encourage users to prioritize data based on their individual needs and willingness to pay. Effective policy aims for an internet that maximizes benefits and incentives for all through flexible, value-driven models.

Evidence does not support claims that restricting providers from accounting for externalities improves outcomes. In fact, usage-based pricing and congestion pricing could, in many cases, encourage expansion of network capacity.[168] It is possible that, under some conditions, differential pricing could provide incentives for artificial network scarcity.[169] If that is the concern, however, economic analysis should clearly establish when such risks exist before regulating. Additionally, regulation should be narrowly targeted to address only proven harms, while avoiding constraints on beneficial incentives for investment, usage, and innovation.

Importantly, limiting ISP pricing flexibility may hinder faster network construction and ultimately reduce consumer welfare. In a 2013 paper, former DOJ Chief Economist and current FTC Chief Economist Aviv Nevo (and co-authors) explained:

Our results suggest that usage-based pricing is an effective means to remove low-value traffic from the Internet, while improving overall welfare. Consumers adopt higher speeds, on average, which lowers waiting costs. Yet overall usage falls slightly. The effect on subscriber welfare depends on the alternative considered. If we hold the set of plans, and their prices, constant, then usage-based pricing is a transfer of surplus from consumers to ISPs. However, if we let the ISP set price to maximize revenues, then consumers are better off.[170]

The authors further note that overall (and ISP) welfare could be increased further with $100/month flat-rate pricing on a Gigabit network. But as the authors note, “[f]rom the ISP’s perspective, the capital costs of such investment would be recovered in approximately 150…months. Similarly, this estimate is a lower bound on the actual time required.”[171]

While such cost recovery is feasible, it assumes no significant changes in technology, regulation, or demand that would alter the calculation; relatively high population density; and, most importantly, the ability to charge relatively high rates, leading to decreased penetration. And the authors further note that the optimal fixed fee for Gigabit was almost $200/month. While:

This revenue-maximizing price is in the middle of the range of prices currently offered for Gigabit service in the US…, due to restrictions on rates from local municipalities, an ISP may have a difficult time charging this rate.[172]

The bottom line is that regulatory restrictions on pricing generally serve to reduce welfare and incentives for broadband investment. The FCC should avoid adopting such restrictions, particularly without the evidence or economic analysis sufficient to justify them.

B.      The Record Reflects that the Commission Should Not Interfere with Usage-Based Pricing

Data caps lay at the heart of zero rating and usage-based pricing. Thus, it is unsurprising that the Commission has taken the first steps to inquire about consumers’ experiences with data caps, especially given its demonstrated antagonism toward zero rating. But without data caps, zero rating certain applications is irrelevant because, effectively, every application is zero rated. Similarly, without data caps, usage-based billing is meaningless from the consumer’s standpoint, as data would be “too cheap to meter.”

Practically speaking, data caps are one of many ways in which providers can use pricing and data allowances to manage network congestion. Even so, it appears that consumer demand is guiding providers away from data caps. According to Statista, 45% of mobile consumers say they have unlimited data plans.[173] It should be axiomatic that consumers who subscribe to unlimited data plans prefer those plans over the alternatives.[174] Perhaps that’s why OpenVault reports a “trend” among many operators to provide unlimited data to their gigabit subscribers.[175] If this continues, data caps and, in turn, zero rating and usage-based billing may soon be practices of the past, much like long-distance telephone charges.[176] EFF’s comments in this matter echo this observation:

Given abundant capacity, throttling, paid prioritization, and data caps become all the more unreasonable. This is already apparent in broadband plans, both wireline and mobile, where increasingly there are very high to no data caps. As more fiber is laid, data caps should disappear altogether. Certainly, the need to manage the volume of traffic as a matter of “reasonable network management” will be even less plausible than it is today as time goes on.[177]

Until the day that data caps “disappear altogether,” however, providers will likely continue offering plans with zero rating or usage-based pricing. Because we still live in a world of limited capacity and periodic congestion, zero-rating policies provide a benefit to many consumers, as reported in our comments in this matter.[178] Free State Foundation’s comments support our conclusion:

The regulatory uncertainty caused by the Title II Order’s general conduct standard and the Wheeler FCC’s investigation of free data plans effectively halted new offerings for unlimited data plans. But the Pai FCC’ rescission of the Wheeler FCC’s report and the RIF Order’s repeal of the Title II Order provided a market climate hospitable to innovative “free data plans.”156 And there is no evidence in the Notice of anyone being harmed by the offering of such plans. Accordingly, the Commission should not risk the elimination of “free data plans” by reimposing public utility regulation and the vague “general conduct” standard. The existing policy of market freedom should be retained to the benefit of consumers. Or at the most, the Commission should analyze future complaints involving innovations like “free data” plans under a commercially reasonable standard such as the one addressed later in these comments.[179]

Layton & Jamison further highlight the benefits of zero rating in encouraging U.S. veterans to connect with U.S. Department of Veterans Affairs health-care providers:

The US Department of Veteran’s Affairs (VA) video app which is called VA Video Connect and is offered in partnership with US broadband providers, allows veterans and caregivers to meet with VA healthcare providers via a computer, tablet, or mobile device without data charges. The VA reported that more than 120,000 veterans accessed the app (Wicklund, 2020), which was important because VA hospitals were under high stress during the pandemic and could not maintain their prior level of routine care. The VA also reported that the app increased the VA’s ability to reach roughly 2.6 million veterans from remote locations with limited transportation or hesitancy over in-person, medical visits. Politico reported, “Officials at the Department of Veterans Affairs are privately sounding the alarm that California’s new net neutrality law could cut off veterans nationwide from a key telehealth app.”[180]

The Commission’s antagonism toward data caps and zero rating has always been somewhat misguided. Past and future investments in broadband capacity, however, have and will render efforts to regulate, reign in, or eliminate such practices increasingly unnecessary, unwarranted, and quixotic.

[1] Notice of Proposed Rulemaking, Safeguarding and Securing the Open Internet, WC Docket No. 23-320 (Sep. 28, 2023) [hereinafter “NPRM”] at ¶1.

[2] Report and Order on Remand, Declaratory Ruling, and Order, In the Matter of Protecting and Promoting the Open Internet, GN Docket No. 14-28 (Mar. 15, 2015) [hereinafter “2015 Order”].

[3] Report and Order on Remand, Declaratory Ruling, and Order, In the Matter of Restoring Internet Freedom, WC Docket No. 17-108 (Jan. 4, 2018) [hereinafter “2018 Order”]

[4] NPRM at ¶114.

[5] Maria Browne, David Gossett, K. C. Halm, Nancy Libin, Christopher Savage, & John Seiver, Here We Go Again—FCC Proposes to Revive Net Neutrality Rules, JD Supra (Oct. 2, 2023), https://www.jdsupra.com/legalnews/here-we-go-again-fcc-proposes-to-revive-5527239.

[6] Daniel Lyons, Why Resurrect Net Neutrality?, AEIdeas (Oct. 4, 2023), https://www.aei.org/technology-and-innovation/why-resurrect-net-neutrality.

[7] ICLE, Notice of Ex Parte Meetings, Restoring Internet Freedom, WC Docket No. 17-108 (Nov. 6, 2017), available at https://laweconcenter.org/images/articles/icle_fcc_rif_ex_parte.pdf. See also, ICLE, Policy Comments, WC Docket No. 17-108 (July 17, 2017), available at https://laweconcenter.org/wp-content/uploads/2017/09/icle-comments_policy_rif_nprm-final.pdf.

[8] Wages & White Lion Invs., L.L.C. v. Food & Drug Admin., No. 21-60766, 21-60800 (5th Cir. 2024) (en banc) (quoting Greater Bos. Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970) (footnote omitted); accord Encino Motorcars, LLC v. Navarro, 579 U.S. 211, 222 (2016) (“When an agency changes its existing position, it … must at least display awareness that it is changing position and show that there are good reasons for the new policy.” (quotation and citation omitted)).

[9] Comments of NCTA, WC Docket No. 23-320 (Dec. 14, 2023) at 49.

[10] NPRM at ¶1 (“[T]he COVID-19 pandemic … demonstrated how essential broadband Internet connections are for consumers’ participation in our society and economy.”).

[11] Id. (“Congress responded by investing tens of billions of dollars into building out broadband Internet networks and making access more affordable and equitable, culminating in the generational investment of $65 billion in the Infrastructure Investment and Jobs Act.”).

[12] NPRM at ¶3 (“[R]eclassification will strengthen the Commission’s ability to secure communications networks and critical infrastructure against national security threats.”).

[13] Id. (“[T]his authority will allow the Commission to protect consumers, including by issuing straightforward, clear rules to prevent Internet service providers from engaging in practices harmful to consumers, competition, and public safety, and by establishing a uniform, national regulatory approach rather than disparate requirements that vary state-by-state.”).

[14] Id.

[15] NPRM at ¶1.

[16] NPRM at ¶16.

[17] NPRM at ¶17.

[18] Id.

[19] Comments of ICLE, WC Docket No. 23-320 (Dec. 14, 2023) at 4, 9-18.

[20] Id.

[21] NPRM at ¶17 (citing Colleen McClain et al., The Internet and the Pandemic: 1. How the internet and technology shaped Americans’ personal experiences amid COVID-19, Pew Research Center (Sep. 1, 2021), https://www.pewresearch.org/internet/2021/09/01/how-the-internet-andtechnology-shaped-americans-personal-experiences-amid-covid-19.

[22] Monica Anderson & John B. Horrigan, Americans Have Mixed Views on Policies Encouraging Broadband Adoption, Pew Research Center (Apr. 10, 2017), https://www.pewresearch.org/short-reads/2017/04/10/americans-have-mixed-views-on-policies-encouraging-broadband-adoption (“[R]oughly nine-in-ten Americans describe high-speed internet service as either essential (49%) or important but not essential (41%)”).

[23] Emily A. Vogels, Andrew Perrin, Lee Rainie, & Monica Anderson, 53% of Americans Say the Internet Has Been Essential During the COVID-19 Outbreak, Pew Research Center (Apr. 30, 2020), https://www.pewresearch.org/internet/2020/04/30/53-of-americans-say-the-internet-has-been-essential-during-the-covid-19-outbreak.

[24] NPRM at ¶17.

[25] OpenVault, Broadband Insights Report (OVBI) 4Q22 (Feb. 8, 2023), https://openvault.com/wp-content/uploads/2023/02/OVBI_4Q22_Report.pdf.

[26] See, NPRM at ¶131 (describing the “virtuous cycle” as one in which “market signals on both sides of ISPs’ platforms encourage consumer demand, content creation, and innovation, with each respectively increasing the other, providing ISPs incentives to invest in their networks.”)

[27] OpenVault, Broadband Industry Report (OVBI) 3Q 2019, (Nov. 11, 2019), https://telecompetitor.com/clients/openvault/Q3/Openvault_Q319_Final.pdf; OpenVault, Broadband Insights Report (OVBI) 3Q21, (Nov. 15, 2021), https://openvault.com/wp-content/uploads/2021/11/OVBI_3Q21_Report.pdf; OpenVault, Broadband Insights Report (OVBI) 3Q23, (Nov. 3, 2023), https://openvault.com/wp-content/uploads/2023/11/OVBI_3Q23_Report_FINAL.pdf.

[28] NPRM at ¶17.

[29] CTIA, 2023 Annual Survey Highlights (Nov. 2, 2023), available at https://api.ctia.org/wp-content/uploads/2023/11/2023-Annual-Survey-Highlights.pdf.

[30] NPRM at ¶1.

[31] NPRM at n. 59.

[32] ICLE Comments, supra n. 19, at 3.

[33] Comments of the Advanced Communications Law & Policy Institute, WC Docket No. 23-320 (Dec. 14, 2023) at 12. See also, Comments of CTIA, WC Docket No. 23-320 (Dec. 14, 2023) at 43 (“In the Notice, the Commission ignores that Congress has recently acted to address the ‘availability and affordability of BIAS’ via the IIJA, which focused on BIAS in detail and, throughout that lengthy discussion, chose not to apply Title II.”). See also, Comments of NCTA, supra n. 9, at 83 (“The $1 trillion Infrastructure Investment and Jobs Act (‘IIJA’) that President Biden signed into law in November 2021, for example, allocates $65 billion to support broadband deployment, adoption, and digital equity across the country, without regard to broadband’s regulatory classification.”) and id. 84 (“As with legislation relating to national security and other issues, the fact that Congress took comprehensive action on broadband affordability and adoption without requiring or authorizing regulation of broadband as a Title II service speaks volumes.”).

[34] NPRM at ¶3.

[35] NPRM at ¶25.

[36] NPRM at ¶119.

[37] Comments of the Free State Foundation, WC Docket No. 23-320 (Dec. 14, 2023) at 22.

[38] Comments of CPAC Center for Regulatory Freedom, WC Docket No. 23-320 (Dec. 14, 2023) at 9.

[39] Office of the Director of National Intelligence, Annual Threat Assessment of the U.S. Intelligence Community (Feb. 6, 2023), available at https://www.odni.gov/files/odni/documents/assessments/ata-2023-unclassified-report.pdf.

[40] Daniel R. Coats, Statement for the Record, Worldwide Threat Assessment of the US Intelligence Community, Senate Armed Services Committee (May 23, 2017) at 1-2, available at https://www.dni.gov/files/documents/newsroom/testimonies/sasc%202017%20ata%20sfr%20-%20final.pdf.

[41] Id.

[42] Id.

[43] Comments of the Free State Foundation, supra n. 36, at 22.

[44] NPRM at ¶¶21, 26, 27.

[45] Comments of CTIA, supra n. 32, at 36.

[46] Comments of AT&T, WC Docket No. 23-320 (Dec. 14, 2023) at 20-21.

[47] Comments of TechFreedom, WC Docket No. 23-320 (Dec. 14, 2023) at 46 (“The Communications Act specifies that ‘public safety services’ are those which are ‘not made commercially available to the public by the provider.’ Accordingly, the 2015 Order explicitly ‘excluded [such services] from the definition of mobile [BIAS].’ Likewise, the Act defines a ‘telecommunications service’ (the thing Title II covers) as ‘the offering of telecommunications for a fee directly to the public.’ Accordingly, the 2015 Order applied Title II only to ‘broadband Internet access service’ (BIAS), defined as a ‘mass-market retail service’ offered ‘directly to the public.’”)

[48] Id. at 44-45. See also, Comments of Technology Policy Institute, WC Docket No. 23-320 (Dec. 14, 2023) at 39 (“But this example highlights the need for public safety to have prioritized access to networks, which demonstrates potential benefits of prioritization.”). See also, Comments of AT&T at 20-21 (“FirstNet users never compete with commercial traffic for bandwidth, and the network does not throttle them anywhere in the country in any circumstances.”)

[49] NPRM at ¶21.

[50] NPRM at ¶21.

[51] NPRM at ¶21.

[52] NPRM at ¶96.

[53] Comments of NCTA, supra n. 9, at 10.

[54] NPRM at ¶24.

[55] Section 177 of the Clean Air Act (42 U.S.C. §7507) is a provision that allows states to adopt and enforce California’s motor vehicle emission standards, which are often more stringent than federal standards. This section was implemented due to California’s unique authority to set emission standards, as it had vehicle regulations that preceded the federal Clean Air Act. See also, California Air Resources Board, Section 177 States Regulation Dashboard (2024), https://ww2.arb.ca.gov/our-work/programs/advanced-clean-cars-program/states-have-adopted-californias-vehicle-regulations.

[56] Am. Booksellers Found. v. Dean, 342 F.3d 96, 104 (2003), citing Cooley v. Bd. of Wardens, 53 U.S. 299, 319 (1852).

[57] See, e.g., Geoffrey A. Manne & Joshua D. Wright, Innovation and the Limits of Antitrust, 6 J. Competition L. & Econ. 153 (2010).

[58] FACT SHEET: FCC Chairwoman Rosenworcel Proposes to Restore Net Neutrality Rules, Fed. Commc’n Comm’n. (Sep. 26, 2023), available at https://docs.fcc.gov/public/attachments/DOC-397235A1.pdf.

[59] In public comments, Commissioners have invoked a fifth example regarding 2018 allegations of Verizon throttling the Santa Clara Fire Department’s wireless broadband service during a wildfire emergency. However, it’s unlikely the service would have been subject to Title II regulation and, even if it was, whether such regulation would have addressed the allegations in this particular example. See, for example, Comments of TechFreedom, supra n. 46, at 44-45. It is perhaps for these reasons that this example was not included in the NPRM, except obliquely in a footnote. See NPRM at n. 56.

[60] NPRM at n. 7.

[61] Declan McCullagh, Telco Agrees to Stop Blocking VoIP Calls, CNET (Mar. 5, 2005), https://www.cnet.com/home/internet/telco-agrees-to-stop-blocking-voip-calls.

[62] NPRM at n. 7.

[63] Comments of TechFreedom, supra n. 46, at 27.

[64] NPRM at ¶128.

[65] See, Comments of CTIA, supra n. 32, at 11 (“[T]he Commission makes no findings and the Notice does not recognize the thorough rebuttal debunking the claims in the paper.”). See also, Comments of the U.S. Chamber of Commerce, WC Docket No. 23-320 (Dec. 14, 2023) at 5 (“[T]he Commission cites a single 2019 study regarding alleged throttling practices by wireless ISPs in the U.S. and elsewhere—the methodology, veracity, and import of which has been contested by providers and others.”)

[66] Comments of ICLE, supra n. 19, at 29.

[67] NPRM at n. 484. See also, Comments of CTIA at 10-11.

[68] Comments of the Scalia Law Clinic, WC Docket No. 23-320 (Dec. 14, 2023) at 6. Critics of the net neutrally repeal advanced a parade of horribles, speculating that internet providers would engage in various undesirable practices, including throttling, anticompetitive paid-prioritization, and blocking. Yet none of this has come to pass. To date, there is no credible evidence of internet service providers engaging in blocking, throttling, or anticompetitive paid prioritization. That is unsurprising given the competitive environment. See RIF, 83 Fed. Reg. 7900 (“[N]o Internet paid prioritization agreements have yet been launched in the United States, rendering any concerns about such practices purely theoretical.”), id. at 7901 (“[T]here is scant evidence that end users, under different legal frameworks, have been prevented by blocking or throttling from accessing the content of their choosing.”); USTelecom Reply Comments, supra, at 7-8 (“[The 2018 Order’s critics] raise alarm regarding the potential for harmful blocking, throttling, or paid prioritization, but the record lacks any evidence that ISPs have employed these practices since the RIF Order took effect.”); Charter Communications, Inc., Comments on Restoring Internet Freedom, at 3 (Apr. 20, 2020) (“For the nineteen years before the Commission’s Title II Order, there were only isolated incidents of purported ISP blocking or discrimination, and there is no evidence that ISPs have engaged in such practices since the adoption of the RIF Order in 2017.”).

[69] Comments of TechFreedom, supra n. 46, at 28.

[70] Comments of the Information Technology & Innovation Foundation (ITIF), WC Docket No. 23-320 (Dec. 14, 2023) at 7. See also, Comments of CTIA, supra n. 32, at 19 (“The Notice does not identify a single BIAS provider that has disclosed it engages in blocking or throttling or paid prioritization, or a single instance where a BIAS provider has failed to make such a disclosure in violation of existing law. This more than demonstrates that market forces and transparency are sufficient to prevent harm to openness, and there is no basis to re- impose the Internet conduct rules.”). See also, Comments of NCTA, supra n. 9, at 53 (“[A]s the Commission is well aware, providers’ commitments are enshrined in their disclosures under the Commission’s Transparency Rule, which the Commission can independently enforce—holding providers to their obligations to clearly and publicly disclose on their websites the terms and conditions of their broadband offerings, including any practices regarding blocking, throttling, and paid prioritization.”)

[71] Comments of CTIA, supra n. 32, at 18-19.

[72] Id. at 12.

[73] Roslyn Layton & Mark Jamison, Net Neutrality in the USA During COVID-19, in Beyond the Pandemic? Exploring the Impact of COVID-19 on Telecommunications and the Internet (Jason Whalley, Volker Stocker & William Lehr eds., 2023).

[74] Comments of CTIA at 97.

[75] Many of our findings and conclusion submitted during the 2018 Order’s rulemaking process remain true today and much of this section builds on those comments. ICLE, Policy Comments, supra n. 7.

[76] Id. at 73-74.

[77]Ángel Martin Oro, Interview: Nicolai J. Foss and Peter G. Klein on “Organizing Entrepreneurial Judgment,” Sintetia (Jul. 7, 2014), http://www.sintetia.com/interview-nicolai-j-foss-and-peter-g-klein-on-organizing-entrepreneurial-judgment. See also Nicolai J. Foss & Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (2014).

[78] See Thomas W. Hazlett & Joshua D. Wright, The Law and Economics of Network Neutrality, 45 Ind. L. Rev. 767 (2012).

[79] See, e.g., Robin S. Lee & Tim Wu, Subsidizing Creativity Through Network Design: Zero-Pricing and Net Neutrality, 23 J. Econ. Perspectives 61, 67 (2009).

[80] Michael Weinberg, But For These Rules…., Public Knowledge (Sep. 10, 2013), https://www.publicknowledge.org/news-blog/blogs/these-rules.

[81] Public Knowledge, Petition to Deny, In the Matter of Applications of Comcast Corporation, General Electric Company and NBC Universal, Inc. for Consent to Assign Licenses or Transfer Control of Licensees, MB Docket No. 10-56, available at https://www.publicknowledge.org/files/docs/PK-nbc-comcast-20100621.pdf.

[82] See generally Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Assoc. 990 (2003).

[83] Larry F. Darby & Joseph P. Fuhr, Jr., Consumer Welfare, Capital Formation and Net Neutrality: Paying for Next Generation Broadband Networks, 16 Media L. & Pol’y 122, 123 (2007).

[84] Marc Bourreau, Frago Kourandi & Tommaso Valletti, Net Neutrality with Competing Internet Platforms, 63 J. Indus. Econ. 1 (2015).

[85] Paul Njoroge et al., Investment in Two-Sided Markets and the Net Neutrality Debate, 12 Rev. Network Econ. 355, 361 (2013). Some previous papers have found the opposite result in some instances. All of these models exclude important aspects of the more updated literature, however. See Id. 362-65, for a literature review. One, in particular, finds a welfare increase from neutrality, although not with monopoly platforms, interestingly. But this paper does not incorporate infrastructure investment incentives in its models. See Nicholas Economides & Joacim Tåg, Network Neutrality on the Internet: A Two-sided Market Analysis, 24 Info. Econ. & Pol’y 91 (2012).

[86] Marc Borreau, et al., supra n. 85 at 33-34.

[87] NPRM at ¶160.

[88] Id.

[89] Comments of the Technology Policy Institute, supra n. 47, at 15.

[90] ICLE Policy Comments, supra n. 7, at 50.

[91] See, e.g., Daniel A. Lyons, Innovations in Mobile Broadband Pricing, 92 Denv. U. L. Rev. 453 (2015).

[92] Mark A. Jamison & Janice Hauge, Dumbing Down the Net: A Further Look at the Net Neutrality Debate, Internet Policy And Economics: Challenges And Perspectives 57-71 (William H. Lehr & Lorenzo Maria Pupillo, eds., 2009).

[93] See, e.g., Lee & Wu, supra n. 77, at 67.

[94] See Ronald H. Coase, Payola in Radio and Television Broadcasting, 22 J.L. & Econ. 269 (1979), available at http://old.ccer.edu.cn/download/7874-3.pdf.

[95] See Stephen M. Bainbridge, Manne on Insider Trading (UCLA School of Law, Law-Econ Research Paper No. 08-04), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1096259.

[96] See Gabriel Rossman, Climbing the Charts: What Radio Airplay Tells Us about the Diffusion of Innovation (2012).

[97] Joshua D. Wright, Slotting Contracts and Consumer Welfare, 74 Antitrust L. J. 439, 448 (2007). See also Benjamin Klein & Joshua D. Wright, The Economics of Slotting Contracts, 50 J. L. & Econ. 421 (2007).

[98] Klein & Wright, supra note 5 at 422.

[99] Id. at 423-24.

[100] NPRM at ¶158.

[101] See, e.g., Jan Krämer & Lukas Wiewiorra, Network Neutrality and Congestion Sensitive Content Providers: Implications for Service Innovation, Broadband Investment and Regulation, (MPRA Paper No. 27003, Oct. 2010), available at http://mpra.ub.uni-muenchen.de/27003/1/MPRA_paper_27003.pdf. See also Drew Fitzgerald, How the Web’s Fast Lanes Would Work Without Net Neutrality, Wall St. J. (May 16, 2014), http://online.wsj.com/news/articles/SB10001424052702304908304579565880257774274.

[102] See Mark A. Jamison & Janice A. Hauge, Getting What You Pay For: Analyzing The Net Neutrality Debate (TPRC 2007) at 14-15, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1081690. (“When the non-degradation condition holds, a network provider will increase network capacity when providing premium transmission service.”).

[103] Steven Musil, Netflix: We’re the Ones Throttling Videos Speeds on AT&T and Verizon, CNET (Mar. 24, 2016), https://www.cnet.com/news/netflix-admits-throttling-video-speeds-on-at-t-verizon.

[104] Comments of the Competitive Enterprise Institute, WC Docket No. 23-320 (Dec. 14, 2023) at 15.

[105] U.S. Department of State, Passport Fees (Aug. 1, 2023), https://travel.state.gov/content/travel/en/passports/how-apply/fees.html.

[106] Federal Highway Administration, High-Occupancy Toll Lanes (Partial Facility Pricing) (Feb. 11, 2022), https://ops.fhwa.dot.gov/congestionpricing/strategies/involving_tolls/hot_lanes.htm.

[107] Comments of ICLE, supra n. 19, at 7.

[108] Id.

[109] Id. at 23.

[110] Comments of ITIF, supra n. 69, at 7-8.

[111] Comments of the Free State Foundation, supra n. 36, at 29. See also, Comments of the Scalia Law Clinic, supra n. 67,  at 7 (“Prioritization can be helpful in the public safety context and allows for providers to make ‘tradeoffs’ that can help increase speed and accessibility for all.”)

[112] Comments of NCTA, supra n. 9, at 72.

[113] Comments of the Competitive Enterprise Institute, supra n. 102, at 15.

[114] Comments of the Wireless Internet Service Providers Association (WISPA), WC Docket No. 23-320 (Dec. 14, 2023) at 39.

[115] Id. at 7.

[116] NPRM at ¶150.

[117] Id.

[118] NPRM at ¶152.

[119] Patrick, Chasing Away Elephants, Fairytalenight.com (Apr. 16, 2020), https://www.fairytalenight.com/2020/04/16/chasing-away-elephants (“A man is walking down the street, clapping his hands together every ten seconds. Asked by another man, why he is performing this peculiar behavior, he responds: ‘I’m clapping to scare away the elephants.’ Visibly puzzled, the second man notes that there are no elephants there, where upon the clapping man replies: ‘See, it works!’”)

[120] There is, however, a pro-competitive explanation for Comcast’s alleged conduct. Comments of TechFreedom, supra n. 46, at 27 (Explaining that intensive file-sharing traffic was causing such severe latency and jitter that it made VoIP telephony unusable. Comcast wanted to launch its VoIP offering with dedicated network capacity but feared accusations of making it impossible for rival VoIP services to compete. Throttling BitTorrent was pro-competitive in that it allowed Comcast and its competitors to offer VoIP services.) In addition, in the wake of the Comcast matter, Micro Transport Protocol, or μTP, was developed reduce congestion related to peer-to-peer file sharing. See, Drake Baer, How BitTorrent Rewrote the Rules of the Internet, Fast Company (Mar. 5, 2014), https://www.fastcompany.com/3026852/how-bittorrent-rewrote-the-rules-of-the-internet.

[121] NPRM at ¶152.

[122] ICLE & TechFreedom, Policy Comments, GN Docket No. 14-28 (Jul. 17, 2014) at 15-16, https://laweconcenter.org/resources/icle-techfreedom-policy-comments.

[123] NPRM at ¶153.

[124] NPRM at ¶156.

[125] NPRM at ¶156.

[126] Comments of TechFreedom, supra n. 46, at 2.

[127] Id.

[128] Comments of 5G America, WC Docket No. 23-320 (Dec. 14, 2023) at 8.

[129] NPRM at ¶128.

[130] See, Comments of CTIA, supra n. 32, at 11 (“[T]he Commission makes no findings and the Notice does not recognize the thorough rebuttal debunking the claims in the paper.”). See also, Comments of the U.S. Chamber of Commerce, supra n. 64, at 5 (“[T]he Commission cites a single 2019 study regarding alleged throttling practices by wireless ISPs in the U.S. and elsewhere—the methodology, veracity, and import of which has been contested by providers and others.”).

[131] Comments of ICLE, supra n. 19, at 29.

[132] Comments of CTIA, supra n. 32, at 10-11.

[133] Many of our findings and conclusion submitted during the 2018 Order’s rulemaking process remain true today and much of this section builds on those comments. ICLE, Policy Comments, supra n. 7

[134] NPRM at ¶166.

[135] NPRM at ¶165

[136] NPRM at ¶165.

[137] Id.

[138] United States Telecom Ass’n v. Fed. Commc’ns Comm’n, 825 F.3d 674, 736 (D.C. Cir. 2016).

[139] Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 52 (1983).

[140] 2015 Order at ¶138.

[141] Report and Order, In the Matter of Preserving the Open Internet Broadband Industry Practices, GN Docket No. 09-191, ¶68 (Dec. 23, 2010), [hereinafter “2010 Order”]; 2015 Order, supra n. 2, at ¶137.

[142] Dissenting Statement of Commissioner Ajit Pai, In the Matter of Protecting & Promoting the Open Internet, GN Docket No. 14-28,  30 F.C.C. Rcd. 5601, 5921 (2015).

[143] 2015 Order at ¶137-38.

[144] NPRM at ¶167.

[145] Cellco Partnership v. Fed. Commc’ns Comm’n, 700 F.3d 534, 548 (D.C. Cir, 2012); Verizon v. F.C.C., 740 F.3d 623, 657 (D.C. Cir. 2014).

[146] 2010 Order at ¶68.

[147] 2015 Order at ¶148.

[148] Id.

[149] 2015 Order at n. 123. See also, Comments of the Electronic Frontier Foundation, WC Docket No. 23-320 (Dec. 14, 2023) at 7.

[150] Jordan Crook, Apple Introduces iOS 6, Coming This Fall, TechCrunch (Jun. 11, 2012), https://techcrunch.com/2012/06/11/apple-announces-ios-6-wwdc.

[151] 9to5Mac, Sprint Says It Will Not Charge For FaceTime Over Network, Verizon Calls iOS 6 Pricing Conversations ‘Premature’, 9to5Mac (Jul. 18, 2012), https://9to5mac.com/2012/07/18/sprint-says-it-will-not-charge-for-facetime-over-cellular-verizon-calls-talk-premature; Jon Brodkin, Verizon Will Enable iPhone’s FaceTime On All Data Plans, Unlike AT&T, ArsTechnica (Sep. 13, 2012), https://arstechnica.com/apple/2012/09/verizon-will-enable-iphones-facetime-on-all-data-plans-unlike-att.

[152] Jim Cicconi, A Few Thoughts On FaceTime, AT&T Public Policy (Nov. 8, 2012), https://www.attpublicpolicy.com/broadband/a-few-thoughts-on-facetime.

[153] Id.; At the time, a FaceTime call consumed on average 2-4 times more bandwidth than a similar call carried out via Skype. FCC, Open Internet Advisory Committee – 2013 Annual Report, at 3.

[154] Jim Cicconi, A Few Thoughts On FaceTime, AT&T Public Policy (Nov. 8, 2012),  https://www.attpublicpolicy.com/broadband/a-few-thoughts-on-facetime.

[155] Press Release, AT&T, AT&T 4G LTE Coverage Double In 2012 (Nov. 16, 2012), https://www.att.com/gen/press-room?pid=23553&cdvn=news&newsarticleid=35717.

[156] And note, such a vast arrogation of power surely will factor into a “major questions analysis.” See, Comments of ICLE, surpra n. 19, at nn. 153-185, and accompanying text.

[157] NPRM at ¶120.

[158] NPRM at ¶175.

[159] FCC, Chairwoman Rosenworcel Proposes to Investigate How Data Caps Affect Consumers and Competition (Jun. 15, 2023), available at https://docs.fcc.gov/public/attachments/DOC-394416A1.pdf.

[160] FCC, FCC Launches Data Cap Stories Portal (Jun. 21, 2023), https://www.fcc.gov/consumer-governmental-affairs/fcc-launches-data-cap-stories-portal.

[161] NPRM at ¶534.

[162] NPRM at ¶166.

[163] FCC, Policy Review of Mobile Broadband Operators’ Sponsored Data Offerings for Zero-Rated Content and Services (Jan. 11, 2017), available at https://docs.fcc.gov/public/attachments/DOC-342987A1.pdf.

[164] FCC, Statement of Commissioner Michael O’Rielly on Conclusion of Zero Rating Inquiries (Feb. 3, 2017), available at https://docs.fcc.gov/public/attachments/DOC-343340A1.pdf.

[165] Full Transcript: FCC Commissioner Jessica Rosenworcel Answers Net Neutrality Questions on Too Embarrassed to Ask, Vox (Dec. 20, 2017), https://www.vox.com/2017/12/20/16797164/transcript-fcc-commissioner-jessica-rosenworcel-net-neutrality-questions-too-embarrassed-to-ask.

[166] Id.

[167] Comments of AT&T, supra n. 45 at 5-6.

[168] See generally, Robert D. Willig, Pareto Superior Nonlinear Outlay Schedules, 11 Bell J. Econ. 56 (1978).

[169] See Nicholas Economides, Why Imposing New Tolls on Third-Party Content and Applications Threatens Innovation and Will Not Improve Broadband Providers’ Investment (NYU Center for Law, Economics & Organization Working Paper No. 10-32, Jul. 2010), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1627347.

[170] Aviv Nevo, John L Turner, & Jonathan W. Williams, Usage-Based Pricing and Demand for Residential Broadband 38 (Working Paper, Sep. 12, 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330426.

[171] Id. at 37.

[172] Id. at 38.

[173] Most Common Mobile Data Plans in the U.S. as of September 2023, Statista (Nov. 2023), https://www.statista.com/forecasts/997206/most-common-mobile-data-plans-in-the-us (Response to the question, “How large is your monthly data volume according to your main smartphone contract/prepaid service?”).

[174] Comments of CTIA, supra n. 32, at 102-103 (“[U]sage-based pricing and zero-rating are quintessential examples of offers that facilitate choice. Usage-based pricing plans involve customers paying a fixed monthly fee for a fixed amount of data per month, so that consumers do not need to choose between “all you can eat” or nothing. Zero-rating involves certain traffic that does not count towards any usage-based pricing limit, meaning consumers get the benefits of more choice of price points and extra data”).

[175] OpenVault (2023), supra, n. 26.

[176] See, Comments of AT&T, supra, n. 45 at 26-27 (describing zero-rating as the “equivalent of toll-free calling”).

[177] Comments of Electronic Frontier Foundation, supra n. 146 at 14-15.

[178] ICLE comments, supra n. 19 at 30-32 (summarizing and FCC report concluding data caps provide revenues to fund broadband buildout, provide incentives to develop more efficient ways of delivering data-intensive services, and enable business-model experimentation).

[179] Comments of the Free State Foundation, supra n. 36 at 55-56.

[180] Layton & Jamison, supra n. 72, at 199.

Continue reading
Telecommunications & Regulated Utilities

ICLE Comments to FCC on Title II NPRM

Regulatory Comments I.        Introduction Writing on behalf of the International Center for Law & Economics (ICLE), we thank the Federal Communications Commission (“FCC” or “the Commission”) for . . .

I.        Introduction

Writing on behalf of the International Center for Law & Economics (ICLE), we thank the Federal Communications Commission (“FCC” or “the Commission”) for the opportunity to respond to this notice of proposed rulemaking (“NPRM”) as the Commission seeks, yet again, to reclassify broadband internet-access services under Title II of the Communications Act of 1934.

The new NPRM emphasizes the principles of an “open internet,” but falls short of providing a concrete operational definition of what this entails.[1] The Commission’s vague and open-ended description of a “open internet” introduces enormous ambiguities that could grant the FCC unwarranted and expanded scope of discretion. In suggesting that openness equates to basic consumer access, without clear limitations or exceptions, the order leaves room for interpretation of what constitutes “open” access. This not only hampers stakeholders from understanding the boundaries of compliance, but also gives the FCC an opaque veil of authority that could be applied both expansively and inconsistently.

Some critics see the FCC’s pursuit of common-carrier regulation of broadband internet as an attempt to “control” an industry with vast economic and political significance.[2] That may be true. As we discuss in Section II, a more charitable criticism is that the Commission mistakenly believes that the provision of broadband internet is a natural monopoly that is best served by utility-style regulation. Alternatively, it could be argued that the FCC mistakenly believes that a dynamic and competitive industry marked by rapid innovation, improving quality, and falling prices can be effectively regulated as if it were a public utility. Under any of these rationales, Title II regulation is mistaken at best, and nefarious at worst.

Although much has changed since the 2015 Order,[3] nothing has happened that newly justifies the Commission reimposing Title II on broadband service. Perhaps recognizing the difficulty this poses, the Commission offers several new justifications for Title II regulation. In particular, “national security” is offered as a primary justification. In the 2015 Order, “net neutrality” was mentioned nearly 70 times. In contrast, the recent NPRM uses the term only a handful of times: once in the text and the others in only two footnotes. The 2015 Order mentioned “national security” only three times, while the NPRM uses the term more than five dozen times.

In addition, the FCC’s NPRM provides several other new justifications for sweeping regulation of broadband-internet access:

  • COVID-19: “[T]he COVID-19 pandemic and the rapid shift of work, education, and health care online demonstrated how essential broadband Internet connections are for consumers’ participation in our society and economy.”[4]
  • Federal spending on provider investments and consumer subsidies: “Congress responded by investing tens of billions of dollars into building out broadband Internet networks and making access more affordable and equitable, culminating in the generational investment of $65 billion in the Infrastructure Investment and Jobs Act.”[5]
  • The need for a uniform national regulatory system: “[T]his authority will allow the Commission to protect consumers, including by issuing straightforward, clear rules to prevent Internet service providers from engaging in practices harmful to consumers, competition, and public safety, and by establishing a uniform, national regulatory approach rather than disparate requirements that vary state-by-state.”[6]

We caution the Commission to take care when relying on these justifications, for several reasons. First, the COVID-19 justification is at odds with the way history unfolded. U.S. broadband providers’ responses to the steep increase in demand during the pandemic was a demonstrable success of broadband competition (especially compared to how networks abroad fared).[7]

The Commission’s reliance on the passage of the Infrastructure Investment and Jobs Act (IIJA) is also a problematic justification for Title II regulation. The legislative process would have been a perfect time for Congress to legislate net neutrality or Title II regulation as it was debating the investment of tens of billions of dollars to encourage broadband buildout for the next decade or so. But no such provisions were included in the spending bills. If anything, this should indicate that the Commission should refrain from such an excessive regulatory intervention.

Even the Commission’s newly enacted digital-discrimination rules undermine the case for Title II regulation. Congress included a very terse statement that the Commission should look into impermissible discrimination in broadband deployment, but gave zero indication that it wanted Title II reclassification to serve as a remedy, even if such discrimination was found.[8] In short, if Congress intended to regulate broadband internet under Title II, it had numerous opportunities to do so in the recent past, but chose otherwise.

When it comes to national security, Congress has created a number of entities that have oversight powers.[9] But despite recent legislative investment in broadband deployment, Congress gave no indication that it wished the FCC to become a body driven by a national-security mission.  Thus, the Commission’s attempt to step into this arena appears both redundant and outside its core competencies. This further suggests that imposing net neutrality under the guise of such justifications might be unfounded, rather than grounded in a changed internet landscape or emergent security threats.

Aside from these overarching concerns advising against Title II regulation, the following comments seek to evaluate the FCC’s numerous beliefs and conclusions, as well as answer questions posed by the NPRM.

In Section II, we report that, by most measures, U.S. broadband competition is vibrant and has improved dramatically since the COVID-19 pandemic. We show that, since 2021, more households are connected to the internet, broadband speeds have increased while prices have declined, more households are served by more than a single provider, and new technologies—such as satellite and 5G—have increased internet access and intermodal competition among providers.

In that section, we also conclude that a mere “incentive and ability” of providers to engage in practices that pose a threat to “internet openness” (however defined) is insufficient justification to impose outright bans on certain practices that have been demonstrated to enhance internet performance, foster investment, and improve consumer and edge provider well-being. Moreover, robust and increasing broadband competition would place a substantial check on the “incentive and ability” for provider attempts to engage in anticompetitive or harmful conduct.

Rather than promoting “openness,” Title II may serve to suppress it, as it would ban or regulate both existing practices or future innovative practices that simultaneously boost provider returns and improve internet users’ experience. As such, Section II argues that the heavy-handed regulation proposed by the NPRM is likely to both reduce investment returns and increase the uncertainty of those returns. This would thereby stifle future broadband investment, especially among small and rural providers.

As discussed in Section II.C.2, paid prioritization has been demonstrated to benefit consumers and edge providers and, in some, cases may be necessary to deliver some high-demand internet services. We also present evidence that throttling of application-service providers is virtually nonexistent and that consumers are largely indifferent to throttling policies as currently practiced. While the NPRM does not anticipate regulating data caps or usage-based pricing, we argue that there is a significant likelihood these practices could be scrutinized under the proposed “internet conduct” rules. Both practices have been shown to be especially beneficial to low-income or low-usage internet subscribers.

Section III describes how already-existing laws and agencies are well-equipped to deal with competition, consumer protection, and national-security issues. Many of the issues the FCC uses to justify extending its purview do not require Title II reclassification, or even action from the FCC itself.

Lastly, in Section IV, we demonstrate that the FCC’s proposed rules will certainly invite challenge under the “major questions doctrine,” which requires a clear grant of authority from Congress when an agency action exercises powers of vast economic and political significance. Moreover, based on recent Supreme Court precedent, there is a significant likelihood that the Commission’s proposed Title II regulation will be struck down by the courts. Reclassification of broadband as a Title II telecommunications service would clearly be an exercise of powers of “vast economic and political significance.” Broadband providers have invested billions of dollars per year into building out reliable high-speed networks throughout the country, serving hundreds of millions of consumers.[10] Nearly every U.S. resident, business, public agency, and other organization uses broadband internet over large portions of the day. Both federal and state governments have supported this continued buildout through subsidies to providers and consumers. As then-Judge Brett Kavanaugh put it when considering the 2015 Order, the “FCC’s net neutrality rule is a major rule for the purposes of The Supreme Court’s major rules doctrine. Indeed, I believe that proposition is indisputable.”[11] It is also clear the classification of broadband under the Communications Act is ambiguous, as every court to review the question has found it to be so.[12]

II.      Title II Is Inappropriate to Regulate Broadband

The Commission’s NPRM proposes regulating broadband as a Title II telecommunications service. But such regulations are unnecessary to protect the public and will harm investment, competition, and innovation. Part II.A details the absence of evidence that would justify reclassifying broadband as a common carrier under Title II. Part II.B shows how the current “light-touch” regulatory approach under Title I promotes innovation and competition. Part II.C presents evidence that Title II reclassification will reduce investment, and Part II.D explains how the NPRM’s proposed rules will reduce innovation by broadband providers.

A.      No Adequate Justification to Change Regulatory Classification of Broadband Providers

The NPRM argues that the Commission must restore Title II authority to “safeguard the open Internet” by “clear rules to prevent Internet service providers from engaging in practices harmful to consumers, competition, and public safety….”[13] But the NPRM’s arguments to support this assertion are weak, and the evidence is sparse.

Part II.A.1 argues that the alleged harms to openness are based on poor economic logic and lack any evidence demonstrating that broadband providers have reduced “openness” in the absence of Title II regulation. Part II.A.2 examines the logic of regulating broadband as a monopoly utility, and finds it wanting in light of competitive conditions in the market. Part II.A.3 furthers that argument by detailing the level of competition in the market for high-speed internet, noting the growth in the number of providers, the falling prices and increasing speeds made available, and the increased level of intermodal competition since repeal of the 2015 Order.

1.        NPRM has not sufficiently supported its assertion of a threat to openness

In the NPRM, the Commission notes that:

We believe that the rules we propose today will establish a baseline that the Commission can use to prevent and address conduct that harms consumers and competition when it occurs. Above, we express our belief that consumers perceive and use BIAS as an essential service, critical to accessing healthcare, education, work, commerce, and civic engagement. Because of its importance, we further believe it is paramount that consumers be able to use their BIAS connections without degradation due to blocking, throttling, paid prioritization, or other harmful conduct.[14]

Relatedly, the Commission roots its proposed rules in the so-called “incentive and ability [of ISPs] to engage in practices that pose a threat to Internet openness.”[15]

But the NPRM’s proposed rules, rooted in the presumption of ISPs’ “incentive and ability” to engage in practices that threaten internet openness, rest on a speculative foundation, rather than any substantive record of violations. Given the voluminous scale of internet traffic, the evidence of actual infractions is remarkably scant. This paucity of evidence undermines the rationale for preemptive, industrywide prohibitions, which would be based on hypothetical future harms. The mere possibility of ISPs engaging in deleterious conduct does not, in itself, warrant imposing onerous rules that could impede investment in innovative business models.

The assertion that ISPs have the incentive and ability to harm open internet access lacks convincing substantiation of demonstrable harmful conduct.[16] Speculative harm cannot justify regulations that could dissuade ISPs from exploring novel and potentially pro-consumer arrangements. Where there is evidence of consumer ignorance of the tradeoffs inherent in various product offerings, the solution may lie in enhanced disclosure—providing notice and choice to consumers—not in the imposition of broad restrictions.

Furthermore, the Commission fails to distinguish between instances where so-called “paid prioritization” has pro-consumer benefits and where it may constitute an anticompetitive harm. Many business relationships that might be labeled as paid prioritization—such as Netflix’s collocation of data centers within different networks to expedite service and reduce overall network load—are unequivocally pro-consumer. Such arrangements are better understood as sensible network optimization, rather than as anticompetitive behavior.

This narrow focus on ISPs as a potential vector of consumer harm also overlooks the broader ecosystem in which content aggregators like Netflix or Google exert significant influence over access to content. These platforms can, and often do, have a more immediate effect on consumer access than do ISPs. While edge providers sometimes come under fire themselves (wrongly, in our view), it is relevant to assessing the desirability of these proposed rules whether edge providers are made more or less powerful if ISPs are constrained, and what effect that would have on consumer welfare. Relatedly, many of the concerns over blocking, throttling, and paid prioritization are, in essence, expressing a concern that these edge providers will be unable to successfully bargain with ISPs. This, however, is a strange basis for such rules, as many of these firms are as large as or larger than any particular ISP. Moreover, the power these large firms exert in business relationships with ISPs establishes conditions that have downstream benefits for all edge providers.

Thus, the NPRM’s concern over the need for “neutral” connection lanes fails to recognize that neutrality may not be the sole (or even the best) path to fostering innovation. Startups could benefit from making agreements with ISPs to ensure optimized data transmission, which could be more achievable and less costly than the NPRM suggests. Moreover, the emergence of distributed cloud computing blurs the lines between established firms and newcomers, as they often share the same infrastructure and delivery networks, muting the Commission’s concerns.

Before moving forward, the Commission should diligently investigate the likelihood of future harms absent regulation, considering that no concrete evidence has surfaced since the last two rounds of rules on this matter—or even prior—of ISPs using their alleged incentive and ability to affect consumers and edge providers detrimentally. The FCC should substantiate actual harm rather than legislate against conjectural threats. Moreover, the FCC might find that transparency rules alone, or even the mere risk of public disclosure without formal regulation, could sufficiently deter quality degradation without the need for more intrusive regulations.

2.        Widespread use of high-speed internet does not render broadband internet a public utility

The Commission concludes that broadband internet access services are “[n]ot unlike other essential utilities, such as electricity and water” and that high-speed internet “was essential or important to 90 percent of U.S. adults during the COVID-19 pandemic.”[17] The Commission appears to argue that broadband internet is therefore an essential public utility and should be regulated as such.

But many essentials to human survival—shelter, food, clothing—are thus not subject to common-carrier regulations, because they are provided by multiple suppliers in competitive markets. Utilities are considered distinct because they tend to have such significant economies of scale that (1) a single monopoly provider can provide the goods or services at a lower cost than multiple competing firms and/or (2) market demand is insufficient to support more than a single supplier.[18] Water, sewer, electricity, and natural gas are typically considered “natural” monopolies under this definition.[19] In many cases, not only are these industries treated as monopolies, but their monopoly status is codified by laws forbidding competition. At one time, local and long-distance telephone services were considered—and treated as—natural monopolies, as was cable television.[20]

Over time, innovations have eroded the “natural” monopolies in telephone and cable.[21] In 2000, 94% of U.S. households had a landline telephone, and only 42% had a mobile phone.[22] By 2018, those numbers flipped.[23] In 2015, 73% of households subscribed to cable or satellite-television service.[24] Today, fewer than half of U.S. households subscribe.[25] Much of that transition is due to the enormous improvements in broadband speed, reliability, and affordability discussed in Part II.A.3.a. Similarly, entry and intermodal competition from 5G, fixed wireless, and satellite—as discussed in Part II.A.3.c—has meant that more than 94% of the country can now access high-speed broadband from three or more providers, thereby eroding the already tenuous claims that broadband-internet service is akin to a utility.

Regulating a competitive industry as a monopoly utility is what former Justice Stephen Breyer identified as a regulatory “mismatch,” which he defined as:

[A]n area where the rationale for regulation, judged by empirical fact, is not compelling, or where there are apparently less restrictive or more incentive-based forms of governmental intervention that can obtain regulation’s purported objective. [26]

As we note throughout these comments, the federal government already has in place many laws, rules, and policies that could satisfy many of the objectives the FCC seeks with Title II reclassification. In nearly every case, existing regulations are less-restrictive, more incentive-based, or less-capricious than common-carrier regulation under Title II.

3.        Existing broadband competition renders common-carrier regulations unnecessary

The FCC seeks comment on the state of competition in broadband internet-access services.[27] The NPRM claims that more than one-third of households lack competitive choice for fixed broadband at speeds of 100/20 Mbps, and that 70% of rural households lack such choice.[28] Despite the fact that nearly one-in-eight households with at-home internet are mobile-only, the Commission concludes that fixed and mobile internet are not substitutable.[29] Against this backdrop, the FCC seeks comment regarding whether services with substantially different technologies can substitute for each other competitively, and whether consumers nationwide have an adequate choice of providers.[30]

By most measures, U.S. broadband competition is vibrant and has increased dramatically since the COVID-19 pandemic. Since 2021, more households are connected to the internet, broadband speeds have increased while prices have declined, more households are served by more than a single provider, and new technologies—such as satellite and 5G—have expanded internet access and intermodal competition among providers.

a.        More households are served by two or more providers

Criticisms of the current state of broadband deployment tend to presume it results from widespread market failure. Specifically, the critics believe that too few Americans have affordable access to adequate broadband speed and capacity and that this, in turn, is the result of insufficient competition among broadband providers.[31] For example, in her speech announcing the FCC’s latest proposal to regulate internet services under Title II, Chair Jessica Rosenworcel claimed that 80% of the country faces a monopoly or duopoly for 100 Mbps or higher download speeds.[32] But, in fact, nearly all of the country has access to at-home internet, a vast majority has access to high-speed internet, and much of the country has access to these speeds from three or more providers.

The Federal Communications Commission (FCC) defines high-speed broadband as Internet service that offers speeds of at least 25/3 Mbps.[33] The IIJA defines a location as “unserved” if it has no internet connection available or only has a connection offering speeds of less than 25/3 Mbps.[34] A location is considered “underserved” if the only options available offer speeds of less than 100/20 Mbps.[35] The third iteration of the National Broadband Map, released in November 2023, indicates:[36]

  • 8% of locations have access to connections of 25/3 Mbps or higher;
  • 5% of locations have access to speeds of 200/25 Mbps or higher.
  • Only 6.2% of locations are unserved, and 2.6% are “underserved” with connections of less than 100/20 Mbps.

The most recent FCC data on U.S. broadband deployment finds that 90% of the population in 2021 was served by one or more providers offering 250/25 Mbps or higher speeds (Table 1).[37] That is more than double the share of the population five years earlier, when only 44% of Americans had access to such speeds.[38] In 2019, the FCC did not report the share of population with access to 1,000/100 Mbps speeds or higher. In 2021, 28% of the population had access to these gigabit download speeds.

Table 1 shows that, in 2021, more than 85% of the population was covered by two or more fixed broadband providers offering 25/3 Mbps or higher speeds and more than 60% of the country was covered by three or more providers providing such speeds. If satellite and 5G providers are included, then close to 100% of the country is served by two or more high-speed providers.

Moreover, the evidence indicates that broadband competition has increased over time, as measured by the number of competing high-speed providers (Figure 1).[39]

  • 25/3 Mbps: In 2018, 73.0% of households had access to 25/3 Mbps speeds from only one or two fixed broadband providers and only 21.6% had access from three or more providers. In 2021, only 29.1% of households had access from one or two providers while 69.3% were served by three or more providers. Thus, the number of households served by three or more providers increased by 47.7 percentage points from 2018 through 2021.
  • 100/20 Mbps: In 2018, 11.6% of households had no access to 100/20 Mbps speeds and 14.8% had access from three or more fixed broadband providers. In 2021, 5.4% of households had no access, while 21.3% were served by three or more providers. Thus, the number of households served by three or more providers increased by 6.5 percentage points from 2018 through 2021.

Since the 2018 Order[40] that reclassified broadband under Title I, broadband competition has increased. The share of households with high-speed fixed broadband connections offered by three or more providers has increased. Over the same period, entry and intermodal competition from 5G, fixed wireless, and satellite, as discussed in more depth below, has meant that more than 94% of the country can now access high-speed broadband from three or more providers. The growing consumer adoption of technologies that differ substantially from fixed broadband demonstrate that consumers view these technologies as competitive substitutes for each other.

b.        Broadband speeds have increased while prices have declined

Critics of the current state of U.S. broadband competition claim that U.S. prices are among the highest in the developed world because the U.S. market is not as competitive as other jurisdictions. For example, the Community Tech Network asks rhetorically, “So why does the internet cost so much more in the U.S. than in other countries? One possible answer is the lack of competition.”[41] Their article includes a graphic in which U.S. internet is described as “expensive and slow” while Australia is categorized as “fast and cheap.”

None of these claims appear to hold up under scrutiny. Instead, adjusting for consumption and download speeds, U.S. fixed-broadband pricing is among the lowest in the developed world. On a cost-per-megabit basis, the United States is among the least costly (Figure 2).[42] In addition, Speedtest’s Global Index of median speeds reports the United States as having the second-fastest median speed among OECD countries (Figure 3).[43]

 

Cross-country comparisons of broadband pricing are especially fraught, due to country-by-country variations in factors that drive the costs of delivering broadband and the prices paid by consumers. Deployment costs are driven largely by population density and terrain, as well as each country’s unique regulatory and tax policies.[44] Consumer choices often drive the prices paid by subscribers. These include choices regarding the mix of fixed broadband and mobile, speed preferences, and data consumption.[45]

A broadband-pricing index published annually by USTelecom reports that inflation-adjusted broadband prices for the most popular speed tiers among consumers have decreased by 54.7% from 2015 to 2023, or 5.6% a year.[46] Prices for the highest-speed tiers have decreased by 55.8% over the same period. The Producer Price Index for residential internet-access services decreased by 11.2% from 2015 through July 2023.[47] The median fixed-broadband connection in the United States delivers more than 207 Mbps download service, an 80% increase over the pre-pandemic median speed (Figure 4).[48]

An industry experiencing increasing quality along with decreasing prices is consistent with an industry that faces robust, if not increasing, competition. By these measures, the U.S. broadband industry, under Title I regulation, is both competitive and dynamic. To date, proponents of Title II regulation have not demonstrated that net neutrality or other common-carrier obligations have or will improve internet speeds or pricing for consumers.

c.        New technologies have increased intermodal competition

Nearly one-in-eight households with at-home internet are mobile-only.[49] According to Pew Research, 19% of adults who do not have at-home broadband report that their smartphone does everything they need to do online.[50] Even so, the Commission concludes that fixed and mobile internet are not substitutable,[51] and seeks comments regarding its conclusion that, “fixed broadband and mobile wireless broadband are not substitutes in all cases,” as well as its finding that broadband service and mobile-wireless service “enable[] different situational uses.”[52]

“All cases” is an unreasonably high threshold that fails to recognize the central question of competition—namely, how do or would consumers respond to a significant change in prices, quality, or terms and conditions? It’s been long-established that goods and services need not be perfect—or even close—substitutes to exert competitive pressure.[53] Indeed, as we discuss in this section, consumer adoption of 5G and satellite broadband indicate that many consumers view fixed, mobile, and satellite broadband as competitive substitutes. Thus, any FCC evaluation of broadband competition must account for competitive threats and pressures associated with intermodal competition.

One of the most important changes to occur since the last two net-neutrality rounds is the intensification of intermodal competition, primarily due to the introduction and expansion of satellite and fixed-wireless options, alongside the rapid growth of high-speed 5G technology. These developments have not only diversified the array of available services, but also enhanced their quality and accessibility. Moreover, the advent of widely available satellite and fixed-wireless technologies offers viable alternatives to traditional broadband, breaking down previous geographical and infrastructural barriers. Satellite-broadband services, 5G wireless, and fixed wireless now offer robust competition in areas previously served by, at most, one or two fixed-broadband providers. When considering the state of competition in broadband access, acknowledging this growing intermodal competition is crucial.

The advent of low-earth orbit (LEO) satellite broadband has dramatically expanded the geographic reach of high-speed internet access. Starlink satellite service has been made available to all locations in the United States.[54] Starlink’s reported speeds are between 25/5 Mbps and 220/25 Mbps.[55] Project Kuiper has successfully launched its first test satellites,[56] with commercial service expected to begin in the second half of 2024.[57] Starlink and Project Kuiper provide new broadband options, especially for rural and remote households previously limited to slow DSL services. S&P Global Market Intelligence reports:

Satellite broadband subs … have lingered in the 1 million to 2 million subscriber range since 2008 but finally broke above 2 million last year due largely to growth at Low Earth Orbit new entrant Starlink.” [58]

Research published in 2017—two years before the first launch of Starlink satellites—found that households in manufactured or modular homes are more likely to adopt satellite internet instead of wired, cable connections.[59] One explanation is that many manufactured homes are not cable-ready and lack the wiring for cable-internet connections. Thus, despite the higher monthly costs, the “all-in” cost of satellite connections is relatively lower. These consumers clearly considered cable and satellite to be competitors. In research published last month, Gregory Rosston and Scott Wallsten highlighted the importance of satellite broadband for competition in rural areas:

Starlink (and its likely future LEO competitors) are creating real, facilities-based broadband competition in areas that are currently not served by low-latency service or are served only by companies that rely on heavy subsidies. The opportunities, therefore are broadband competition in rural areas and large reductions in taxpayer spending on broadband availability.[60]

Citing estimates from research firm Omdia, the Wall Street Journal reports that about 43% of U.S. consumers had 5G mobile subscriptions as of June 2023.[61] The increasing deployment of 5G wireless technology has led to faster speeds, lower latency, and greater reliability, leading to 5G becoming increasingly competitive with fixed broadband.

  • Recent data reports 5G download speeds of 80.0 Mbps to 195.5 Mbps among the three largest U.S. providers.[62] These speeds are sufficient to support a household of two to five users, streaming high-resolution and 4K video, streaming music, online gaming, remote work, and home-security services.[63] Moreover, these speeds far exceed the FCC’s definition of “high-speed broadband” as speeds of at least 25/3 Mbps.[64]
  • Analysis of Speedtest data by Ericsson finds “the vast majority” of speed tests have measured a latency of less than 50 ms for both 4G and 5G.[65] In comparison, the FCC reports cable latencies of between 13 ms and 26 ms and fiber latencies of between 9 ms and 13 ms.[66]

As the 5G rollout continues and more spectrum is deployed, wireless speeds will continue to increase.[67] And enhancements like 5G fixed-wireless access (FWA) enable carriers to compete directly with wired services. For example, one study concludes:

We find that at current prices, full FWA entry to a cable-only market, which constitutes approximately 30 percent of all cable modem subscribers in the United States, would convert 18 percent of cable-only households to FWA …. In cable/fiber markets, we find that full FWA entry would convert 2 percent of households from cable modem to FWA ….[68]

B.      Title I Enables Business-Model Experimentation and Differentiation

The NPRM assumes that net-neutrality rules assuring an “open Internet” are necessary to promote “edge innovation,” which creates consumer demand for high-speed internet and therefore “expanded investments in broadband infrastructure.”[69] But the NPRM essentially ignores the dynamic competition in broadband markets that leads to significant investment and innovation by broadband providers, as the market since the repeal 2015 Order shows. Part II.B.1 describes this dynamic competition in broadband markets. Part II.B.2 makes the case that Title I classification is what has allowed continued experimentation and innovation by broadband providers.

1.        Broadband markets are characterized by dynamic competition

Potential competition plays a pivotal role in dynamic technology markets. The threat that new technologies like LEO satellite and 5G fixed wireless could disrupt incumbents’ market share stimulates continued infrastructure investment and innovation. Even where substitution currently is incomplete, the looming threat of competitive disruption disciplines behavior.

To this point, as we have previously noted,[70] broadband-market competition should be understood as dynamic, not static. Related to the question of intermodal competition (which can often present imperfect substitutes) are market dynamics driven by potential competition:

In dynamic contexts, potential competitors can have much greater importance. What today appears merely to be a potential competitor can obliterate incumbents tomorrow in acts of Schumpeterian creative destruction. To exclude such a competitor from the boundaries of the market would clearly be a mistake.[71]

Where traditional competition analysis tends to gauge competitiveness using narrow, static indicia such as price levels and market share, a focus on “dynamic competition” may be more appropriate in technology-driven markets like broadband service. Dynamic markets are not typically composed of many competitors making marginal price adjustments to capture small slices of market share. Instead, such markets often experience sequential competition: firms vie to capture the entire market (or most of it), with would-be competitors and new entrants attempting to disrupt incumbents by introducing innovative new products or business models to supplant previous technologies.

An assumption that more concentration must mean less competition stems from a blackboard model of “perfect competition,” where innovation is merely a competitive dimension that emerges from a healthy market structure, rather than innovation driving the evolution of market structures. Rivalry is, of course, important, but no one seriously believes we live in a world of perfect competition characterized by atomistic firms competing to produce commodity goods and services. Yet this simplistic structuralist view of markets is frequently advanced in policy discussions.[72]

As Harold Demsetz famously observed, “the asserted relationship between market concentration and competition cannot be derived from existing theoretical considerations and that it is based largely on an incorrect understanding of the concept of competition or rivalry.”[73] In the case of natural monopolies, scale economies may make it more efficient for one firm to produce a good or service in a given market than it would be for two or more firms. Scale economies arise when high fixed costs are spread over a larger number of goods, allowing larger firms to enjoy lower per-unit costs of production. Due to economies of scale, markets like broadband, with high fixed costs, will tend to have fewer firms than markets with lower fixed costs. But Demsetz demonstrated that, even then, competition for the market itself can lead to an efficient result that prevents the typical welfare harms attributed to monopolies.[74]

The oft-neglected literature on dynamic capabilities and organizational strategy, by contrast, supports the supposition that innovation drives market structure.[75] For the last several decades, this literature has demonstrated that static price-effect-focused analysis is insufficient to understand dynamic markets. For dynamic markets, instead, it is performance that matters, with price as a secondary consideration and innovation as an important component of performance.[76] So long as a market remains contestable, even if it’s highly concentrated, firms’ performance will determine the likelihood of new entrants. It is pressure from those potential new entrants that continues to drive market competitiveness.[77]

Indeed, in highly dynamic economies, particularly those characterized by scale economies, there can be just as much reason to be concerned about too many competitors as by too few. Further, these dynamic markets tend to see a continual rebalancing between equilibrium and disruption:

With dynamic competition, new entrants and incumbents alike engage in new product and process development and other adjustments to change. Frequent new product introductions followed by rapid price declines are commonplace. Innovations stem from investment in R&D or from the improvement and combination of older technologies. Firms continuously introduce product innovations, and from time to time, dominant designs emerge. With innovation, the number of new entrants explodes, but once dominant designs emerge, implosions are likely, and markets become more concentrated. With dynamic competition, innovation and competition are tightly linked.[78]

Thus, in any given market at a given time, there is likely some optimal number of firms that maximizes social welfare.[79] That optimal number—which is sometimes just one and is never the maximum possible—is subject to change, as technological shocks affect the dominant paradigms controlling the market.[80] The optimal number of firms also varies with the strength of scale economies, such that consumers may benefit from an increase in concentration if economies of scale are strong enough.[81] Therefore, in dynamic markets characterized by high fixed costs and strong economies of scale, like broadband markets, the optimal number of firms is reached much more quickly than in, for instance, relatively more commodity-like markets.

Broadband has many of the attributes of a dynamic market, which tends to make static analyses of broadband competition fail to accurately appreciate competitive realities.[82] Broadband markets are driven by technological trends and can be disrupted by rapid modal shifts (e.g., from DSL to cable, or, looking forward, from cable to 5G wireless, satellite, and fixed wireless). Moreover, the infrastructure necessary to deliver broadband requires both long-term planning, as well as substantial sustained investment. Firms in broadband markets are driven not merely by potential entrants today, but by the necessity of intense and expensive planning for future shifts in technology and consumption preferences. Thus, firms operate with an eye toward future competitive pressures, not merely in response to winning market share in the present.

Contrary to some assumptions, the U.S. broadband market is characterized by a significant amount of entry (and exit). As Connolly & Prieger find:

The striking conclusion is that there is a tremendous amount of dynamic activity in the US broadband market. In the national market, the entry rate averages 14-19% annually, which is greater than the entry rates the economic literature has found for many other industries. The exit rate for broadband is also higher than for other industries, but not as high as the entry rate, so that net entry averages 3.1% annually. With narrower geographic or service type market definitions, the entry rates average from 24% to an astounding 49% per annum.[83]

Thus, broadband providers must balance the need to offer attractive pricing in response to immediate competitive pressures with a simultaneous need to make risky and costly investments in technological upgrades in order to compete with advanced technologies that may not be implemented for a decade or more.

Just as market share is a poor indicator of competition, basic accounting measures of profitability and investment often fail to demonstrate how risk/return expectations are realized in dynamic markets over the entire innovation lifecycle. A very large and very profitable ISP may have experienced prior negative returns on invested capital, a result of the need to assume risk and make enormous investments under conditions of uncertainty. The broadband market is constantly evolving as a result of historical and ongoing infrastructure investment, rapidly changing technology, the evolution of content and content-delivery technology, new regulations, and shifting usage patterns, among other factors. Facilities-based competition (e.g., among fiber, cable, mobile, and satellite) has ebbed and flowed depending on these various characteristics, but it has consistently produced higher-quality connectivity at lower quality-adjusted prices. An accurate assessment of competitiveness in broadband markets must take account of all these characteristics.

Further, it is well-known that process and product innovation does not arise solely from new entry; incumbent firms frequently are important sources of innovation, as well as increased market competitiveness.[84] Dynamic analysis does take entry seriously, but it is much more sensitive to potential entry as a constraint on incumbents than a structuralist view would permit. Thus, for example, an incumbent broadband provider that offers a 250 Mbps tier must consider the potential capabilities of an existing competitor that only offers 100 Mbps service; it must incorporate potential threats from that competitor in its decision matrix when evaluating whether to upgrade its network to 1 Gbps in order to retain its customer base. An incumbent’s dominant position can quickly erode thanks to imperfect in-market substitutes, as well as from out-of-market firms that may decide to enter in the future.[85]

2.        Title I classification promotes dynamic competition

The debate surrounding the optimal regulatory framework for broadband services often hinges on finding a balance that fosters innovation and consumer welfare without stifling competition. The broadband industry has thrived, for decades delivering lower prices and faster speeds under a Title I classification.[86] History has demonstrated that a light-touch regulatory regime under Title I of the Communications Act is the most conducive environment to achieve these objectives.

One of the primary functions of a firm is to discover consumer needs, a process that frequently requires firms to “think outside the box.” To attract and retain customers, firms must experiment with offerings that introduce competition from unexpected quarters and keep competitive pressures in place through technological and business-model innovation.

Light-touch regulatory frameworks are inherently more compatible with this approach than are more onerous regimes, like Title II of the Communications Act. For example, in 2011, MetroPCS attempted to introduce a limited data plan offering subsidized, unlimited access to YouTube and other content providers, targeting price-sensitive consumers.[87] This plan, though unconventional, was poised to help bridge the digital divide by making wireless data more accessible to a segment traditionally underserved by larger carriers. This type of business model is a non-neutral form of paid prioritization, but it would very likely have helped price-conscious consumers access more internet services. MetroPCS ultimately abandoned this plan, and such a plan would almost certainly run afoul of the proposed rules in this NPRM.[88]

Since then, ISPs have experimented with other potentially non-neutral paid-prioritization approaches that nonetheless would yield enormous consumer surplus, such as AT&T’s Sponsored Data program[89] and T-Mobile’s Binge On.[90] Such business models provide more choices, potentially lower prices, and introduce competitive threats to other players in the market. Ex ante rules that presumptively ban this kind of experimentation foreclose the ability to discover if such models actually serve the interests of consumers in practice.

And the harms that flow from reduced innovation affect not just ISPs and their consumers, but all parts of the internet ecosystem. As Sidak and Teece have observed:

The lost benefits [of bans on paid prioritization] would affect both end users and suppliers of content and applications. Optional business-to-business transactions for QoS will enhance the efficiency of traffic flow over broadband networks, reducing congestion. That enhanced efficiency benefits both the end users receiving content or applications and the content providers whose content or applications are demanded. Superior QoS is a form of product differentiation, and it therefore increases welfare by increasing the production choices available to content and applications providers and the consumption choices available to end users. Finally, as in other two-sided platforms, optional business-to-business transactions for QoS will allow broadband network operators to reduce subscription prices for broadband end users, promoting broadband adoption by end users, which will increase the value of the platform for all users.[91]

This follows from the nature of ISPs as platforms sitting at the center of a two-sided market. On one side are end users who pay the ISP for access to the internet; on the other are content providers who want access to the end users. A ban on paid prioritization assures that the ISP can monetize only one side of the market. Aside from putting upward pricing pressure on end consumers, this also has a detrimental effect on the overall value of the platform for users and content providers alike.

Prescriptive ex ante regulations under Title II amount to per se bans on certain conduct, without even inquiring whether such conduct is a net harm. Antitrust law, which is sensitive to exactly the sort of vertical harms that are the subject of concern in this NPRM,[92] has developed rule-of-reason analysis to parse when challenged conduct is harmful to consumer welfare.[93] That is, antitrust law does not assume that vertical restraints always harm consumers, but has learned that, in many cases, vertical restraints are a net benefit. But this analysis always occurs ex post, allowing companies to experiment with innovative business models like the many variations of paid prioritization.

C.      Title II Reclassification Introduces Regulatory Uncertainty

The Commission tentatively deems unsubstantiated the 2018 Order’s conclusions that ISP investment is closely tied to the Title II classification.[94] This is because the Commission now concludes that network-infrastructure owners make long-term, irreversible investments and that the adoption of orders reclassifying broadband internet-access services would be unlikely to change these investment decisions. In addition, because the Commission received conflicting viewpoints on the actual effect of Title II classification on investment, it concludes that no one can “quantify with any reasonable degree of accuracy how either a Title I or a Title II approach may affect future investment.”[95] Instead, the Commission tentatively concludes that changes in ISP investment following adoption of reclassification orders were more likely related to factors such as economic conditions, technology changes, and general business decisions, rather than to Title I or Title II classification.[96] The Commission seeks comments on these findings, beliefs, and conclusions.

Put simply, Title II reclassification will hinder investment. The see-sawing between Title I and Title II regulation over the years has already injected regulatory uncertainty into the broadband market. Reimposing Title II regulations will inject additional uncertainty.[97] This uncertainty is compounded by the FCC’s recent digital-discrimination rules. Title II combined with digital discrimination imposes a double whammy of ex ante regulation of some conduct, combined with ex post monitoring, scrutiny, and enforcement of vast array of other conduct.[98]

Firms’ investment decisions are often likened to a pipeline. But a more appropriate analogy would be an assembly line, where investment opportunities are investigated and evaluated. Opportunities with negative returns on investment are rejected and those with positive returns are further evaluated and ranked. Because firms have limited resources, some of the investments with positive returns are rejected. Once a firm decides to pursue an investment opportunity, the project is further evaluated throughout the deployment timeframe. Just as a product can be pulled from the assembly line for defects, investments can be pulled for economic or technical defects. Generally speaking, the further down the assembly line the project goes, the less likely it is to be pulled. Thus, an interruption at the end of the assembly line is likely to be less disruptive than an interruption at the beginning.

In this sense, the Commission is correct to conclude that Title II classification would have relatively less impact on investments that are near the end of their assembly line. But that observation misses the much bigger picture of investments at the beginning of the assembly line and potential investments that are still in the investigation and evaluation stage. For these projects, Title II classification can turn projects with positive expected returns into projects with negative expected returns. In addition, the regulatory uncertainty that is endemic to Title II regulation reduces firms’ confidence in the reliability of their return-on-investment projections. Because of the well-known and widely accepted risk-return tradeoff, firms facing increased uncertainty in investment returns will demand higher expected returns from the investments they pursue.[99]

Put simply, Title II classification may not have a significant effect on investments near completion, but could have a statistically and economically significant impact on future and early-stage investments. Recently published peer-reviewed research supports this conclusion.

Wolfgang Briglauer and his co-authors examine the impact of net-neutrality regulations on broadband-network investment, specifically fiber-optic networks in OECD countries.[100] Roslyn Layton and Mark Jamison describe Briglauer, et al.’s research as “the only empirical, non-anecdotal analysis of net neutrality and investment to date.”[101] Using panel data from 2000 through 2021, Briglauer and his co-authors find evidence that net-neutrality regulations have a significant negative impact on fiber-optic network investment by internet service providers. They employ several econometric techniques, including fixed effects and instrumental variables models, to establish evidence of a causal relationship between net-neutrality rules and reduced investment. The main finding is that the introduction of net-neutrality regulations leads to an estimated 22-25% decrease in new fiber-optic network investments by ISPs.

Briglauer et al. argue their statistical analysis provides evidence that strict net-neutrality rules tend to slow deployment of new high-speed broadband connections. They find the negative impact manifests with a delay, rather than immediately, likely due to rigidities and lags in broadband-deployment projects, thus pointing to a long-run effect. In addition, their fiber investment variable measures newly installed fiber connections, representing new broadband-infrastructure capacity. This is more indicative of long-run capital investment rather than short-run variations in spending.

Briglauer et al. control for other factors unrelated to net-neutrality regulations by including macroeconomic conditions relevant for investment decisions, such as long-term interest rates and a measure of investment freedom. They also control for deployment costs, measured by population density and wages. In addition, their statistical model includes measures of cable competition, mobile competition, telecommunications services prices, and the number of broadband subscriptions. In many cases, these control variables have a statistically significant relationship with fiber investment. Nevertheless, even controlling for these other factors, the authors found that net-neutrality regulations were associated with decreased fiber-optic network investments by ISPs.

The Commission concludes that “changes in ISP investment following the adoption of each Order were more likely the result of other factors unrelated to the classification of BIAS, such as broader economic conditions.”[102] In this framing, it seems the Commission is arguing that if something contributes “more” (however “more” is measured) to investment than Title II classification, then the Commission should conclude that classification has no effect. But this is the wrong framing. Using statistical analysis, the effect of net-neutrality regulations on investment can be estimated while controlling for these other variables. The fact that other variables also affect investment does not invalidate a finding that net-neutrality regulations have some statistically and economically significant negative relationship with investment.

D.     Title II Would Deter Future Innovation in Business Models

1.        Paid prioritization is an essential component of many online business models

The Commission proposes to ban paid or affiliated prioritization arrangements, concluding such arrangements harm consumers, competition, and innovation, as well as creating disincentives to promote broadband deployment.”[103] Chair Rosensworcel has characterized paid prioritization as creating “fast lanes that favor those who can pay for access.”[104] This framing invites the question that was raised years ago, “Do fast lanes mean there are, by definition, slow lanes?”[105] The answer is “no,” as explained by Vox:

An ISP’s bandwidth is not fixed at current levels: As MVPDs shift to all-digital infrastructures, they have significant capacity to dedicate a larger portion of their “pipes” to broadband, which can meaningfully increase bandwidth available to consumers from today’s levels.

Think of bandwidth as a highway: If an entirely new lane is added at the ISP’s expense, that does not harm anyone riding along on the preexisting highway. We struggle to understand why enabling an “extra” HOV lane is bad policy that requires government regulation.

One should not simply assume that the creation of fast lanes of dedicated bandwidth forces everyone else who chooses not to pay ISPs, or cannot pay ISPs, into slow lanes. While those lanes may be slower than the fast lanes, they were slower with or without the fast lanes.

And if bandwidth-heavy traffic that would have traveled over the open Internet (adding to congestion) is offloaded onto a separate fast lane that does not impair the preexisting pipe’s bandwidth capabilities, it should actually ease congestion on the existing lanes, rather than create slow lanes.[106]

Prioritization is a longstanding and widespread practice and, as discussed at length in The Verge regarding Netflix’s Open Connect technology, the internet can’t work without some form of it:

When Open Connect originally launched a decade ago, the service started working collaboratively with ISPs on deployment. Netflix provides ISPs with the servers for free, and Netflix has an internal reliability team that works with ISP resources to maintain the servers. The benefit to ISPs, according to both Netflix and Akamai, is fewer costs to ISPs by alleviating the need for them to have to fetch copies of content themselves.[107]

Indeed, the Verge piece makes clear that even paid prioritization can be an essential tool for edge providers. As we’ve previously noted, paid prioritization offers an economically efficient means to distribute the costs of network optimization.[108]

Axel Gautier and Robert Somogyi developed a model that includes both paid prioritization and zero rating and conclude:

Prioritization is the preferred option of both the ISP and consumers under severe congestion and high-value content, because the low price charged by the ISP to consumers is counterbalanced by large payments from the [content providers].[109]

Banning paid prioritization forces all data to be treated equally, even if customers or services would benefit from differentiated offerings. Without flexibility in how services are delivered and priced, companies lose incentives to develop better networks and new innovations for specific use cases like high-bandwidth video streaming or remote medical services.

  1. Throttling is an effective traffic-management tool

The Commission proposes to ban throttling lawful content, applications, services, and nonharmful devices.[110] While the Commission notes that throttling is “not outright blocking,” it also concludes such conduct “can have the same effects as outright blocking.”[111] The proposed ban would not ban throttling when it is “based on a choice clearly made by the end user,” such as a consumer’s choice of a plan in which a set amount of data is provided at one speed tier and any remaining data is provided at a lower tier.[112]

Internet bandwidth is a scarce and congestible resource subject to wild swings in consumer use. For example, Taylor Swift’s 2023 U.S. concerts have been associated with record-breaking levels of 5G data use on AT&T’s network.[113] Thus, allowing application-specific throttling gives companies incentives to streamline data demands. For mobile networks, excessive data usage impacts spectrum resources available to other customers. If networks cannot limit bandwidth-hungry apps during busy periods, then smartphone app developers lose incentives to tighten data usage. As internet-video traffic occupies about two-thirds of bandwidth, networks need some ability to manage congestion.[114] Outright throttling bans, rather than specific rules against anticompetitive discrimination, eliminate useful tools.

There is a dearth of empirical research regarding the throttling of application-service providers. In the only known published academic research, Daeho Lee and Junseok Hwang categorize application-service providers into four groups by bandwidth-usage attributes and latency sensitivity.[115] Using data from South Korea, they test the hypothesis that ISPs would be more likely to discriminate against content providers needing more bandwidth and more sensitive to latency. A regression of estimated technology-gap ratios on these variables, however, shows no significance, suggesting that ISPs do not discriminate against content providers based on bandwidth usage or latency. Using crowdsourced measurements across 2,735 ISPs in 183 countries and regions, Li et al. find that U.S. mobile providers seem to throttle content providers, but not to the extent in which consumers would likely notice.[116]

On the consumer side, recent research published in Telecommunications Policy finds no evidence that subscribers change their behavior in the face of throttled data rates.[117] Christoph Bauner and Augusto Espin analyze throughput levels measured for mobile ISPs in the United States with usage data to evaluate how sensitive users are to throttling. Using regression analysis of app usage on various measures of throttling, Bauner & Espin find no significant effect of data throughput on app usage. They argue that users may benefit from a modest degree of throttling when it aids network stability and reliability.[118] Bauner & Espin conclude their finding “seemingly weakens the … argument in favor of net neutrality rules.”[119]

In another consumer study, Hyun Ji Lee and Brian Whitacre found that low-income users were willing to pay for an extra GB of data each month, but were not willing to pay extra for a higher speed.[120] This is likely because, if a subscriber has a higher data limit, then they have a lower chance of being throttled for exceeding the cap. Lee & Whitacre’s results indicate Lifeline consumers are willing to pay for the option to use more unthrottled data, but are not willing to pay for higher speeds at all levels of data usage. This data-speed tradeoff suggests those consumers would benefit from a plan that offered a larger data allowance, but throttled speeds if the allowance is exceeded.

If, in fact, ISPs do not generally engage in throttling application-service providers and, when throttling does happen, consumers do not significantly change their usage in the face of throttling, then a ban on throttling is a solution in search of problem. In fact, it could be a solution that is worse than any perceived problem. A ban on data throttling removes essential network-management tools that could prevent congestion and improve overall customer experience. Moreover, discrimination against specific applications or competing services can already be scrutinized under existing antitrust and consumer-protection laws, as discussed in Part III.

  1. Data caps and usage-based pricing can benefit both consumers and providers

In addition to the Commission’s proposed rules prohibiting throttling, the agency is also investigating data caps and usage-based pricing (UBP).[121] A 2021 survey reports that, during the pandemic, 37% of those surveyed hit their data cap, and 68% of those who exceeded their data-cap limit paid overage fees.[122]

Data caps and UBP are not a new issue. In 2013, an FCC advisory committee issued a report on data caps and UBP.[123] That report identified several ways in which the policies improve network performance, consumer experience, and investment and innovation among ISPs and edge providers:

  • Data caps allow ISPs to employ various forms of price discrimination to recover the substantial fixed costs of building broadband networks. Without the ability to charge heavier users more through caps or usage-based pricing, ISPs lose flexibility in designing business models that align costs and willingness-to-pay. This could hamper their incentives and financial ability to continue investing in next-generation network upgrades.
  • The ability to implement data caps or UBP provides incentive for internet application and edge service providers to develop more efficient ways of delivering data-intensive services. For example, data caps may “encourage edge providers to innovate more efficient means of delivering their services” by optimizing video compression algorithms and streamlining data transfers. Removing the possibility of caps or UBP eliminates a motivation for driving such innovation on the edge provider side.
  • Prohibiting data caps or UBP would restrict future business-model experimentation between ISPs and consumers in response to evolving internet-usage patterns and demands. As technology enables new bandwidth-hungry apps and consumer behavior shifts, a strict ban on caps limits the pricing and service optionsthat ISPs can explore to sustainably meet that demand.[124]

While the NPRM is silent on data caps and UBP, the 2015 Order noted that data caps “may benefit consumers by offering them more choices over a greater range of service options,” but left open the possibility of future regulation:[125]

The record also reflects differing views over some broadband providers’ practices with respect to usage allowances (also called “data caps”). … Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks. Conversely, some commenters have expressed concern that such practices can potentially be used by broadband providers to disadvantage competing over-the-top providers. Given the unresolved debate concerning the benefits and drawbacks of data allowances and usage-based pricing plans, we decline to make blanket findings about these practices and will address concerns under the no-unreasonable interference/disadvantage on a case-by-case basis.[126]

Gus Hurwitz points out that data caps are a way of offering lower-priced services to lower-need users.[127] They are also a way of apportioning the cost of those networks in proportion to the intensity of a given user’s usage. He notes that, if all users faced the same prices regardless of their usage, there would be no marginal cost to incremental usage. Thus, users and content providers would have little incentive to consider their bandwidth usage. Network congestion does not go away by lifting data caps. Instead, it may be worsened, especially if there is no additional cost associated with additional usage.

As we note above, Lee & Whitacre found that low-income consumers were willing to pay for an extra GB of data each month, but were not willing to pay extra for a higher speed.[128] This indicates that even Lifeline subscribers have a positive willingness-to-pay for a greater data allowance.

Regardless of the effects of prohibiting data caps or UBP on consumers and providers, the more pernicious risk is the legal uncertainty of these practices under Title II regulation. Although the NPRM does not identify any specific proposals regarding data caps or UBP, there is a strong likelihood that these practices could be scrutinized or regulated under the overly broad proposed “conduct rules.” For example, Scott Jordan provides a thorough review of possible data-cap practices and which ones might fall afoul of the 2015 Order.[129] He concludes:

  • Heavy-users caps on mobile-broadband service would likely satisfy the Order’s rules;
  • Profit-maximizing caps on mobile-broadband service may or may not satisfy the rules; and
  • Caps on fixed-broadband service are unlikely to satisfy the rules.

Jordan’s comprehensive survey demonstrates that many data-cap practices are in a gray zone of uncertainty regarding whether they would or would not satisfy the FCC’s conduct rules. This uncertainty would, by itself, likely stifle experimentation with innovative business models and practices, thereby hindering investment and diminishing users’ experiences.

III.    Existing Policies Protect Consumers, National Security, and Public Safety

The Commission seeks comments on whether consumer-protection and antitrust laws provide sufficient protections against blocking, throttling, paid prioritization, and “other conduct that harms the open Internet.][130] In this section, we note that the United States has a multiplicity of agencies, laws, regulations, and rules that span competition, consumer-protection, and national-security issues. The Commission has provided little to no evidence that the existing regulatory regime has been deficient in enforcing existing policies or that new policies are needed—particularly outside of a congressional mandate.

A.      Antitrust and Consumer Protection

Fundamental to the Commission’s position in the 2018 Order was the reasonable conclusion that ensuring ISPs do not interfere with consumers’ access to content over the internet would best be effected by adopting a competition and consumer-protection oriented approach. This is consistent with the Commission’s historical, deregulatory approach to information services, including in the 2015 Order. Since 2018, nothing has changed to disturb the soundness of this approach.

Core to the distinction in these approaches is an evaluation of the appropriate way to judge risk.  The 2015 Order was premised on the theory that because ISPs have any incentive and ability to engage in problematic conduct, they thus will very likely engage in that conduct.[131]  The Commission used this assumption to justify strong ex ante regulation to curtail such expected conduct. In the 2018 Order, rather than simply presuming harm, the Commission undertook an extensive, thorough, and fact-based analysis to first assess the likely risk of harm.[132] Based on this analysis, the Commission concluded that the risk of harmful conduct was low, in terms of both the likelihood that ISPs will engage in such conduct and its potential adverse effects on consumers. Because this risk is low, the Commission reasonably determined that a “light touch” ex post competition-oriented regulatory approach was preferable to the ex ante prescriptive rules adopted in the 2015 Order and under consideration in this NPRM.

We believe that the Commission had the better analysis in 2018 and should continue to support this approach. Indeed, in the long history of the net-neutrality debates, the justifications for imposing Title II obligations on ISPs have been rooted in the precautionary principle, with little or no actual evidence produced demonstrating any intentional violation of “neutrality” principles. And since 2018, no other evidence has been produced.

The ideal regulatory framework for dealing with potential violations of neutrality principles is an ex post regulatory approach that reflects well-established competition law principles and is commensurate with the actual degree of risk and extent of harm associated with ISP misconduct, while also mitigating against the risk that over-regulation that would harm consumers by curtailing pro-competitive ISP activity.

As the Commission observed in the 2018 Order, “[t]he Communications Act includes an antitrust savings clause, so the antitrust laws apply with equal vigor to entities regulated by the Commission.”[133] Thus, the Commission has already struck the proper balance between indirect antitrust enforcement and direct regulation under the Communications Act, which incorporates competition policy as the generally applicable regulatory “default” in the absence of specific statutory mandates. As Justice Breyer has observed, “[r]egulation is viewed as a substitute for competition, to be used only as a weapon of last resort—as a heroic cure reserved for a serious disease.”[134]

Of course, the Communications Act does not speak directly to “net neutrality” harms. But to the extent the act permits the Commission to regulate in this area, it does so largely by requiring the agency to choose between Title I and Title II classifications, reserving Title II for circumstances where the Commission determines that the risk of harm from providers is sufficiently great that ex ante, prescriptive regulation is appropriate—“as a heroic cure reserved for a serious disease.”[135]

Moreover, the Commission’s prior efforts to promote net neutrality overlap substantially, if not entirely, with concerns over ISPs engaging in anticompetitive conduct. In the 2018 Order, the Commission specifically noted that this was a necessary logical justification for its previous order, observing that: “The premise of Title II and other public utility regulation is that ISPs can exercise market power sufficient to substantially distort economic efficiency and harm end users.”[136]

In the 2015 Order, the Commission acknowledged that “[c]ommitment to robust competition and open networks defined Commission policy at the outset of the digital revolution,”[137] and that “[t]he principles of open access, competition, and consumer choice embodied in Carterfone and the Computer Inquires have continued to guide Commission policy in the Internet era[.]”[138]  Likewise, the Commission explicitly acknowledged in the 2015 Order that its asserted authority under Section 706 was based, at least in part, on a mandate to promote competition.[139] Most tellingly, in a section titled “Competitive Effects,” the Commission noted that:

As the Commission has found previously, broadband providers have incentives to interfere with and disadvantage the operation of third-party Internet-based services that compete with the providers’ own services. Practices that have anti-competitive effects in the market for applications, services, content, or devices would likely unreasonably interfere with or unreasonably disadvantage edge providers’ ability to reach consumers in ways that would have a dampening effect on innovation, interrupting the virtuous cycle.  As such, these anticompetitive practices are likely to harm consumers’ and edge providers’ ability to use broadband Internet access service to reach one another . . . .[140]

Thus, as the Commission itself acknowledged in the 2015 Order, competition—and, by implication, anticompetitive behavior of ISPs—is one of the core concerns that drove development of internet policy. Indeed, in the present NPRM, much of the feared harms mentioned are largely derived from vertical foreclosure theory. Namely, they stem from the classic antitrust concern that dominant firms in a vertical supply chain may foreclose competitors from access to consumers, or extract supracompetitive prices from input providers.[141] For example, the NPRM declares that:

[W]e also propose to reinstate rules that prohibit ISPs from blocking or throttling the information transmitted over their networks or engaging in paid or affiliated prioritization arrangements. Additionally, we propose to reinstate a general conduct standard that would prohibit practices that cause unreasonable interference or unreasonable disadvantage to consumers or edge providers.[142]

These instances of potential ISP misconduct raise straightforward antitrust concerns with vertical conduct, squarely within the purview of antitrust law.[143] Importantly, antitrust enforcers and courts—following antitrust economists—assess these vertical restraints under the rule of reason, avoiding their presumptive condemnation because they only rarely result in actual anticompetitive harm.[144]

Under this approach, the effects of potentially harmful conduct are typically evaluated and weighed against the various aims that competition law seeks to promote; only following that review is it determined whether particular conduct is harmful and, if so, whether there are procompetitive benefits that outweigh the harm.

In fact, only a few types of conduct are presumptively condemned, and then only when experience has demonstrated that they are more-often-than-not harmful.[145] Vertical restraints are never evaluated under this per se standard.[146] With such a competition framework for assessing conduct that might threaten “Internet openness,” the Commission would be well-positioned to detect and remedy harmful conduct.

B.      The Transparency Rule Is Adequate for Consumer Protection

One of the longstanding policies available to protect consumers is the Commission’s transparency rule. The existing transparency rule, as upheld by the D.C. Circuit in Verizon v. FCC, mandates that broadband internet-access service providers disclose network-management practices, performance, and commercial terms.[147] This rule, applicable to both fixed and mobile providers, is integral for enabling consumers and edge providers to make informed choices. This rule has, in one form or another, been operational since 2010, and has served as a valuable consumer-protection measure.

The Commission is, however, considering extending this rule in a number of ways. It’s important to keep in mind that no policy extended indefinitely presents an unalloyed good: even transparency requirements, taken too far, can bring more costs than benefits.[148] For example, the proposed enhancements include more tailored disclosures to various stakeholders—including consumers, edge providers, and the FCC[149]—that, despite best intentions, may impose significant costs in the form of compliance burdens on ISPs, while doing little if anything to inform consumers meaningfully.

Additionally, a rule change that leads to the publication of information like pricing will functionally resemble a de facto tariff system. Tariffing, however, is a core component of common carriage.[150] Thus, if the Commission opts not to reclassify under Title II, imposition of such a de facto tariff could be a violation of Section 706. Moreover, regulatory pressure to report pricing in uniform ways could lead to uniform pricing, which, though benign-sounding, could lead to downstream changes in service level and pricing that do not ultimately increase consumer welfare.

For example, although at times difficult to follow, internet-service pricing that is designed around discounts and incentives could be used to benefit economically vulnerable consumers and attract or retain them through a form of price discrimination. If, however, rates converge on a uniform schedule, it is possible that these forms of discounts and incentives will disappear, and that pricing will reflect a mean that is more difficult for lower-income consumers. This possibility has increased substantially with the FCC’s recently adopted digital-discrimination rules, which explicitly subject pricing, discounts, incentives and other terms and conditions to scrutiny and enforcement under the rules.[151] Thus, even in the absence of Title II regulation, the proposed reporting requirements can work hand-in-hand with the digital-discrimination rules to regulate rates in the direction of uniform pricing across providers, thereby limiting the scope of competition for broadband services.

Further, the utility of certain disclosures, such as those related to network congestion, is also questionable. The Commission opted to forego requiring disclosures related to network performance in the 2015 Order.[152]  The Commission should continue in this manner, as such requirements are even less useful today than they were in 2015. With the availability of speed-test applications, consumers already possess tools to assess the performance of their ISP, casting doubt on the additional value of mandatory congestion disclosures.

IV.    Title II Reclassification Will Present Significant Legal Challenges for the Commission

In the NPRM, the FCC asks whether and how the major questions doctrine (MQD) should inform its conclusions on the text and structure of the Communications Act.[153] With the FCC yet again seeking to reclassify broadband, it is worth noting that, since courts have consistently found the Communications Act is ambiguous as to the proper classification of broadband, there are reasons to doubt whether courts would allow this Title II reclassification as compatible with the MQD.

The MQD, as developed by the Supreme Court, stands for the proposition that agencies will not receive deference while interpreting ambiguous statutory language of “vast economic and political significance.”[154] The MQD requires that Congress give an agency clear congressional authorization to act in such cases. In other words, an ambiguous grant of authority is not enough.

In three recent cases, the Supreme Court has struck down major agency actions due to reliance on ambiguous statutory provisions.

In Ala. Ass’n of Realtors v. Dep’t of Health & Human Servs.,[155] the Court rejected the Centers for Disease Control and Prevention’s (CDC) attempt to impose a moratorium upon residential evictions due to COVID-19. The Court emphasized that “[e]ven if the text were ambiguous, the sheer scope of the CDC’s claimed authority… would counsel against the Government’s interpretation.”[156] Instead, the Court required “Congress to speak clearly when authorizing an agency to exercise powers of ‘vast economic and political significance.’”[157] The Court was concerned that the government’s reading of the statute would give them “a breathtaking amount of authority” with virtually “no limit… beyond the requirement that CDC deem a measure ‘necessary.’”[158]

In NFIB v. Dep’t of Labor,[159] the Court found the Occupational Safety and Health Administration (OSHA) could not pass a vaccine mandate for workplaces. Quoting Realtors, the Court noted that Congress must “speak clearly when authorizing and agency to exercise powers of vast economic and political significance.”[160] Since the vaccine mandate was “a significant encroachment into the lives—and health—of a vast number of employees,” it had vast economic and political significance.[161] Therefore, since the statute did not “plainly authorize[] the Secretary’s mandate,” OSHA’s rule was unlawful.[162] The Court found the MQD was important, because it limited agencies’ ability to “exploit some gap, ambiguity, or doubtful expression in Congress’s statutes to assume responsibilities far beyond its initial assignment.”[163]

In West Virginia v. EPA,[164] the Court considered a rulemaking by the Environmental Protection Agency (EPA) on emission limits for power plants. After reviewing the caselaw back to Brown & Williamson through Gonzalez, UARG, Burwell, Realtors, and NFIB,[165] the Court concluded that there was an “identifiable body of law that has developed over a series of significant cases all addressing a particular and recurring problem: agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.”[166] The Court found it was clearly a major question, because the EPA had changed a longstanding practice in how it operated under the statute by expanding its power to “unprecedented” levels through a little-used statutory grant of authority.[167] This is despite the fact the agency had asked Congress for increased authority to do exactly what it decided to do under this provision.[168] Since there was no “clear Congressional authorization” for such a rule, the Court struck it down under the MQD.[169]

In sum, the MQD is now recognized by the Supreme Court as an important limit on agency action. If the statutory authority relied upon by the agency is ambiguous and the agency action is of vast economic and political significance, then courts will find the agency action unlawful on grounds that it exceeds the authority granted by Congress. As the Court put it in NFIB:

Why does the major questions doctrine matter? It ensures that the national government’s power to make the laws that govern us remains where Article I of the Constitution says it belongs—with the people’s elected representatives. If administrative agencies seek to regulate the daily lives and liberties of millions of Americans, the doctrine says, they must at least be able to trace that power to a clear grant of authority from Congress.[170]

Here, reclassification of broadband as a Title II telecommunications service would clearly be an exercise of powers of vast economic and political significance. Broadband providers have invested billions of dollars annually into building out reliable high-speed networks throughout the country, serving hundreds of millions of consumers.[171] On top of that, both federal and state governments have supported this continued buildout through subsidies.[172] The NPRM, which closely mirrors the rules from the 2015 Order, would further affect the expected returns on investment from both broadband providers and policymakers.[173] As then-Judge Brett Kavanaugh put it when considering the 2015 OIO, the “FCC’s net neutrality rule is a major rule for the purposes of The Supreme Court’s major rules doctrine. Indeed, I believe that proposition is indisputable.”[174]

It is worth noting that, much like the agency actions in Realtor and NFIB, the scope of authority claimed by the FCC through reclassification is staggering, allowing the Commission to regulate nearly the entire internet infrastructure through Title II’s expansive regulatory provisions. And as in West Virginia, Congress has considered and rejected net-neutrality legislation that would give the FCC clear authority to impose such rules.

Moreover, the NPRM’s attempt, much like the 2015 Order, to nominally minimize the reach of its claimed authority under Title II through forbearance amounts to rewriting the act to make it more palatable, including by forbearing from rate regulation or network-unbundling requirements. [175]  This is very similar to the attempted “tailoring” by the EPA that the Court rejected in Utility Air Regulatory Group v. EPA.[176]  There, the Tailoring Rule was an attempt to make it such that small entities with the potential to emit greenhouse gasses would not be subject to lawsuits that the act would allow.[177] The Court rejected this attempt to rewrite the statute, concluding that an agency “has no power to ‘tailor’ legislation to bureaucratic policy goals by rewriting unambiguous statutory terms.”[178] Much like the EPA in UARG, the FCC’s “need to rewrite clear provisions of the statute should have alerted” them “that it had taken a wrong interpretive turn.”[179]

Moreover, the ability to forbear under Title II also gives the FCC the ability to stop forbearing once Title II reclassification is made. Thus, the decision to reclassify will have huge economic and political implications, as the public and those regulated will have to pay special attention to the forbearance and possible un-forbearance of the FCC’s decisions going forward.

The concurrence from D.C. Circuit Court of Appeals Judges Sri Srinivasan and David Tatel in US Telecom did not dispute that the rule had vast economic and political significance. The concurrence instead focused on the implications of the Supreme Court’s opinion in National Cable and Telecommn’cs Ass’n v. Brand X Internet Serv., 545 US. 967 (2005).[180] The concurrence concluded essentially that Brand X settled the question by finding the FCC had the authority to make the classification decision.[181]

The problem with this, however, is that the Brand X decision just found that the Communications Act is ambiguous as to whether broadband is a “telecommunications service.”[182] In Brand X, the late Justice Antonin Scalia made the argument in his dissent that the Communications Act defined telecommunications service in a way that unambiguously applied to cable-modem service.[183] If this was the Court’s opinion, then there would be a strong argument that it is settled law that Congress spoke clearly to the issue. But it wasn’t. The majority rejected Justice Scalia’s arguments and found the definition ambiguous. In other words, Brand X did not foreclose a challenge under the MQD.

On the contrary, Brand X, as well as the D.C. Circuit’s decision upholding the 2015 Order[184] and the 2018 Order,[185] all stand for the proposition that the classification of broadband service under the Communications Act is ambiguous. Here, this means that the second part of the MQD, whether Congress clearly spoke to the issue, is a clear no.

To sum up, 1) the MQD is now clearly recognized doctrine by the Supreme Court; 2) the decision to apply Title II to broadband services is a decision of “vast economic and political significance”; and 3) Brand X (and its progeny) stands for the proposition that Congress has not unambiguously spoken to whether broadband service is a telecommunications service under the Communications Act. Therefore, the decision to reclassify broadband service again will likely fail under the MQD.

[1] Notice of Proposed Rulemaking, Safeguarding and Securing the Open Internet, WC Docket No. 23-320 (Sep. 28, 2023) [hereinafter “NPRM”] at ¶ 1.

[2] Brendan Carr, Dissenting Statement of Commissioner Brendan Carr, Safeguarding and Securing the Open Internet, WC Docket No. 23-320, Notice of Proposed Rulemaking (Oct. 19, 2023), available at https://docs.fcc.gov/public/attachments/FCC-23-83A3.pdf (“In other words, utility-style regulation of the Internet was never about improving your online experience—that was just the sheep’s clothing. It was always about government control.”).

[3] Report and Order on Remand, Declaratory Ruling, and Order, In the Matter of Protecting and Promoting the Open Internet, GN Docket No. 14-28 (Mar. 15, 2015) [hereinafter “2015 Order”].

[4] Id.

[5] Id.

[6] Id. at ¶ 3.

[7] See, e.g., Anna-Maria Kovacs, U.S. Broadband Networks Rise to the Challenge of Surging Traffic During the Pandemic, Georgetown University (Jun. 2020), https://georgetown.app.box.com/s/8e76udzd1ic0pyg42fqsc96r1yzkz1jf. See also European Commission, Digital Solutions During the Pandemic (Sep. 2023), https://commission.europa.eu/strategy-and-policy/coronavirus-response/digital-solutions-during-pandemic_en (“To prevent network congestion and to support the enjoyment of digital services, the?European Commission called upon?telecom operators and users to take action and met with the CEOs of the streaming platforms. The streaming platforms were encouraged to offer standard rather than high-definition content, telecom operators were recommended to adopt mitigating measures for continued traffic, and users were advised to apply settings to reduce data consumption, including the use of Wi-Fi.”)

[8] See Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, § 60506 (2021) (Digital Discrimination) [hereinafter “IIJA”].

[9] See Brendan Carr, supra, note 2 (“Congress has already empowered Executive Branch agencies with national security expertise, including the DOJ, DHS, and Treasury, with the lead when it comes to security issues in the communications sector.”)

[10] See, e.g., 2022 Broadband Capex Report, USTelecom (Sep. 8, 2023), https://ustelecom.org/research/2022-broadband-capex (“America’s broadband industry invested a record $102.4 billion in U.S. communications infrastructure in 2022, reflecting broadband providers’ determination to help achieve the national objective of affordable, reliable high-speed connectivity for all. The annual figure represents a 21-year high for investment from the communications sector and a 19% year-over-year increase.”).

[11] US Telecom v. FCC, 855 F.3d 381, 422 (D.C. Cir. 2016) (Kavanaugh, J., dissenting from denial of rehearing en banc).

[12] Cf. National Cable and Telecommn’cs Ass’n v. Brand X Internet Serv., 545 US. 967 (2005); US Telecom v. FCC, 825 F.3d 674 (D.C. Cir. 2016).; Mozilla Corp v. FCC, 940 F.3d 1 (D.C. Cir. 2019).

[13] NPRM at ¶ 3.

[14] Id. at ¶ 116.

[15] Id. at ¶ 122.

[16] See, for example, Bauner & Espin, infra note 116 (regarding throttling, concluding “incentives for such discrimination are not as strong as feared.”)

[17] NPRM at ¶ 17.

[18] See Paul Krugman & Robin Wells, Economics 389 (4th ed. 2015) (“So the natural monopolist has increasing returns to scale over the entire range of output for which any firm would want to remain in the industry—the range of output at which the firm would at least break even in the long run. The source of this condition is large fixed costs: when large fixed costs are required to operate, a given quantity of output is produced at lower average total cost by one large firm than by two or more smaller firms.”)

[19] Id. (“The most visible natural monopolies in the modern economy are local utilities—water, gas, and sometimes electricity. As we’ll see, natural monopolies pose a special challenge to public policy.”)

[20] See Richard H. K. Vietor, Contrived Competition 167 (1994) (“[I]n the early part of the twentieth century, American Telephone and Telegraph (AT&T) set itself the goal of providing universal telephone services through an end-to-end national monopoly. … By [the 1960s], however, the distortions of regulatory cross-subsidy had diverged too far from the economics of technological change.”); see also Thomas W. Hazlett, Cable TV Franchises as Barriers to Video Competition, 2 Va. J.L. & Tech. 1, 1 (2007) (“Traditionally, municipal cable TV franchises were advanced as consumer protection to counter “natural monopoly” video providers. …  Now, marketplace changes render even this weak traditional case moot. … [V]ideo rivalry has proven viable, with inter-modal competition from satellite TV and local exchange carriers (LECs) offering “triple play” services.”)

[21] See id. at 59-73.

[22] Share of United States Households Using Specific Technologies, Our World in Data (n.d.), https://ourworldindata.org/grapher/technology-adoption-by-households-in-the-united-states.

[23] Id. (showing household usage of landlines and mobile phones in 2018 at 42.7% and 95%, respectively).

[24] Edward Carlson, Cutting the Cord: NTIA Data Show Shift to Streaming Video as Consumers Drop Pay-TV, NTIA (2019), https://www.ntia.gov/blog/2019/cutting-cord-ntia-data-show-shift-streaming-video-consumers-drop-pay-tv.

[25] Karl Bode, A New Low: Just 46% Of U.S. Households Subscribe to Traditional Cable TV, TechDirt (Sep. 18, 2023), https://www.techdirt.com/2023/09/18/a-new-low-just-46-of-u-s-households-subscribe-to-traditional-cable-tv. See also Shira Ovide, Cable TV Is the New Landline, N.Y. Times (Jan. 6, 2022), https://www.nytimes.com/2022/01/06/technology/cable-tv.html.

[26] See Stephen Breyer, Regulation and Its Reform 195 (1982).

[27] NPRM at ¶ 127.

[28] Id.

[29] Id.

[30] Id.

[31] See, e.g., Karl Bode, Colorado Eyes Killing State Law Prohibiting Community Broadband Networks, TechDirt (Mar. 30, 2023), https://www.techdirt.com/2023/03/30/colorado-eyes-killing-state-law-prohibiting-community-broadband-networks (Local broadband monopolies are a “widespread market failure that’s left Americans paying an arm and a leg for what’s often spotty, substandard broadband access.”).

[32] FCC Chair Rosenworcel on Reinstating Net Neutrality Rules, C-Span (Sep. 25, 2023), https://www.c-span.org/video/?530731-1/fcc-chair-rosenworcel-reinstating-net-neutrality-rules (“Only one-fifth of the country has more than two choices at [100 Mbps download] speed. So, if your broadband provider mucks up your traffic, messes around with your ability to go where you want and do what you want online, you can’t just pick up and take your business to another provider. That provider may be the only game in town.”).

[33] See FCC, 2015 Broadband Progress Report (2015), https://www.fcc.gov/reports-research/reports/broadband-progressreports/2015-broadband-progress-report (Upgrading the standard speed from 4/1 Mbps to 25/3 Mbps). In November 2023, FCC Chair Rosenworcel announced a notice of inquiry seeking input on a proposal to raise the minimum connection-speed benchmark to 100/20 Mbps, with a goal of having a benchmark of 1000/500 Mbps by the year 2030; See also, Eric Fruits, Gotta Go Fast: Sonic the Hedgehog Meets the FCC, Truth on the Market (Nov. 3, 2023), https://truthonthemarket.com/2023/11/03/gotta-go-fast-sonic-the-hedgehog-meets-the-fcc.

[34] See IIJA at § 60102 (a)(1)(A). See also Jake Varn, What Makes a Community “Unserved” or “Underserved” by Broadband?, Pew Charitable Trusts (May 3, 2023), available at https://www.pewtrusts.org/-/media/assets/2023/06/un–and-underserved-definitions-ta-memo-pdf.pdf.

[35] See IIJA at § 60102(a)(1)(C)(II)(i).

[36] Mike Conlow, New FCC Broadband Map, Version 3, Mike’s Newsletter (Nov. 20, 2023), https://mikeconlow.substack.com/p/new-fcc-broadband-map-version-3.

[37] FCC, Fixed Broadband Deployment (Jun. 2021), https://broadband477map.fcc.gov/#/area-summary?version=jun2021&type=nation&geoid=0&tech=acfw&speed=25_3&vlat=27.480205324799257&vlon=-41.52925368904516&vzoom=5.127403622197149.

[38] FCC, 2019 Broadband Deployment Report, GN Docket No. 18-238, FCC 19-44 (May 29, 2019), at Fig, 4, available at https://docs.fcc.gov/public/attachments/FCC-19-44A1.pdf.

[39] FCC, 2022 Communications Marketplace Report, GN Docket No. 22-203 (Dec. 30, 2022), at Fig. II.A.28, https://docs.fcc.gov/public/attachments/FCC-22-103A1.pdf.

[40] Report and Order on Remand, Declaratory Ruling, and Order, In the Matter of Restoring Internet Freedom WC Docket No. 17-108 (Jan. 4, 2018) [hereinafter “2018 Order”]

[41] Why Is the Internet More Expensive in the USA Than in Other Countries?, Community Tech Network (Feb. 2, 2023), https://communitytechnetwork.org/blog/why-is-the-internet-more-expensive-in-the-usa-than-in-other-countries.

[42] This is qualitatively consistent with the FCC’s finding that United States has the seventh-lowest prices per-gigabit of data consumption. FCC, 2022 Communications Marketplace Report (Appendix G), GN Docket No. 22-103 (Dec. 30, 2022), at 69 (Fig. 41 Fixed Broadband Price Indexes), available at https://docs.fcc.gov/public/attachments/FCC-22-103A5.pdf.

[43] Speedtest, Median Country Speeds Oct. 2023, Speedtest Global Index (last accessed Dec. 11, 2023), https://www.speedtest.net/global-index.

[44] See Eric Fruits & Kristian Stout, The Income Conundrum: Intent and Effects Analysis of Digital Discrimination, Int’l Ctr. for L. & Econ. (Nov. 14, 2022), available at https://laweconcenter.org/wp-content/uploads/2022/11/The-Income-Conundrum-Intent-and-Effects-Analysis-of-Digital-Discrimination.pdf; see also Giuseppe Colangelo, Regulatory Myopia and the Fair Share of Network Costs: Learning from Net Neutrality’s Mistakes, Int’l Ctr. for L. & Econ. (May 18, 2023), https://laweconcenter.org/resources/regulatory-myopia-and-the-fair-share-of-network-costs-learning-from-net-neutralitys-mistakes.

[45] Id.

[46] Arthur Menko, 2023 Broadband Pricing Index, Business Planning Inc., (Oct. 2023), available at https://ustelecom.org/wp-content/uploads/2023/10/USTelecom-2023-BPI-Report-final.pdf.

[47] U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Telecommunication, Cable, and Internet User Services: Residential Internet Access Services [WPU374102], retrieved from FRED, Federal Reserve Bank of St. Louis (Aug. 29, 2023), https://fred.stlouisfed.org/series/WPU374102.

[48] Speedtest, United States Median Country Speeds July 2023, Speedtest Global Index (2023), https://www.speedtest.net/global-index/united-states. Prior years retrieved from Internet Archive. See also Camryn Smith, The Average Internet Speed in the U.S. Has Increased by Over 100 Mbps since 2017, AllConnect (Aug. 4, 2023), https://www.allconnect.com/blog/internet-speeds-over-time (average download speed in the United States was 30.7 Mbps in 2017 and 138.9 Mbps in the first half of 2023).

[49] U.S. Census Bureau, 2021 American Community Survey 1-Year Estimates, Table Id. S2801 (2021); U.S. Census Bureau, ACS 1-Year Estimates Public Use Microdata Sample 2021, Access to the Internet (ACCESSINET) (2021).

[50] Andrew Perrin, Mobile Technology and Home Broadband 2021, Pew Research Center (Jun. 3, 2021), https://www.pewresearch.org/internet/2021/06/03/mobile-technology-and-home-broadband-2021.

[51] Id. U.S. Census Bureau, 2021 American Community Survey 1-Year Estimates, Table Id. S2801 (2021); U.S. Census Bureau, ACS 1-Year Estimates Public Use Microdata Sample 2021, Access to the Internet (ACCESSINET) (2021).

[52] NPRM at ¶123 (emphasis added).

[53] See Edward Chamberlin, The Theory of Monopolistic Competition (1933) (arguing that even if a competitor’s service is not a perfect substitute, it can still exert competitive pressure by appealing to different segments of the market with different preferences.). See also William J. Baumol, Contestable Markets: An Uprising in the Theory of Industry Structure, 72 Am. Econ. Rev. (1982) (arguing that even if a new entrant’s product is not a perfect substitute for the incumbent’s product, it can still exert competitive pressure by threatening to enter the market and erode the incumbent’s market share.)

[54] See Dan Heming, Starlink No Longer Has a Waitlist for Standard Service, and 10 MPH Speed Enforcement Update, Mobile Internet Resource Center (Oct. 3, 3023), https://www.rvmobileinternet.com/starlink-no-longer-has-a-waitlist-for-standard-service-and-10-mph-speed-enforcement-update.

[55] See Starlink Specifications, Starlink (last accessed Dec. 12, 2023), https://www.starlink.com/legal/documents/DOC-1400-28829-70.

[56] See Amazon Staff, Amazon Shares an Update on How Project Kuiper’s Test Satellites are Performing, Amazon (Oct. 16, 2023), https://www.aboutamazon.com/news/innovation-at-amazon/amazon-project-kuiper-test-satellites-space-launch-october-2023-update.

[57] See Kuiper Service to Start by End of 2024: Amazon, Communications Daily (Oct. 12, 2023), https://communicationsdaily.com/news/2023/10/12/Kuiper-Service-to-Start-by-End-of-2024-Amazon-2310110007.

[58] John Fletcher, The History of US Broadband, S&P Global Market Intelligence (May 23,2023), https://www.spglobal.com/marketintelligence/en/news-insights/research/the-history-of-us-broadband. The report also notes, “While fixed wireless similarly had trouble breaking above 2 million subscribers for years, its recent surge, driven by T-Mobile US Inc. and Verizon, helped it surpass 6 million last year.” Id.

[59] See Andre Boik, The Economics of Universal Service: An Analysis of Entry Subsidies for High Speed Broadband, 40 Info. Econ. & Pol’y 13 (2017).

[60] Gregory Rosston & Scott Wallsten, Should Satellite Broadband Be Included in Universal Service Subsidy Programs?, 6 J. L. & Innovation 135 (2023).

[61] See Drew FitzGerald, After More Than Four Years, Has 5G Lived Up to Expectations?, Wall St. J. (Oct. 14, 2023), https://www.wsj.com/business/telecom/how-5g-changed-world-752b13ee.

[62] See Robert Wyrzykowski, 5G Experience Report, OpenSignal (Jul. 2023), https://www.opensignal.com/reports/2023/07/usa/mobile-network-experience-5g; Petroc Taylor, Average 5G and Overall Download Speed by Provider in the United States in 2023 (in Mbps), Statista (Jul. 11, 2023), https://www.statista.com/statistics/818204/4g-3g-and-overall-download-speed-in-the-united-states-by-provider.

[63] See Robin Layton, Everything You Need to Know About Internet Speeds, AllConnect (Aug. 9, 2023), https://www.allconnect.com/blog/consumers-guide-to-internet-speed.

[64] See FCC, 2015 Broadband Progress Report (2015), https://www.fcc.gov/reports-research/reports/broadband-progressreports/2015-broadband-progress-report (upgrading the standard speed from 4/1 Mbps to 25/3 Mbps). In November 2023, FCC Chair Rosenworcel week announced a notice of inquiry seeking input on a proposal to raise the minimum connection-speed benchmark to 100/20 Mbps, with a goal of having a benchmark of 1000/500 Mbps by the year 2030; See Eric Fruits, Gotta Go Fast: Sonic the Hedgehog Meets the FCC, Truth on the Market (Nov. 3, 2023), https://truthonthemarket.com/2023/11/03/gotta-go-fast-sonic-the-hedgehog-meets-the-fcc.

[65] Reiner Ludwig, Who Cares About Latency in 5G?, Ericsson Blog (Aug. 16, 2022), https://www.ericsson.com/en/blog/2022/8/who-cares-about-latency-in-5g.

[66] FCC, Measuring Fixed Broadband—Eleventh Report (Dec. 31, 2021), https://www.fcc.gov/reports-research/reports/measuring-broadband-america/measuring-fixed-broadband-eleventh-report.

[67] See, Eli Blumenthal, Verizon’s 5G Speeds Are About to Get Faster, Ahead of Schedule, CNET (Aug. 14, 2023), https://www.cnet.com/tech/mobile/verizons-5g-speeds-are-about-to-get-faster-ahead-of-schedule.

[68] Hal Singer & Augustus Urschel, Competitive Effects of Fixed Wireless Access on Wireline Broadband Technologies, Econ One (Jun. 2023), available at https://api.ctia.org/wp-content/uploads/2023/06/Competitive-Effects-of-Fixed-Wireless-Access-on-Wireline-Broadband-Technologies-FINAL.pdf.

[69] NPRM at ¶129.

[70] This section is adapted from Geoffrey A. Manne, Kristian Stout & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture, at 26-30, Int. Ctr. for L. & Econ. (Jun. 3, 2021), available at https://laweconcenter.org/wp-content/uploads/2021/06/A-Dynamic-Analysis-of-Broadband-Competition.pdf.

[71] See J. Gregory Sidak & David J. Teece, Dynamic Competition in Antitrust Law, 5 J. Competition L. & Econ. 581, 614 (2009).

[72] C.f. id. at 585 (“Indeed, it is common to find a debate about innovation policy among economists collapsing into a rather narrow discussion of the relative virtues of competition and monopoly, as if they were the main determinants of innovation. Clearly, much more is at work.”).

[73] Harold Demsetz, Why Regulate Utilities?, 11 J. L. & Econ. 55, 55 (1968).

[74] See id.

[75] See Sidak & Teece, Dynamic Competition, supra note 71.

[76] See, e.g., Thomas M. Jorde & David J. Teece, Competing Through Innovation: Implications for Market Definition, 64 Chi.-Kent L. Rev. 741, 742 (1988) (“Moreover, in markets characterized by rapid technological progress, competition often takes place on the basis of performance features and not price.”); David S. Evans & Richard Schmalensee, Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries, in 2 Innovation Policy and The Economy 1, 3 (Adam B. Jaffe, et al., eds. 2002) (“The defining feature of new-economy industries is a competitive process dominated by efforts to create intellectual property through R&D, which often results in rapid and disruptive technological change.”).

[77] See generally William J. Baumol, John C. Panzar & Robert D. Willig, Contestable Markets and the Theory of Industry Structure (1982).

[78] Sidak & Teece, Dynamic Competition, supra note 71, at 585, 604.

[79] For a discussion of this principle and how it applies to broadband markets, see T. Randolph Beard, George S. Ford, Lawrence J. Spiwak, & Michael Stern, The Law and Economics of Municipal Broadband, 73 Fed. Comm’cns L.J. 1 (2020) [hereinafter, “Beard, Ford, Spiwak & Stern”].

[80] See Rabah Amir, Market Structure, Scale Economies and Industry Performance, CORE Discussion Paper No. 2003/65 (Sep. 1, 2003), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=995721.

[81] See Demsetz, Why Regulate Utilities?, supra note 73; see also Sharat Ganapati, Growing Oligopolies, Prices, Output, and Productivity, Census Working Paper CES-WP-18-48 (Jan. 20, 2020), available at https://www.sganapati.com/files/Ganapati_2019_OligopoliesPricesQuantities_AEJmicro.pdf (noting that increased concentration results from a beneficial growth in firm size in productive industries that “expand real output and hold down prices, raising consumer welfare, while maintaining or reducing their workforces, lowering labor’s share of output.”)

[82] See generally J. Gregory Sidak & David J. Teece, Innovation Spillovers and The “Dirt Road” Fallacy: The Intellectual Bankruptcy of Banning Optional Transactions for Enhanced Delivery Over the Internet, 6 J. Comp. L. Econ. 521, 540 (2010) (Discussing the broad array of factors that must be taken into account in a dynamic analysis of the Internet and broadband service).

[83] Michelle Connolly & James E. Prieger, A Basic Analysis of Entry and Exit in the US Broadband Market, 2005-2008, Pepperdine University School of Public Policy Working Paper No. 42 (2013) at 4, https://digitalcommons.pepperdine.edu/sppworkingpapers/42 (published as Michelle Connolly & James E. Prieger, A Basic Analysis of Entry and Exit in the US Broadband Market, 2005-2008, 12 Rev. Network Econ. 229 (2013)).

[84] See generally Nicolai J. Foss & Peter G. Klein, Organizing Entrepreneurial Judgment (2012).

[85] See, e.g., Sidak & Teece, Dynamic Competition, supra note 71, at 615.

[86] Menko, supra note 46.

[87] See Daniel A. Lyons, Innovations in Mobile Broadband Pricing 3-4, Mercatus Center Working Paper No. 14-08 (Mar. 2014), available at https://www.mercatus.org/research/working-papers/innovations-mobile-broadband-pricing.

[88] Id.

[89] AT&T, Sponsored Data from AT&T (last accessed Dec. 12, 2023), https://www.att.com/att/sponsoreddata/en.

[90] T-Mobile, Unlimited Video Streaming with Binge On (last accessed Dec. 12, 2023), https://www.t-mobile.com/tv-streaming/binge-on.

[91] J. Gregory Sidak & David J. Teece, supra, note 82, at 532-33.

[92] See infra Section III.A.

[93] See, e.g., Herbert Hovenkamp, The Rule of Reason, 70 Fla. L. R. 81 (2018) (“Vertical restraints should be found unlawful only when they facilitate an output reduction that serves to increase prices in relation to costs. To that extent, every anticompetitive vertical restrain must contain at least an implicit horizontal element, whether it be collusion or exclusion. The vast majority of purely vertical agreements pose no such threat. These conclusions are largely borne out by the case law. Once the rule of reason is applied to a vertical practice, few instances of it are condemned.”)

[94] NPRM at ¶ 56.

[95] Id.

[96] Id.

[97] ICLE, Comments on Refreshing the Record in Restoring Internet Freedom and Lifeline Proceedings in Light of the D.C. Circuit’s Mozilla Decision, WC Docket Nos. 17-108, 17-287, 11-42 (Apr. 20, 2020), at 9, available at https://laweconcenter.org/wp-content/uploads/2020/04/icle_rifo_record_refresh_comments_final-20200420.pdf (“But the widely different regulatory philosophies underlying the Orders—that of the RIFO’s light-touch regulation under Title I compared to the OIO’s more interventionist regulation based on the uncertain whims of a changing political environment under Title II—strongly suggests different levels of regulatory certainty. And it is virtually inevitable that the greater regime uncertainty under Title II would contribute to a reduction in investment and/or its less efficient and effectively deployment. Such an effect is likely more attenuated than the acute, immediate response many seem to be looking for. But it may be no less real and no less important.”)

[98] Brendan Carr, Dissenting Statement of Commissioner Brendan Carr, Implementing the Infrastructure Investment and Jobs Act: Prevention and Elimination of Digital Discrimination, GN Docket No. 22-69, Report and Order and Further Notice of Proposed Rulemaking (Nov. 15, 2023), https://docs.fcc.gov/public/attachments/FCC-23-100A3.pdf (Regarding digital discrimination rules, “The FCC reserves the right under this plan to regulate both ‘actions and omissions, whether recurring or a single instance.’ In other words, if you take any action, you may be liable, and if you do nothing, you may be liable. There is no path to complying with this standardless regime.”)

[99] See Edwin J. Elton & Martin J. Gruber, Modern Portfolio Theory and Investment Analysis (4th ed, 1991).

[100] Wolfgang Briglauer, Carlo Cambini, Klaus Gugler, & Volker Stocker, Net Neutrality and High-Speed Broadband Networks: Evidence from OECD Countries, 55 Eur. J. Law Econ. 533–571 (2023).

[101] Roslyn Layton & Mark Jamison, Net Neutrality in the USA During COVID-19, in Beyond the Pandemic? Exploring the Impact of COVID-19 on Telecommunications and the Internet, (Jason Whalley, Volker Stocker & William Lehr eds., 2023).

[102] NPRM at ¶ 56.

[103] NPRM at ¶ 157.

[104] FCC, Fact Sheet: FCC Chairwoman Rosenworcel Proposes to Restore Net Neutrality Rules (Sep. 26, 2023), available at https://docs.fcc.gov/public/attachments/DOC-397235A1.pdf.

[105] Rich Greenfield, Adding “Fast Lanes” Does Not Require Harming the Internet, Vox (May 14, 2014), https://www.vox.com/2014/5/14/11626812/adding-fast-lanes-does-not-require-harming-the-internet.

[106] Id.

[107] Catie Keck, A Look Under the Hood of the Most Successful Streaming Service on the Planet, The Verge (Nov. 17, 2021), https://www.theverge.com/22787426/netflix-cdn-open-connect.

[108] ICLE Comments., supra note 97 at 3-8. See also J. Gregory Sidak & David J. Teece, supra, note 82 at 533 (“Superior [quality of service] is a form of product differentiation, and it therefore increases welfare by increasing the production choices available to content and applications providers and the consumption choices available to end users. Finally, as in other two-sided platforms, optional business-to-business transactions for [quality of service] will allow broadband network operators to reduce subscription prices for broadband end users, promoting broadband adoption by end users, which will increase the value of the platform for all users.”).

[109] Axel Gautier & Robert Somogyi, Prioritization vs Zero-Rating: Discrimination on the Internet, 73 Int’l. J Ind. Org. 102662 (Dec. 2020).

[110] NPRM at ¶ 153.

[111] Id.

[112] Id. at ¶ 155.

[113] See Nilay Patel, Taylor Swift Fans Used Record Amounts of Data during the Eras Tour in North America, The Verge (Nov. 16, 2023), https://www.theverge.com/2023/11/16/23949041/taylor-swift-eras-tour-mobile-data-usage-att.

[114] Sandvine, Sandvine’s 2023 Global Internet Phenomena Report Shows 24% Jump in Video Traffic, with Netflix Volume Overtaking YouTube (Jan. 17, 2023), https://www.prnewswire.com/news-releases/sandvines-2023-global-internet-phenomena-report-shows-24-jump-in-video-traffic-with-netflix-volume-overtaking-youtube-301723445.html.

[115] Daeho Lee & Junseok Hwang, Network Neutrality and Difference in Efficiency Among Internet Application Service Providers: A Meta-Frontier Analysis, 35 Telecomm. Pol’y 764 (2011).

[116] Fangfan Li, Arian Akhavan Niaki, David Choffnes, Phillipa Gill, & Alan Mislove. A Large-Scale Analysis of Deployed Traffic Differentiation Practices, Association for Computing Machinery, Proceedings of the ACM Special Interest Group on Data Communication, SIGCOMM ’19 (2019), https://dl.acm.org/doi/pdf/10.1145/3341302.3342092.

[117] Christoph Bauner & Augusto Espin, Do Subscribers of Mobile Networks Care About Data Throttling?, 47 Telecom. Pol’y 102665 (Nov. 2023).

[118] Id. (“[U]sers may actually benefit from a modest degree of throttling as this preserves bandwidth and thus aides network stability and reliability. In other words, even if users get harmed by the direct effect of throttling (slower data transmission), the positive indirect effect (more reliable network) may outweigh this issue, so that users may prefer the throttled network. If this is the case, it would pose an additional argument against net neutrality regulation.”)

[119] Id.

[120] Hyun Ji Lee & Brian Whitacre, Estimating Willingness-to-Pay for Broadband Attributes Among Low-Income Consumers: Results From Two FCC Lifeline Pilot Projects, 41 Telecomm. Pol’y. 769 (Oct. 2017).

[121] Johnny Kampis, Johnny Kampis: FCC Push To Eliminate Data Caps Could Increase Broadband Rates For Many Users, Broadband Breakfast (Sep. 28, 2023), https://broadbandbreakfast.com/2023/09/johnny-kampis-fcc-push-to-eliminate-data-caps-could-increase-broadband-rates-for-many-users.

[122] Peter Christiansen, Survey Finds Nearly Half of America Unaware of Internet Data Cap Limits, HighSpeedInternet.com (Feb. 25, 2021), https://www.highspeedinternet.com/resources/data-caps-survey.

[123] See Working Group on Economic Impacts of Open Internet Frameworks, Policy Issues in Data Caps and Usage-Based Pricing, Open Internet Advisory Committee (Jul. 9, 2013), available at https://transition.fcc.gov/cgb/oiac/Economic-Impacts.pdf.

[124] See id. at 14-16.

[125] 2015 Order at ¶¶ 151-153.

[126] Id.

[127] Guz Hurwitz, The Not Neutrality of Tech Reporting: Discussing the Economics of Lifting Data Caps During a Stay-at-Home Crisis, Truth on the Market (Mar. 20, 2020), https://truthonthemarket.com/2020/03/20/the-not-neutrality-of-tech-reporting-discussing-the-economics-of-lifting-data-caps-during-a-stay-at-home-crisis.

[128] Hyun Ji Lee & Brian Whitacre, Estimating Willingness-to-Pay for Broadband Attributes among Low-Income Consumers: Results from Two FCC Lifeline Pilot Projects, 41 Telecomm. Pol’y. 769 (2017).

[129] See Scott Jordan, A Critical Survey of the Literature on Broadband Data Caps, 41 Telecomm. Pol’y 813 (2017).

[130] NPRM at ¶ 137.

[131] 2015 Order at ¶¶ 78-101; see also In the Matter of Protecting & Promoting the Open Internet, Dissenting Statement of Commissioner Michael O’Rielly, 30 F.C.C. Rcd. 5601, 5987 (2015) (“Even after enduring three weeks of spin, it is hard for me to believe that the Commission is establishing an entire Title II/net neutrality regime to protect against hypothetical harms. There is not a shred of evidence that any aspect of this structure is necessary. The D.C. Circuit called the prior, scaled-down version a “prophylactic” approach. I call it guilt by imagination.”).

[132] 2018 Order at ¶¶ 109-139.

[133] 2018 Order at ¶ 143.

[134] Stephen G. Breyer, Antitrust, Deregulation, and the Newly Liberated Marketplace, 75 Cal. L. Rev. 1005, 1007 (1987).

[135] Id.

[136] 2018 Order at ¶ 123. See also Joshua D. Wright & Thomas W. Hazlett, The Effect of Regulation on Broadband Markets: Evaluating the Empirical Evidence in the FCC’s 2015 “Open Internet” Order, 50 Rev. Indus. Org. 487, 489 (2017) (Network neutrality rules address conduct that “[i]f undertaken for anti-competitive purpose and achieving anti-competitive effect, [] would be deemed vertical foreclosure in economics (or under antitrust law).”). See also 2015 Order at ¶ 79 & note 123 (discussing past instances of alleged ISP misconduct that amounted to “limit[ations on] openness,” all of which were cognizable under the antitrust laws).

[137] 2015 Order at ¶ 63.

[138] Id. at ¶ 64.

[139] Id. at  ¶ 275.

[140] Id. at ¶ 140.

[141] See Patrick Rey & Jean Tirole, A Primer on Foreclosure, in III Handbook of Indus. Org. 2145 (Mark Armstrong & Rob Porter eds., 2007).

[142] NPRM at ¶ 23.

[143] See Rey & Tirole, A Primer on Foreclosure, supra note 140.

[144] See Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 629 (2007) (documenting the economic evidence showing that such vertical relationships are more likely to be competitively beneficial or benign than to raise serious threats of foreclosure).

[145] See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886-87 (2007) (holding that the per se rule should be applied “only after courts have had considerable experience with the type of restraint at issue” and “only if courts can predict with confidence that [the restraint] would be invalidated in all or almost all instances under the rule of reason” because it “‘lack[s] . . . any redeeming virtue.’” (citation omitted)).

[146] See D. Daniel Sokol, The Transformation of Vertical Restraints: Per Se Illegality, the Rule of Reason, and Per Se Legality, 79 Antitrust L.J. 1003, 1004 (2014) (“[T]he shift in the antitrust rules applied to [vertical restraints] has not been from per se illegality to the rule of reason, but has been a more dramatic shift from per se illegality to presumptive legality under the rule of reason”).

[147] NPRM at ¶ 136 (“The Commission’s transparency rule requires ISPs to publicly disclose the network practices, performance characteristics, and commercial terms of the BIAS they offer, including disclosure of any blocking, throttling, and affiliated or paid prioritization practices.”).

[148] See, e.g. Geoffrey A. Manne, The Hydraulic Theory of Disclosure Regulation and Other Costs of Disclosure, 58 Ala. L. Rev. 473 (2007).

[149] NPRM at ¶¶ 172-175.

[150] 47 U.S.C. § 201(b).

[151] Eric Fruits, Everyone Discriminates Under the FCC’s Proposed New Rules, Truth on the Market (Oct. 30, 2023), https://truthonthemarket.com/2023/10/30/everyone-discriminates-under-the-fccs-proposed-new-rules.

[152] NPRM at ¶ 175.

[153] See NPRM at ¶¶ 80-83.

[154] King v. Burwell, 576 U.S. 473, 486 (2015) (quoting Utility Air Regulatory Group v. EPA, 573 U.S. 302, 324 (2014)).

[155] 141 S. Ct. 2485 (2021).

[156] Id. at 2489.

[157] Id.

[158] Id.

[159] 142 S. Ct. 661 (2022).

[160] Id. at 665.

[161] Id.

[162] Id.

[163] Id. at 669.

[164] 142 S. Ct. 2587 (2022).

[165] See id. at 2607-09.

[166] Id. at 2609.

[167] See id. at 2612.

[168] See id. at 2614.

[169] See id. at 2615-17.

[170] NFIB, 142 S. Ct. at 668.

[171] See, e.g., 2022 Broadband Capex Report, USTelecom (Sep. 8, 2023), https://ustelecom.org/research/2022-broadband-capex (“America’s broadband industry invested a record $102.4 billion in U.S. communications infrastructure in 2022, reflecting broadband providers’ determination to help achieve the national objective of affordable, reliable high-speed connectivity for all. The annual figure represents a 21-year high for investment from the communications sector and a 19% year-over-year increase.”).

[172] See NPRM at ¶ 1 (“Congress responded by investing tens of billions of dollars into building out broadband Internet networks and making access more affordable and equitable, culminating in the generational investment of $65 billion in the Infrastructure Investment and Jobs Act.”); 47 U.S.C. § 1701(1) (“[A]ccess to affordable, reliable, high-speed broadband is essential to full participation in modern life in the United States.”). See also 47 U.S.C. §§ 1722(1)(A)-(B) (“[A] broadband connection and digital literacy are increasingly critical to how individuals (A) participate in society, economy and civic institutions of the United States;” and “(B) access health care and essential services, obtain education, and build careers.”)

[173] See supra Part II.C.

[174] US Telecom v. FCC, 855 F.3d 381, 422 (D.C. Cir. 2016) (Kavanaugh, J., dissenting from denial of rehearing en banc).

[175] See NPRM at ¶¶ 103-113. See also FCC Fact Sheet, Safeguarding and Securing the Open Internet (Sept. 28, 2023) (“Propose to forbear from 26 Title II provisions, and clarify that the Commission will not regulate rates or require network unbundling.”).

[176] 573 US. 302, 328 (2014) (“We reaffirm the core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.”).

[177] See id. at 326 (“The Tailoring Rule is not just an announcement of EPA’s refusal to enforce the statutory permitting requirements; it purports to alter those requirements and to establish with the force of law that otherwise-prohibited conduct will not violate the Act. This alteration of the statutory requirements was crucial to EPA’s “tailoring” efforts. Without it, small entities with the potential to emit greenhouse gases in amounts exceeding the statutory thresholds would have remained subject to citizen suits—authorized by the Act.”).

[178] Id. at 325.

[179] Id. at 328.

[180] See US Telecom, 855 F.3d at 383-85 (Srinivasan, J. & Tatel, J., concurring in denial from rehearing en banc).

[181] See id. at 385 (“In Brand X, the Supreme Court definitively — and authoritatively, for our purposes as an inferior court — answered that question yes.”).

[182] See Brand X, 545 U.S. at 989 (“[T]he statute fails unambiguously to classify the telecommunications component of cable modem service as a distinct offering.”).

[183] See id. at 1005-14 (Scalia, J., dissenting).

[184] See US Telecom v. FCC, 825 F.3d 674 (D.C. Cir. 2016).

[185] See Mozilla Corp v. FCC, 940 F.3d 1 (D.C. Cir. 2019).

Continue reading
Telecommunications & Regulated Utilities

Brief of ICLE in Moody v NetChoice, NetChoice v Paxton

Amicus Brief Interest of Amicus[1] The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for . . .

Interest of Amicus[1]

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies and economic learning to inform policy debates and has longstanding expertise evaluating law and policy.

ICLE has an interest in ensuring that First Amendment law promotes the public interest by remaining grounded in sensible rules informed by sound economic analysis. ICLE scholars have written extensively on issues related to social media regulation and free speech. See, e.g., Geoffrey A. Manne, Ben Sperry, & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Computer & Tech. L. J. 26 (2022); Ben Sperry, Knowledge and Decisions in the Information Age: The Law & Economics of Regulating Misinformation on Social-Media Platforms, 59 Gonzaga L. Rev., forthcoming (2023); Br. of Internet Law Scholars, Gonzalez v. Google; Jamie Whyte, Polluting Words: Is There a Coasean Case to Regulate Offensive Speech?, ICLE White Paper (Sep. 2021); Ben Sperry, An L&E Defense of the First Amendment’s Protection of Private Ordering, Truth on the Market (Apr. 23, 2021); Liability for User-Generated Content Online: Principles for Lawmakers (Jul. 11, 2019).

Statement

The pair of NetChoice cases before the Court presents the opportunity to bolster the Court’s longstanding jurisprudence on state action and editorial discretion by affirming that the First Amendment applies to Internet speech without disfavor. See Reno v. ACLU, 521 U.S. 844, 870 (1997) (finding “no basis for qualifying the level of First Amendment scrutiny that should be applied” to the Internet).

The First Amendment protects social media companies’ rights to exercise their own content moderation policies free from government interference. Social media companies are private actors with the same right to editorial discretion over disseminating third-party speech as offline equivalents like newspapers and cable operators. See Manhattan Cmty. Access Corp. v. Halleck, 139 S. Ct. 1921, 1926 (2019); Mia. Herald Publ’g Co. v. Tornillo, 418 U.S. 241 (1974); Turner Broad. Sys. v. FCC, 512 U.S. 622 (1994).

Consistent with that jurisprudence, the Court should conclude that social media companies are private actors fully capable of taking part in the marketplace of ideas through their exercise of editorial discretion, free from government interference.

Summary of Argument

“The most basic of all decisions is who shall decide.” Thomas Sowell, Knowledge and Decisions 40 (2d ed. 1996). Under the First Amendment, the general rule is that private actors get to decide what speech is acceptable. It is not the government’s place to censor speech or to require private actors to open their property to unwanted speech. The market process determines speech rules on social media platforms[2] just as it does in the offline world.

The animating principle of the First Amendment is to protect this “marketplace of ideas.” “The theory of our Constitution is ‘that the best test of truth is the power of the thought to get itself accepted in the competition of the market.’” United States v. Alvarez, 567 U.S. 709, 728 (2012) (quoting Abrams v. United States, 250 U.S. 616, 630 (1919) (Holmes, J., dissenting)). To facilitate that competition, the Constitution staunchly protects the liberty of private actors to determine what speech is acceptable, largely free from government regulation of this marketplace. See Halleck, 139 S. Ct. at 1926 (“The Free Speech Clause of the First Amendment constrains governmental actors and protects private actors….”).

Importantly, one way private actors participate in the marketplace of ideas is through private ordering—by setting speech policies for their own private property, enforceable by common law remedies under contract and property law. See id. at 1930 (a “private entity may thus exercise editorial discretion over the speech and speakers in the forum”).

Protecting private ordering is particularly important with social media. While the challenged laws concern producers of social media content, producers are only a sliver of social media users. The vast majority of social media users are content consumers, and it is for their benefit that social media companies moderate content. Speech, even when lawful and otherwise protected by the First Amendment, can still be harmful, at least from the point of view of listeners. Social media companies must balance users’ demand for speech with the fact that not everyone wants to consume every possible type of speech.

The issue is how best to optimize the benefits of speech while minimizing negative speech externalities. Speech produced on social media platforms causes negative externalities when some consumers are exposed to speech they find offensive, disconcerting, or otherwise harmful. Those consumers may stop using the platform as a result. On the other hand, if limits on speech production are too extreme, speech producers and consumers may seek other speech platforms.

To optimize the value of their platforms, social media companies must consider how best to keep users—both producers and consumers of speech—engaged. Major social media platforms mainly generate revenue through advertisements. This means a loss in user engagement could reduce the value to advertisers, and thus result in less advertising revenue. In particular, a loss in engagement by high-value users could result in less advertising, and that in turn, diminishes incentives to invest in the platform. Optimizing a platform requires satisfying users who are valuable to advertisers.

Major social media platforms have developed moderation policies in response to market demand to protect their users from speech those users consider harmful. This editorial control is protected First Amendment activity.

On the other hand, the common carriage justifications Texas and Florida offer for their restrictions on social media platforms’ control over their own property do not save the States’ impermissible intervention into the marketplace of ideas. Two of the most prominent legal justifications for common carriage regulation—holding one’s property open to all-comers and market power—do not apply to social media companies. Major social media companies require all users to accept terms of service, which limit what speech is allowed. And assuming market power can justify common carriage, neither Florida nor Texas even attempted to make such a finding, making at best mere assertions.

The States’ intervention is more like treating social media platforms as company towns—an outdated approach that this Court should reject as inconsistent with First Amendment doctrine and utterly unsuitable to the Internet Age.

Argument

I. Social Media Platforms Are Best Positioned to Optimize Their Platforms To Serve Their Users’ Speech Preferences.

The First Amendment promotes a marketplace of ideas. To have a marketplace of any kind, there must be strong private property rights and enforceable contracts that enable entrepreneurs to discover the best ways to serve consumers. See generally Hernando de Soto, The Mystery of Capital (2000). As full participants in the marketplace of ideas, social media platforms must be free to exercise their own editorial policies and have choice over which ideas they allow on their platforms. Otherwise, there is no marketplace of ideas at all, but either a government-mandated free-for-all where voices struggle to be heard or an overly restricted forum where the government censors disfavored ideas.

The marketplace analogy is apt when considering First Amendment principles because, like virtually any other human activity, speech has both benefits and costs. Like other profit-driven market endeavors, it is ultimately the subjective, individual preferences of consumers that determine how to manage those tradeoffs. The nature of what is deemed offensive is obviously context- and listener-dependent, but the parties best suited to set and enforce appropriate speech rules are the property owners subject to the constraints of the marketplace.

When it comes to speech, an individual’s desire for an audience must be balanced with a prospective audience’s willingness to listen. Formal economic institutions acting in the marketplace must strike the proper balance between these desires and have an incentive to get it right or they could lose consumers. Asking government to make categorical decisions for all of society is substituting centralized evaluation of the costs and benefits of access to communications for the individual decisions of many actors, including property owners who open their property to third party speech. As the economist Thomas Sowell put it, “that different costs and benefits must be balanced does not in itself imply who must balance them?or even that there must be a single balance for all, or a unitary viewpoint (one ‘we’) from which the issue is categorically resolved.” Thomas Sowell, Knowledge and Decisions 240 (2d ed. 1996).

Rather than incremental decisions on how and under what terms individuals may relate to one another on a particular platform—which can evolve over time in response to changes in what individuals find acceptable—governments can only hand down categorical guidelines through precedential decisions: “you must allow a, b, and c speech” or “you must not allow x, y, and z speech.”

This freedom to experiment and evolve is vital in the social-media sphere, where norms about speech are in constant flux. Social media users often impose negative externalities on other users through their speech. Thus, social media companies must resolve social-cost problems among their users by balancing their speech interests.

In his famous work “The Problem of Social Cost,” the economist Ronald Coase argued that the traditional approach to regulating externalities was misguided because it overlooked the reciprocal nature of harms. Ronald H. Coase, The Problem of Social Cost, 3 J. L. & Econ. 1, 2 (1960). For example, the noise from a factory is a potential cost to the doctor next door who consequently cannot use his office to conduct certain testing, and simultaneously the doctor moving his office next door is a potential cost to the factory’s ability to use its equipment. In a world of well-defined property rights and low transaction costs, the initial allocation of a right would not matter, because the parties could bargain to overcome the harm in a beneficial manner—i.e., the factory could pay the doctor for lost income or to set up sound-proof walls, or the doctor could pay the factory to reduce the sound of its machines. But in the real world, where there are often significant transaction costs, who has the initial right matters because it is unlikely that the right will get to the highest valued use.

Similarly, on social media, speech that some users find offensive or false may be inoffensive or even patently true to other users. Protecting one group from offensive speech necessarily imposes costs on the group that favors the same speech. There is a reciprocal nature to the harms of speech, much as with other forms of nuisance. Due to transaction costs, it is unlikely that users will be able to effectively bargain to a solution on speech harms. There is a significant difference, though. Unlike the situation of the factory owner and the doctor, social media users are all using the property of social media companies. And those companies are best positioned to—and must be allowed to—balance these varied interests in real-time to optimize their platform’s value in response to consumer demand.

Social media companies are what economists call “multi-sided” platforms. See generally David S. Evans & Richard Shmalensee, Matchmakers: The New Economics of Multisided Platforms (2016). They are for-profit businesses, and the way they generate profits is by acting as intermediaries between users and advertisers. If they fail to serve their users well, those users will abandon the platform. Without users, advertisers would have no interest in buying ads. And without advertisers, there is no profit to be made.

As in any other community, “[i]nteractions on multi-sided platforms can involve behavior that some users find offensive.” David S. Evans, Governing Bad Behavior by Users of Multi-Sided Platforms, 27 Berkeley Tech. L.J. 1201, 1215 (2012). As a result, “[p]eople may incur costs [from] unwanted exposure to hate speech, pornography, violent images, and other offensive content.” Id. And “[e]ven if they are not exposed to this content, they may dislike being part of a community in which such behavior takes place.” Id.

These cases challenge laws that cater to one set of social media users—producers of speech on social media platforms. But social media platforms must be at least as sensitive to their speech consumers. Indeed, the one-percent rule—“a vast majority of user-generated content in any specific community comes from the top 1% of active users”[3]—teaches that speech-consuming users may be even more important because they far outnumber producers. In turn, less intense users are usually the first to leave a platform, and their exit may cascade into total platform collapse. See, e.g., János Török & János Kertész, Cascading Collapse of Online Social Networks, 7 Sci. Rep., art. 16743 (2017).

Social media companies thus need to optimize the value of their platform by setting rules that keep users—mostly speech consumers—sufficiently engaged that there are advertisers who will pay to reach them. Even more, social media platforms must encourage engagement by the right users. To attract advertisers, platforms must ensure individuals likely to engage with advertisements remain active on the platform.[4] Platforms ensure this optimization by setting and enforcing community rules.

In addition, like users, advertisers themselves have preferences social media platforms must take into account. Advertisers may threaten to pull ads if they do not like the platform’s speech-governance decisions. For instance, after Elon Musk restored the accounts of Twitter users who had been banned by the company’s prior leadership, major advertisers left the platform. See Kate Conger, Tiffany Hsu, & Ryan Mac, Elon Musk’s Twitter Faces Exodus of Advertisers and Executives, N.Y. Times (Nov. 1, 2022); Ryan Mac & Tiffany Hsu, Twitter’s US Ad Sales Plunge 59% as Woes Continue, N.Y. Times (Jun. 5, 2013).

Thus, it is no surprise that in the cases of major social media companies, the platforms have set content-moderation standards that restrict many kinds of speech. See generally Kate Klonick, The New Governors: The People, Rules, and Processes Governing Online Speech, 131 Harv. L. Rev. 1598 (2018).

The bottom line is that the market process leaves the platforms themselves best positioned to make these incremental editorial decisions about their users’ preferences on speech, in response to the feedback loop between consumer, producer, and advertiser demand. It should go without saying that social media users do not necessarily want more opportunities to say and hear certain speech. Forcing social media companies to favor one set of users—a fraction of speech producers—by forbidding “viewpoint discrimination” favored by other users is unwarranted and unlawful interference in those companies’ editorial discretion. That interference threatens rather than promotes the marketplace of ideas.

II. The First Amendment Protects Private Ordering of Speech, Including Social Media Platform Moderation Polices.

The First Amendment protects the right of social media platforms to serve the speech preferences of their users through their moderation policies.

The “text and original meaning [of the First and Fourteenth Amendments], as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech.” Halleck, 139 S. Ct. at 1928. The First Amendment’s reach does not grow when private property owners open their property for speech. If such property owners were “subject to First Amendment constraints” and thus “lose the ability to exercise what they deem to be appropriate editorial discretion within that open forum” they would “face the unappetizing choice of allowing all comers or closing the platform altogether.” Id. at 1930. That is, the First Amendment respects—indeed protects—private ordering.

So, while the First Amendment protects the right of individuals to speak (and receive speech) without fear of legal repercussions in most instances, it does not make speech consequence-free, nor does it mandate the carrying of all speech in private spaces.

“Bad” speech has, in fact, long been kept in check via informal means, or what one might call “private ordering.” In this sense, property rights and contract law have long played a crucial role in determining the speech rules of any given space.

For instance, a man would be well within his legal rights to eject a guest from his home for using racial epithets. As a property owner, he would not only have the right to ask that person to leave but could exercise his right to eject that person as a trespasser—if necessary, calling the police to assist him. Similarly, one could not expect to go to a restaurant and yell at the top of her lungs about political issues and expect the venue to abide. A bar hosting an “open mic night” and thus opening itself up to speech is still within its rights to end a performance so offensive it could lead to a loss of patrons. Subject to narrow exceptions, property owners determine acceptable speech on their property and may enforce those rules by excluding those who refuse to comply.

A. Social media platforms are not state actors.

One exception to this strong distinction between state and private action is when a “private entity performs a traditional, exclusive public function.” See Halleck, 139 S. Ct. at 1928. In those cases, there may be a right to free speech that operates against a private actor. See Marsh v. Alabama, 326 U.S. 501 (1946).

Proceeding from Marsh, many litigants seize upon this Court’s recent analogizing social media to the “modern public square.” Packingham v. N. Carolina, 137 S. Ct. 1730, 1737 (2017). They argue social media companies are like a company town or town square and so lack the discretion to restrict speech protected by the First Amendment. But cases since Marsh make clear that the state-actor exception is exceptionally narrow.

In Marsh, this Court found that a company town, while private, was a state actor for purposes of the First Amendment. At issue was whether the company town could prevent a Jehovah’s Witness from passing out literature on the town’s sidewalks. The Court noted that “[o]wnership does not always mean absolute dominion. The more an owner, for his advantage, opens up his property for use by the public in general, the more do his rights become circumscribed by the statutory and constitutional rights of those who use it.” Marsh, 326 U.S. at 506. The Court proceeded to balance private property rights with First Amendment rights, determining that, in company towns, the First Amendment’s protections should be in the “preferred position.” See id. at 509.

The Court later extended this finding to shopping centers, finding they were the “functional equivalent” to the business district in Marsh, and thus finding that a shopping center could not restrict peaceful picketing of a grocery story by a local food-workers union. Food Employees v. Logan Valley Plaza, 391 U.S. 308, 318, 325 (1968).

But the Court began retreating from both Logan Valley and Marsh just a few years later in Lloyd Corp. v. Tanner, 407 U.S. 551 (1972), which concerned hand-billing in a shopping mall. Noting the “economic anomaly” that was company towns, the Court said Marsh “simply held that where private interests were substituting for and performing the customary functions of government, First Amendment freedoms could not be denied where exercised in the customary manner on the town’s sidewalks and streets.” Id. at 562 (emphasis added).

Building on Tanner, the Court went a step further in Hudgens v. NLRB, 424 U.S. 507 (1976), reversing Logan Valley and more severely cabining Marsh. Hudgens involved picketing on private property, and the Court concluded bluntly that, “under the present state of the law the constitutional guarantee of free expression has no part to play in a case such as this[.]” Id. at 521. Marsh is now a narrow exception, the Court explained, limited to situations where private property has taken on all attributes of a town. See id. at 516. And following Hudgens, the Court further limited the public-function test to “the exercise by a private entity of powers traditionally exclusively reserved to the State.” See Jackson v. Metropolitan Edison Co., 419 U.S. 345, 352 (1974).

Today it is well-established that “the constitutional guarantee of free speech is a guarantee only against abridgment by government, federal or state.” Hudgens, 424 U.S. at 513. Purely private actors—even those who open their property to the public—are not subject to First-Amendment limits on how they use their property.

The Court reaffirmed that rule recently in Halleck, which considered whether a public-access channel operated by a cable provider was a state actor. Summarizing the case law, the Court said the test required more than just a finding that the government at some point exercised the same function or that the function serves the public good. Instead, the government must have “traditionally and exclusively performed the function.” Halleck, 139 S. Ct. at 1929 (emphasis in original).

The Court then found that merely operating as a public forum for speech is not a function traditionally and exclusively performed by the government. And because “[it] is not an activity that only governmental entities have traditionally performed,” a private actor providing a forum for speech retains “editorial discretion over the speech and speakers in the forum.” Id. at 1930.

Following this Court’s state-actor jurisprudence, federal courts have consistently found social media companies are not equivalent to company towns and thus not subject to First Amendment constraints. Unlike the company town, where those within their geographical confines have little choice but to deal with them as if they are the government themselves, social media users can simply use alternative means to convey speech or receive it. The Ninth Circuit, for instance, squarely rejected the argument that social media companies fulfill a traditional, public function. See Prager Univ. v. Google, LLC, 951 F.3d 991, 996-99 (9th Cir. 2020). Every federal court to consider whether social media companies are state actors under this theory has found the same. See, e.g., Freedom Watch, Inc. v. Google Inc., 816 F. App’x 497, 499 (D.C. Cir. 2020); Brock v. Zuckerberg, 2021 WL 2650070, at *3 (S.D.N.Y. Jun. 25, 2021); Zimmerman v. Facebook, Inc., 2020 WL 5877863 at *2 (N.D. Cal. Oct. 2, 2020); Ebeid v. Facebook, Inc., 2019 WL 2059662 at *6 (N.D. Cal. May 9, 2019); Green v. YouTube, LLC, 2019 WL 1428890, at *4 (D.N.H. Mar. 13, 2019); Nyabwa v. Facebook, 2018 WL 585467, at *1 (S.D. Tex. Jan. 26, 2018); Shulman v. Facebook.com, 2017 WL 5129885, at *4 (D.N.J. Nov. 6, 2017).

B. Social media companies have a right to editorial discretion.

Private actors have the right to editorial discretion that cannot generally be overcome by state action compelling the dissemination of speech. See Mia. Herald Publ’g Co. v. Tornillo, 418 U.S. 241 (1974); Turner Broad. Sys. v. FCC, 512 U.S. 622 (1994). This is particularly important for private actors whose business is disseminating speech, like newspapers, cable operators, and social media companies.

In Tornillo, the Court struck a right-to-reply statute for political candidates because it “compel[s] editors or publishers to publish that which ‘reason tells them should not be published.’” 418 U.S. at 256. The Court established a general rule that the limits on media companies’ editorial discretion were not defined by government edict but by “the acceptance of a sufficient number of readers—and hence advertisers —to assure financial success; and, second, the journalistic integrity of its editors and publishers.” Id. at 255 (citing Columbia Broadcasting System, Inc. v. Democratic Nat’l Comm., 412 U. S. 94, 117 (1973)). In other words, the limits on how private entities exercise their editorial discretion comes from the marketplace of ideas itself—the preferences of speech consumers, advertisers, and the property owners—not the government.

The size and influence of social media companies does not shrink Tornillo’s effect. No matter how large the editor or the forum, the government still may not coerce private entities to disseminate speech. See id. at 254 (“However much validity may be found in these arguments [about monopoly power], at each point the implementation of a remedy such as an enforceable right of access necessarily calls for some mechanism .?.?.?If it is governmental coercion, this at once brings about a confrontation with the express provisions of the First Amendment.”). Alleged market power is insufficient to justify compelling the dissemination of speech by social media companies.

Turner confirms that market power is irrelevant. There the Court began with “an initial premise: Cable programmers and cable operators engage in and transmit speech, and they are entitled to the protection of the speech and press provisions of the First Amendment.” 512 U.S. at 636. While the Court nonetheless applied intermediate scrutiny, it did so based on technological differences in transmission by newspapers and cable television, and the fact that the law was content-neutral. The level of scrutiny thus turns on “the special characteristics” of transmission, not “the economic characteristics” of the market. Id. at 640.

Returning to Tornillo, the Court reasoned that the law violated the First Amendment by intruding upon the company’s editorial discretion. See 418 U.S. at 258. Like newspapers, social media platforms are “more than a passive receptable for news, comment, and advertising,” as their “choice of material,” their “decisions made as to the limitations on the size and content of the paper” and their “treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment.” Id. Indeed, that exercise of editorial control and judgment is central to a platform’s retention of speech consumers and attraction of advertisers targeting those users, and thus the platform’s continued survival. See supra, pp. ___.

Accordingly, federal courts rightly have called government actions into question when they violate the right of social media platforms to exercise editorial discretion. See NetChoice, LLC v. Bonta, 2023 WL 6135551, at *15 (N.D. Cal. Sept. 18, 2023); O’Handley v. Padilla, 579 F. Supp. 3d 1163, 1186-88 (N.D. Cal. Jan. 10, 2022); see also Murthy v. Missouri, No. 23-411, 2023 WL 6935337, at *2 (U.S. Oct. 20, 2023) (Alito, J., dissenting) (“The injunction applies only when the Government crosses the line and begins to coerce or control others’ [i.e. the social media companies’] exercise of their free-speech [i.e. editorial discretion] rights.”).

Thus, the Fifth Circuit’s claim in Paxton that “the Supreme Court’s cases do not carve out ‘editorial discretion’ as a special category of First-Amendment-protected expression,” 49 F.4th at 463, is demonstrably wrong. The Court has established that private actors have a right to exercise editorial discretion concerning speech on their property. See Halleck (using the phrase “editorial discretion” 11 times). Social media platforms have the same right.

C. Strict scrutiny applies.

As social media companies have a right to editorial discretion, the next question is the level of scrutiny the challenged statutes must satisfy. Strict scrutiny is proper, because social media platforms are much more like the newspapers in Tornillo than the cable companies in Turner.

In Turner, the Court found:

[The] physical connection between the television set and the cable network gives the cable operator bottleneck, or gatekeeper, control over most (if not all) of the television programming that is channeled into the subscriber’s home .?.?.?. [U]nlike speaker in other media, [cable operators] can thus silence the voice of competing speakers with a mere flick of the switch.

512 U.S. at 656. Social media platforms have no physical control of the connection to the home, and thus no practical ability to exclude competing voices or platforms. The internet architecture simply does not allow them to stop users from using other sites to find speech or speak. Strict scrutiny should apply to SB 7072 and HB 20.

Likewise, compelling social media companies to allow speech contrary to their terms of service is fundamentally different than mandating access for military recruiters in law schools or requiring shopping malls to allow the peaceful exercise of speech in areas held open to the public. Contra Paxton, 49 F.4th at 462-63. In those instances, there was no identification of the venue with the message. See Rumsfeld v. Forum for Acad. & Inst. Rights, Inc., 547 U.S. 47, 65 (2006); PruneYard Shopping Ctr. v. Robins, 447 U.S. 74, 86-88 (1980).

Here, the moderation decisions of social media companies do have implications for advertisers who do not want their brand associated with certain content. See Jonathan Vanian, Apple, Disney, other media companies pause advertising on X after Elon Musk boosted antisemitic tweet, CNBC (Nov. 17, 2023);[5] Caleb Ecarma, Twitter Can’t Seem to Buck Its Advertisers-Don’t-Want-to-Be-Seen-Next-to-Nazis Problem, Vanity Fair (Aug. 17, 2023);[6] Ryan Mac & Tiffany Hsu, Twitter’s US Ad Sales Plunge 59% as Woes Continue, N.Y. Times (Jun. 5, 2023).[7] Similarly, users will exit if they don’t enjoy the experience of the platform. See Steven Vaughan-Nichols, Twitter seeing ‘record user engagement’? The data tells a different story, ZDNet (Jun. 30, 2023).[8] Speech by social media companies disavowing what is said by some users of their platforms does not prevent advertisers and much of the public from identifying user speech with the platform.

Moreover, both the Florida and Texas laws are discriminate based upon content, as a reviewing court would have to consider what speech is at issue to determine whether a social media company can moderate it. This makes the laws different than those at issue in Turner, and offer an alternative reason they should be subject to strict scrutiny.

Section 230 of the Communications Act does not change this analysis. Contra Paxton, 49 F.4th at 465-66. Section 230 supplements the First Amendment’s protection of editorial discretion by granting “providers and users of an interactive computer service” immunity from (most) lawsuits for speech generated by other “information content providers” on their platforms. See 47 U.S.C. §230(c). The animating reason for Section 230 was to provide “protection for private blocking and screening” by preventing lawsuits over third party content that was left up, see Section 230(c)(1), or over third-party content that was taken down, see Section 230(c)(2). See also Geoffrey A. Manne, Ben Sperry, & Kristian Stout, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, 49 Rutgers Computer & Tech. L. J. 26, 39-41 (2022). Section 230 encourages social media companies to use their underlying First Amendment rights to editorial discretion. There is no basis for citing it as a basis for restricting such rights.

*  *  *

The challenged Florida and Texas laws treat social media platforms essentially as company towns. But social media platforms simply do not demonstrate the requisite characteristics sufficient to treat them as company towns whose moderation decisions are subject to court review for viewpoint discrimination. Instead, consistent with their economic function, they are private actors with their own rights to editorial discretion protected from government interference.

III. The Justifications for Common Carriage Regulation Do Not Apply to Social Media Companies.

The law and economics principles described above establish a general rule of the First Amendment that private property owners like social media companies have the right, responsibility, and need in the marketplace to moderate speech on their platforms. It makes no more sense to apply common carriage regulation to social media platforms than it does to treat them as company towns subject to the First Amendment.

Both Florida’s SB 7072 and Texas’s HB 20 are designed to restrict the ability of social media companies to exercise editorial discretion on their platforms. Each State justified its law by comparing social media companies to common carriers. Florida’s legislative findings included the statement that social media platforms should be “treated similarly to common carriers.” Act of May 24, 2021, ch. 2021-32, § 1(6), 2021 Fla. Laws 503, 505. Texas’ legislature found that “social media platforms function as common carriers” and “social media platforms with the largest number of users are common carriers by virtue of their market dominance.” Act of Sept. 9, 2021, ch. 3, § (3)–(4), 2021 Tex. Gen. Laws 3904, 3904.

But simply “[l]abeling” a social media platform “a common carrier .?.?.?has no real First Amendment consequences.” Denver Area Educ. Telecomm. Consortium, Inc. v. FCC, 518 U.S. 727, 825 (1996) (Thomas, J., concurring in the judgment in part and dissenting in part). And nothing about social media platforms justifies the label in any event: Social media platforms do not hold themselves out to the public as common carriers, and social media platforms lack monopoly power.

A. Social media platforms do not hold themselves out to all comers.

Both the Eleventh Circuit in Moody and the Fifth Circuit in Paxton recognized that one characteristic common carriers share is that they hold themselves out as serving all members of the public without individualized bargaining. See Moody, 34 F.4th 1196, 1220 (11th Cir. 2022); Paxton, 49 F.4th at 469.

Major social media companies, however, do not hold themselves out to the public indiscriminately either for users or the type of speech allowed. Unlike a telephone company or the postal service, both of which carry all private communications regardless of the underlying message, social media companies require all users to accept terms of service dealing specifically with speech in order to use the platform. They also maintain the discretion to enforce their rules as they see fit, both curating and editing speech before presenting it to the world.. As the Eleventh Circuit put it in Moody, social media users “are not freely able to transmit messages ‘of their own design and choosing’ because platforms make—and have always made—‘individualized’ content- and viewpoint-based decisions about whether to publish particular messages or users.” Moody, 34 F.4th at 1220 (quoting FCC v. Midwest Video Corp., 440 U.S. 689, 701 (1979)).

Moreover, the very service that online platforms offer to users, and that users accept, is the moderation of speech in one form or another. Instagram allows users to curate feeds of specialized images, and Twitter does the same for specialized microblogs. Without this core moderation service, the services would be essentially useless to users. By contrast, common carriers do not have as a core part of their service the moderation of speech: any moderation of speech is incidental to operation of the service (e.g. removing unruly passengers).

Judge Srinivasan’s concurring opinion in United States Telecom Association v. FCC, 855 F.3d 381 (D.C. Cir. 2017) (denying rehearing en banc), is instructive on this point. The panel there had denied a petition for review of the FCC’s net neutrality order, which applied common carriage regulation to internet service providers. At the rehearing stage, then-Judge Kavanaugh feared the panel’s opinion would allow the government to “impose forced-carriage or equal-access obligations on YouTube and Twitter.” Id. at 433 (Kavanaugh, J., dissenting). Judge Srinivasan sought to allay that fear by explaining: Social media platforms “are not considered common carriers that hold themselves out as affording neutral, indiscriminate access to their platform without any editorial filtering[.]”. Id. at 392 (Srinivasan, J., concurring) (emphasis added). Indeed, even the Internet service providers deemed common carriers there could escape such designation if they acted like social media platforms and exercised editorial discretion and advertised themselves as doing so. See id. at 389-90 (Srinivasan, J., concurring).

Unlike the telegraph, telephone, the postal service, or even email, major social media companies do not hold themselves out to the public as open to all legal speech—they expressly retain their editorial discretion. They have publicly available terms of service that users must agree to before creating profiles that detail what is and is not allowed on their platforms. While common carriers like airlines may be able to eject passengers based upon conduct even where there is a speech element, social media companies retain the right to restrict pure expression that is inconsistent with their community standards. These rules include limitations on otherwise legal speech and disclose that violators may be restricted from use, including expulsion. Br. for Pet’rs, https://netchoice.org/wp-content/uploads/2023/11/No.‌-22-555_NetChoice-and-CCIAs-Brief-Paxton.pdf, at 4-7.

The Fifth Circuit was wrong to minimize social media platforms’ editorial discretion by comparing their efforts to newspapers curating articles and columns. See Paxton, 49 F.4th at 459-60, 492 (noting that more than 99% of content is not reviewed by a human). Miami Herald did not establish a floor on how much a private actor must exercise editorial discretion in order to be protected by the First Amendment. Nor did it specify that a human must review content rather than a company investing in algorithms to help them moderate content. The Fifth Circuit’s reasoning is essentially a “use it or lose it” theory of the First Amendment, which says if social media companies do not aggressively use their editorial discretion rights, then they can lose them. “That is not how constitutional rights work,” however; the “‘use it or lose it’ theory is wholly foreign to the First Amendment.” U.S. Telecom, 855 F.3d at 429 (Kavanaugh, J., dissenting).

Since social media companies do not hold themselves out to the public as open to all speech, they are not common carriers that can somehow be required to carry third party speech contrary to their terms of service.

B. Social media companies lack gatekeeper monopoly power.

Another reason offered for treating social media platforms like common carriers is that some social media companies are alleged to have “dominant market share,” see Biden v. Knight, 141 S. Ct. 1220, 1224 (2021) (Thomas, J., concurring), or in the words of Turner, “gatekeeper” or “bottleneck” market power. See Turner, 512 U.S. at 656.

As shown above, however, Turner is not really about market power but about the unique physical connection that gave cable providers the power to restrict access to content by the flick of a switch. In any case, there is no basis for concluding that social media companies are all monopolists.

A number of major social media companies covered by the Florida and Texas laws are not in any sense holders of substantial market power as measured by share of visits.[9] Neither are companies like reddit, LinkedIn, Tumblr, or Pinterest, who all have even fewer visits. Nonetheless, the challenged laws would apply to such entities based on monthly users at the national level or gross revenue. See Fla. Stat. §501.2041(1)(g)(4) (covered providers must have at least 100 million monthly users or $100 million in gross annual revenue); Tex. Bus. & Com. Code §§ 120.001(1), .002(b) (covered social media platforms have 50 million monthly active users). But raw revenue or user numbers do not show market power. It is, at the very least, market share (i.e., concentration) that could plausibly be instructive—and even then, market power entails a much more complex determination. See, e.g., Brian Albrecht, Competition Increases Concentration, Truth on the Market (Aug. 16, 2023), https://‌truthonthemarket.com/2023/08/16/competition-increases‌-concentration/. As economist Chad Syverson puts it, “concentration is worse than just a noisy barometer of market power. Instead, we cannot even generally know which way the barometer is oriented.” Chad Syverson, Macroeconomics and Market Power: Context, Implications, and Open Questions, 33 J. Econ. Persp. 23, 26 (2019).

Second, there is no legislative finding of market power that would justify either law: just a bare assertion by the Texas legislature that “social media platforms with the largest number of users are common carriers by virtue of their market dominance.” HB 20 § 1(4). That “finding” by the Texas legislature fails to even define a relevant market, let alone establish market shares, or identify any indicia of market power of any players in that market. In then-Judge Kavanaugh’s words, both Florida and Texas failed to “even tr[y] to make a market power showing.” U.S. Telecom, 855 F.3d at 418 (Kavanaugh, J., dissenting); see also FTC v. Facebook, 560 F. Supp. 3d 1, 18 (D.D.C. Jun. 28, 2021) (“[T]he FTC’s bare assertions would be too conclusory to plausibly establish market power”).

The Texas legislature’s bare assertion is considerably weaker than the “unusually detailed statutory findings” the Court relied on in Turner, 512 U.S. at 646,[10] and is woefully insufficient to permit reliance on this justification for common-carrier-like treatment under the First Amendment.

Conclusion

The First Amendment protects the marketplace of ideas by protecting private ordering of speech rules. For the foregoing reasons, the Court should reverse the decision of the Fifth Circuit in Paxton and affirm the decision of the Eleventh Circuit in Moody.

[1] Amicus curiae affirms that no counsel for any party authored this brief in whole or in part, and that no entity or person other than amici and their counsel made any monetary contribution toward the preparation and submission of this brief.

[2] Throughout this brief, the term “platform” as applied to the property of social media companies is used in the economic sense, as these companies are all what economists call multisided platforms. See David S. Evans, Multisided Platforms, Dynamic Competition, and the Assessment of Market Power for Internet-Based Firms, at 6 (Coase-Sandor Inst. for L. & Econ. Working Paper No. 753, Mar. 2016).

[3] Valtteri Vuorio & Zachary Horne, A Lurking Bias: Representativeness of Users Across Social Media and Its Implications for Sampling Bias In Cognitive Science, PsyArXiv Preprint at 1 (Feb. 2, 2023); see also, e.g., Alessia Antelmi, et al., Characterizing the Behavioral Evolution of Twitter Users and The Truth Behind the 90-9-1 Rule, in WWW ’19: Companion Proceedings of The 2019 World Wide Web Conference 1035 (May 2019).

[4] “For decades, the 18-to-34 age group has been considered especially valuable to advertisers. It’s the biggest cohort, overtaking the baby boomers in 2015, and 18 to 34s are thought to have money to burn on toys and clothes and products, rather than the more staid investments of middle age.” Ryan Kailath, Is 18 to 34 still the most coveted demographic?, Marketplace.com Dec. 8, 2017), https://www.market‌place.org/2017/12/08/coveted-18-34-year-old-demographic.

[5] https://www.cnbc.com/2023/11/17/apple-has-paused-advertising-on-x-after-musk-promoted-antisemitic-tweet.html.

[6] https://www.vanityfair.com/news/2023/08/twitter-advert‌isers-dont-want-nazi-problem.

[7] https://www.nytimes.com/2023/06/05/technology/twitter-ad-sales-musk.html.

[8] https://www.zdnet.com/article/twitter-seeing-record-user-engagement-the-data-tells-a-different-story.

[9] See https://www.statista.com/statistics/265773/market-share-of-the-most-popular-social-media-websites-in-the-us (Facebook at 49.9%, Instagram at 15.85%, X/Twitter at 14.69%, YouTube at 2.29%); https://gs.statcounter.com/social-media-stats/all/‌united-states-of-america (similar numbers).

[10] See also Pub. L. 102-385 § 2(a)(1) (detailing price increases of cable television since rate deregulation, which is inferential evidence of market power); id. § 2(a)(2) (explaining that local franchising regulations and the cost of building out cable networks leave most consumers with only one available option).

Continue reading
Innovation & the New Economy