How the FCC Will Lose on Net Neutrality
With Matt Starr, Berin Szoka and Geoffrey Manne
Today’s oral argument in the D.C Circuit over the FCC’s Net Neutrality rules suggests that the case — Verizon v. FCC — is likely to turn on whether the Order impermissibly imposes common carrier regulation on broadband ISPs. If so, the FCC will lose, no matter what the court thinks of the Commission’s sharply contested claims of authority under the Telecommunications Act.
The FCC won last year before the same court when Verizon challenged its order mandating that carriers provide data roaming services to their competitors’ customers. But Judge Tatel, who wrote the Cellco decision is likely to write the court’s opinion overturning the Net neutrality rules — just as he wrote the court’s 2010 Comcast v. FCC opinion, thwarting the FCC’s first attempt at informal net neutrality regulation.
Over an extraordinary two-hour session, Judges Tatel and Silberman asked a barrage of questions that suggest they’ll apply the same test used to uphold the data roaming rule to strike down at least the non-discrimination rule at the heart of the Open Internet Order — and probably, the entire Order.
Common Carrier Analysis
The Communications Act explicitly prohibits treating services that are not regulated under Title II as common carriers. Title II regulates “telecommunications services,” such as landline telephone service, but broadband is an “information service” regulated under Title I of the Act, while wireless is regulated under Title III of the Act (as a “radio transmission”).
In Cellco, the court ruled that the FCC’s data roaming rule did not impermissibly classify mobile providers as common carriers even though it compelled wireless carriers to let other companies’ subscribers roam on their networks. Here, the Open Internet Order effectively forces ISPs to carry traffic of all “edge” providers in an equal, non-discriminatory manner. While these might seem similar, the two mandates differ significantly, and Tatel’s analysis in the data roaming case may lead to precisely the opposite result here.
Tatel’s data roaming opinion rested on a test, derived from decades of case law, for determining what level of regulation constitutes an impermissible imposition of common carrier status:
“If a carrier is forced to offer service indiscriminately and on general terms, then that carrier is being relegated to common carrier status”;
“[T]he Commission has significant latitude to determine the bounds of common carriage in particular cases”;
“[C]ommon carriage is not all or nothing—there is a gray area [between common carrier status and private carrier status] in which although a given regulation might be applied to common carriers, the obligations imposed are not common carriage per se” because they permit carriers to retain sufficient decisionmaking authority over their networks (by retaining programming control and/or the authority to negotiate terms, for example); and
In this gray area, “[the FCC’s] determination that a regulation does or does not confer common carrier status warrants deference” under the Supreme Court’s Chevron decision.
In Cellco, the court determined that the data roaming rule fell into the gray area, and thus deferred to the FCC’s determination that the regulation did not impose common carrier status. The essential distinction, according to the court, was that carriers remained free to “negotiate the terms of their roaming arrangements on an individualized basis,” provided their terms were “commercially reasonable.” Rather than impose a “presumption of reasonableness,” the Commission offered “considerable flexibility for providers to respond to the competitive forces at play in the mobile-data market.” Thus, the court held, the data roaming rule “leaves substantial room for individualized bargaining and discrimination in terms,” and thus “does not amount to a duty to hold out facilities indifferently for public use.”
The Open Internet rules, by contrast, impose a much harsher restriction on what ISPs may do with their broadband networks, barring them from blocking any legal content and prohibiting “unreasonable” discrimination. Judges Tatel and Silberman repeatedly asked questions that suggested that the Order’s reasonable discrimination rule removed the kind of “flexibility” that justified upholding the data roaming rule. By requiring carriers to “offer service indiscriminately and on general terms” and to “hold out facilities indifferently for public use” (to quote the D.C. Circuit’s test), the rule would go beyond the “gray area” in which the FCC gets deference, and fall into the D.C. Circuit’s definition of common carriage. If that’s indeed ultimately where the two judges wind up, it’s game over for the FCC.
The Open Internet Order requires broadband ISPs to make their networks available, and to do so on equal terms that remove pricing flexibility, to any edge provider that wishes to have its content available on an ISP’s network. This seems to be Judge Tatel’s interpretation of ¶ 76 of the Order, which goes on at length about the reasons why “pay for priority” arrangements would “raise significant cause for concern” and then concludes: “In light of each of these concerns, as a general matter, it’s unlikely that pay for priority would satisfy the ‘no unreasonable discrimination’ standard.” So… legal in principle, but effectively banned in practice — a per se rule dressed up as a rule of reason.
If that isn’t, in effect, a requirement that ISPs hold out their networks “indifferently for public use,” it’s hard to imagine what is — as Tatel certainly seemed to think today. Tatel’s use of the term “indiscriminately” in Cellco almost hints that the test was written with the FCC’s “no discrimination” rule in mind.
The FCC tried, but failed, to address such concerns in the Open Internet Order, by arguing that broadband providers remained free to “make individualized decisions” with the only customers that matter: their subscribers. Today, the agency again insisted that restricting, however heavily, a broadband provider’s ability to negotiate with an edge provider (or the backbone providers in between) is irrelevant to the analysis of whether the FCC has illegally imposed common carriage. But if that argument worked, the D.C. Circuit would not have had to analyze whether the data roaming rule afforded sufficient flexibility to carriers in contracting with other carriers to provide data roaming services to their customers.
Similarly, the FCC failed today, and in its briefs, to effectively distinguish this case from Midwest Video II, which was critical to the Cellco decision. here, the Supreme Court court struck down public-access rules imposed on cable companies as impermissible common carrier regulation because they “prohibited [cable operators] from determining or influencing the content of access programming,” and “delimit[ed] what [they could] charge for access and use of equipment.” In other words, the FCC’s rule left no flexibility for negotiations between companies — the same problem as in the Open Internet Order. The FCC attempted to distinguish the two cases by arguing that the FCC was restricting an existing wholesale market for channel carriage, while no such market exists today for prioritized Internet services. But this misses the key point made, emphatically, by Judge Silberman: it is the FCC’s relentless attempt to regulate Net Neutrality that has prevented the development of this market. Nothing better reveals the stasis mentality behind the FCC’s Order
Perhaps the most damning moment of today’s arguments occurred when Verizon’s lawyer responded to questions about what room for negotiation was left under the unreasonable discrimination rule — by pointing to what the FCC itself said in Footnote 240 of the Order. There the FCC quotes, approvingly, comments filed by Sprint: “The unreasonable discrimination standard contained in Section 202(a) of the Act contains the very flexibility the Commission needs to distinguish desirable from improper discrimination.” In other words, the only room for “commercially reasonable negotiation” recognized by the FCC under the nondiscrimination rule is found in the limited discretion traditionally available to common carriers under Section 202(a). Oops. This #LawyerFail will doubtless feature prominently in the court’s discussion of this issue, as the FCC’s perhaps accidental concession that, whatever the agency claims, it’s really imposing common carrier status — analogous to Title II, no less!
Judges Tatel and Silberman seemed to disagree only as to whether the no-blocking rule would also fail under Cellco’s reasoning. Tatel suggested that if the non-discrimination rule didn’t exist, the blocking rule, standing alone, would “leave substantial room for individualized bargaining and discrimination in terms” just as the data roaming rule did. Tatel spent perhaps fifteen minutes trying to draw clear answers from all counsel on this point, but seemed convinced that, at most, the no-blocking rule simply imposed a duty on the broadband provider to allow an edge provider to reach its customers, while still allowing the broadband provider to negotiate for faster carriage on “commercially reasonable terms.” Silberman disagreed, insisting that the blocking rule still imposed a common carrier duty to carry traffic at a zero price.
Ultimately the distinction between these two rules under Cellco’s common carriage test may not matter. If the court decides that the order is not severable, striking down the nondiscrimination rule as common carriage would cause the entire Order to fall.
The judges got into an interesting, though relatively short, discussion of this point. Verizon’s counsel repeatedly noted that the FCC had never stated any intention that the order should be read as severable either in the Order, in its briefs or even at oral argument. Unlike in MD/DC/DE Broadaster’s Assoc. v. FCC, the Commission did not state in the adopting regulation that it intended to treat the regulation as severable. And, as the DC Circuit has stated, “[s]everance and affirmance of a portion of an administrative regulation is improper if there is ‘substantial doubt’ that the agency would have adopted the severed portion on its own.”
The question, as the Supreme Court held in K Mart Corp. v. Cartier, Inc., is whether the remainder of the regulation could function sensibly without the stricken provision. This isn’t clear. While Judge Tatel seems to suggest that the rule against blocking could function without the nondiscrimination rule, Judge Silberman seems convinced that the two were intended as necessary complements by the FCC. The determination of the no-blocking rule’s severability may come down to Judge Rogers, who didn’t telegraph her view.
So what’s next?
The prediction made by Fred Campbell shortly after the Cellco decision seems like the most likely outcome: Tatel, joined by at least Silberman, could strike down the entire Order as imposing common carriage — while offering the FCC a roadmap to try its hand at Net Neutrality yet again by rewriting the discrimination rule to allow for prioritized or accelerated carriage on commercially reasonable terms.
Or, if the the court decides the order is severable, it could strike down just the nondiscrimination rule — assuming the court could find either direct or ancillary jurisdiction for both the transparency rule and the non-discrimination rule.
Either way, an FCC loss will mean that negotiated arrangements for priority carriage will be governed under something more like a rule of reason. The FCC could try to create its own rule. Or the matter could simply be left to the antitrust and consumer protection laws enforced by the Department of Justice, the Federal Trade Commission, the states and private plaintiffs. We think the latter’s definitely the best approach. But whether it is or not, it will be the controlling legal authority on the ground the day the FCC loses — unless and until the FCC issues revised rules (or Congress passes a law) that can survive judicial review.
Ultimately, we suspect the FCC will have a hard time letting go. After 79 years, it’s clearly in denial about its growing obsolescence.
Filed under: federal communications commission, net neutrality, regulation, telecommunications Tagged: DC Circuit, FCC, Federal Communications Commission, Internet service provider, net neutrality, NetNeutrality, Tatel, Verizon, Verizon Communications, Verizon Wireless