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The FCC’s Bright Lines

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The US Federal Communications Commission (FCC) has done what many observers long believed was unthinkable. The FCC – by a three-to-two party-line vote – replaced its longstanding ‘light touch’ approach to internet regulation with comprehensive network neutrality rules that:

  • Reclassify retail broadband internet access service (BIAS) as a telecommunications service subject to ‘common carrier’ (public utility) regulation
  • Expressly ban ‘paid prioritisation’
  • Regulate the relationship between broadband internet service providers (ISPs) and their retail customers
  • Apply to mobile ISPs the same regulatory requirement applied to fixed ISPs
  • Empower the agency to resolve what were previously viewed as commercial disputes regarding internet interconnection.

“Even if the order survives judicial review intact, how will the rules operate in practice?”

After years of debate, the FCC sought to create ‘certainty’ by adopting a series of ‘bright line’ rules regarding network neutrality. However, the Open Internet Remand Order (Remand Order) raises a number of new questions – in particular, will the Court of Appeals – as it has done twice before – strike down some or all of the FCC’s network neutrality determination? And, even if the order survives judicial review intact, how will the rules operate in practice?


the road to regulation

The speed with which the regulatory ground shifted has been breathtaking. In January 2014, in Verizon vs FCC, the Court of Appeals for the District of Columbia Circuit (DC Circuit) struck down most of the FCC’s prior Open Internet rules. Those rules, adopted by the agency in 2010, included a prohibition against ‘unreasonable discrimination’, which implicitly barred paid prioritisation. (Paid prioritisation refers to an arrangement in which an ‘edge provider’, such as Google or Netflix, agrees to pay a broadband ISP, such as AT&T or Comcast, for access to a ‘fast lane’ between the ISP’s point of presence and the ISP’s retail customers’ premises.)

Four months later, the FCC issued a Notice of Proposed Rulemaking (Notice) which – based on guidance provided by the court – proposed to adopt rules that banned broadband ISPs from blocking internet traffic, while allowing ‘commercially reasonable’ paid prioritisation agreements. The FCC’s proposal ignited a firestorm of opposition. Interested parties filed some four million comments, many opposing the adoption of the ‘commercially reasonable’ standard. In November 2014, President Obama called on the FCC to adopt “the strongest possible rules to protect net neutrality”, including an express prohibition of paid prioritisation. That is exactly what the FCC has done.


Five Fundamental Changes

Rarely has the FCC overturned so many precedents in a single order.

1 Reclassification.

Under the US Communications Act, electronic communications services are classified as either ‘telecommunications’ or ‘information’ services. Telecommunications services enable the delivery of user-provided information between points specified by the end-user “without change in the form or content of the information”. By contrast, information services provide users with “capability for generating, acquiring, storing, transforming, processing, retrieving, utilising, or making available information”.

Telecommunications services are subject to traditional public utility regulations – referred to in the US as Title II or ‘common carrier’ regulation – including the requirement that services be provided to any user, on reasonable request, at standardised prices, terms and conditions that are just, reasonable and not unreasonably discriminatory. Information services, by contrast, are subject to ‘light touch’ regulation. Indeed, the Communications Act expressly prohibits the FCC from imposing common carrier regulation on information services.

Since 1998, the FCC has repeatedly concluded that an entity that provides broadband internet access is providing a single, integrated information service because the offering “combines the transmission of data with computer processing, information provision, and computer interactivity”. The Supreme Court upheld this decision.

In Verizon, the DC Circuit held that the FCC’s ‘no unreasonable discrimination’ rule contravened the statutory prohibition against imposing common carrier obligations on providers of information services. The rule, the court explained, did exactly what Title II does: it prohibited broadband ISPs from unreasonably discriminating against edge providers. The court therefore struck down the rule (along with a prohibition on blocking edge provider traffic) and remanded the case to the FCC for further consideration.

The Verizon case made clear that the only way that the FCC might be able to prohibit paid prioritisation would be to reclassify broadband internet access service as a telecommunications service. The FCC does not have unlimited discretion to classify a service as telecommunications or an information service in order to achieve its policy goals. Rather, the FCC’s classification must be based on the characteristics of the service. In the Remand Order, the FCC found that, in recent years, the market had changed: consumers now view broadband internet access service as one that merely transports traffic from end-users to an internet endpoint and from that endpoint back to the end-user. Therefore, the agency concluded, BIAS should be reclassified as a telecoms service.

2 Prohibition of paid prioritisation.

Acting pursuant to its authority under Title II of the Communications Act, the FCC adopted a rule that for the first time expressly prohibits broadband ISPs from accepting payment to provide an edge provider with access to a ‘fast lane’ between the ISP and its end-users. While broadband ISPs may seek waivers of this rule, they must demonstrate that any paid prioritisation arrangement “would provide some significant public interest benefit and would not harm the open nature of the internet”, a standard that will be very difficult – if not impossible – to meet.

3 Complaint process.

The FCC’s reclassification of broadband internet access service as a telecommunications service has another important consequence. Historically, the FCC has not actively regulated the relationship between broadband ISPs and their subscribers. In the Remand Order, however, the FCC made clear that end-users, as they have long done when dissatisfied with their telephone service, will now be able to file a complaint with the agency if they do believe that their broadband ISP is not fulfilling its obligation as a common carrier to provide service on terms that are just, reasonable and not unreasonably discriminatory.

“The FCC’s new rules apply equally to both fixed and mobile broadband internet services.”

4 Regulation of mobile broadband

Internet access service. The FCC’s 2010 Open Internet rules were asymmetrical: mobile broadband ISPs were subject to significantly less regulation than fixed broadband ISPs. This reflects both historical practice – the mobile market has always been lightly regulated in the US – and the fact that, at the time the FCC adopted those rules, the mobile broadband internet access market was just starting to develop. By contrast, the FCC’s new rules apply equally to both fixed and mobile broadband internet access services. The FCC reasoned that imposition of symmetrical regulation is now appropriate because mobile BIAS is more widely used and mobile networks are more technologically advanced than they were in 2010.

5 Internet interconnection.

Perhaps the greatest surprise was the FCC’s decision to address the relationship between broadband ISPs and entities with which they interconnect. Broadband ISPs typically interconnect with internet backbone providers, which carry traffic between the ISPs and edge providers. Increasingly, however, large edge providers, such as Netflix, are seeking to negotiate direct interconnection agreements with broadband ISPs. Other edge providers are contracting with content delivery networks (CDNs), such as Akamai, to host their content in servers located close to consumers of that content.

The CDNs, in turn, seek to negotiate direct interconnection agreements with the ISPs that serve those consumers. In either case, the primary purpose is the same: to enable content to be delivered to end-users more quickly.

Historically, ISP interconnection agreements have been viewed as purely commercial arrangements, not subject to FCC oversight. Indeed, until very recently, this issue was not even viewed as part of the network neutrality debate. Nonetheless, the FCC ruled that – for the first time – broadband providers, CDNs, and edge providers that have entered (or that seek to enter) internet interconnection agreements can file complaints at the agency if they believed that an ISP is engaging in unjust or unreasonable practices, such as failing to provide adequate interconnection capacity.


Five LEGAL challenges

Not surprisingly, the FCC’s Remand Order has proven controversial. Network neutrality advocates have praised the agency’s actions, which they believe are necessary to ensure that ISPs do not use their position as gatekeepers to destroy the openness that has made the internet such a powerful engine for innovation and the free exchange of ideas. By contrast, major telephone and cable companies claim that the rules exceed the FCC’s statutory authority and, in any case, are unnecessary.

A number of ISPs and trade associations are challenging the FCC’s decision in the courts. While the parties have not yet filed their legal briefs, they are likely to contest at least five separate aspects of the Remand Order. Challenging an administrative agency decision is always an uphill battle: US law generally requires the courts to defer to agency decisions unless they are ‘arbitrary and capricious’, not supported by the evidence, or exceed the agency’s statutory authority. The FCC, moreover, is entitled to deference in interpreting the provisions of the Communications Act. Nonetheless, the DC Circuit, which is the court most likely to hear the appeal, could find that one or more of the challenges has merit.

1 Inadequate notice.

The first challenge will almost certainly be procedural. Under US law, an administrative agency must provide the public with adequate notice, and a reasonable opportunity to comment, before adopting new regulations. In the present case, the FCC sought comment on proposed rules that would have preserved the classification of broadband internet access service as an information service, while banning only ‘commercially unreasonable’ paid prioritisation agreements. The rules adopted, however, reclassify BIAS as a telecommunications service, and ban all paid prioritisation. The parties challenging the rules are certain to argue that, given the fundamental change in direction, the FCC should have issued a further Notice and invited another round of comments.

“Interested parties have already said just about all there is to say on net neutrality.”

This argument is not likely to prevail. The FCC’s Notice sought comments on a range of options, including reclassification, and many commenters expressed views – both pro and con – about the actions that the agency ultimately took. Moreover, as a practical matter, requiring the FCC to seek further comment would not likely change the outcome. After years of debate, and the filing of millions of comments, interested parties have already said just about everything there is to say on the subject of net neutrality.

2 Reclassification.

The most vulnerable part of the Remand Order is the reclassification of a broadband internet access service as a telecommunications service. The FCC has described BIAS as a “retail service . . . that provides the capability to transmit data to and receive data from all or substantially all internet endpoints”. In other words, in the FCC’s view, the service consists of transporting a user’s information to an edge provider and transporting the edge provider’s information back to the user.

Parties challenging the order are likely to argue that a broadband internet access service, as defined by the FCC, does not meet the statutory definition of a telecommunications service. BIAS, in this view, does not simply deliver user-provided information between points specified by the end-user “without change in the form or content of the information”. Rather, the service allows a user to send a request to an edge provider and have the edge provider send back the requested content. This function, they are likely to contend, fits far more naturally within the definition of an information service because it uses telecommunications to provide users with “capability for generating, acquiring, storing, transforming, processing, retrieving, utilising, or making available information”.

3 Paid prioritiSation.

If the court finds that the FCC erred in reclassifying a broadband internet access service as a telecommunications service, it would have to conclude – as the court did in Verizon – that the FCC lacks legal authority to ban paid prioritisation because this would constitute the imposition of common carrier regulations on an information service provider. However, even if the court upholds the FCC’s reclassification, it could still strike down the prohibition on paid prioritisation.

Paid prioritisation proponents are likely to point out that the Communications Act does not prohibit common carriers from discriminating. Rather, Section 202(a) of the Act bars only unjust and unreasonable discrimination. Consistent with this provision, telecommunications common carriers may offer different grades of service at different prices. For example, carriers have long charged higher rates for faster transmission speeds. As the DC Circuit concluded in Verizon, the FCC’s ban on paid prioritisation does not permit broadband ISPs to engage in any discrimination. Rather, broadband
ISPs must deliver all edge provider traffic to end-users on identical terms – ie. at the same speed and at no charge.

The FCC, however, did not rely on Section 202(a) to ban paid prioritisation. Rather, the agency relied on a different provision of the Act, Section 201(b), which bans ‘unjust’ and ‘unreasonable’ practices. In Verizon, the Court of Appeals found reasonable the FCC’s somewhat counter-intuitive conclusion that allowing broadband ISPs to charge for paid prioritisation would ultimately decrease the ISPs’ incentive to invest in infrastructure. That could provide a basis on which to conclude that entering into a paid prioritisation agreement is an unreasonable practice. Nonetheless, given the long history of allowing common carriers to engage in ‘reasonable’ discrimination, the court might not agree that charging higher prices for faster service is an unreasonable practice.

4 Application of common carrier requirements to mobile ISPs.

Mobile ISPs are also certain to challenge the FCC’s decision to apply common carrier regulation to mobile broadband internet access services. While this is a serious claim, the FCC’s decision may be able to survive judicial review. Under the Communications Act, the FCC can only apply common carrier regulations to mobile providers that offer so-called Commercial Mobile Radio Services (CMRS). Section 332(d) of the Act defines CMRS as services that are interconnected to ‘the public switched network’. The FCC has long defined the public switched network to mean the public switched telephone network (PSTN). In order to apply common carrier regulation to mobile ISPs, however, the FCC broadened the definition of the public switched network to include the internet.

Mobile ISPs claim the FCC did not have authority to make this change because, at the time Congress adopted the relevant statutory provisions, and up until the adoption of the Remand Order, the term ‘public switched network’ has always been used to mean the public telephone network. Fortunately for the FCC, however, Congress – doubtless recognising that technology would evolve over time – gave the agency express authority to redefine the public switched network.

“Congress gave the agency express authority to redefine the public switched network.”

5 Application of forbearance.

Title II of the Communications Act contains a wide range of requirements applicable to common carriers. Many of the requirements date back to the adoption of the Act in 1934, when telephone service was viewed as a natural monopoly. In 1996, however, Congress gave the FCC power to ‘forbear’ from applying a provisions of the Act if the agency concluded that application of the provision is not necessary to protect consumers or to ensure that a telecommunications carrier is providing service on prices, terms and conditions that are just, reasonable and not unjustly or unreasonably discriminatory.

Acting pursuant to this authority, the FCC ‘forbeared’ from applying a significant number of Title II requirements to broadband ISPs. For example, the FCC will not require broadband ISPs to file and obtain advanced regulatory approval for tariffs. By picking and choosing which Title II provisions to apply, the FCC sought to adopt a ‘Title II for the 21t century’ – similar to that which has long-governed mobile telephony – that would impose no more regulation than necessary.

Some broadband ISPs may challenge the FCC’s use of forbearance on the grounds that the agency failed to assess whether market competition is sufficiently effective to allow for the lifting of Title II requirements. Ordinarily, of course, most entities prefer less regulation. But, by challenging the FCC’s use of its forbearance authority, some litigants may seek to force the FCC to make an ‘either/or’ choice: either the FCC imposes the full range of Title II requirements or it returns to the ‘light touch’ regime applicable to information service providers.

While this is an interesting strategic move, it is unlikely to be effective. To be sure, the Communications Act requires the FCC to consider whether forbearance “will promote competitive market conditions”. And, in many cases, the development of competition has provided a basis for the FCC to exercise its forbearance authority. However, the Communications Act nowhere requires the FCC to find that a particular market is competitive before it does so.


Five Unintended Consequences

Even if the FCC’s Remand Order survives judicial review, it could still have some significant unintended consequences.

1 Regulation of prices, terms, and conditions.

Although the FCC decided to forbear from requiring broadband ISPs to file tariffs, the agency will allow retail customers who believe that the prices, terms and conditions on which an ISP is providing service are not just and reasonable to file complaints. As a result, a subscriber who thinks his monthly charge is too high, or who thinks her data cap is too slow, could ask the FCC to resolve the dispute. While the FCC’s enforcement decision would nominally bind only the parties, it would effectively establish the prices, terms and conditions on which the broadband ISP would provide service to all customers going forward. Given the limited competition in the broadband internet access market, the FCC could be inundated with such complaints.

2 Universal service.

The FCC’s decision also could result in higher prices for retail customers. Section 254 of the Communications Act requires telecommunications carriers to make payments to the universal service fund (USF). Under current rules, common carriers must pay 17.4% of all ‘end-user telecommunications revenues’ to the fund; carriers typically pass these costs through to their customers. Given the continuing decrease in end-user telecommunications revenue resulting from the migration of traffic from traditional voice networks to the internet, the USF ‘tax rate’ will soon reach unacceptably high levels.

While the FCC has temporarily ‘forbeared’ from requiring broadband ISPs to make USF payments, the agency will be under intense pressure to broaden the tax base by including payments from broadband internet access subscribers within the definition of end-user telecommunications revenue. If the agency does so, consumers could find significant universal service surcharges tacked onto their monthly internet bills.

3 Interconnection.

Network neutrality advocates contend that regulation – and, in particular, the prohibition of paid prioritisation – is necessary to level the playing field. By prohibiting wealthy, established edge providers from purchasing access to a fast lane between an ISP and its subscribers, they reason, net neutrality ensures that small, innovative edge providers will have the same ability to access end-users as other market participants.

Ironically, banning paid prioritisation may not accomplish the advocates’ primary goal. If wellfunded edge providers are not able to get their content to subscribers more quickly by getting priority access to the ‘last mile’, they will try to obtain an advantage elsewhere. The largest edge providers will pay for direct interconnection to the major broadband ISPs. Other edge providers are likely to enter into agreements to have content delivery networks host their content. Rather than discouraging this conduct, the FCC will actually facilitate it by allowing edge providers and CDNs to file a complaint if they believe that the prices, terms, and conditions on which an ISP is offering interconnection are not just and reasonable.

4 State regulation.

The FCC’s Remand Order could also lead to renewed disputes between the federal agency and the 50 state public utility commissions. Under the dual regulatory system created by the Communications Act, the FCC regulates international and interstate communications (such as a telephone call from Los Angeles to New York), while the state commissions regulate ‘intrastate’ communications (such as calls from Los Angeles to San Francisco). However, the FCC can preempt state regulation of intrastate service where, as a practical matter, it is not possible to separate a service into interstate and intrastate components and apply separate regulatory requirements to each.

The FCC has long held that broadband internet access service is subject solely to federal regulation because it is not possible to determine whether a particular internet communication originates and terminates in the same state. As long as the FCC classified broadband internet access service as an information service subject to light touch regulation, the states were generally willing to defer. However, now that the FCC has reclassified BIAS as a telecommunications service subject to Title II regulation, state regulatory authorities are likely to try to reassert their historic role. If the FCC seeks to preempt such actions, the agency could find itself back in court.

5 International.

Finally, the Remand Order could significantly complicate the US government’s negotiation position in multilateral forums, such as the International Telecommunications Union (ITU). The US has strongly opposed efforts by some countries to apply legacy telecoms regulation to the internet on the grounds that this could provide a basis for nations to impair the openness of the internet. US government officials may find it difficult to explain to other countries why their imposition of traditional telecoms regulation would harm internet openness, while imposition of traditional telecoms regulation by the FCC will have precisely the opposite effect.


Next Steps

Interested parties will have until early June to file petitions for judicial review. The court of appeals is likely to hear oral argument in the autumn, with a decision sometime around the end of the year. Any party not satisfied with the result could seek Supreme Court review. If the Court agrees to hear the case, it would likely issue a decision during the first quarter of 2017. In the interim, Congress could seek to resolve the issue through legislation. However, few observers currently believe that Congress can craft a bipartisan bill that would be acceptable to the President.

One thing is certain: the debate about network neutrality is far from over.

Jonathan Jacob Nadler says the FCC’s new Open Internet Remand Order makes five fundamental changes, faces five legal challenges – and will have five unintended consequences.

Intermedia Issue:
Vol 43, Issue 2
Issue Date:
June 2015

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