Net neutrality is on trial in Washington. Here’s what you need to know.

September 10, 2013

(Photo by Matt McGee)

On Monday, network neutrality got its day in court. The United States Court of Appeals for the D.C. Circuit heard arguments from Verizon that the Federal Communications Commission had exceeded its authority by enacting network neutrality regulations.

But if you had gone to court expecting a rousing argument about the merits of network neutrality regulation, you would have been disappointed. Drenched in legal jargon, the argument focused on minutia of the 1996 Telecommunications Act and of past legal precedents.

Fortunately, we're here to help. Read on to learn how we got to this point, what's at stake in the debate, and what will happen if the courts find the FCC overstepped its authority.

What was Monday's oral argument about?

In 2010, the Federal Communications Commission approved an Open Internet Order, which prohibited broadband providers from blocking or discriminating against Internet content. Advocates of the order argue it was necessary to prevent large incumbents like Verizon and Comcast from stifling competition and innovation online.

In 2011, Verizon sued, arguing that the the FCC had exceeded its authority. On Monday, the case finally reached a three-judge panel of the U.S. Court of Appeals for the DC Circuit, which heard arguments from both sides.

Verizon contends that the FCC overstepped its authority by imposing what amount to common carrier regulations on broadband providers. The FCC disagrees.

What are common carrier regulations and why do we have them?

Common carrier regulations govern private companies that provide basic infrastructure such as railroads or electric utilities. Thanks to a lack of competition, these companies often have a lot of power over their customers. Common carrier regulations are intended to protect consumers by requiring companies to serve all customers on a non-discriminatory basis.

In the 1970s, AT&T had a monopoly over phone service in most parts of the country and was regulated as a common carrier. Regulators became concerned that AT&T would use its dominance in telecommunications to dominate the nascent market for online services. So they drew a legal distinction between firms (like AT&T) that provided basic telecommunications infrastructure and those (like AOL and Compuserve) that used that infrastructure to provide online services.

The former were regulated as common carriers to prevent them from abusing their market power. In contrast, regulators thought the market for online services would be highly innovative and competitive, so they exempted these firms from most regulations.

Congress codified that distinction in the 1996 Telecommunications Act. Congress dubbed providers of basic telecommunications infrastructure "telecommunications services," and gave the Federal Communications Commission broad authority over them. In contrast, "information services" were largely exempt from regulation.

How did the FCC interpret those rules?

Initially, the DSL broadband services offered by companies like Verizon were classified as telecom services, subjecting them to common carrier regulation. At the same time, online services like AOL and Yahoo were classified as information services, which exempted them from most regulations.

But the market was changing rapidly. Cable companies started offering phone service and Internet access. The phone and cable companies argued that, now that they were competing with each other, it didn't make sense to impose regulations that were intended to deal with monopolies.

So cable companies convinced the FCC to classify their new broadband Internet services as "information services" under the law. A few years later, the FCC reclassified DSL as an "information service" too. That effectively deregulated the market by exempting the firms from a range of requirements that would have otherwise applied to them.

(Don Ryan, Associated Press)
(Don Ryan, Associated Press)

Is that what Congress had in mind when it passed the 1996 Telecom Act?

A lot of people didn't think so. The decision to classify broadband as an information service became the subject of, yes, another lawsuit, which reached the Supreme Court in 2005.

Surprisingly, one of the harshest critics of the FCC's deregulatory strategy was one of the Supreme Court's most conservative members, Antonin Scalia. The justice, who had helped shape telecommunications policy in the Nixon administration, blasted the FCC for its "implausible reading of the statute."

But Scalia was in the minority. The court's majority decided that it was up to the FCC to decide how to classify broadband services. And the Bush FCC used that discretion to put broadband services in the less-regulated "information services" bucket.

But the FCC took a different course under President Obama, right?

President Obama promised to protect network neutrality on the campaign trail, so everyone expected his nominee to head the FCC, Julius Genachowski, to take a more activist posture. And the courts have been clear that the FCC has the option to reverse itself and re-classify broadband as a telecommunications service. So the FCC could have declared broadband a telecommunications service. That would give the FCC a strong legal foundation to enact the network neutrality regulations.

But when Genachowski floated the possibility of reclassifying broadband as an information service in 2010, he got an earful from Congress. Dozens of members of Congress, including many Democrats, warned that reclassification will lead to "lengthy court battles" and discourage investment in broadband infrastructure.

So Genachowski split the baby instead. The agency retained the Bush-era classification of broadband as a lightly-regulated "information service." But it argued that the statute gave the agency discretion to impose regulations that look suspiciously like common carrier rules.

Wait, I thought the whole point of the "information service" category was that they were exempt from common carrier obligations.

That's right. And even some supporters of network neutrality regulations think that Genachowski's interpretation is a stretch. The purpose of distinguishing between telecommunication and information services was to shield dynamic technology companies in the second category from the complex regulations that govern common carriers in the first category. Retaining the "information service" label but imposing network neutrality regulations anyway makes a hash of this regulatory scheme.

Indeed, one pro-net-neutrality group, the Electronic Frontier Foundation, has warned that the FCC's gambit could open a Pandora's box, since it would dramatically expand the FCC's authority to regulate not just incumbent broadband providers, but other parts of the Internet as well. For example, the group says, similar reasoning could justify imposing "Internet Decency" regulations to clean up smut online, something few network neutrality supporters relish.

Verizon, of course, also believes the FCC overstepped its authority. So shortly after the FCC's rules became official in 2011, the company sued to block their enforcement. The telephone giant argues that the agency improperly imposed what amounted to common-carriage rules on Verizon even though the agency had previously declared that Verizon's broadband service was not a common-carrier service.

Verizon's challenge reached a three-judge panel of the D.C. Circuit on Monday.


(Photo by NCinDC)

How did the argument go?

The common carriage issue was a major focus of the judges' questions. Verizon contends that rules prohibiting content discrimination amount to common carrier regulation, since it forces Verizon to carry traffic from content providers all over the Internet free of charge. And that would be problematic because information services are not supposed to be regulated as common carriers.

The FCC disagreed, arguing that prohibiting Verizon from favoring some Web sites over others merely protects end users' right to get the content of their choice. But at least two of the three judges seemed skeptical of the agency's argument.

The judges did seem more sympathetic to two other provisions of the FCC order. These required more transparency from broadband providers and prohibited them from blocking third-party content outright. There was a lot of discussion about whether the judges could uphold some provisions of the order while striking down others, or whether the entire document had to stand or fall together.

If the court decides the FCC exceeded its authority, will that be the end of network neutrality?

Not necessarily. First, the agency could still appeal the ruling to the Supreme Court. If that fails, then the FCC's incoming chairman, Tom Wheeler, will have a few choices

One option could be to craft new, narrower regulations that are consistent with the court's reasoning, whatever it turns out to be. That approach might not get network neutrality advocates everything they want, but they might regard it as better than no neutrality rules at all.

The FCC's other option is to bite the bullet and reclassify broadband as a telecommunication service. That would give the FCC clear legal authority to impose common carrier regulations.

As we mentioned before, there was a huge backlash last time the FCC tried to do this. And Gigi Sohn, the president of the liberal Public Knowledge, predicts the FCC would face a similar reaction if it tried again. The phone and cable industries both oppose reclassification, she says, and between the two of them they have "an awful lot of friends on the Hill."

But the FCC's legal authority to reclassify is pretty clear. And while members of Congress would grumble, it's unlikely that the Democrat-controlled Senate or President Obama would sign off on legislation overruling a Democratic FCC chairman's decision to reclassify.

Why is reclassification so controversial?

Many critics like the current classification precisely because it ties the FCC's hands. Berin Szoka, for example, heads the free-market group TechFreedom. He warns that reclassification would give the FCC a blank check to "do anything that they want."

"In the long term you have no real certainty as to how you're going to be regulated and which aspects of common carriage the FCC can impose on you," Szoka says. He's particularly concerned that reclassification could lead to broadband price controls, which he believes would discourage innovation in the broadband market.

But Sohn says the law doesn't require the FCC to use the powers it would get as a result of reclassification. For example, cell phone service is classified as a telecommunications services. In principle, that means the FCC has the power to dictate the prices of cell phone plans. But the FCC has chosen not to exercise that power, leaving the price of cell phone service to market forces. Sohn argues that the FCC could, and probably would, show similar restraint in the broadband market.

What happens next?

The D.C. Circuit is expected to issue its ruling later this year or early next year. Depending on how it rules, the case might be appealed to the Supreme Court, it might be sent back down to the lower court for further consideration, or the FCC might be forced to start over. Litigation over the issue could easily continue for years.

In principle, Congress could resolve the issue by passing new legislation either authorizing or prohibiting the FCC from enacting network neutrality regulations. But Congress is distracted and deadlocked. It's not likely to enact legislation on the topic any time soon.

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Brian Fung · September 10, 2013