Can the FCC promote broadband competition, innovation, and investment? The courts and Congress to decide

On Monday, September 9, a three-judge panel of the United States Court of Appeals District of Columbia Circuit heard oral arguments in Verizon v. Federal Communications (11-1355). Judges Judith W. Rogers, David S. Tatel, Laurence H. Silberman will now decide the fate of the FCC’s Open Internet rules.

Adopted in December 2010, the FCC’s rules are an attempt to preserve the Internet as an open network enabling consumer choice, freedom of expression, user control, competition and the freedom to innovate. The FCC found that broadband providers had taken actions that endanger the Internet’s openness by blocking or degrading disfavored content and applications without disclosing their practices to consumers. And broadband providers have financial interests in services that may compete with online content and services.

Building on the FCC’s Internet Policy Statement the commission adopted in 2005, the Open Internet rules require all broadband providers to publicly disclose network management practices, restrict broadband providers from blocking Internet content and applications, and bar fixed broadband providers from engaging in unreasonable discrimination in transmitting lawful network traffic. The rules aimed to ensure transparency and continued Internet openness, while making clear that broadband providers can effectively manage their networks and respond to market demands.

For the better part of a century, telecom companies have been regulated under what's known as "common carrier" rules, meaning they are required by law to provide phone access to all Americans and open their networks to traffic generated by others, including their competitors. The FCC decided to treat the Internet differently and declined to impose common-carrier provisions on broadband providers, so the providers didn't have to ensure access to the network. But the Internet Policy Statement found that Internet service providers couldn't block or discriminate against lawful Internet content.

In an excellent pre-game analysis of the Appeals Court hearing, Public Knowledge’s Harold Feld noted that the arguments would focus on two questions: 1) Did the FCC have the authority to make the network neutrality rules? 2) Even if the FCC does have the authority, does something else prohibit the FCC from exercising that authority here? But, in addition, in the background, the talk in the courtroom was also about why the FCC has the authority to make network neutrality rules and other arguments and statutes that stop the FCC from having network neutrality rules.

The Wall Street Journal framed the case as a power fight between Internet firms such as Google and Facebook and carriers like Verizon and Comcast when it comes to pricing and profiting from fast-growing Web traffic. Several Internet service providers have expressed interest in charging content providers like Netflix for the capacity they consume when sending traffic over their networks to subscribers' homes. The case will determine, the WSJ reported, whether the FCC has the authority to tell broadband Internet providers such as Comcast and Verizon that they can't give priority to some Internet services or adjust fees and speeds to handle data-heavy traffic like video. The FCC argues that, except for reasonable network management, such prioritization would undermine the openness that has allowed the Internet to flourish. Verizon says the FCC is overstepping its bounds. Verizon argues that the rules effectively regulate its Internet services as a common carrier and says the FCC still doesn't have the regulatory authority to impose such rules. The FCC counters that the rules don't extend common-carrier regulation to Internet services. And it warned that if broadband providers require payment from Web publishers, it will stunt innovation: "The next Google or Facebook might never begin."

“This will determine whether the laws and regulations of the past — the pre-Internet age — will apply to the Internet’s future,” said Scott Cleland, the chairman of NetCompetition, a group sponsored by broadband companies, including Verizon. “It will determine the regulatory power and authority of the FCC in the 21st century.”

Former White House Aide, Susan Crawford, a supporter of the FCC’s position, said, “The question presented by the case is, does the U.S. government have any role to play when it comes to ensuring ubiquitous, open, world-class, interconnected, reasonably priced Internet access? Does the government have good reason to ensure that facility in America?”

The case is also a test of Verizon's novel argument that its decisions about traffic on its network are subject to the same First Amendment rights a publisher has in deciding what to put in a newspaper. In transmitting the speech of others, "broadband providers possess editorial discretion,'" Verizon wrote in a court filing. But the FCC dismisses the First Amendment claim saying Verizon is more like a paperboy than a newspaper. “Verizon has articulated no plausible claim of expressive activity in providing its end users access to their chosen Internet content,” the FCC argues. “By delivering information requested by its customers, Verizon is no different from a messenger delivering documents that contain speech.”

Verizon also argues that the Open Internet rules “limit the means by which providers can secure additional revenue, which impairs their ability to deploy new networks and capabilities.” But the FCC counters that Verizon “is paid for the use of its network at whatever rate it establishes.”

Free market proponents -- such as Tech Freedom, the Free State Foundation, and Cato Institute, which filed an amicus brief in the case -- take issue with the need for the regulation in the first place because there is nothing to regulate. "The government identifies no compelling interest. The evidence simply does not show discriminatory practices requiring new regulatory remedies," the brief said. "To the extent broadband providers abuse market power to block access to competitors, rather than infringe on providers' editorial discretion, such actions can be addressed through existing antitrust law."

Since the FCC’s rules were adopted, there have been two publicized instances of possible violations of the rules. The first was when AT&T Wireless announced it wouldn't deploy Apple's Face Time video conferencing app across all of the carrier’s rate tiers. Public Knowledge approached the company and threatened to file a complaint, AT&T changed its policy and agreed to deploy the feature to all tiers. The second case involves a Google Fiber subscriber in Kansas City who was told by Google he couldn't host a server under its terms of service. In a letter to the FCC, Google said it was not in violation of the Open Internet rules because it falls under "reasonable network management" and wasn't blocking or discriminating against any content.

These instances and the lack of other complaints means the rules are working, said Public Knowledge’s Feld. "If there were no rules, it would just be a screaming match. One of the advantages of rules like this is there is a process for resolving conflicts," Feld said. "Without this rule, we will start to see all kinds of little games creeping in. It's very likely we will see a lot more companies pushing the boundaries."

So, what happened at the hearing? First, realize that guessing case outcomes based solely on oral arguments is like reading tea leaves to predict the future. Although the judges seemed intent on viewing the case from as many sides as possible, the consensus of the coverage we saw this week (1) pointed to the doubt expressed by the judges about the FCC’s rules. Judge Silberman and Judge Tatel said that the agency seemed to illegally impose common carrier rules on broadband providers. Judith Rogers did not ask as many questions but appeared to accept much of the FCC’s position. Judge Tatel, who many telecommunications analysts expect to be the swing vote on the case, pushed lawyers on both sides to concede that the part of the FCC rule that prohibits outright blocking of online content or applications could be allowed. Judge Tatel also queried each side on whether the two main provisions of the Open Internet Order — no blocking and no discrimination — had to be taken as a whole or could be separated, with the no-blocking rule being upheld. Judge Tatel also said that right now content companies are getting service free. That’s an odd statement since broadband customers pay for two-way service allowing them to both receive and send data. In fact, Pantelis Michelopoulos -- arguing for Public Knowledge, Vonage, and others who intervened in support of the FCC -- said Verizon is looking to get paid twice. The rules are needed because Verizon has the ability and incentive to degrade edge providers -- websites and services like Netflix, who were relying for access on a company that would like to compete with it for entertainment-watching eyeballs.

Helgi C. Walker of the law firm Wiley Rein, who argued the case on behalf of Verizon, said the rules had to be struck down as a whole. Congress never intended the FCC to have authority to regulate the Internet, she said. And Verizon Communications should be able to block its broadband customers from going to websites that refuse to pay the provider to deliver their traffic. Walker discussed Verizon’s desire to enter into special commercial agreements with edge providers where ISPs charge edge providers extra just to be able to reach the ISP’s subscribers.

Sean A. Lev, who argued the case for the agency, told the judges that the FCC did have the authority to govern the Internet under numerous parts of the Telecommunications Act, including one that gives the commission the duty to work to expand broadband access. Companies that have equal access to consumers are encouraged to innovate, Lev said, adding that it would result in more vibrant start-ups and a growth in demand for Internet service.

By the end of the hearing, the question appeared to be whether the FCC's Open Internet Rules would be invalidated in their entirety, or whether only some of them would be thrown out. While Judge Tatel appeared to be willing to consider upholding some of the FCC regulations, Judge Silberman suggested the court may need to consider invalidating the network neutrality rules in their entirety.

Public Knowledge led the way this week with the smartest analysis of the hearing:

• Michael Weinberg pointed out the types of “special commercial agreements” Walker argued for are exactly the types of agreements that raise network neutrality concerns. 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.
• Harold Feld’s take: three judges, three opinions. Judge Rogers seemed most likely to affirm the FCC and the rule. Judge Tatel wanted to eliminate the non-discrimination rule but keep the no blocking rule. Judge Silberman wanted to get rid of both the no blocking rule and the no discrimination rule – although would be happy to get rid of all the rules because the FCC did not make an explicit finding of “market power.” (See a longer version, too)
• PK President and CEO Gigi Sohn offered a “good, bad, and ugly” take on the proceeding.
• The good news – if you are someone who thinks the FCC should be able to protect consumers and promote competition with regard to broadband - is that there seemed to be little appetite from the judges to question seriously the FCC’s power (or “authority”) to regulate broadband internet access under Section 706 of the Telecommunications Act of 1996.
• The bad -- Two of the three judges were very concerned that some or all of the open internet rules were really “common carriage” rules.
• The ugly: the real possibility that the FCC wins the war over authority but lose the battle over net neutrality. What good is having authority over broadband access if you cannot use it to keep the Internet an open network where the biggest companies and the smallest start-ups have an equal opportunity to succeed? As Sohn points out:

What is most ugly is that the FCC is responsible for the position in which it now finds itself. Had the Commission bit the bullet and treated broadband internet access providers as “telecommunications services” subject to common carrier obligations when it adopted the rules in 2010, the common carriage/ non-common carriage distinction would be irrelevant. (See more on this)

The court is likely to take several months to issue its decision, lawyers involved in the case say — perhaps before the end of the year, but more likely in 2014. And once that ruling comes, there’s always the chance it will be appealed to the Supreme Court.

We should keep in mind, too, that the network neutrality debate isn’t happening in a vacuum. An article by the Washington Post’s Cecilia Kang caught our eye and helped put the week into perspective. Kang highlighted a concerted effort by phone companies to liberate them from their longtime overseer, the FCC. Verizon’s court challenge is just one prong of that effort to shift regulation of broadband businesses to other agencies that don't have nearly as much power as the FCC:

• Jon Leibowitz, the former chairman of the FTC, is lobbying -- on behalf of telecom giants including Verizon, AT&T and Comcast -- lawmakers to take away some privacy powers from the FCC. Leibowitz is calling for new legislation that consolidates data breach rules under the FTC. Today, telecom firms comply with privacy rules at the FCC, as well as laws enforced by the FTC and by individual states.
• AT&T's head of lobbying, Jim Cicconi, also raised concerns about the FCC's policing of broadband providers. In a speech, Cicconi questioned the FCC's antitrust powers, saying the FTC and Justice Department have more expertise in the area of competition law.
• The American Independent found that the telecom industry funneled millions of dollars into more than 30 “grassroots” foundations and think-tanks in an effort to persuade the FCC that consumers were opposed to network neutrality regulations. Many of the organizations that received those funds, such as the National Gay and Lesbian Chamber of Commerce and the American Association of People with Disabilities, have no obvious ties to the telecom industry or FCC regulatory policy. Despite that, they signed initiatives and public letters opposing net neutrality rules that were designed to protect consumers. (2) (These efforts were mocked in a “mockumentary” this week.)
• The FCC's budget has been shrunk and Congress is considering additional cuts. All three FCC Commissioners testified before the Financial Services and General Government Subcommittee of the Senate Committee on Appropriations on September 11. Because of sequester, the FCC is operating on a budget of $322 million in 2013 after it asked for $346.7 million. Apparently, the House is considering reducing the agency’s budget further in 2014 to $320 million.
• Chairwoman Mignon Clyburn warned that if the country wanted to remain a world leader in communications, it should not compromise the FCC funding that supports the FCC's mission. She suggested that budget cuts could lead to a cascade of negative outcomes that will continue to slow the FCC's ability to process thousands of applications for new and innovative services, which could affect spectrum development and auctions. She said that corner-cutting does not come without programmatic costs. Those costs include not replacing failing equipment, turning off the air conditioning system at 6 p.m. during the heat of the summer, routine shortages in supplies, cancellation of contracts, bare bones travel budgets. She pointed out that the FCC pays for its own budget from user fees, so that the sequester was simply siphoning off some of that money.
• Commissioner Rosenworcel said the FCC is proud of its ability to do more with less money, but that there are also consequences, including "reduced outreach, delayed decisionmaking, and fewer resources to address hard and persistent problems..."

In total, the week's flurry of attacks on the FCC brings fresh attention to the agency. Telecom firms argue they have outgrown the FCC's original mandate, set out nearly a century ago, of doling out licenses for broadcast airwaves and regulating the telephone monopoly. They say the confusion over who should regulate broadband providers has led to too many agencies claiming oversight over their businesses. The FCC has broader powers than other agencies, including the ability to create new rules that are aimed at heading off harmful behavior in the future. In contrast, the Federal Trade Commission and Department of Justice play more of a defensive role. As law enforcement agencies, they review mergers or bring enforcement actions against companies after investigating practices that are typically brought to their attention from complaints.

"The overall trend here is to strip away the authority of the FCC to prevent discriminatory practices ranging from personal privacy breeches to anticompetitive favoritism in the marketplace," said Gene Kimmelman, a director of the Internet Freedom and Human Rights project at the New America Foundation and former antitrust official for the Justice Department. "These telecom firms want as little oversight as possible."

Notes:
1. See --

• Judges Hear Arguments on Rules for Internet
• Appeals Court Voices Concern About FCC Rule
• Appeals court skeptical of FCC’s Internet access rules
• Lawyer: Verizon should be able to block websites
• Appeals court judges voice skepticism of FCC net-neutrality rules
• FCC Runs Net Neutrality Gauntlet in D.C.
• DC Court Questions Validity of Net Neutrality Rules
• Net Neutrality 2013: The D.C. Circuit Hears the Arguments
• Net neutrality is on trial in Washington. Here’s what you need to know.
• FCC's Net Neutrality Rules May Not Survive Court
• Look out Netflix and Google! An analyst thinks the court may allow ISPs to charge you

2. Two major telecom-industry groups, CTIA – The Wireless Association and the National Cable and Telecommunications Association (NCTA), contributed in excess of $4 million to the effort, and the industry spent another $2 million funding an umbrella organization of nearly 300 listed community groups who joined the coalition against net neutrality in support of the telecom industry. Many of those organizations also seem unlikely partners, such as the U.S. Cattlemen’s Association and the Jewish Energy Project. Finding allies in opposing government regulation would seem a logical strategy for the telecom industry. But members of its Broadband for America coalition, whose staff members blog and editorialize critically on net neutrality, often have no overlapping interests with telecommunications providers. For some, the connection appears to be monetary. The American Association of People With Disabilities, the Cuban American National Council, the League of United Latin American Citizens, and the National Gay & Lesbian Chamber of Commerce all received grants paid by two major telecommunications industry foundations, the CTIA and the NCTA. All four groups, as well as the CTIA and NCTA, are members of Broadband for America.