D.C. Circuit Upholds FCC’s Net Neutrality Rules

On June 14, 2016, the United States Court of Appeals for the D.C. Circuit upheld the Federal Communications Commission’s (FCC’s or Commission’s) 2015 Open Internet Order (2015 Open Internet Order), which classified broadband Internet access service (BIAS) as a ​“telecommunications service” under Title II of the Communications Act of 1934, as amended, and imposed a slate of ​“open Internet” and traditional common-carrier regulations on BIAS.  The 2015 Open Internet Order was the Commission’s third attempt at imposing Open Internet regulations, after the first two attempts were overturned by the D.C. Circuit.  Although additional appeal options are available, this decision is likely to hold and it removes substantial doubt about the Commission’s efforts to regulate BIAS.  As a result, BIAS providers should review carefully their practices and policies to ensure compliance with the Commission’s newly affirmed rules.

The History

The court’s decision is the culmination of a series of decisions by the FCC in which the agency has sought to regulate the provision of broadband services.  Following its partial defeat in Verizon Communications Inc. v. FCC (Verizon) in 2014, the Commission conducted a rulemaking and released the 2015 Open Internet Order re-establishing and reformulating the Open Internet rules that the D.C. Circuit overturned in Verizon.  First, the Commission introduced three ​“bright line” rules: no blocking, no throttling, and no paid prioritization.  The Commission also created a forward-looking General Conduct Rule, which bars broadband providers from unreasonably interfering with end users’ Internet use or edge providers’ ability to make their services available to end users.  To overcome the legal challenges raised in Verizon, the 2015 Open Internet Order reclassified both fixed and mobile BIAS as telecommunications services, and extended those regulations to ​“interconnection arrangements.”  Lastly, the Commission forbore from applying a host of provisions of Title II to BIAS providers.   

Petitioners’ Challenge

In March of 2015, US Telecom and Alamo Broadband filed separate complaints with the D.C. Circuit’s Court of Appeals (DC Circuit or court) challenging the 2015 Open Internet Order, followed by challenges from the National Cable & Telecommunications Association, the American Cable Association, CTIA, AT&T, CenturyLink, Full Service Network, TruConnect Mobile, Sage Telecommunications, Telscape Communications and Daniel Berninger, which were consolidated with the US Telecom complaint (Petitioners).  Petitioners claimed that the Commission used improper legal procedures and did not have the legal authority to reclassify BIAS as a telecommunications service.  They also claimed that the reclassification and subsequent common carrier regulation would reverse decades of established legal precedent, slow innovation, chill investment, and lead to increased consumer costs.  Other arguments raised included a challenge to the Commission’s decision to regulate interconnection agreement under Title II; assertions of improper forbearance from some Title II regulations; a challenge to the inclusion of mobile broadband in the 2015 Open Internet Order; and specific challenges to the ban on paid prioritization and the General Conduct Rule.  

The Decision

Judge Tatel wrote the court’s decision, and was joined by Judge Srinivasan (Judge Tatel also wrote the majority opinion in the Verizon case).  Judge Williams concurred in part, and dissented in part.  The court began its decision by emphasizing its limited role as that of a reviewer, ensuring that the agency has acted within the limits of its authority from Congress and that such action is not ​“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”  The court also explained that it does not determine the wisdom of the agency’s decision as a policy matter, but to ensure the FCC is acting within its congressional authority. With this framework in place, the court first addressed Petitioners’ procedural claims, followed by substantive claims. 

1.      Procedural Claims

The court rejected four procedural claims.  First, the court rejected a claim that the FCC violated Section 553 of the Administrative Procedure Act (APA), which requires that a Notice of Proposed Rulemaking (NPRM) includes either the terms or substance of the proposed rule or a description of the subjects and issues involved, finding that a rule only needs to be a ​“logical outgrowth” of the notice.  The second claim, that the FCC did not provide the public with a meaningful opportunity to comment on its reliance on issues of consumer perception, was rejected because the court found the Supreme Court’s decision in National Cable & Telecommunications Association v. Brand X Internet Services (Brand X ) was sufficient to inform commenters that classification under the Communications Act turns on what the consumer perceives to be the finished product.  Similarly, the court rejected Petitioners’ third argument that the FCC relied on the telecommunications management exception with no opportunity for meaningful comment, finding that Brand X adequately laid the ground work for finding that broadband is not an information service because the telecommunications component of broadband is not ​“functionally separate” from the information services component.  Finally, the court found it did not have jurisdiction to hear the argument that the FCC violated the Regulatory Flexibility Act by not conducting an adequate Final Regulatory Flexibility Analysis on the effects of reclassification on small businesses, because the Petitioners should have first filed a petition for reconsideration with the Commission.

2.      Substantive Challenges

The Petitioners advanced three main substantive challenges to the 2015 Open Internet Order, all of which the court rejected.  First, Petitioners claimed that the FCC lacked statutory authority to reclassify broadband as a telecommunications service.  Second, Petitioners argued that even if the FCC had such authority, it failed to adequately explain why it reclassified broadband from an information service to a telecommunications service.  Third, Petitioners argued that in order to reclassify broadband, the FCC had to first determine that BIAS providers were common carriers.

The FCC Has Authority to Reclassify Broadband as a Telecommunications Service

The court held that the Commission acted well within its authority in reclassifying broadband under the deference given to the Commission under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (Chevron).  The court reasoned that Petitioners’ emphasis on the last mile of transmission was misplaced in that Brand X focused on the nature of functions broadband providers offered to end users, not the length of the transmission pathway.  Thus, the Commission acted in accordance with Brand X instruction that the proper classification of broadband turns on the factual parameters of how Internet technology works.

The court struck down each of US Telecom’s arguments that broadband is unambiguously an information service.  The court noted that the definition of information service concludes with ​“via telecommunications” and that US Telecom failed to provide an unambiguous answer to whether broadband providers make a standalone offering of telecommunications.  The court also agreed with the Commission that Congress did not settle the definition of an information service through the Communications Decency Act of 1996 (Title V of the Telecommunications Act of 1996) and that nothing in the Communications Act ​“suggests that Congress intended to freeze in place the Commission’s existing classifications of various services.”

Applying Chevron deference, the court struck down Petitioners’ additional arguments on reclassification. 

First, the court rejected the argument that the FCC’s classification of BIAS as a telecommunications service is unreasonable since many broadband providers offer information services such as email alongside Internet access, finding today these services constitute separate offerings, and consumers perceive them to be separate services.

Second, the court upheld the FCC’s determination that caching and DNS, when offered as a part of BIAS, are simply used to facilitate the transmission of information and to manage the network, and therefore fall outside the definition of ​“information services.”  The Commission had previously used those elements of broadband to consider broadband an ​“information service.”

Third, the court rejected claims the Commission failed to provide an adequate rationale for reclassifying broadband and could have instead relied on its authority under section 706.  The Commission determined that it could not rely on section 706 and refrain from reclassification because the ​“bright-line” rules it wanted to create would effectively treat providers as common carriers.  The court accepted this as a ​“perfectly good reason” for the Commission’s change in position on classification.

Finally, the court rejected Petitioners’ arguments that reclassification would actually harm investment as an inadequate basis for overturning the 2015 Open Internet Order.  The court was clear that it would not judge whether the Commission’s predictions were correct or the same the court might reach, but only whether its judgements were reasonable.

Court Finds that Reclassification of Broadband as a Telecommunications Service Is Not Arbitrary and Capricious

The court rejected US Telecom’s argument that the Commission’s about-face on classification requires that new policy be based on factual findings that contradict the previous policy.  The court determined, following the instructions of the Brand X decision, that the key change was not that broadband has changed, but that consumers now perceive broadband as a separate, standalone offering.  The court agreed with the FCC that changes in factual circumstances were not crucial to the re-classification decision.

Court Upholds Interconnection Arrangements under Title II

The court rejected claims that Verizon prevents the Commission from regulating interconnection agreements until it also classifies the offerings a provider makes to edge providers and backbone networks as a telecommunications service under Title II.  The court found that because the Commission reclassified broadband as a telecommunications service, regulating interconnection agreements was reasonably necessary to ensure that broadband providers do not use terms of interconnection to disadvantage edge providers or prevent consumers from reaching the services and applications of their choosing.  The court here also rejected procedural arguments, finding that the Commission provided ample notice in the NPRM that it may decide to regulate interconnection agreements.

Classifying Mobile Broadband as a Commercial Mobile Service is Not Arbitrary and Capricious

In addressing Petitioners claims that the Commission erred in classifying mobile broadband as a commercial mobile service, the court found that mobile broadband ​“unquestionably” meets three of the four components of a commercial mobile service: it is a ​“mobile service,” it ​“is provided for profit,” and it is available ​“to the public” or a ​“substantial portion of the public.”  The only question was whether mobile broadband also ​“makes interconnected services available.”  In 2007, the Commission determined that mobile broadband did not connect to the ​“public switched network” and was therefore not an ​“interconnected service,” or, by extension, a commercial mobile service.  In the 2015 Open Internet Order, the Commission decided to expand its definition of the public switched network to ​“reflect the current network landscape.”  The court rejected US Telecom’s argument that mobile broadband would always be considered a ​“private mobile service,” and never a ​“commercial mobile service,” because it would require inserting the word telephone into the statute.  The court found the Commission’s exercise of authority to define ambiguous terms under the Chevron doctrine to be a reasonable interpretation of the statute.  The court also agreed with the Commission that mobile broadband, through Voice over Internet Protocol (VoIP), allows users to communicate via telephone numbers, meaning it meets the definition of ​“interconnected services.”

The court also agreed with the Commission that it needed to reclassify mobile broadband as a commercial mobile service and could not solely rely on classifying broadband as a ​“telecommunications service.”  This ensures that if a consumer is accessing the Internet through a mobile phone, the Internet connection is subject to the same common carrier protections.  The court also determined that Petitioners clearly understood that the definition of public switched network was under consideration, based on numerous ex parte letters and comments filed in the FCC’s rulemaking proceeding.

Court Upholds FCC’s Decision to Forbear 

The court dismissed Petitioner Full Service Network’s (FSN) challenges to the Commission’s decision to forbear from applying certain portions of the Communications Act, finding that the agency’s interpretation ​“will prevail unless it is erroneous or inconsistent with the plain terms of the regulation.”  The Commission forbore from applying a number of provisions under Title II, but FSN focused its objections on the forbearance from sections 251 and 252 of the Communications Act, which required offering wholesale services on an unbundled basis.  The court found that the statute governing the Commission’s forbearance did not require the additional considerations that FSN claimed, such as a geographic limit to forbearance, and on the specific provisions in question, the Commission’s concern that unbundling could harm investment and competition was reasonable.

Commission Has Authority to Implement Paid Prioritization Rules 

The court rejected the claim from Petitioners Alamo Broadband, Inc. and Daniel Berninger (Alamo and Berninger) that even with reclassification, the Commission lacks authority under Section 201(b) of Title II and Section 303(b) of Title III to impose the paid prioritization ban, and instead the court focused  on Verizon​’s finding that the Commission’s section 706 authority extends to rules ​“governing broadband providers treatment of Internet traffic,” in reliance on the Commission’s ​“virtuous cycle” argument.  The ​“virtuous cycle” argument was advanced by the Commission in Verizon, in which it argued that open Internet policies drive innovation, consumer demand, and investment, which in turn furthers section 706’s obligation that the FCC encourage the deployment of advanced telecommunications capabilities.  This authority justified the transparency rule in the 2010 Open Internet Order, which requires providers disclose information on network management practices, performance, and commercial terms so consumers can make informed choices.  Alamo and Berninger contended that arguments in Verizon that granted the Commission this broad rulemaking authority under section 706 were dicta (non-binding).  However, the court held that because the Verizon court’s findings were necessary to uphold the transparency rule, they could not be dismissed as dicta.

Commission Has Authority to Implement General Conduct Rule

US Telecom argued that the General Conduct Rule is impermissibly vague, and the Commission failed to provide adequate notice that it would issue a rule of this kind.  The court rejected US Telecom’s procedural challenge by pointing to a question in the NPRM asking how the Commission can ​“ensure that the rule it adopts sufficiently protects against harms to the open Internet…” and to the fact the Commission outlined in detail the factors it would apply in determining such a standard.  These factors guiding the application of the General Conduct Rule include: end-user control; competitive effects; harm to consumers; the effect on innovation, investment or broadband deployment; impact on free expression; whether a practice is application agnostic; and if the practice adheres to common standard practices.  BIAS providers can also seek an ​“advisory opinion” from the FCC’s Enforcement Bureau on whether a practice violates the rules.  The court found that the General Conduct Rule and the Commission’s seven factor test provides a ​“reasonable degree of certainty” and that the accompanying advisory opinion process addresses any remaining constitutional concerns.

Dissent of Senior Circuit Judge Williams

Judge Williams concurred and dissented in part from the majority’s opinion.  Judge Williams agreed that broadband Internet access service can be considered a telecommunications service.  However, in his view, the 2015 Open Internet Order must be vacated for three reasons:

• the Commission’s justification of its switch in classification of broadband from a Title I information service to a Title II telecommunications service fails for want of reasoned decision-making;
• the Commission’s reliance on sections 201(b) and 706 of the Communications Act is inadequate and the two statutes do not justify the rules adopted; and
• the Commission’s decision to forbear from enforcing a wide array of Title II’s provisions is based on premises inconsistent with its reclassification of broadband.

Judge Williams was unconvinced by the Commission’s reasons for reclassifying BIAS and imposing rules such as the ban on paid prioritization and the General Conduct Rule.  In his view, the Commission often wanted it both ways, finding that the broadband market is uncompetitive and should therefore be regulated under Title II, but also that it is competitive enough that the Commission can forbear from provisions of Title II that promote competition. Likewise, on paid prioritization, Williams found the Commission’s logic inconsistent with the Commission being opposed to consumers paying more for differentiated services but declining to prohibit edge providers from paid-peering and other arrangements that could lock in the advantages enjoyed by major edge providers.  Judge Williams concluded with a warning that by ​“refusing to inquire into competitive conditions, [the Commission] shunts broadband service onto the legal track suited to natural monopolies.”  He warned that this framework makes it harder for new firms to enter the market, and so ​“the Commission’s decision has a decent chance of bringing about the conditions under which some (but by no means all) of its actions could be grounded – the prevalence of incurable monopoly.”

Implications

Though subject to appeal to the full court for review or to the Supreme Court, the decision is effective immediately and impacts all fixed and mobile broadband providers.  With the Commission’s 2015 Open Internet Order rules remaining in full effect, carriers must comply.  In the short term, the decision is likely going to embolden the Commission to undertake enforcement actions under its Open Internet rules, and pursue its rulemaking proceeding on broadband privacy rules. The Commission also will likely begin looking at other broadband practices, such as its ongoing inquiry into the zero-rating practices of various BIAS providers.  Providers should make arrangements, if not already, to understand the 2015 Internet Order and ensure a compliance plan is in place.

If you have any questions about this decision, or would like to better understand what the open internet rules require of BIAS providers, please contact your usual Kelley Drye attorney.