You can’t innovate when you have to litigate

April 15, 2015

Lawrence J. Spiwak

The Hill

Last month, the Federal Communications Commission (FCC) issued its 300-plus page Open Internet Order, in which it reversed nearly two decades of bipartisan policy of applying a “light touch” to the Internet in favor of imposing legacy common carrier telephone regulations under Title II of the Communications Act designed for the world of the old “Ma Bell” monopoly. The appeals process has already begun and, given the remarkable legal and factual gymnastics employed by the commission to support its decision, the potential for a reversal and/or remand is high. While any lawyer will tell you that there is no way to make an accurate prognostication about the ultimate outcome of the litigation, we are likely to see the appellate arguments proceed along the following sequence.

The threshold legal question will not be on substance, but rather on procedure. Under the Administrative Procedure Act, the FCC must notify the public of its intentions to regulate in a particular way, providing, ideally, a great deal of the details of its plan. Doing so permits the public to comment on the specifics. Yet, in this case, the FCC in its May 2014 Notice of Proposed Rulemaking explicitly stated that it did not intend to reclassify, proposing instead to continue to impose a “light touch” pursuant to the D.C. Circuit’s instructions in Verizon v. FCC. Given the radical nature of the commission’s departure from its original approach, coupled with the now well-documented political pressure imposed on the independent agency by the White House to reclassify, a strong case for remand on procedural grounds can be and will be made.

Assuming arguendo that the commission’s order survives this procedural challenge, the next legal question is whether the FCC articulated a sufficient rationale for changing its longstanding policy of a light-touch approach to regulating broadband Internet access — an approach theSupreme Court has reviewed and validated. While an agency is generally permitted to change its mind, it can only do so based on reasoned decision-making and in the face of changed circumstances. However, the commission’s factual gymnastics in its order may prove too much for a reviewing court. Indeed, to make its logic fly, the commission had to redefine accepted norms of how the Internet works.

The commission’s acrobatics were particularly acute for the Internet service you get on your cellphone. While it is true that Congress intended mobile voice to be subject to a very light form of common carrier regulation, Congress set forth a specific and detailed statutory scheme designed to keep “private mobile service” (i.e., mobile broadband) out of the Title II trap. So how did the commission get around this little detail? The commission simply changed the age-old definition of the telephone network.

But these challenges are not the end of the inquiry.

Again assuming (1) the FCC survives the procedural challenge, and (2) the court accepts the FCC’s justification to reverse course on the appropriate regulatory treatment of high-speed Internet services, the reviewing court will next have to evaluate whether the commission’s application of Ma Bell Title II common carrier regulations to the Internet make any sense. Given the multitude of issues raised by the FCC’s decision to reclassify, the potential legal problems are endless. For the sake of brevity, I will highlight just two items of significant legal vulnerability.

The first major flaw is the FCC’s claim that it is not imposing price regulation on the Internet. To state the matter bluntly, this just isn’t true. You have been lied to.

In fact, at the center of the agency’s order is a “no blocking” rule. Under this rule, broadband service providers (BSPs) cannot charge “edge” providers (e.g., Netflix) for imposing costs on their network. As the courts have already recognized, however, this rule amounts to nothing more than rate regulation, albeit at a “zero price.” Oddly, by imposing Ma Bell regulations on the Internet, the FCC has set its own trap. Under traditional telephone regulation, regulators must permit service providers to recover their costs. Thus, this zero price regulation amounts — in the legal parlance — to a “confiscatory” (i.e., below cost) rate. Imposing price regulation — even at a zero price — is a significant legal vulnerability of the order, especially since a reviewing court has already exposed the problem.

Along the same vein, the FCC now bans “paid prioritization,” which simply means that content providers can’t pay for better quality delivery. All Intenret traffic is not equal, so prioritization makes good sense and is already used in a very general way today. The FCC’s problem is that Section 202 of the Communications Act has always permitted service providers to charge different prices for different levels of service, so long as those prices are made available to “similarly situated customers.” To get around this little detail, the commission again engages in a bit of legal gymnastics: The FCC did not adopt its “no paid prioritization” rule under Section 202 (which prohibits only “unreasonable” discriminatory pricing and practices); instead, the agency adopts its “no paid prioritization” rule under the “public interest” catch-all language contained in Section 201 (the provision which governs whether a rate is “just and reasonable”). The FCC offers no good explanation for ignoring the plain language of the law, and I expect a court to see right through the agency’s deliberate obscuration of this material issue.

The second obvious legal flaw is the commission’s new standard for when not to regulate (i.e., forbearance). Traditionally, the FCC has only granted forbearance of price regulation in the presence of competition. Its rationale was straightforward: Competition, rather than price regulation through mandated tariffs, can be trusted to protect consumers from monopoly prices. Under the commission’s new forbearance standard articulated in the order, however, it will now forbear from regulations in the presence of a “terminating monopoly” because it argues that its new Open Internet Rules, coupled with its backstop authority of Section 706, make tariffs “unnecessary.” The commission’s justification for this new forbearance standard is particularly weak, but given its regulatory proclivities, perhaps deliberately so. Indeed, the order makes clear that much of its deregulatory provisions, including forbearance from retail rate regulation, are temporary in nature.

The commission’s forbearance argument also exposes its analytical hypocrisy regarding its imposition of de facto rate regulation: The commission claims it is not imposing price regulation on the Internet by forbearing from the tariffing requirements of Section 203. If this claim is true, then under the D.C. Circuit’s ruling in Orloff v. FCC, the commission must surrender enforcement of just and reasonable rates to the market. Yet, at the center of the commission’s imposition of its Open Internet Rules is its finding that BSPs are “terminating monopolies.” However, if the commission’s Open Internet Rules are the only thing stopping a BSP from raising price (because the market can’t), then the commission’s Open Internet Rules are, by definition, rate regulation. Significantly, rate regulation is not prohibited by statute, but the law provides guidelines on how such regulation is done. Under the FCC’s new rules, the proper implementation of rate regulation would likely require all content providers to pay a termination fee to broadband providers to reach end users. It’s clear the FCC did not intend this outcome, but unintended consequences are regulation’s constant companion.

Given the scope of the agency’s rules, I have only scratched the surface of potential legal problems with the commission’s order. However, one thing is clear: We can now look forward to years of protracted litigation, no doubt ultimately ending up in the Supreme Court. Such legal wrangling will bring great uncertainty to both the provision and use of Internet services, slowing both deployment of and innovation on the Internet. In its most recent order, the FCC has demonstrated, once again, that it has no answers to what is the proper role of government on the Internet.

It’s time for Congress to step in and provide the FCC clear guidance on how, and if, the Internet is to be regulated.

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

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