On Friday, the FCC had its day in court, as the Court of Appeals for the DC Circuit heard oral arguments in US Telecom Association v. FCC. In advance of the showdown, Gus Hurwitz explained (0) how the treatment of five key issues could shed light on the direction in which the judges will rule. Now that the arguments are over, how did the FCC fare?
On Brand X, the last mile, and interconnection
Before Friday’s showdown, Hurwitz explained:
If the judges seem sympathetic to the idea that Brand X was only about the last mile, or that the purpose of the order is to regulate the relationship between ISPs and the edge, things will be looking good for the petitioners and bad for the FCC.
So how did the judges approach Brand X? Judge Tatel opened his remarks with a call to go back to Brand X, the landmark 2005 Supreme Court case, in which the FCC’s determination that a cable service provider offers an information, not telecommunications, service was upheld 6-3 (It is no small irony that a decade hence, the FCC has taken the opposite view.). Being that it was an information service, it was not incumbent for cable providers to offer their services on a common-carriage basis or unbundle their lines to service-based competitors. The case established the Chevron doctrine – the idea that federal agencies have deference to interpret Congressional statutes, provided that they are “ambiguous” – as a matter of administrative law. During the arguments, Judge Tatel questioned how the last mile is defined and whether interconnection is part of it.
Petitioner counsel Peter Keisler observed that the last mile is the “dumb pipe,” and the question in Brand X was whether service-based competitors could get access to the operators’ facilities, not to the Internet. He was vigorous in his explanation that the FCC acted unlawfully in the imposition of Title II, which he described as the culmination of a number of decisions over several years which the FCC reversed all at once. To explain why Internet access is an information service, he referred to a number of statutes and rulings, without challenge from the judges, including the Modified Final Judgement of the AT&T divestiture, the Computer Inquiries, FCC v. Midwest Video, and the Telecommunications Act of 1996, in which Congress declared that the “Internet should be unfettered from regulation.”
There was considerable discussion during the panel of the Verizon v. FCC decision, which defined broadband to be made up of two services: a last-mile component (i.e. ISPs selling access to their subscribers), and a sender-side component (i.e. ISPs selling transit to edge providers, commonly referred to as interconnection). The FCC’s new Open Internet rules clearly place the last mile under Title II but do not do the same for interconnection. Keisler explained that the FCC had intended to classify interconnection under Title II but reversed their intentions at Google’s behest, as the company realized Title II reclassification could be detrimental to its business. Keisler said the FCC is attempting to impose common carriage obligations on interconnection without the proper jurisdiction, an approach he termed the “Cheshire cat” – in which the body of the animal disappears while the smile remains.
FCC Counsel Jonathan Sallet responded that interconnection is inherent in the offer ISPs make to their customers, and thus it was not necessary to classify the edge-facing portion. Keisler rebutted that no such promises are made to customers.
Judge Tatel appeared to be sympathetic to the deference that the FCC achieves by classifying the last mile as common carriage, but the judges’ probing questions about the treatment of the sender side indicates that they might feel the FCC was arbitrary and capricious in its reasoning. Judge Srinivasan observed that if interconnection is an “information service,” then it can’t be treated under common carriage, concluding that the FCC had a “Verizon obstacle” in its argumentation. The court’s dim view of the agency’s treatment of interconnection does not bode well for the FCC.
Is the Internet just the next-generation telephone network?
In his piece last Friday, Hurwitz pointed out that:
If the court seems to accept the FCC’s view that the Internet is just the next generation phone system – and, in particular, that the IP address is the new phone number – that will be a big win for the commission.
In their attempt to define a new “public-switched network,” inclusive of both the switched public telephone network and the Internet, Keisler accused the FCC of creating a “Frankenstein network.” After some back and forth about whether Judge Tatel owns a smartphone (1), the judge established that a telephone subscriber with a telephone cannot connect to the Internet, therefore failing the test that there is a presumable single network which can be identified and regulated. The petitioners observed that having a mobile network with the North American numbering plan is not the functional equivalent of the Internet and charged that the FCC has unfairly replaced the functional equivalence test with a ubiquity test. Williams quipped that milk is “ubiquitous,” implying that that alone is not grounds for reclassification. Inadequate notice in the NPRM was also noted. It thus appears that the classification of mobile broadband under Title II will almost certainly be overturned.
The bounds of FCC authority
When it comes to the limits of the FCC’s authority, Hurwitz’ predicted:
It is likely that Judge Williams will be sympathetic to concerns that the commission has exceeded its statutory authority, or that, if it hasn’t, that the statutory authority is unconstitutionally broad. If Judge Tatel also seems sympathetic to these concerns, it would bode ill for the commission.
Judge Williams made a number of pointed criticisms of FCC process and deliberation. At one point he asked the commission what they have been doing for the past 5 years, expressing his dissatisfaction with the agency’s ban on paid prioritization. He also noted that the deterrence of harm could be achieved in a “much less damaging” way with antitrust, and that the agency had failed to address key points in the record established by three FCC economists.
On the other hand, it is not exactly clear how sympathetic Judge Tatel is to the FCC, as he made points that were both favorable and unfavorable vis-à-vis the agency. In one instance he suggested that the agency has some deference to interpret a broadband “offer,” but he also had concerns as to why the agency changed course from 706 to Title II.
Did the FCC follow the instructions from the Verizon court?
The DC Circuit’s Verizon opinion is widely seen as having offered the FCC a roadmap for how to legally re-implement its 2010 Open Internet order based on Section 706 – that is, without reclassifying Internet access as a Title II service. The FCC decided instead to reclassify. It will be interesting to see how the court responds to the FCC’s decision. If the judges focus substantially on this decision, it will likely be a bad omen for the FCC.
Judge Tatel demanded the “crispest answer” as to why the FCC “abandoned” the Section 706 “blueprint” offered in Verizon, noting that nothing has changed since the agency was last in front of the court. The FCC’s Jonathan Sallet responded that the current state of affairs “disrupts the Virtuous Circle,” and that bright-line rules are needed. Judge Williams was not convinced, stating (2) that “the plausibility of that depends on the proposition of there being a significant, non-trivial group of potential edge providers out there who are being thwarted under an arrangement which does not involve the various bans imposed by the order.” Again, bad news for the FCC.
The role of the First Amendment argument
Regarding the First Amendment, Hurwitz declared,
If the court does spend more than the minimum time that it must on these issues, it probably suggests a good outcome for the FCC. If the FCC is going to lose, the court will almost certainly find a way for it to lose on narrower grounds than the First Amendment challenge – so we would expect the judges to focus on those other issues.
The court spent only the allotted time on the First Amendment discussion, suggesting that the panel would prefer the issue to be addressed at the Supreme Court. Tatel seemed to buy the FCC’s argument that broadband providers are selling transportation, not expression. However Judge Williams introduced the example of MetroPCS exercising its editorial rights it an attempt to create a low-budget offer of Internet access that included an exclusive offer of YouTube.
Earlier in the proceeding, Williams affirmed paid prioritization, saying that the the record was “ambiguous” on whether paid prioritization creates harm. He critiqued Sallet’s argument that allowing paid peering is in “deep conflict” with the Open Internet order’s ban on paid prioritization. The judge likened paid prioritization to refrigerated cars on a train. “Some packets require prioritization. Some packets are inherently time-sensitive. Latency and jitter are important… So that there should be a channeling of services that need prioritization and others that don’t is utterly reasonable,” he said. Williams noted that the only edge provider that was party to the case was one that opposes the FCC’s ban on paid prioritization. He recognized petitioner Dan Berninger, an entrepreneur developing a service in which people reading the same news article could talk to each other in real time. The FCC’s ban on paid prioritization prohibits Berninger from deploying the service, which could be a violation of First Amendment rights if such services are proactively banned.
Sallet calmly held that the FCC was justified and reasonable in its actions, but this was belied by a more energetic argumentation by Pantelis Michalopoulos, who spoke on behalf of the respondents saying that the FCC embraced 706 but “turbo-charged” it with Title II.
The bottom line: Not a particularly good day for the FCC
The proceeding exposed many flaws in the FCC’s reasoning and procedure, and it begs a bigger question as to why the agency has jettisoned a legislative solution, which clearly would have been more legally sustainable. When most countries with net neutrality rules rely on the will of the people to make such laws through their democratically elected representatives, it is curious why the FCC should reject the bona fide offer of Congress to make a net neutrality law and instead rely on the convoluted “Frankenstein” of its regulatory creation.
In the short run, the FCC’s choice will likely have an opportunity cost of around $1 billion in litigation fees borne by taxpayers and petitioners. Such monies are foregone and can’t be used to invest in broadband infrastructure or innovative services. The court’s reprimand of the agency for its inability to follow the Verizon instructions, its failure to follow legal procedure, and the illegal reclassification of mobile broadband all indicate that the 2015 Open Internet rules will be overturned in part, if not entirely.