Wednesday, January 05, 2011

Infamous No. 78 (of the Net Neutrality Order)

One of the most important – and famous – of the Federalist Papers is Alexander Hamilton's No. 78, which explained the principle of judicial review in a way that became an accepted part of our constitutional understanding, especially when relied upon in Chief Justice Marshall's famous Marbury v. Madison decision.

In our world of communications law and policy, Paragraph No. 78 of the FCC's net neutrality regulation order, released on December 23, may well be the most important paragraph in the document. And, from my perspective, it may become as justifiably infamous as Federalist No. 78 is justifiably famous.

Paragraph 78 flatly rejects the position advocated by the Free State Foundation and others that only "discriminatory" practices that are committed by Internet providers which possess market power and which cause consumer harm are prohibited by its new net neutrality regulation.

The Commission explicitly declares that its regulatory reach extends beyond practices that are "only" anticompetitive and that cause consumer harm. It characterizes these terms as "unduly narrow." According to the Commission, the "broad purposes" of the rule cannot be achieved "by preventing only those practices that are demonstrably anticompetitive or harmful to consumers."

Paragraph No. 78 is so important because, by disclaiming reliance only on anticompetitive injury and consumer harm (generally present only when an Internet provider possesses market power), the Commission leaves itself largely at sea in enforcing its rules. By "at sea," I mean, of course, that the Commission, as it acknowledges, is leaving itself with nearly unbridled discretion in deciding which Internet provider practices will be permitted and which will not.

The Commission says that its new rule rests on the proposition that Internet service providers should not pick winners or the losers on the Internet. But the prospect of the FCC arrogating to itself the power to pick such winners and losers, without even requiring any showing of anti-competiveness or consumer harm, is more than a little unsettling.

For now, I just want to call your attention to Paragraph No. 78. In the coming days, we will have more to say about the FCC's order, and especially about how Paragraph 78, in conjunction with other parts of the Commission's order, unless substantially cabined in a principled way, is likely to lead to an unstable, litigious regulatory environment. And an unstable, litigious, regulatory environment is not conducive to further investment and innovation in the Internet ecosystem.