Monday, July 25, 2011

DC Circuit Vacates [Net Neutrality] Rule

Did you hear about the D.C. Circuit's opinion last week vacating the Commission's major new rule?

Here are just a few key quotes from the decision:

"Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters."

"The petitioners also maintain, and we agree, the Commission relied upon insufficient empirical data…."

"As we have said before, this type of reasoning, which fails to view a cost at the margin, is illogical and, in an economic analysis, unacceptable."

"By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule…."

As you are reading this, you could be forgiven for thinking that the D.C. Circuit has ruled, anticipatorily, on the FCC's net neutrality regulations (aka the "Open Internet" rules), which were voted on last December but which have not yet become effective. But, alas, you would be wrong, and my blog title with the bracket is meant, for now, as only a tease. Sorry.

The above quotes are taken from the D.C. Circuit's July 22 opinion in Business Roundtable v. Securities and Exchange Commission in which the court vacated the SEC's rule requiring public companies to provide shareholders with information about, and their ability to vote for, shareholder-nominated candidates for the board of directors. Obviously, the SEC is not the FCC. And the SEC's enabling statutes required, in the Business Roundtable case, the SEC to consider the rule's impact upon efficiency, competition, and capital formation.

Nevertheless, the court's analysis, which ultimately concludes the SEC's shareholder information rule is arbitrary and capricious under the Administrative Procedure Act's judicial review standard, is certainly relevant to considering review of the FCC's net neutrality mandates. Quoting from the Supreme Court's leading case, the D.C. Circuit explained: "We must assure ourselves the agency has 'examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choices made.' Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)."

The court's critique of the SEC's reasoning, as illustrated by the quotes above, surely has some applicability to the FCC's reasoning – more properly, the deficiencies in its reasoning – regarding the net neutrality order. Without rehashing the FCC's order here, the agency's market failure and competition analysis is decidedly thin, based much more on possible hypothetical problems that could occur in the future rather than on evidence of market problems that have occurred.

And the costs imposed by the regulation were certainly downplayed or ignored as evidenced by the fact that the FCC had failed completely to analyze the regulatory costs pursuant to the Paperwork Reduction Act requirements. A reviewing court is not likely to be impressed by the fact that such consideration is now taking place – a half-year after the rule was voted on -- rather than before. The House Energy and Commerce Committee's Report, dated April 1, 2011, accompanying its resolution of disapproval of the FCC's net neutrality regulation contains an excellent analysis of the FCC's arbitrary reasoning.

In short, in broad outline, the FCC's failure of reasoned decision-making mirrors that of the SEC's regarding promulgation of the shareholder information regulation. My guess is that, like the D.C. Circuit in Business Roundtable, a court reviewing the FCC's net neutrality regulations will find the Commission, in the words of State Farm, failed to make a rational connection "between the facts found and the choices made."

And, finally, there is this to consider: There was no question whatever with respect the SEC rule as to the agency's jurisdiction to promulgate the rule. With regard to the net neutrality order, the FCC's jurisdiction to regulate the business practices of Internet service providers is, to put the matter charitably, by no means clear. Indeed, many think it is highly doubtful. As Free State Foundation advisory board member Daniel Lyons explained recently in this Perspectives piece, jurisdiction-stretching agency orders should not receive Chevron deference upon review.

I understand that the FCC's lawyers can go about distinguishing the court's opinion in Business Roundtable from review of the FCC's order adopting new net neutrality regulations. But, in my view, the D.C. Circuit's decision is another foreboding sign.