FSF Scholars React to DC Circuit's Net Neutrality Decision

Below are quick reactions from three members of the Free State Foundation's distinguished Board of Academic Advisors – Christopher Yoo, Justin (Gus) Hurwitz, and Daniel Lyons – to yesterday's D.C. Circuit decision in Verizon v. FCC. Each of these members of FSF's Board of Academic Advisors is acknowledged expert in the field of communications law and policy.

While upholding the FCC's authority under Section 706 to take certain actions regarding the oversight of broadband providers, the court held unlawful the anti-discrimination and the anti-blocking prongs of the FCC's net neutrality regulations. The court found the FCC lacked the authority to promulgate these regulations.

Here are the reactions:

FSF's Justin (Gus) Hurwitz – University of Nebraska College of Law

Yesterday’s network neutrality decision was in line with most expectations. The DC Circuit found that the Communications Act gives the FCC broad power to regulate networks that the Commission classifies as “information services” (such as the Internet), but that it imposes clear restrictions on treating such networks as “telecommunications” networks (e.g., the traditional telephone system). In so finding, the judges got things right on the law. The Commission’s ability to construe its power broadly is in line with modern administrative jurisprudence, as most recently affirmed by the Supreme Court last May in its City of Arlington opinion; the prohibition on imposing common carriage requirements on information services follows from the DC Circuit’s recent CellCo decision.

Of course, getting things right on the law doesn’t mean that the judges have left everyone – or even anyone – happy as a matter of policy. Both Net Neutrality proponents and opponents are expressing concerns about the implications of yesterday’s decision. Proponents are decrying the death of network neutrality, and even of the Internet itself – they say that the FCC must reclassify the Internet as a telecommunications service – or, at a minimum, must use its broad power (just affirmed by the DC Circuit) to issue new rules that will fit within the constraints indicated by the DC Circuit’s decision. Opponents are expressing alarm at the broad construction of the Commission’s power allowed by the judges, saying that that power must be constrained.

Taking the latter concern first, the simple fact is that Communications Act gives the FCC very broad power. One could almost say that the way in which courts interpret laws such as Section 706, which speaks to the Commission’s authority over “advanced telecommunications capabilities,” is generative in nature, giving the Commission power to do almost anything it deems appropriate to promote competition and remove barriers to investment (short of that which is expressly prohibited by the statute, viz., treating information services as common carriers). This is an alarmingly broad scope of authority – and it is almost certainly beyond the scope intended by either the 1934 or 1996 Congresses. But any change to constrain this broad power needs to come, and should come, from Congress, not the courts. Importantly, while the Commission’s power may be broad, we should remember that there are important procedural safeguards in place governing how it uses that authority. Let us not forget the Commission’s high-profile losses in Comcast, the original network neutrality case, and more recently in Fox, a case unrelated to network neutrality but that reminds us that the Commission’s enforcement actions are subject to basic Due Process and Fair Notice requirements.

On the other side, demands for another round of rulemaking or reclassification are premature. Here the simple fact is that the concerns animating network neutrality proponents have never substantiated a need for broad regulation. The few cases that have raised net neutrality concerns haven’t required new rules to address these concerns – the resources expended by the FCC to date in creating the Open Internet Order almost certainly exceed any harm they have kept from befalling consumers. And there is substantial evidence that “non-neutrality” (an Orwellian term if ever there was one) can be beneficial for consumers. Unfortunately, these benefits have never been given the opportunity to develop because of the Commission’s prophylactic rules. Rather than adopt ex ante rules that forego likely benefits to avoid speculative harms, the Commission should adopt an ex post adjudicative approach that takes action to remedy actual harms that may develop while allowing firms to experiment with new, pro-consumer, business models.

Fortunately, this appears to be the approach that Chairman Wheeler has advocated. In a posting to the Commission’s blog late yesterday, he expressed his “strong preference [to develop the Commission’s power] in a common law fashion, taking account of and learning from the particular facts that have given rise to concern. The preference is based on a desire to avoid both Type I (false positives) and Type II (false negatives) errors. ... If something appears to go wrong in a material, not a trivial, way, the FCC will be available to use the totality of its authority for adjudication and enforcement. ... I am not advocating intervention unless there is an unmistakable warrant for it."

This is exactly the right approach for the Commission to take. It allows firms to develop new business models, to demonstrate whether they are, in fact, beneficial to consumers. It doesn’t forego the Commission’s ability to take action against such conduct if it is, in fact, harmful to consumers. And it provides all of us – not least Congress – with information needed to make informed decisions as we move forward.

FSF's Christopher Yoo – University of Pennsylvania Law School

Introduction

            On January 14, 2014, the U.S. Court of Appeals for the D.C. Circuit handed down its eagerly anticipated decision in Verizon v. FCC, in which the court assessed the legality of the Federal Communications Commission’s (FCC’s) 2010 Open Internet Order.  The result is that the FCC’s order was struck down with respect to the nondiscrimination and nonblocking rules, although the transparency rule was left in place.  The fact that the D.C. Circuit deviated from its usual practice of simply remanding noncompliant agency actions and instead vacated portions of the FCC’s order arguably reflects skepticism that the agency could find an alternative justification for those rules.

            That said, the opinion contains language likely to serve as sources of both encouragement and anxiety to the Order’s proponents and opponents alike.  On the one hand, Part II of the opinion upheld the FCC’s conclusion that both section 706 of the Telecommunications Act of 1996 represents an affirmative grant to the FCC of authority to regulate broadband providers. On the other hand, Part III of the opinion imposed strict limits on the ways in which the FCC may exercise that authority. Most notably for the network neutrality debate, the prohibition of common carriage obligations appears to leave little room for the FCC to impose a nondiscrimination mandate.  Speculation about the opinion’s implications for the future has only just begun.

            Much can (and surely will) be said about the implications of the D.C. Circuit’s decision.  For the time being, I thought I would offer a few quick observations about the statutory source of the FCC’s authority over broadband providers, which may well prove to be the most important aspect of the D.C. Circuit’s decision.

The Missing Argument

            The D.C. Circuit first concluded that section 706(a) represents an affirmative grant of authority to the FCC.  The FCC ruled in 1998 that section 706(a) did not represent an affirmative grant of authority, and the D.C. Circuit relied on that determination in 2010 when holding that section 706(a) did not give the FCC the statutory authority to sanction Comcast for using TCP resets to rate-limit BitTorrent, widely regarded as the most high-profile violation of network neutrality principles to date.  The D.C. Circuit revisited that determination in Verizon v. FCC, observing quite properly that agencies are allowed to change their minds so long as they acknowledge that they are changing their positions and set forth their reasons for doing so.  So long as the agency properly explains its change of heart, courts will defer to any reasonable interpretation that is not precluded by the language of the statute.

            The threshold question is whether Congress has directly spoken to the precise question at issue. This inquiry naturally requires an examination of the statutory text.  Section 706(a) provides:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

The D.C. Circuit focused on the last phrase, holding that ordering the FCC to utilize “regulating methods” represented an affirmative grant of authority.

            This last phrase, “other regulating methods that remove barriers to infrastructure investment,” is a classic “catchall” clause.  As a result, the traditional canon of statutory construction known as ejusdem generis “limits general terms [that] follow specific ones to matters similar to those specified.” In other words, the scope of the catchall phrase is limited by the terms that precede it.  The joint brief submitted by Verizon and MetroPCS raised precisely this argument. A related canon known as noscitur a sociis “counsels that a word is given more precise content by the neighboring words with which it is associated.” In other words, if an ambiguous statutory term is embedded in a list, courts should construe it in light of the other terms in the list.

            The first two items in the list contained in section 706(a), “price cap regulation” and “regulatory forbearance,” are deregulatory in focus.  The third item, “measures that promote competition in the local telecommunications market,” also does not at first blush lend itself to a reading that would impose heavier regulatory obligations on broadband providers.  The FCC concluded that promoting competition in access and content would ultimately stimulate demand for greater investments in infrastructure. The FCC based this conclusion on a single empirical study, and one that focused on the cable television industry (not broadband) and was unable to find clear evidence of discrimination. Against this is arrayed the growing corpus of empirical studies showing that access requirements deter investment and competition in local telecommunications services. Even more importantly, this construction would be significantly out of steps with the other terms contained in the list.

            Whether the catchall can support the regulation of broadband providers thus depends on whether a court is willing to accept a fairly indirect argument that is considerable tension with the empirical findings of the majority of the peer-reviewed literature and with the text and structure of section 706(a).  The D.C. Circuit was willing to do so. Should the FCC decide to appeal the decision, it remains to be seen whether the Supreme Court will agree.

The Missing Section 706 Report

            The D.C. Circuit held that section 706(b) also gave the FCC statutory authority to regulate broadband providers.  If the FCC concluded that “advanced telecommunications capability is [not] being deployed to all Americans in a reasonable and timely fashion,” it “shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” Again, the specified means of “removing barriers to infrastructure investment and by promoting competition in the telecommunications market” mirror the language of the third and fourth clauses of section 706(a).  Thus, the same arguments advanced above apply.

            More importantly, the FCC is only authorized to act under section 706(b) if it finds that advanced telecommunications capability, defined by the statute to include broadband, is not being deployed to all Americans in a reasonable and timely fashion.  The first five of the annual reports issued pursuant to section 706 had concluded that broadband deployment did meet this standard.  Only in the sixth report, the last one issued prior to the Open Internet Order, did the FCC find broadband deployment to be inadequate.

            Under the previous Administration, the FCC was criticized for its tardiness in issuing annual reports.  As a general matter, the current Administration has better adhered to the statutory deadlines, consistently issuing its annual section 706 reports somewhere between May and August and with the last report being issued in August 2012.  If the FCC had held to its current pattern, it should have issued its most recent section 706 report no later than August 2013.  Five months have passed since that date with no sign of the report.

            One can only speculate as to why.  Interestingly, the primary basis for the FCC’s finding in its last report that broadband deployments was not reasonable and timely was the fact that as of June 2011, 19 million Americans (or 6% of the population) lacked access to broadband, which the FCC defined as service providing download speeds of 4 Mbps. Commissioner Pai pointed out, however, that if wireless broadband were included, the number of unserved Americans dropped to 5.5 million or 1.7% of the population. Moreover, the last section 706 report was based on data reflecting the earliest stages of the deployment of the fourth-generation wireless technology known as LTE.  Since that time, Verizon has completed its LTE buildout.  AT&T’s LTE network now reaches 80% of the U.S. population and is scheduled for completion by the end of 2014.  Sprint and T-Mobile are racing to catch up, each reaching 200 million by the end of 2013. In addition, recent studies indicate that Verizon’s, AT&T’s, and T-Mobile’s LTE offerings provide an average download speed of 12 to 19 Mbps and peak download speeds of 49 to 66 Mbps. The near ubiquity of LTE suggests that the number of people who cannot access broadband that meets or exceeds the FCC’s 4 Mbps standard is now likely to be considerably less than the 1.7% reported as of June 2011.  And if broadband deployment is reasonable and timely, section 706(b) provides the FCC no authority to act.

Conclusion

            These are a few initial thoughts about the D.C. Circuit’s opinion itself.  There are doubtlessly some important responses to the concerns I have raised, and I look forward to exploring the nuances of the various arguments.  In the meantime, one of the few clear implications is that the lull that had settled over Capitol Hill, the FCC, the public interest community, and the industry while waiting for the D.C. Circuit to render its opinion is now over.  The next round of the debate over network neutrality has only just begun.

FSF's Daniel Lyons – Boston College Law School

The Court’s decision is good news for innovation and ultimately for consumers. The Commission’s conception of one-size-fits-all Internet access is increasingly at odds with the diverse demands of broadband customers. Broadband providers are increasingly offering innovative, non-traditional pricing structures to differentiate themselves from their competition. This is particularly true in the wireless space—witness, for example, AT&T’s “sponsored data” initiative and T-Mobile’s successful campaign to decouple handset subsidies from service contracts. Today’s court decision allows broadband providers to innovate further by developing the other half of broadband’s two-sided market.

But it is worth noting that this decision is unlikely to be the final word on the issue. The Commission may try to re-impose net neutrality by reclassifying broadband service as a Title II telecommunications service. And even if it does not do so, the court’s decision appears to leave the Commission with some wiggle room to regulate commercially reasonable agreements, especially when considered in light of last year’s data roaming order. For example, while the Commission can no longer prohibit priority access agreements with content providers, it may be able to require broadband providers to offer any priority deal on a commercially reasonable basis and prohibit exclusive agreements that would deny priority access to content providers willing and able to pay for such service.

It will be interesting to see what develops in this space. But one thing is certain: the Court’s decision has both identified the need for Chairmen Walden and Upton’s proposed Communications Act update to proceed, and has helped clear some of the underbrush that may otherwise have impeded their efforts to do so. 

It's the Consumer, Stupid! - Part II

In thinking about the brouhaha over AT&T's proposed "sponsored data" plan for its wireless service, I was reminded of a blog I wrote shortly after the oral argument in Verizon's appeal of the FCC's net neutrality regulations. With a nod to James Carville, it was titled, "It's the Consumer, Stupid!"

I explained there that, amidst all the back-and-forth about net neutrality, it is easy to be seduced into focusing on the wrong questions – for example, whether "edge providers" or broadband providers are more adversely impacted by a particular business practice. The most important questions should involve the impact of the business practice on consumers, not the providers.

Well, welcome to "It's the Consumer, Stupid – Part II" – courtesy of some of the reactions to AT&T's sponsored data proposal. As you know by now, under AT&T's proposal, data charges on AT&T wireless service resulting from eligible uses will be billed directly to the sponsoring company, rather than to the AT&T subscriber. Thus, as AT&T claims, the sponsored data plan operates in a fashion similar to the long-familiar 1-800 numbers that allow telephone customers to call toll-free, with the sponsor of the 800 number paying for the call.

First, let me make clear that I understand, and almost no one seriously contends otherwise, that the FCC's net neutrality regulations, by their terms, do not apply to AT&T's plan because the prohibitions don't apply to wireless services. Nevertheless, this fact doesn't stop some, who almost always reflexively oppose any business practice that can be made to "sound" in net neutrality from suggesting that, in any event, the practice ought not be allowed.

Second, I understand that sometimes it doesn't matter one whit whether the FCC 's existing regulations actually do or do not prohibit a proposed business practice, or whether the FCC actually does or does not possess authority to prohibit the practice. By this I mean that often the objectors' goal is simply to create enough of a stir – a brouhaha, as we say – so that the company proposing the new service will withdraw the proposal to "reconsider," "reevaluate," "recalibrate," or whatever. It may take only a raised eyebrow or two from FCC officials or members of Congress to lead to such a strategic back-off.

I have seen such back-offs under fire many times in the past, and I'm sure I'll see more. I often wince when they occur, but I understand the pressures that may be brought to bear.

In this instance, I hope AT&T holds fast for one main reason: Consumers, on the whole, are likely to benefit if AT&T's plan goes forward. Whether or not the plan benefits AT&T is not my concern, although I assume AT&T anticipates its business will benefit or it wouldn't propose the new offering. Too often "consumer advocates" adopt the posture that anything that benefits the service provider's business must be detrimental to the provider's consumers. In other words, they view the provider-customer relationship through a "zero-sum game" lens. This, of course, is completely wrong.

Let me now address the two principal objections raised in one form or another to AT&T's proposal.

AT&T's plan puts it in the business of picking winners and losers on the Internet.

AT&T says its plan is voluntary and non-exclusive, so it is difficult to understand how AT&T is picking any winners and losers. What some of the objectors seem to mean, instead, is that the very existence of the plan means, ipso facto, there will be winners and losers in the sense that some companies may not be able to afford to establish a sponsored data plan. Perhaps they are even the proverbial start-up still in the garage.

Depending on the business model employed by the content or apps provider, the sponsored data plan will be more or less attractive. Some companies certainly may benefit from such a business model more than others. This is the way markets operate. Most importantly, though, consumers benefit from the marketplace competition as companies innovate and invest in new content and applications while seeking a competitive edge.

Even assuming for the sake of argument that AT&T's plan were exclusive rather than non-exclusive, it still would be wrong to assume AT&T would be in the position of picking winners and losers. This is because the wireless marketplace is competitive, and, therefore, it is in the interest of AT&T and its competitors to carry all the content and applications that consumers find attractive. In other words, AT&T and its competitors all want more usage of their network facilities. If a new start-up content or application provider has a good business plan that includes sponsored data – a proposal for a service likely to attract consumers – it will be able to attract capital to fund participation in AT&T's plan.

AT&T's plan could ultimately harm consumers.

This claim has been made by several of the objectors, but, for illustrative purposes, I'll take the statement issued by Rep. Anna Eshoo, the ranking member of the House Subcommittee on Communications and Technology, whom I respect. According to a report in the Hillicon Valley blog, Rep. Eshoo said:

 On its face, the ability for consumers to access ‘toll-free’ content seems like long-awaited relief from frustrating data caps. But embedded in programs of this type are serious implications for fairness and competition in the mobile marketplace. …And we must ask just how beneficial a program like this is to consumers who could ultimately foot the bill for the added cost of doing business.

I wouldn't characterize data usage plans (most providers no longer have actual caps on usage, but rather tiered usage pricing plans) as frustrating as opposed to economically sound. But, in any event, a plan that allows consumers to enjoy certain content and applications free from usage caps appears consumer-friendly, and not just "on its face." Just ask real-world consumers whether or not they prefer having this usage-free option available for some of their favorite heavy-trafficked sites, say, Netflix or ESPN. We know the answer.

But Rep. Eshoo's suggestion is that, whatever the data-free plan's acknowledged short-term benefit to consumers, they "could ultimately foot the bill for the added cost of doing business." Presumably she means to suggest that the content and apps providers, ultimately, might pass on to consumers the fees they pay AT&T to participate in the sponsored data program. Depending on the business model devised by the content and apps providers, they may or may not charge consumers to access their products and services.

But here's the most fundamental point: There simply is no free lunch. Assuming that the government is not going to take over the private wireless networks, and pay the costs of maintaining and operating them – and I don't take Rep. Eshoo to be proposing this – it is just an economic fact that, ultimately, private networks, such as AT&T's, must be paid for one way or another by those who use them, whether by AT&T's subscribers, or by the content and apps providers who rely on AT&T's network for reaching their own users, or some combination of these segments.

Under AT&T's proposal, participating content and apps providers will share some of the costs of operating and expanding AT&T's wireless network. There is no reason for the government to dictate that the costs for network operation and facilities upgrades shouldn’t be paid for, at least in part, by the content and applications providers that are reliant on the network to reach their customers. It is at least possible, if not likely, that this cost-sharing mechanism will turn out to be, at least for some business models, a more economically efficient way to recover the costs of operating and expanding the service provider's networks, while expanding customer usage. And, in this context, economically efficient means less costly, on an overall basis, ultimately to the benefit of all consumers that use the network.

Put slightly differently, given the competition in the wireless broadband market – indeed, in the broadband marketplace at large – the costs of the FCC interfering with proposals like AT&T's are likely to outweigh the benefits. This is because the costs entail curtailing market experimentation that drives innovation in new products and investment in new facilities. And when that happens, especially in a dynamic marketplace, we're talking real consumer harm.

So, remember, in thinking about these issues: "It's the Consumer, Stupid!"

First Principles: Restoring the First Amendment to Its Rightful Place

On December 27, the D.C. Circuit issued an important opinion involving Federal Communications Commission rules promulgated to implement the Cable Act of 1992. Court opinions may not have been on your holiday reading list – there is a reason my wife calls me a workaholic! – so you may have missed the opinion in Agape v. FCC.

Because the court's decision implicates first principles – in this case respecting the First Amendment's free speech guarantee – you should be aware of it.

In Agape, the D.C. Circuit rejected a challenge to the FCC's 2012 order allowing the FCC's "Viewability Rule" to expire. The Viewability Rule imposed certain "downconversion" requirements on cable operators in connection with "must carry" obligations created by the Cable Act of 1992. In the 1992 Act, Congress required cable television systems to dedicate some of their channels to local broadcast stations, creating "must carry" rights for broadcast stations that elect mandatory carriage.

For present purposes, it is enough to understand that the Commission allowed the Viewability Rule to sunset in light of the transition from analog to digital broadcasting and accompanying technological and marketplace changes. Or as Judge Edwards puts it near the beginning of his opinion: "Since 2007 [when the Viewability Rule was promulgated], the telecommunications market – including the technology in use by broadcasters, cable distributors, and customers – has changed dramatically."

Judge Edwards explains why each of the challengers' arguments regarding statutory authority, arbitrary reasoning, and APA notice-and-comment violations are to no avail, and I refer you to his decision on these points. But the principal reason I write now is to call your attention to Judge Kavanaugh's excellent – and important – concurring opinion.

While Judge Kavanaugh agrees in full with Judge Edwards' opinion, he would go further: "The dramatically changed marketplace that the Commission aptly recognized in this case undermines the constitutional foundation of the Viewability Rule and, indeed, of the broader must-carry regime as well."

Judge Kavanaugh asserts – just as he did in his concurring opinion in the Tennis Channel case in May 2013 – that the "must carry" and other program carriage requirements imposed on cable operators violate the First Amendment. He points out that, in sustaining these requirements in Turner Broadcasting System, Inc. v. FCC in 1994, the Supreme Court "rested its approval of the must-carry regime on the fact that cable operators in the early 1990s possessed 'bottleneck monopoly power.'" As Judge Kavanaugh explained:

"Things have changed. In the two decades since Congress enacted the Cable Act of 1992, the video programming marketplace has radically transformed. Cable operators today face intense competition from a burgeoning number of satellite, fiber optic, and Internet television providers – none of whom are saddled with the same program carriage and non-discrimination burdens that cable operators bear. As this Court has flatly stated, cable operators 'no longer have the bottleneck power over programming that concerned the Congress in 1992.'"

I am pleased that, in his opinion, Judge Kavanaugh cited my 2009 Charleston Law Review article, "Charting a New Constitutional Jurisprudence for the Digital Age," in support of that proposition. In my article, after reviewing the Supreme Court's jurisprudence, along with marketplace developments, I argued that legacy program content requirements, including those applying to cable operators, should no longer be considered constitutional. I concluded this way:

"Perhaps it was predictable, maybe even likely, that the First Amendment’s protections would be limited substantially during the twentieth century’s Analog Age that tended towards a monopolistic or oligopolistic communications marketplace. But now, in the face of proliferating competitive alternatives attributable to profound marketplace and technological changes, it ought to be considered predictable and yes, even likely, for the Court to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s Digital Age."

In addition to relying on my law review article, Judge Kavanaugh cited Christopher Yoo's Vertical Integration and Media Regulation in the New Economy at 19 Yale. J. on Reg. 171. I am proud that Professor Yoo is a member of the Free State Foundation's Board of Academic Advisors.

This excerpt from Judge Kavanaugh's opinion captures the essence of the matter:

"Unsurprisingly, cable regulations adopted in the era of Cheers and The Cosby Show are ill-suited to a marketplace populated by Homeland and House of Cards. And the constitutional problems infecting the 1992 Cable Act’s various program carriage and non-discrimination requirements grow more significant every day, as new video programming distributors emerge and prosper. The upshot is that the cable 'bottleneck monopoly' on which Turner rested no longer exists – and, as a result, the Act’s infringements on cable operators’ editorial discretion no longer can withstand First Amendment scrutiny."

I like the reference to House of Cards in this sense – the whole edifice of legacy First Amendment jurisprudence regarding the electronic media was constructed primarily on notions of "scarcity" and "bottleneck monopoly power" that no longer exist in today's communications marketplace, if ever they did. This First Amendment jurisprudence is a "House of Cards" waiting to crumble. I am confident that, before too much longer, other jurists will join Judge Kavanaugh in recognizing that existing government controls and program carriage mandates impinging on the editorial discretion of cable operators and other electronic media are incompatible with the free speech rights guaranteed by the First Amendment.

The FCC itself has a duty to conform its actions to the dictates of the First Amendment, so the agency should not wait for the courts to order it to do so. But, in the meantime, I commend to you a close reading of Judge Kavanaugh's decision. It's about first principles – in this instance restoring the First Amendment to its rightful place.