Net Neutrality Antidiscrimination Rules Seem Like Common-Carriage Rules, Judges Say

Tatel took the lead in dissecting the 2010 order, which prohibits blocking content and unreasonably discriminating in the transmission of network traffic. Tatel focused much of his questioning on whether the order’s anti-blocking provisions alone would prevent charging edge providers for faster service to the end-user. The general consensus among court observers in follow-up interviews was that the antidiscrimination portion of the rules may be struck.

The FCC regulating the Internet in a common carrier mode is what a “majority of the court perceives as the biggest barrier,” said Judge Laurence Silberman. The content providers in Midwest Video II seem to be in “exactly the same position as edge providers here,” he said. In 1979’s Midwest Video II, the Supreme Court vacated the FCC’s public access rules as impermissible common-carrier obligations. “Distinguish it for me,” said Tatel to Lev. “Isn’t that exactly this case?"

Judges also accused the FCC of running afoul of the principles in the D.C. Circuit’s data roaming decision. In Cellco Partnership v. FCC, the court wrote that the agency wasn’t treating mobile Internet providers as common carriers, because the rules left “substantial room for individualized bargaining and discrimination in terms” (CD Dec 5 p1).

"What saved digital roaming in Cellco was flexibility,” said Tatel, who wrote that opinion for the 3-0 court. “I haven’t heard a basis for distinguishing this case from the classic common-carriage” requirements that were found wanting in Cellco, he said. There, the commission’s data roaming order listed 16 different factors for the commission to take into account in evaluating whether a data roaming agreement was reasonable, he said. “Where is that flexibility here?"

"As a matter of law, this regulation requires some level of access, which runs afoul of the common-carriage” requirements, Silberman said. Lev defended the rules, arguing it’s not necessarily common carriage to require a basic level of service if an ISP has some flexibility to negotiate. This seemed to lead to some confusion among the judges. If the court blocks the antidiscrimination provisions, could Verizon still charge for different levels of Internet access, asked Tatel. Responded Lev: Slower service doesn’t count as blocking.

Tatel asked: Can Verizon enter into negotiations with edge providers? He thinks the “whole theory” was that charging edge providers could hurt investment and reduce broadband deployment. “You're defending the rule you've got,” he said. “You haven’t shown me where the flexibility is."

Impartial observers and rule opponents see at least a partial FCC loss as likely, they told us after the argument. “The question is not whether the FCC is going to lose, but on what grounds is it going to lose and how,” said former Commissioner Robert McDowell, now at the Hudson Institute. McDowell dissented vigorously to the order, but said if it is partly overturned while the court upholds the FCC’s authority in general “for the bigger picture, that gives a green light to more regulation in the Internet space.” If the FCC’s authority is upheld as long as it allows enough flexibility, the court “has essentially found direct authority from Congress for the commission to regulate in this area,” he said. “That will create more chaos in the Internet space for years to come.”

"Based on the oral argument, which is always dangerous, it seems like that the court is going to find that the FCC had authority under Sect. 706 to adopt the open Internet rules, but it is going to strike the anti-discriminatory provision on the ground that it is common carrier regulation that’s not permissible,” former FCC General Counsel Chris Wright of Wiltshire Grannis told us as he left the courthouse.

As Tatel was pushing for severability,Wiley Rein attorney Helgi Walker, arguing for Verizon, continued to argue the entire law was bad. An ISP would enter into “pay for priority” arrangement “at its peril,” Walker said during her rebuttal time. The ability of an edge provider to pay for priority is the “whole reason” public interest groups wanted the rules, she said.

Tatel spent several minutes trying to “unpack” the anti-blocking and the antidiscrimination rule, as Walker tried to argue they were both forms of price discrimination that forced Verizon’s hand. “Just like common carriers, we may not deviate from a price of zero,” she said. Silberman said he is unsure about whether ISPs can charge edge providers, or whether they have to carry the providers for free. Verizon has to carry them for free, Walker said, continuing to argue the case was just like Midwest Video II.

The antidiscrimination provision seems like “classic common carriage,” Tatel said. But, he asked Walker, if you can still charge for access under the anti-blocking provisions, wouldn’t that make this case just like the data roaming case? If only the no-blocking rule remained -- if Verizon could still charge some edge providers for faster service -- “I don’t think we would be here,” Walker responded.

"I've been hearing it’s a mixed bag,” said ex-Commissioner Michael Copps. Copps was an enthusiastic supporter of the net neutrality rules when they were approved almost three years ago. “You can’t make any predictions on these things,” he said. “But I do know that Internet freedom can’t exist in a mixed bag. We have to have some clarity here.” Copps said he is concerned about the discussion about whether the rules let a carrier like Verizon give some customers preferable treatment through paid prioritization. Lev appeared to indicate under questioning from judges that they do. “That’s just something that allows the big players to build moats around their businesses, that’s just something to deny startups and entrepreneurs access to consumers,” Copps said.

The argument over whether some provisions are common-carrier rules show why the FCC should have reclassified broadband as a Title II service before imposing net neutrality rules, rather than sidestepping that issue and relying on the commission’s Title I authority, Copps said. “That way I think we would have had some clarity and that way I don’t think it would have been such a mixed bag before the court today and I think the commission would have had a good shot of making a very, very strong case based on that classification.”

"The most likely outcome is that the non-discrimination provision will be thrown out,” said public interest lawyer Andrew Schwartzman, who attended the argument that he cautioned isn’t necessarily dispositive to Verizon’s outcome. Judge Judith “Rogers is always hard to read because she doesn’t say much, but I suspect she would dissent,” Schwartzman said. “Assuming that Tatel votes to reverse the commission, it is very hard to see how the commission could succeed in taking the case en banc, but it might try anyway as a necessary prelude to asking the Supreme Court to hear it. If the decision is, indeed, limited to reversing the non-discrimination rule, it is possible that both Verizon and the FCC would ask the Supreme Court to hear the case.”

A split decision by the court “complicates the FCC’s course of action if there is no further judicial review,” Schwartzman said. “Most of the public interest community and much of the tech community wanted the FCC to go further than it did, so they will renew pressure for reclassification under Title II. I would imagine that the cable and telco industries will try to foreclose such action by promising not to abuse the discretion they get under this outcome."

"It’s not clear that there’s three votes for anything after this oral argument,” said Public Knowledge Senior Vice President Harold Feld. He noted that Rogers’ “last caution” to Walker was “I wouldn’t take anything for granted going into this.” Feld said both Tatel and Silberman were intrigued by the common-carrier issue as it relates to the antidiscriminatory provision. “On the plus side for the commission, it seemed clear that there were three votes to find that the commission had authority through its Section 706 argument,” he said. “Two judges seemed to think that the inability to negotiate is a problem under the common-carriage argument. It seemed clear that Tatel and Silberman were in agreement on that.” But Feld said the court could opt to remand part of the order to the FCC for further work, rather than vacating it. “That’s something they've certainly done before,” he said. “You may get three votes for that.”

Judges seemed to agree with Verizon “that the FCC’s rules, as a practical matter, amount to converting Verizon’s Internet access service into a common carrier service and that this is prohibited by the Communications Act,” said Free State Foundation President Randolph May. “Or put another way, the FCC lacks authority to impose a common carriage mandate on Internet providers.” Judges also seemed to agree that the FCC “failed affirmatively to claim that Verizon possesses market power,” which “seemed likely to adversely affect the FCC’s chances of prevailing, along with the related point that the agency casts the potential harms from absence of a net neutrality rule in speculative” terms, he said. “It was not evident that the judges were inclined to give the commission Chevron deference on the points that were of most concern to the court, especially the question whether the net neutrality mandates, in effect, amount to a common carriage requirement not authorized by the Communications Act."

"A D.C. Circuit panel majority signaled” it’s “inclined to pare back FCC Open Internet rules in a way that would allow cable and telco broadband providers to charge Internet edge providers for improved connections to broadband customers,” said Stifel Nicolaus in an email to investors. “At the same time, the panel seemed inclined to uphold the FCC’s authority to regulate broadband to some extent. If the majority follows through on its suggestions, we believe this would be a very promising development for most cable … and telco … providers, particularly on the wireline side, given that only fixed providers are subject to anti-discrimination provisions."

The court appears likely to hand down a decision around the end of the year, said Guggenheim analyst Paul Gallant in a research note. “The judges seemed to lean toward sending at least some of the net neutrality rules back to the FCC and giving the agency another opportunity to refashion them in a way that did not violate the Act’s ban on treating ISPs as common carriers,” he said. “As always with court cases, it is never clear precisely where judges may end up after oral arguments. And in this case, even after almost two hours of oral argument (one which was scheduled for less than one hour), one of the judges even said he was ’totally confused’ by a key point in the discussion. So some caution is in order here.” Gallant said if the court remands parts of the order, the FCC has two main choices: “Adopt more favorable net neutrality rules for cable/telcos by letting them exert more leverage over the terms of carrying edge/content traffic” or apply “Title II to broadband to strengthen the legal basis for the net neutrality rules.”