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Bye Bye Net Neutrality?

Say goodbye to network neutrality… at least for now. That's my take after watching and evaluating the arguments over the issue at the D.C. Circuit Court recently.

Based on Verizon Communications Inc. (NYSE: VZ)'s challenge to the Federal Communications Commission (FCC) 's "no blocking" and "anti-discrimination" rules and lack of severability, Judges Laurence Silberman and David Tatel seem inclined to vacate parts, if not all, of the FCC's Open Internet regs because they impose common carrier obligations on an "information service." Meanwhile, Judge Judith Rodgers asked few questions. (Verizon v. FCC, 11 1355, D.C. Cir. argued September 9, 2013).

That's the good news. The bad news is that the judges gave short shrift to the claim that the FCC lacks the authority to adopt rules, as well as to Verizon's First Amendment and Fifth Amendment "takings" claims.

If my read is accurate and the regs are vacated, the FCC will then have three options: (1) seek en-banc review by the full D.C. Circuit; (2) petition for Supreme Court review; and/or (3) try again. Because few cable TV issues ever really die or fade away, look for more pressure by the Open Internet Coalition (OIC) on Congress and the FCC to declare Internet infrastructure providers to be common carriers when distributing the content and applications of others.

Judge Tatel, who is blind, seemed to have the most foresight and clearest understanding of the law, policy, and business implications of the case. He authored Comcast v. FCC, 08-1291 (D.C. Cir. April 6, 2010), which chastised the FCC for claiming ancillary authority over Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s interference with peer-to-peer file sharing. He also penned the opinion in Cellco Ptp. v. FCC, 11-1135 (D.C. Cir. December 4, 2012). That case upheld FCC authority to impose data roaming regs on mobile data providers in the face of Verizon's claim that this was impermissible common carrier regulation.

Because edge providers have to be given access at no charge, Judge Silberman found it difficult to understand how the FCC could claim its rules were not tantamount to common carrier regs. He agreed with Tatel that the anti-discrimination rules were clearly common carrier.

Silberman appeared confused about how the Internet works. No-one explained that over-the-top (OTT) traffic is on the public Internet, while VoIP and other services offered by phone and cable companies pass through dedicated facilities separate from the public Internet. Only the protocol (IP) is the same. FCC counsel Sean Lev struggled to clarify that edge providers already pay networks for interconnection and backhaul.

Pantelis Michalopoulos, who represented the OIC -- which includes Amazon.com Inc. (Nasdaq: AMZN), Dish Network LLC (Nasdaq: DISH), Facebook , Netflix Inc. (Nasdaq: NFLX), TiVo Inc. (Nasdaq: TIVO), Vonage Holdings Corp. (NYSE: VG), and YouTube Inc. -- argued that the anti-discrimination rule should be upheld so that carriers cannot double charge both consumers and edge providers.

That's the heart of this case. It's why some 200 attorneys started lining up in the hallway an hour before the argument began. If the anti-discrimination rule is invalidated but the anti-blocking rule is upheld, the stage will be set for a two-sided market. Telcos and cable companies will be free to offer edge providers "faster lanes" for a fee -- a healthy boost for cable's small-to-midsize business (SMB) revenue.

Despite little evidence, public interest groups, the OIC, and the FCC worry that telcos and cable companies will have a disincentive to maintain and upgrade their infrastructure if they can charge OTT providers. They also fret that carriers might degrade service, creating congestion and thereby forcing edge providers to pay for priority.

Verizon counsel Helgi Walker, who also represented Comcast and Cellco (Verizon), said her client was interested in charging edge providers for priority access but was reluctant to run foul of the FCC's "anti-discrimination" rule. She argued that even the no-blocking provision was a de facto nondiscrimination rule because it mandates that all edge providers be carried at no charge. That may be a stretch. Judge Tatel signaled approval of the "no-blocking" rule but not the "anti-discrimination" rule. This would allow pay-for-priority and not apply common carrier regulation to an information service.

Under questioning from Silberman, Walker initially conceded that an FCC finding of carrier market power might justify Open Internet regs but later said such a "flat finding" was not sufficient justification. The entire regime should be invalidated, she said, because the FCC never claimed severability -- that the court could strike down some regs without invalidating the entire regime.

The court is expected to hand down its decision by June.

Related posts:

— John Mansell, President, John Mansell Associates Inc. John Mansell is a member of the D.C. Bar, Michigan Bar, and Federal Communications Bar Association.

albreznick 11/19/2013 | 9:42:23 PM
Re: Prospects not looking good? OK, John. Why don't you think it'll make it to the Supreme Court? Won't the FCC fight for its authority all the way to the top if the case hets remanded back to them? Or do you think the high court just won't take the case? 
jman3136 11/19/2013 | 6:01:48 PM
Re: Prospects not looking good? My guess is that the case won't make it to the Supreme Court.  I think it will be remanded to the FCC with insturctions to do away with the anti-discrimination rule, thereby providing MVPDs with the flexibility to create faster lanes for networks and businesses willing to pay a toll for priority.  FCC anti-blocking regs will probably be sustained. Given the D.C. Circuit's recent antipathy for "ancillary authority, perhaps the most interesting finding will be the legal gymnastics to justify FCC jurisdiction.
dwx 11/19/2013 | 5:56:47 PM
Re: Designed to fail MSOs do not need to open their access networks up to competitors, although it's certainly now feasible for Internet access.  The grapevine says MSOs like Comcast are already getting some payment for traffic such as NF on their network now that NF is delivering traffic themselves, I wouldn't be surprised if Verizon was either.   Paying the edge provider is cheaper for NF than paying CDNs to deliver the traffic.   Now that's not getting paid for preferential treatment over other OTT providers, but it takes some of the sting out for the larger access providers.  

I expect NN will be reworked and we will be back to where we started in a few years after all of the lawsuits are done.  
KBode 11/19/2013 | 5:36:43 PM
The battle was already over... I think the fight over meaningful network neutrality rules technically died several years ago in a puff of partisan smoke and hyperbole, and this is just all the death rattle. The rules (that will likely be overturned) already failed to address the issue, allowing pretty much any anti-competitive gatekeeper carrier behavior on wireless provided it could be passed off as for the health of the network under vague technical justifications (see Verizon's block of the Nexus 7 while pushing their own tablet, or the blockade of Google Wallet).

Meanwhile the term network neurtality is now so convoluted and divisive as to be meaningless (though I still do believe in the principles at play), so I'm thinking the discourse needs to return to whether something is or isn't anti-competitive.

I think most analysts do think Verizon will win, leaving the only real question remaining whether or not Tom Wheeler will reclassify ISPs as common carriers under Title II to retain FCC authority over broadband.
spc_isdnip 11/19/2013 | 5:35:01 PM
Designed to fail The FCC's Part 8 rules were designed to be overturned.  They were a political gesture, not sane regulation.  On the other hand, Verizon wants them to succeed, since the whole NN thing was a swipe at Comcast and its limited upstream capabilities compared to FiOS.  They shouldn't have led the opposition; Comcast should have.  So both sides are doing kabuki.


These rules came out after a proceeding that had suggested Title II common carrier authority over the carriage portion.  Then the FCC rejected that in favor of the silly Section 706 hack.  Nothing in 706 hints at this authority; it is an outside section of TA96 that unlike almost everything else in it did not amend CA34. It's the slenderest thread in the whole cloth.

But Tom Wheeler could (and should) take this failure and turn it around.  NN only became an issue because the FCC chose to end the Computer II rules that had allowed competitive access to telco transmission ("basic") facilities.  The FCC can simply restore that -- if you have market power and own the pipe, you have to make it available to other ISPs -- and then people could choose the ISP whose policies and price (they're related) they preferred.  Title II clearly gives them that authority over the telecom pipe, but not over the Internet itself.
albreznick 11/19/2013 | 3:49:26 PM
Prospects not looking good? So it sounds like the prospects are not looking good for the FCC's pride and joy. How do you think the DC Circuit will come down on this, John? And, if it heads to the Supreme Court, what do you think will happen there?  
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