Does The Net Neutrality Decision Impose Rate Regulation?

Did the FCC impose rate regulation on broadband? Good question.

Few issues before the Federal Communications Commission have generated as much controversy and partisan debate as Network Neutrality. As opposing sides have jockeyed for position, their goal has not always been clarity. Perhaps the most contentious and confusing aspect of the debate since the FCC voted on February 26 is the question of whether the FCC’s Net Neutrality decision imposes rate regulation. That seems like a yes/no question, but it isn’t.

In his statement at the FCC meeting, Chairman Tom Wheeler said:

Let me be clear, the FCC will not impose “utility style” regulation. We forbear from sections of Title II that pose a meaningful threat to network investment, and over 700 provisions of the FCC’ rules. That means no rate regulation, no filing of tariffs, and no network unbundling.

In dissent, FCC Commissioner Ajit Pai was equally clear:

One facet of that control is rate regulation. For the first time, the FCC will regulate the rates that Internet service providers may charge and will set a price of zero for certain commercial agreements. And the Order goes out of its way to reject calls to forbear from section 201’s authorization of rate regulation, thus making clear that the FCC will have the authority to determine the appropriate rates and charges for service. The Order also expressly invites parties to file such complaints with the Commission. A government agency deciding whether a rate is lawful is the very definition of rate regulation.(footnotes omitted.)

Commissioner Pai has also expressed concern that the FCC’s decision “allows class-action lawsuits—with attorneys’ fees—should any trial lawyer want to challenge an Internet service provider’s network management practices or rates.”

Commissioner Pai’s first claim, that the FCC has established “a price of zero for certain commercial agreements” is semantic in nature. His argument is rooted in the Commission’s ban on “paid prioritization”; ISPs may not charge edge providers like Amazon or BestBuy for preferred treatment. This, he says, establishes a price of zero, since otherwise an ISP could charge for this service. The Commission says that it is regulating a practice, not establishing a price. Po-ta-to, Po-tah-to.

The more substantial argument, that complaints alleging excessive rates can now be filed in court or at the FCC, requires some background to be understood. In reclassifying Internet broadband service as a “telecommunications service,” the Commission invoked its generic power under Sections 201 and 202 of the Communications Act. Section 201 provides in pertinent part that

All charges, practices, classifications, and regulations for and in connection with such communication service, shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is declared to be unlawful;...

Section 202 prohibits discrimination among customers in those “charges, practices, classifications, regulations, facilities, or services....”

The Commission has also invoked Section 207 of the Communications Act, which says aggrieved persons may

either make complaint to the Commission...or may bring suit for the recovery of the any district court of the United States....

Other provisions of Title II give the FCC the power to impose what would ordinarily be understood as rate regulation; the establishment of price limits or caps, publication of tariffs, mandatory accounting rules and more. However, the FCC explicitly disclaimed its power to impose such strictures. It did this by invoking its forbearance power under Section 10 of the Telecommunications Act of 1996. (This blog addressed forbearance last October.)

Commissioner Pai and his allies argue that (most of the time) the Commission says it is not establishing ex ante rate regulation, i.e., before-the-fact rules. However, they say that this fails to acknowledge that the Commission has retained authority under Sections 201 and 202 to determine if particular charges are “just and reasonable” and to preclude ISPs from discriminating by charging a different price to different customers. This, Commissioner Pai says, is ex post rate regulation.

It is thus a definitional question as to whether a case-by-case determination is rate regulation or an assessment of the reasonableness of a particular practice. On the one hand, there are no price caps, rate of return formulae or other kinds of traditional rate regulation. On the other hand, the Commission could, at least in theory, act on a complaint that a particular rate was “unjust or unreasonable.” However, as will be seen, that may not be the case in practice.

It is a definitional question as to whether a case-by-case determination is rate regulation or an assessment of the reasonableness of a particular practice.

Commissioner Pai’s concerns about a flood of litigation are certainly hyperbolic. For one thing, the Commission has adopted a streamlined complaint process that is designed to weed out all but the most meritorious complaints with minimal paperwork. As to concerns about lawsuits brought directly to court, the doctrine of “primary jurisdiction” means that most or all lawsuits will be sent back to the FCC for initial review. Most importantly of all, in practice, the likelihood of large class actions in federal court is remote. That is because of a 2011 Supreme Court decision called AT&T Mobility LLC v. Concepcion, which held that telecommunications carriers can enforce mandatory arbitration and class action waiver clauses in their customer agreements. Arbitration typically is a very unfavorable forum for consumers.

In the wake of the Conception case, all of the large wired and wireless carriers have adopted mandatory arbitration and class action waiver provisions. The agreement for Verizon FiOS, for example, not only mandates arbitration and prohibits class actions, but, for good measure, says that if something winds up in court anyway, the customer must waive a jury trial. (Certain complaints can also be brought in small claims court, where the maximum damages are a few thousand dollars and there are no class actions.)

It is less clear if the mandatory arbitration clauses also preclude the filing of complaints at the FCC. To date, the FCC has not considered the question of whether it can accept consumer complaints where there is a mandatory arbitration clause or the efficacy of class action waivers. Thus, at the very least, it is uncertain that rate complaints can proceed except through arbitration or small claims court.

Given the emotional intensity of the Net Neutrality issue, and the lack of a simple answer, the debate about whether the FCC has imposed rate regulation will inevitably continue for a long time to come.

By Andrew Jay Schwartzman.