Did Congress Empower the FCC to Regulate the Internet? Appeals Court Says ‘Yes’

Last month’s blockbuster ruling throwing out the key provisions of the Federal Communications Commission’s 2010 Network Neutrality rules justifies taking a hard look at Section 706 of the Telecommunications Act of 1996.

Opponents and proponents of Network Neutrality have, understandably, focused their attention on whether the FCC should take the invitation of the court to "reclassify" broadband services as common carriers under Title II of the Communications Act. In the near term, the controversy over reclassification will be front and center. But the longest lasting and most important legacy of the ruling of the United States Court of Appeals for the District of Columbia Circuit is likely to be its expansive interpretation of Section 706.

An appeal to the Supreme Court is possible, but unlikely. (The FCC would have to decide to seek Supreme Court review and ask the Solicitor General to take the case. Even if he agrees to do so, the Supreme Court would have to grant review, something that it rarely does in the absence of a conflict between lower courts, which is not the case here. Other parties to the case could also appeal, but their likelihood of success is even lower. Thus, whether or not the FCC chooses to reclassify broadband, we are almost certainly going to be living under the appeals court’s interpretation of Section 706.

For some 14 years, the FCC did not consider Section 706 to be an independent source of regulatory authority, but rather thought of it more as a guiding principle to be effectuated using other provisions of the Communications Act. However, after the D.C. Circuit rejected the Commission’s effort to invoke other provisions of the Communications Act to support Net Neutrality policies in 2010, the Commission revisited Section 706 and determined that it could, indeed, be the basis for substantive regulation. Although last month’s decision dealt the Commission a severe blow by rejecting two of the three elements of the Commission’s Net Neutrality rules (anti-blocking and anti-discrimination), it did uphold the Commission’s transparency rules requiring Internet service providers (ISPs) to disclose their network management practices. In doing so, the Commission set forth an extremely broad reading of Section 706.

Here is what Sections 706(a) and 706(b) say:

(a) In general
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.
(b) Inquiry
The Commission shall, within 30 months after February 8, 1996, and annually thereafter, initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) and shall complete the inquiry within 180 days after its initiation. In the inquiry, the Commission shall determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion. If the Commission’s determination is negative, 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.

In short, Section 706 directs the FCC and state public service commissions to "encourage the deployment on a reasonable and timely basis of [broadband] to all Americans...," by using "price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods...." It also directs the Commission to undertake an annual review, and if it finds that broadband deployment is not proceeding "in a reasonable and timely fashion," to "take immediate action to accelerate deployment...."

As Verizon and its supporters pointed out, Section 706(a) does not on its face appear to be an independent grant of vast regulatory authority, but rather seems to be a statement of policy and a directive to the FCC (and the states) to use other existing authority to achieve those goals. Indeed, that is what the FCC itself had always said in the past. And Section 706(b) is extremely vague; its directives to "remov[e] barriers to infrastructure investment" and to "promot[e] competition" are not anchored to any specific action and appear on their face simply to be hortatory in nature.

The Court did not just uphold the FCC’s construction of Section 706, but it did so in sweeping terms. Rejecting Verizon’s assertion that (in the words of the decision) the Commission’s regulations are "too attenuated from" the purpose of accelerating broadband deployment, it ruled that the FCC was fully justified in finding a link between creating an open Internet and acceleration of broadband deployment. It said that the Commission's authority to promulgate regulations that promote broadband deployment encompasses the power to regulate broadband providers' economic relationships with edge providers if, in fact, the nature of those relationships influences the rate and extent to which broadband providers develop and expand services for end users. It also accepted the FCC’s conclusion that, absent FCC action, "broadband providers represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment...."

In reading Section 706 as conferring independent regulatory capacity, the Court has given the FCC a powerful weapon. The right to use "measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment" affords extremely wide latitude to address threats to broadband deployment and the open Internet. The only limit is that it cannot (as in the two rules rejected by the Court) impose common carrier duties. Senior Judge Laurence Silberman dissented from the decision’s holding on Section 706, saying that the majority created a "new statute granting the FCC virtually unlimited authority to regulate the Internet." He said that the holding had no limiting principle, since "any regulation that, in the FCC’s judgment might arguably make the Internet 'better,' could increase demand [for broadband]." Judge Silberman argued that this gives the Commission "carte blanche to issue any regulation that the Commission might believe to be in the public interest."

While Judge Silberman’s dyspeptic analysis may be slightly hyperbolic, his basic reading of the majority’s holding is functionally correct. The Commission can now regulate just about any aspect of broadband networks so long as it can plausibly find a relationship to broadband deployment. This is almost as troublesome to proponents of Network Neutrality as it may be to Verizon and Comcast. Indeed, most of the public interest community had opposed use of Section 706 and argued that the FCC should have at the outset reclassified broadband as a Title II service.

What does this mean in practice? While the Commission clearly lacks authority under the decision to address the most important aspects of Network Neutrality, it does let the Commission do a great deal. Some of it could be very pleasing to consumer advocates; Judge Silberman all but invited the FCC to preempt the 27 "state laws that prohibit municipalities from creating their own broadband infrastructure to compete against private companies." The Commission could probably address some Internet peering issues on an awkward case-by-case basis if they involved contract terms that the Commission deemed commercially unreasonable.

One hopes the Commission would use its newly-determined powers judiciously. For example, although it probably wouldn’t do so, the FCC rather clearly has authority to regulate rates, not only for ISPs but for any service connected to the Internet, such as Netflix. Indeed, the decision arguably gives the Commission significant power to regulate edge providers such as Google and Facebook. And several commentators have argued that the motion picture industry could argue that illegal downloading impedes broadband deployment in asking the Commission to enforce copyright laws.

On the other hand, the decision leaves the Commission powerless to deal with a number of major problems. For example, Voice over Internet Protocol (VoIP) providers (companies such as Vonage that offer telephone service via the Internet) cannot be required to complete calls coming from other carriers, which they may not wish to do for many reasons. Similarly, they are now free to block calls made by their own customers; they might, for example, think that the amount of compensation they would receive from a 1-800 call doesn’t justify allowing the call. And they cannot be required to be "carriers of last resort." That means that they can refuse service to anyone for any reason, such as being a bandwidth hog, or a Muslim. This is a relatively small problem today, but the nation is in the process of converting the entire traditional telephone network to Internet Protocol, so the FCC will be losing the power to impose these requirements on Verizon and AT&T.

One aspect of the decision is especially unclear. Since Section 706(a) applies not only to the FCC but also to "each state commission," this might give state PUC’s the authority to disregard limits imposed by state legislatures. States definitely now have some power to regulate the Internet even though it is arguably the most “interstate” form of commerce imaginable, but what this means will have to be seen over time.

The FCC could have imposed network neutrality rules by treating broadband as a Title II service, but it chose instead to attempt to get to the same result by using Section 706. A central element of modern administrative law is that when statutory language is ambiguous, agencies have broad discretion to interpret the law. The majority in Verizon v. FCC applied that principle to give the FCC everything that it needed - and more - except for what it wanted the most. We may be living with the consequences for a long time.

Andrew Jay Schwartzman is the Benton Senior Counselor at the Public Interest Communications Law Project at Georgetown University Law Center's Institute for Public Representation (IPR).

By Andrew Jay Schwartzman.