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Wickard for the Internet? Network neutrality after Verizon v. FCC.

Table of Contents

  I. Introduction
 II. Section 706 as a Grant of Authority
     A. The Text of Section 706
     B. The Court's Expansive Reading of Section 706
     C. The Impact of the Canons of Construction
     D. The Legislative History of Section 706
     E. The Questionable Empirical Foundation for the Court's
III. Limits on the FCC ' s Section 706 Authority
     A. Statutory Limits on the FCC's Jurisdiction
     B. Common Carriage as a Limit to Section 706 Authority
     C. Commercial Reasonableness as an Alternative Standard
        1. Impact on Competition
        2. Impact on Consumers
        3. Industry Practices
 IV. Title II Reclassification
     A. Legal Barriers to Reclassification
     B. Overlooked Implications of Reclassification
        1. Common Carriage's Inapplicability to Complementary
        2. The Permissibility of Prioritized Service
        3. Difficulties Implementing Common Carriage
        4. Difficulties Implementing Forbearance
V.   Other Implications of the Verizon Decision.
      A. State Regulation
      B. The Applicability of Network Neutrality to Interconnection
         1. The Mischaracterization of Peering as Zero-Price
         2. The Multiple Functions Performed by Prices.
         3. The Danger of Regulating Interconnection Agreements
      C. Case-by-Case Adjudication.
         1. MetroPCS/YouTube.
         2. AT&T/Apple FaceTime
         3. Verizon/Google Tethering Apps.
         4. Verizon/Google Wallet.
         5. Amazon Kindle/Zero Rating.
VI. Conclusion

I. Introduction

The U.S. Court of Appeals for the District of Columbia Circuit's long-awaited decision in Verizon v. FCC (1) represents a major milestone in the debate over network neutrality that has dominated communications policy for the past decade. In upholding some parts while striking down other parts of the FCC's Open Internet Order, (2) the court reached two major conclusions that together represent both a partial victory and partial defeat for proponents and opponents of network neutrality alike. First, the court ruled that section 706 of the Telecommunications Act of 1996 (3) affirmatively grants the FCC the authority to regulate broadband access providers' treatment of Internet traffic. (4) Second, the court ruled that the Order's nondiscrimination and anti-blocking rules represented an invalid exercise of that authority because they contravened other express statutory mandates. (5)

In striking down these rules, the court appeared to provide a roadmap showing a way to reconstitute nondiscrimination and anti-blocking rules that would withstand judicial scrutiny. (6) Wanting to avoid the risk of being rebuked on network neutrality a third time, FCC Chairman Tom Wheeler proposed rules that adhered closely to the path laid out by the court with respect to the nondiscrimination and anti-blocking rules, while beefing up the transparency rules that withstood judicial review. (7) Advocates of network neutrality criticized the proposal for its failure to reinstate a nondiscrimination mandate. (8) The resulting political pressure led Chairman Wheeler to include language in the proposed rule seeking comment on the more radical step of bringing broadband access within the regulatory regime that governs traditional telephone service. (9) Nondiscrimination has thus emerged as the focus of the network neutrality debate. Although the Open Internet Notice of Proposed Rulemaking that the FCC adopted on May 15, 2014, attempts to characterize nondiscrimination as part of a decade-long, bipartisan policy, (10) nondiscrimination did not appear in either Chairman Michael Powell's initial 2004 exposition of Internet freedoms (11) and from the FCC's 2005 Policy Statement. (12) Instead, nondiscrimination emerged as an issue somewhat later in the debate, when Commissioner Michael Copps began to call for it in a series of separate statements and speeches. (13) Moreover, the FCC attempts to characterize its actions in the SBC/AT&T, Verizon/MCI, and AT&T/BellSouth mergers and the Adelphia spinoff as supporting network neutrality. (14) As a formal matter, however, in each of those cases the FCC actually found competition to be sufficiently robust and the record sufficiently bare of evidence of discrimination to justify declining to mandate nondiscriminatory access to their last-mile broadband networks, although the FCC did accept voluntary commitments to abide by the 2005 Policy Statement as being in the public interest. (15)

This essay explores both of these conclusions. Part I critiques the Verizon court's potentially expansive reading of section 706, examining how it may expand FCC's authority beyond broadband access providers to encompass content and application providers (dubbed "edge providers" by the court) (16) and showing how this reading runs counter to standard principles of statutory interpretation. Part II discusses the limitations the court placed on how the FCC can exercise its section 706 authority, concluding that these limits prevent the FCC from imposing the type of nondiscrimination mandate that many regard as the central focus of network neutrality. Part III explores the implications of the court's decision, examining the potential for state broadband regulation, the possibility of Title II reclassification, the future of the wireless exception, and the prospects for a regime based on case-by-case adjudication.

II. Section 706 as a Grant Of Authority

The portion of the Verizon opinion with the most potentially sweeping implications for the future of the Internet is the court's expansive reading of section 706. (17) Understanding these implications requires some background on the federal communications statute, the Communications Act of 1934. When first enacted, the Act contained six titles, four of which were procedural, not substantive. (18) Title I laid out the general provisions regarding the number, qualifications, and terms of FCC Commissioners and defined a number of statutory terms. (19) Title IV contained provisions governing procedural and administrative matters. (20) Title V addressed penal enforcement and forfeitures. (21) Title VI dealt with miscellaneous housekeeping matters, such as abolishing the Federal Radio Commission-- the precursor to the FCC--and transferring its property and personnel to the FCC. (22)

The Act's primary substantive provisions were contained in Title II, which governed common carriers, (23) and Title III, which governed radio communications. (24) In 1984, Congress replaced the old Title VI with a new substantive title to govern cable communications and renumbered the old procedural Title VI as Title VII. (25)

Three provisions of Title I are particularly relevant to the network neutrality debate. Section 1 recognizes that Congress created the Commission "[f]or the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all people of the United States ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges." (26) Section 2(a) provides that "[t]he provisions of this chapter shall apply to all interstate and foreign communication by wire or radio and all interstate and foreign transmission of energy by radio, which originates and/or is received within the United States." (27) Section 4(i) states that "[t]he Commission may perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions." (28)

The FCC has sometimes cited these provisions of Title I as if they represented substantive grants of authority. (29) The problem with this approach should be apparent to every law student and lawyer. The FCC has conceded that statements of purpose, like those contained in section 1, delegate no regulatory authority. (30) Moreover, courts and the FCC have analogized section 4(i) to the Necessary and Proper Clause of the Constitution, (31) which authorizes Congress "[t]o make all Laws which shall be necessary and proper for carrying into Execution" the federal government's enumerated powers. (32) Although the Necessary and Proper Clause extends Congress' authority beyond the strict letter of the enumerated powers, it is not itself a separate grant of authority. It still must be exercised with respect to some enumerated power granted to Congress by Article I, Section 8, or some other explicit provision of the Constitution. (33)

Nonetheless, the FCC has repeatedly invoked these provisions as if they were independent grants of authority to regulate Internet access. For example, in the Second Computer Inquiry, the FCC ruled that the enhanced services that were the direct antecedent to the Internet (34) were not subject to Title II. (35) Instead, the FCC relied on its Title I jurisdiction, explicitly rejecting the argument that the provisions of Titles II or III in any way limited its authority. (36) The D.C. Circuit affirmed both conclusions on judicial review. (37) Over two decades later, dicta in the Supreme Court's decision in National Cable & Telecommunications Association v. Brand X Internet Services similarly suggested that the FCC possessed ancillary authority under Title I to impose access requirements on broadband access providers. (38) However, the D.C. Circuit's 2005 decision in American Library Association v. FCC made clear that the FCC must do more than simply cite the general provisions from Title I to justify regulating under its ancillary jurisdiction. (39) Ancillary jurisdiction must be invoked with respect to one of the specific statutory responsibilities Congress delegated to the FCC in the substantive titles of the Communications Act. (40) In 2010, the D.C. Circuit reaffirmed this principle in Comcast v. FCC, which overturned the FCC's attempt to sanction Comcast for rate-limiting certain peer-to-peer applications. (41) Together, these decisions stand for the very reasonable proposition that Title I ancillary jurisdiction is not an independent grant of authority. Instead, it must be asserted in conjunction with some explicit substantive grant of authority from Congress in Titles II, III, or VI. (42) Simply put, Title I jurisdiction cannot be "ancillary to nothing." (43)

The Comcast court then reviewed the statutory provisions that the FCC offered to support its exercise of ancillary jurisdiction, only to find them wanting. (44) Most importantly for this essay's purposes, the court rejected the FCC's attempt to tie its ancillary jurisdiction to section 706, reasoning that the FCC had ruled in an earlier order that section 706 did not represent an independent grant of authority. (45) The opinion implied that the FCC remained free to revisit this conclusion so long as it did so through official agency action and offered a sufficient explanation of its decision to change policies. (46)

The FCC took the D.C. Circuit up on this invitation in issuing the 2010 Open Internet Order, in which the agency explicitly disavowed its earlier conclusion that section 706 was not an affirmative grant of authority. (47) Instead, the FCC concluded that section 706 indeed gave it the authority to regulate broadband service providers' network management practices, such as blocking Voice over Internet Protocol ("VoIP") communications or degrading online video. (48) The D.C. Circuit affirmed this conclusion in Verizon on judicial review. (49)

A. The Text of Section 706

Given that section 706 represented the sole basis for the Verizon court's conclusion that the FCC has the authority to regulate network management practices, (50) the text of that provision merits close examination. The full statutory provision is as follows:

(a) 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) 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. (51)

The Verizon court deferred to the FCC's conclusion that subsections (a) and (b) of section 706 each represent affirmative grants of authority. (52) Subsection (a) explicitly authorizes the FCC to use four types of regulatory measures: (1) price cap regulation, (53) (2) regulatory forbearance, (3) measures that promote competition in the local telecommunications market, and (4) other regulating methods that remove barriers to infrastructure. (54) The court held that, although subsection (a) could be read as simply setting forth a statement of congressional policy, it "could just as easily be read to vest the Commission with actual authority to utilize such 'regulating methods' to meet this stated goal." (55) The fact that the court's discussion of subsection (a) focuses exclusively on the scope of "regulating methods" indicates that the court saw (4) as the basis for the FCC's jurisdiction. (56)

By its own terms, subsection (b) serves as a grant of authority only if the FCC finds that advanced telecommunications capability is not being deployed in a "reasonable and timely fashion." (57) If so, the FCC is authorized to employ two remedies: (1) removing barriers to infrastructure investment and (2) promoting competition in the telecommunications market. (58) These are essentially identical to the fourth and third measures, respectively, authorized by subsection (a), (59) making the analysis of the scope of the two subsections essentially parallel.

The Verizon court held that section 706(b) also gives the FCC statutory authority to regulate broadband providers. (60) Under this provision, if the FCC concludes 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." (61) Again, the specified means of "removing barriers to infrastructure investment and ... promoting competition in the telecommunications market" mirror the language of the third and fourth clauses of section 706(a). (62) Therefore, the same arguments advanced above apply.

More importantly, the FCC is authorized to act under section 706(b) only if it finds that advanced telecommunications capability--defined by the statute to include broadband (63)--is not "being deployed to all Americans in a reasonable and timely fashion." (64) The first five annual reports the FCC issued pursuant to its section 706 inquiry each concluded that broadband deployment met the requisite standard. (65) Only in the FCC's sixth section 706 report--the first one following the D.C. Circuit's decision in Comcast Corp. v. FCC to reject the statutory provisions the FCC first proffered as bases for its jurisdiction and the last one issued prior to the Open Internet Order--did the FCC find broadband deployment to be inadequate. (66) The Verizon court recognized that "[t]he timing of the Commission's determination is certainly suspicious." (67) The agency continued to find broadband deployment to be inadequate in its two subsequent section 706 reports. (68)

Under the Bush administration, the FCC was criticized for its tardiness in issuing annual reports. (69) Under the Obama administration, the agency has better adhered to statutory deadlines, (70) consistently issuing its annual section 706 reports somewhere between May and August each year from 2009 to 2012. Had the FCC adhered to this historical pattern, it should have issued its ninth section 706 report no later than August 2013. Instead, two years elapsed until August 2014 when the agency solicited input on its tenth annual section 706 report instead of issuing its ninth annual report despite the fact that two years had passed since the issuance of the eighth report. (71) One can only speculate as to why.

Interestingly, the primary basis for the FCC's 2012 finding that broadband deployment 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 or higher. (72) As Commissioner Pai pointed out in his dissent, however, if the report had taken into account mobile wireless broadband, it would have reduced the number of unserved Americans to 5.5 million--or 1.7% of the population. (73) Moreover, the 2012 report was based on data reflecting the earliest stages of the deployment of the fourth-generation wireless technology known as Long-Term Evolution ("LTE"). (74) Since that time, Verizon has completed its LTE buildout, (75) while AT&T's LTE network now reaches 80% of the U.S. population and is scheduled for completion by the end of 2014. (76) Sprint and T-Mobile are racing to catch up: each carrier reached at least 200 million people by the end of 2013 and is projected to reach 80% of the country sometime during 2014. (77) In addition, recent studies indicate that Verizon's, AT&T's, and T-Mobile's LTE offerings provide average download speeds of 12 to 19 Mbps and peak download speeds of 49 to 66 Mbps. (78) 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 considerably less than the 1.7% reported as of June 2011. (79) And, again, if broadband deployment is reasonable and timely, section 706(b) provides the FCC no authority to act.

B. The Court's Expansive Reading of Section 706

The Verizon court made no claim that the nondiscrimination and antiblocking rules fell within the first three measures authorized by section 706(a). Instead, the court explicitly invoked the fourth type of measure authorized by the statute, focusing its discussion entirely on "regulating methods." (80)

At first glance, a regulation blocking broadband access providers from charging edge providers premium prices for premium services would seem more likely to create barriers to infrastructure investment than to remove them. (81) Such a rule would, after all, benefit edge providers at the expense of broadband Internet access providers. (82)

Nevertheless, the court accepted the FCC's assertion that fostering and preserving edge providers represented an important indirect way to promote infrastructure investment. (83) The FCC reasoned that nondiscrimination and anti-blocking rules facilitate innovation by edge providers, thereby leading to increased demand for bandwidth by end users and spurring greater investment in infrastructure in turn. (84) Read in this manner, section 706 authorizes the FCC not only to adopt measures that promote investment in infrastructure directly, but also to promote activities that tangentially encourage infrastructure investment.

What is most striking about this reasoning is its potential expansiveness. Under this approach, the FCC would not only have the authority to institute measures that promote infrastructure investment directly, but also to regulate anything that indirectly affects infrastructure investment as well. In this sense, the court's reasoning is similar to the reasoning followed in a case well known to every first-year law student: Wickard v. Filburn, (85) The explicit terms of the Commerce Clause of the Constitution give Congress the power to regulate only commerce "with foreign Nations, and among the several States, and with the Indian Tribes." (86) Before Wickard, the Supreme Court forbade the federal government from asserting jurisdiction over commerce that was purely intrastate. (87) In Wickard, however, the Court abandoned this vision of dual sovereignty and extended federal jurisdiction to purely intrastate activities that had a tangential impact on interstate commerce. (88) Because almost everything has a putative tangential impact on commerce, Wickard opened the door to an expansion of the commerce power such that left few activities outside its scope. (89)

The Verizon court's reasoning about section 706 could potentially have a similar effect. Expanding the FCC's jurisdiction beyond activities that have a direct impact on infrastructure investment to encompass those that have a tangential impact on infrastructure investment represents a significant extension of the FCC's power. Indeed, it potentially leaves the door open for the FCC to take measures aimed directly at the content and application industries--a prospect widely feared by advocates and critics of network neutrality alike. (90) The history of FCC regulation of broadcast television networks is instructive. After initially denying that it had the authority to regulate television networks directly, the FCC later invoked an expansive reading of ancillary jurisdiction to impose a wide range of restrictions on them. (91) The FCC could well follow the same course here and eventually regulate edge providers, although, as discussed below, the D.C. Circuit's precedents on ancillary jurisdiction do impose some limits on the FCC's authority.

C. The Impact of the Canons of Construction

Proper application of well-established principles of administrative law and statutory construction indicate that the Verizon court should not have condoned the FCC's construction of section 706 so readily. As the Verizon court correctly observed, (92) the proper standard for reviewing an agency's construction of its statutory authority is the familiar two-step analysis established by the Supreme Court in Chevron USA Inc. v. Natural Resources Defense Council, Inc. (93) In step one, a reviewing court asks whether the statute's text "directly addressees] the precise question at issue." (94) If not, step two requires that the court defer to the agency's construction of the statute so long as it is reasonable or permissible. (95)

Arguably, the Verizon court's analysis of section 706 fails at step one. Chevron itself recognizes that in step one, a court should employ the "traditional tools of statutory construction." (96) These tools are generally recognized to include descriptive canons of construction that reflect the normal rules of syntax and linguistics. (97) When applying Chevron step one, the Supreme Court has held that "under the established interpretative canons of noscitur a sociis and ejusdem generis, where general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words." (98) Indeed, it is not even clear that these principles can be properly regarded as canons. The Supreme Court has noted that "[i]t is a familiar principle of statutory construction that words grouped in a list should be given related meaning" and that "[o]ne hardly need rely on such Latin phrases as ejusdem generis and noscitur a sociis to reach this obvious conclusion." (99) Consequently, courts have routinely included ejusdem generis and noscitur a sociis in their Chevron step one analyses. (100)

The phrase on which the Verizon court relied, "other regulating methods that remove barriers to infrastructure investment," is a classic "catchall" clause. Ejusdem generis thus requires that its scope be limited to the terms that precede it. (101) All of the items in the list preceding this catchall--"price cap regulation," "regulatory forbearance," and "measures that promote competition in the local telecommunications market" (102)--are deregulatory in focus. This renders problematic the court's interpretation of the catchall to justify imposing more restrictive regulation. (103)

Despite the court's emphasis on "regulatory methods," a brief passage later in the opinion suggests that the court may have relied on the provision of section 706 authorizing the FCC to adopt "measures that promote competition in the local telecommunications market." (104) This does not change the analysis, however. As the Supreme Court has explained, terms in an enumerated list are construed using "[t]he familiar canon of noscitur a sociis, the interpretive rule that words and people are known by their companions." (105) Thus, just as ejusdem generis counsels in favor of construing a catchall term in light of the other terms in a list, noscitur a sociis leads to the same conclusion with respect to enumerated terms. The same logic would militate in favor of construing this term as being limited to deregulatory measures.

D. The Legislative History of Section 706

The legislative history of section 706 also casts doubt on the Verizon court's construction of the statute. According to the conference report accompanying the Telecommunications Act of 1996, section 706 originated in a provision in the Senate bill that had no counterpart in the House version. (106) The Senate provision was part of a title of the bill entitled "An End to Regulation" and was preceded by provisions entitled "Transition to competitive pricing," "Biennial review of regulations; elimination of unnecessary regulations and functions," and "Regulatory forbearance." (107) The overall sweep of these provisions was to lessen regulation, not increase it.

Moreover, during the preceding Congress, the Senate Commerce Committee reported a bill in 1994 containing a provision that appears to be the antecedent to section 706. (108) This provision, the final provision of the bill, stated:

(a) PROMOTION OF ADVANCED TELECOMMUNICATIONS NETWORK CAPABILITY--The Commission shall promote to all Americans, regardless of location or disability, the deployment of switched, broadband, telecommunications networks capable of enabling users to originate and receive affordable and accessible high quality voice, data, graphics, and video telecommunications services. In promoting the deployment of such networks, the Commission shall, to the maximum extent feasible, rely on competition among telecommunications providers. In the event the Commission determines that users are not gaining reasonable and timely access to switched, broadband, telecommunications network capabilities, the Commission shall have the authority to provide sufficient incentives such that this access is achieved.

(b) RULEMAKING.-If the Commission finds in its inquiry proceedings or any other time that switched, broadband, telecommunications network capabilities are not being deployed to all Americans in a reasonable and timely fashion, it shall commence a rulemaking to prescribe regulations using incentives to promote, to the maximum extent technically feasible and economically reasonable, the availability of switched, broadband, telecommunications network capabilities. (109)

This language clearly identifies "competition among telecommunications providers" as the preferred method for promoting broadband deployment. Indeed, as the Senate Commerce Committee's report that accompanied the bill emphasized:
   The Committee anticipates that this goal will be achieved
   through competition that is enhanced under the terms of this bill.
   But if this goal is not being achieved in a timely fashion, the
   FCC is authorized to act under this section to expedite
   deployment through the use of incentive regulation. (110)

The legislative history thus evinces a clear emphasis on deregulation and competition among broadband access providers as the preferred way to promote broadband deployment. Moreover, the legislative history contains no hints that Congress regarded promoting innovation in content and applications as an appropriate course of action.

E. The Questionable Empirical Foundation for the Court's Reasoning

The natural reading and the legislative history of the provisions authorizing the FCC to "promote competition in the local telecommunications market" and "remove barriers to infrastructure investment" (111) suggest that these provisions are best construed as authorizing measures deregulating broadband access. The FCC nonetheless concluded that more intrusive regulation was justified because greater innovation in content and applications would create greater demand that would stimulate greater investment infrastructure. (112) The Verizon court held that this conclusion was backed by substantial evidence, citing two theoretical studies, one anecdote, and comments filed with the agency by two interested parties. (113)

A close examination of the FCC's 2010 order, however, reveals that its empirical record was quite thin. For example, the FCC based its conclusion in part on an empirical study that it claimed showed that consumers would be harmed if broadband access providers discriminated against particular edge providers on a single empirical study. (114) Problematically, this study focused on the cable television industry, not on broadband providers--and even then, the study found no clear evidence of discrimination. (115) Indeed, the peer reviewer for the FCC questioned whether the instrument on which this study relied could isolate the effect of the lack of openness. (116)

Both the FCC and the Verizon court cited a well-known article on general purpose technologies ("GPTs") by Timothy Bresnahan and Manuel Trajtenberg for the proposition that openness promotes infrastructure investment. (117) But this paper actually concludes that GPTs create positive externalities and that the best way to mitigate the market failure created by these externalities would be to permit providers of GPTs to internalize those externalities through vertical integration or by entering into strategic alliances rather than forced openness. (118) Ironically, the FCC cited this paper as support for a proposition contrary to the conclusion the authors actually reached.

Arrayed against this claim is a growing corpus of empirical studies finding little evidence that access requirements promote investment and competition in broadband access networks. (119) The broader empirical literature on vertical restraints reveals that exclusivity or preferential contracts between suppliers and retail distributors are either neutral or welfare enhancing in the vast majority of cases. (120) That said, the fact that the D.C. Circuit has already upheld the conclusion that regulations mandating that broadband access providers give nondiscriminatory carriage to edge providers promotes infrastructure investment (121) means that the FCC is likely to adopt the same reasoning in the current NPRM and that the Court of Appeals reviewing the most recent Open Internet Order is likely to uphold this conclusion. If the conclusion is erroneous, any correction will have to come from the Supreme Court.

III. Limits on the FCC's Section 706 Authority

To say that section 706 grants the FCC affirmative authority to regulate broadband access is not to say that that authority is unbounded. The general subject matter limitations restrict the scope of the FCC's authority, as does the Verizon court's holding that section 706 cannot be used to impose common carriage. In addition, the jurisprudence on ancillary jurisdiction identifies other statutory provisions that limit the FCC's exercise of authority.

A. Statutory Limits on the FCC's Jurisdiction

The FCC and the Verizon court both recognized that the FCC's jurisdiction is limited to "interstate and foreign communication by wire and radio" and the fact that any measures enacted under section 706 must be designed to "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans." (122)

As noted in Part I.B, limiting an agency to interstate matters has long ceased to be a meaningful restriction on governmental power. Moreover, expanding section 706 authority to include all activities that have a tangential impact on infrastructure investment makes just about any measure affecting content and applications part of promoting broadband deployment.

There is one aspect of prior court decisions on ancillary jurisdiction that may provide a limit on the FCC's authority to regulate. In these decisions, once courts concluded that that the authority asserted by the agency was reasonably ancillary to some authority enumerated in Titles II, III, or VI, they proceeded to evaluate whether the particular exercise of ancillary jurisdiction ran afoul of any other statutory provisions. In so doing, these courts undertook an inquiry that was precisely parallel to the one followed by Verizon v. FCC with respect to section 706.

In this respect, two cases on ancillary jurisdiction are particularly instructive. In Illinois Citizens Committee for Broadcasting v. FCC, the U.S. Court of Appeals for the Seventh Circuit rejected the argument that the FCC had jurisdiction over all matters "affecting communications," concluding instead that the agency's authority was limited to the actual transmission of radio or television signals. (123) In other words, the FCC does not have regulatory authority over activities simply because they have a tangential impact on the transmission communications by wire or radio. In this sense, the FCC's authority is considerably narrower than Congress' commerce power, which has long been recognized to extend to activities that "affect" interstate commerce even when they are not themselves part of interstate commerce. (124)

Similarly, in Motion Picture Association of America v. FCC, the D.C. Circuit rejected arguments that the FCC possessed the authority to require that broadcasters include aural descriptions of a television program's key visual elements during pauses in the program dialogue. (125) The provision of the Communications Act giving the FCC jurisdiction over "all interstate and foreign communication by wire or radio" authorized the agency to impose regulations on transmissions that "incidentally and minimally affect[] program content." (126) It did not, however, give the agency authority to impose "a direct and significant regulation of program content" by requiring broadcasters to write scripts, select actors, decide what to describe and how, and choose the appropriate style and pace, all within "pauses that were not originally intended to be filled." (127) In short, the FCC's statutory authority over wire and radio communications does not give it the authority to regulate content directly.

The D.C. Circuit provided a more detailed discussion of this principle in American Library Ass'n v. FCC, in which the court ruled that the FCC lacked the authority to mandate that receivers recognize a code embedded in digital television programs that prevents their redistribution. (128) The statute gives the FCC authority over devices engaged in interstate "communication" by radio or wire; it does not give the agency authority over devices when they are not engaged in radio or wire transmission, including television receivers after the digital broadcast has been completed. (129)

Together, the courts' precedents establish a number of important limits on the FCC's ancillary authority. Although the FCC can impose regulations that have incidental and minimal effects on content, it lacks the authority to regulate content directly. (130) In addition, the FCC has the authority to regulate communications only when they are being transmitted by wire or radio; it lacks any authority to regulate those communications after they have arrived and presumably before they have been sent. (131)

That said, the power to regulate communications while they are being transmitted does give the FCC considerable power over the economic relationships between content providers and network providers. For example, in National Broadcasting Co. v. United States, the Supreme Court held that even though the FCC lacked the authority to regulate content directly, the FCC could restrict the terms of the contracts between broadcast stations and content providers in ways designed to reallocate the relative bargaining power between these entities. (132) Thus, the FCC may be able to follow a similar path with respect to the Internet.

B. Common Carriage as a Limit to Section 706 Authority

The statutory limitation that the Verizon court spent the most time analyzing was the prohibition of the imposition of common carriage obligations on information services--including broadband access providers. (133) The statute provides that "[a] telecommunications carrier shall be treated as a common carrier under this [Act] only to the extent that it is engaged in providing telecommunications services." (134) On six separate occasions since 1998, the FCC has reiterated that broadband access is an "information service," a category that is mutually exclusive with "telecommunications service." (135) Unless the agency revisits this conclusion, this provision prevents the FCC from using section 706 to impose common carriage obligations on broadband access providers. (136) In other words, the FCC cannot use section 706 to impose backdoor common carriage regulation on providers that are not subject to Title II. (137)

This prohibition of common carriage represents the most significant obstacle to using section 706 to impose a blanket nondiscrimination requirement. The court's decision in Verizon offers guidance as to what constitutes common carriage. As an initial matter, the court held that "requiring broadband providers to serve all edge providers without 'unreasonable discrimination"' is the same thing as the common carriage requirement "compel[ling] those providers to hold themselves out 'to serve the public indiscriminately.'" (138) Furthermore, as the Verizon court noted, the FCC explicitly equated common carriage and the nondiscrimination rule imposed by the 2010 order when it told commenters to look to its common carriage precedents for guidance as to what forms of discrimination were reasonable. (139) Moreover, the 2010 Open Internet Order's prohibition of unreasonable discrimination accommodated none of the flexibility and individualized bargaining needed to take the regulation outside of common carriage. Instead of signaling flexibility, the Order warned that "it is unlikely that pay for priority would satisfy the 'no unreasonable discrimination' standard." (140) Preventing "broadband providers from charging edge providers for using their service" in effect would have "forc[ed] them to sell service to all who ask at a price of $0." (141) The prohibition of unreasonable discrimination would thus have admitted none of the individualized bargaining that the court had previously found necessary to take a restriction outside the realm of common carriage. (142)

In fact, even common carriers typically enjoy the ability to offer different classes of service and to charge different amounts for them. In one extreme case, AT&T created a separate class of service for a single customer; the FCC's attempt to prevent AT&T from doing so was overturned in the courts. (143) Ironically, in declaring prioritized service to be presumptively invalid, the nondiscrimination rule in the Open Internet Order would have forbidden a practice that common carriage would have explicitly permitted. (144)

At the same time, the Verizon court distinguished the Order's nondiscrimination rule from the data roaming rule that the D.C. Circuit upheld in Cellco Partnership v. FCC. (145) As the Verizon court noted, the rule at issue in Cellco required only that mobile telephone companies enter into data roaming agreements on "commercially reasonable" terms, with reasonableness determined by the "totality of the circumstances" governed by sixteen nonexclusive factors. (146) These rules left "substantial room for individualized bargaining and discrimination in terms" and "expressly permitted] providers to adapt roaming agreements to 'individualized circumstances without having to hold themselves out to serve all comers indiscriminately on the same or standardized terms.'" (147) Moreover, the order at issue in Cellco contained language expressly indicating that its standard differed from the nondiscrimination standard applied to common carriers. (148) The Cellco court warned that if the FCC were to apply the "commercially reasonable" standard in a way that was tantamount to common carriage, it would likely be invalidated in as-applied challenges. (149)

It is hard to see how the FCC could implement a blanket nondiscrimination rule and still provide the "substantial room for individualized bargaining and discrimination in terms" and the ability to "adapt roaming agreements to 'individualized circumstances without having to hold themselves out to serve all comers indiscriminately on the same or standardized terms'" required to be a proper exercise of section 706 authority that does not constitute common carriage. (150) Both Cellco and the tradition of common carriage afford providers the latitude to create individualized bargains and different classes of service. But permitting different classes of service with different prices is precisely what the nondiscrimination rule was designed to foreclose. (151)

C. Commercial Reasonableness as an Alternative Standard

That said, a nondiscrimination rule is not the only way for the FCC to address concerns that broadband access providers might restrict access to their networks in ways that would inhibit future broadband deployment. The D.C. Circuit's Cellco decision, holding that the FCC's data roaming rules did not constitute common carriage, and the court's careful distinction of Cellco in Verizon v. FCC offered a clear blueprint for fashioning such a rule based on commercial reasonableness. Indeed, the law employs the commercial reasonableness standard in a wide range of contractual agreements. (152)

The FCC's new rules proposed in its 2014 Open Internet NPRM appear to accept that invitation by embracing commercial reasonableness as the basis for a rule and proposing a totality-of-the-circumstances test guided by six nonexclusive factors plus a catchall: (153)

* Impact on present and future competition;

* Impact on consumers;

* Impact on speech and civic engagement;

* Technical characteristics;

* "Good faith" negotiation;

* Industry practices; and

* Other factors. (154)

If properly applied, such a rule could address the FCC's desire to promote innovation, competition, free expression, and investment in infrastructure without imposing the type of mandatory obligations associated with common carriage. (155)

1. Impact on Competition

Consider, for example, the factor focusing on the impact on competition. As noted earlier, the literature on GPTs recognizes that strategic alliances between content and network providers can enhance competition. (156) This is consistent with one of the major findings of the modern academic literature on competition policy: that vertical integration and exclusivity contracts are often procompetitive in a broad range of circumstances (157) and that these practices can harm competition only when practiced by a firm with significant market share. (158)

This factor would permit firms to engage in individualized bargaining and prioritized service when the relevant firms are too small to plausibly harm competition or when strategic alliances are likely to promote competition. A prime example of when such practices are unlikely to harm competition is the MetroPCS case discussed at greater length below. (159) Simply put, at 3% market share, any practice adopted by MetroPCS was unlikely to harm competition, and any practice that enhanced its ability to compete with the market leaders despite its severe disadvantage in spectrum holdings could only enhance competition. Permitting similarly situated firms not to carry the content of certain providers under these circumstances helps take this rule outside the realm of obligatory carriage associated with common carriage.

2. Impact on Consumers

Focusing on consumer welfare provides another way that the FCC's proposed rule may fall short of mandating carriage of all content on equal terms. For example, some consumers place a greater emphasis on cost than flexibility. Indeed, this cost sensitivity explains the continued popularity of feature phones, which support only a handful of highly popular functions through a proprietary operating system that supports only a narrow range of third-party applications. (160)

Moreover, as I noted nearly a decade ago, the fact that different customers use the network differently provides an opportunity to enhance consumer welfare through network diversity. (161) Most customers disproportionately frequent only a handful of locations. (162) Consequently, they may prefer a network that gives them prioritized access to the locations that they use the most frequently and on which they place the highest value, such as email servers, remote desktop access to their office computers, or their cloud service providers. (163)

Indeed, recent developments in the United Kingdom illustrate this dynamic nicely. Plusnet employs application-specific traffic management that prioritizes VoIP and gaming. (164) O2 prioritizes a different cluster of services, including streaming and gaming. (165) Sky offers an unmanaged network as a selling point. (166) Rather than offering me-too services, these ISPs offer differentiated services designed to deliver a high-value product to customers with strong preferences for particular applications. Indeed, the proof of the pudding is in the eating: the ISP that manages its network most heavily, Plusnet, enjoys the highest customer satisfaction ratings in the UK. (167)

Focusing on consumer welfare thus provides another way that the commercial reasonableness standard can deviate from the nondiscrimination mandate associated with common carriage. These examples underscore how differentiation of traffic can provide consumer benefits by giving the increasingly heterogeneous universe of consumers a broader array of options from which to choose.

3. Industry Practices

Another way in which the commercial reasonableness standard can deviate from common carriage and still take horizontal fairness considerations into account is by examining industry practices. This factor requires an examination of similar transactions with other industry participants, while affording a degree of latitude for variations based on individualized considerations.

An examination of industry practices reveals that many basic services, including VoIP, IP video, and voice over LTE, depend on prioritization or reserved bandwidth to provide the quality of service that consumers demand. The prevalence of these industry practices should be taken into account when assessing the commercial reasonableness of similar arrangements and when implementing the proposed exception for specialized services. Any concerns about whether the growth of specialized services might starve the best-efforts Internet of bandwidth are best addressed through the minimum quality standards established by the anti-blocking rule.
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Title Annotation:I. Introduction through III. Limits on the FCC's Section 706 Authority, p. 415-440
Author:Yoo, Christopher S.
Publication:Federal Communications Law Journal
Date:Jun 1, 2014
Previous Article:Editor's note.
Next Article:Wickard for the Internet? Network neutrality after Verizon v. FCC.

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