Justification of the Open Internet Order

The Open Internet rules were the subject of intense political debate. This update summarizes the FCC’s policy and legal justification for the new rules, as well as the Republican dissent, and discusses the Order’s decision to forbear from applying many Title II regulations to broadband service.

Policy Justification

As a policy matter, the FCC justifies its new rules using the same “virtuous cycle” logic that it relied upon to promulgate its earlier rules (from 2010, described here). The D.C. Circuit subsequently affirmed that logic in Verizon v. FCC in early 2014 (described here). Under this theory, full and unfettered end user access to the Internet encourages the development of new services and applications by edge providers, which drives end user demand for broadband Internet access service. This demand, in turn, stimulates deployment of broadband facilities – which Section 706 directs the FCC to promote and encourage. In the FCC’s view, however, broadband providers have both the incentive and the ability to limit end users’ use of the Internet. Given that incentive and ability, rules banning such conduct are required, both to protect consumers and to ensure that broadband deployment continues apace.

Legal Justification

The court in Verizon v. FCC accepted the “virtuous cycle” logic as a policy matter. The problem was that the specific rules the FCC imposed were barred because they amounted to imposing “common carrier” regulation on broadband providers, a class of entity that the agency had repeatedly in the past classified as “information service” providers which are, by statute, not subject to common carrier obligations. The D.C. Circuit vacated those aspects of the 2010 rules and remanded to the agency for further proceedings, resulting in the current Order. To deal with this ruling, the Order reclassifies broadband as a telecommunications service. That is, it continues to rely on Section 706 as a source of legal authority to act and, by reclassifying broadband as a Title II service, eliminates the prohibition on imposing common carrier requirements that had previously existed as a consequence of having classified broadband as an information service. By virtue of reclassification, Sections 201 and 202 (and other provisions of Title II that the agency does not forbear from) now also provide the agency with legal authority to act.

That earlier classification was based on the view that broadband includes more than the pure transport of end user requests for information (e.g., web sites) and downloads of that information from edge providers. Instead, functions such as DNS services (converting URLs to IP addresses), email, web hosting, data storage, and local caching of web content were (a) viewed as information services, and (b) viewed as inherent in the providers’ offering. This made the entire offering an integrated information service.

The Order fundamentally rejects that earlier logic, on the following main grounds:

• In today’s market (based on providers’ advertisements and how end users use the service), the key, core service being offered is access to the entire Internet. To the extent email, web hosting, etc. are offered as well, they are separable from the transport service. Notably, and unlike when the earlier classifications were made, the “information service” functions (email, web hosting, etc.) are widely available from third parties, indicating that they are separate from, and not integral to, the pure transport offer.
• Broadband service is now much more widely deployed than in the past and has become an essential element of the economic and social lives of a very large fraction of the population.
• The earlier rulings failed to focus on the portion of the definition of “information service” that carves out functions used for the management of a telecommunications network or service. Focusing on that carve-out, DNS, local caching, and a variety of other functions (such as blocking harmful or unwanted traffic) are best seen as part of the management of the transport service, not as information services in and of themselves.

Since the core service being offered is transmission of packets to and from end users, offered to the public on generally standardized terms for a fee, it is now deemed a “telecommunications service” under the definitions in the Communications Act, and the providers of that service – wired and wireless, fixed and mobile – are therefore now “telecommunications carriers.” While this clearly represents a significant change in the FCC’s reading of the Communications Act and the facts surrounding broadband, the Order concludes that the changed circumstances in the market noted above, combined with the agency’s broad authority to interpret ambiguous provisions in its statute under the Chevron doctrine, are sufficient to permit the agency to take this step. In this regard, as widely anticipated, the Order relies in part on Justice Scalia’s dissent in the 2005 Brand X case. (In that case the majority concluded that the FCC was permitted, but not required, to treat cable-delivered broadband as an integrated information service, while Justice Scalia, in dissent, argued that the Communications Act required recognition of a separable telecommunications service.)

While this logic applies to both fixed and mobile service, the FCC faced an additional statutory problem with respect to mobile broadband. Section 332 states that only a mobile service “interconnected” with the “public switched network” may be treated as a common carrier service. This has long been understood to mean that the service permits end users to make and receive normal telephone calls by means of traditional 10-digit telephone numbers—which broadband service does not do. The agency solves this problem by exercising its authority to redefine what “interconnected” means in this context.  (The statute says that an “interconnected” service is “service that is interconnected with the public switched the network (as such terms are defined by regulation by the Commission)”.) Specifically, the Order redefines “public switched network”—the network to which a service must be “interconnected”—to include not just the devices reachable using traditional telephone numbers, but also devices reachable using Internet Protocol (IP) addresses.

The Republican Dissent

The dissenting Commissioners (Commissioners Pai and O’Rielly) contest the majority’s analysis on several grounds. First, they claim that the Commission may not reclassify broadband because the public notice did not adequately disclose that it might do so. Second, they disagree that the “telecommunications management” carve-out applies to DNS, caching, etc. Third, they dispute that the circumstances in the market are materially different from the time of the earlier “information service” classifications, so that the Commission’s justification for changing its position is inadequate.  And, with respect to wireless services in particular, the dissenters strongly object to reclassification, both because they believe it was not adequately noticed to the public, and because they reject the notion that Congress would have considered access to locations on the Internet to fall within the intended meaning of “interconnected.”

Judicial Challenges

Whether these (and other) dissenting arguments ultimately carry the day in the inevitable litigation challenging the Order will be determined by the appellate court that hears the case; the dissenting Commissioners’ objections do not change the fact that the Order has been issued and (absent a stay from the courts) will take effect in the near future.

In sum, while the FCC’s new rules are based on the same legal and policy logic that supported its 2010 rules—and, indeed, in a sense the new rules can be viewed as merely an updated version of the earlier rules—the new rules clearly impose potentially very significant new obligations on broadband providers, notably with regard to disclosures/transparency and the inclusion of interconnection arrangements with other networks under the FCC’s purview. Moreover, what is new—and a major change in the regulatory landscape—is the logic supporting reclassification of broadband as a telecommunications service. Putting aside the political aspects of that decision, legally the agency concluded that it was a necessary step—it was the only way to adopt the key substantive rules, which the Verizon v. FCC court had said could not be imposed as long as broadband was classified as an information service. But this new classification opens the door to subjecting broadband providers to after-the fact, case-by-case judgments about many aspects of their services and, at least potentially, to a host of new regulatory obligations.

The Need for Forbearance

While the FCC found it necessary to reclassify broadband as a telecommunications service in order to justify its rules, doing so creates its own problems for the agency. The 2010 rules had been based essentially entirely on the open-ended directives in Section 706 to “encourage” broadband deployment and to “take immediate action” if the pace of such deployment is inadequate. With broadband providers now “telecommunications carriers,” the default situation is that all or essentially all provisions of Title II – from tariff filing, to keeping books of account in a form prescribed by the Commission, to having to ask permission to enter or leave the market – would apply. To avoid that result, the FCC undertook a novel and massive exercise of its authority under Section 10 of the Act to “forbear” from applying a wide swath of Title II.

Section 10 of the Act (added in 1996) permits the FCC to forbear from (that is, choose not to apply) any provision of its rules or of the Communications Act to a telecommunications carrier or service (or group of carriers or services), if certain requirements are met. The Commission has to find that enforcement is not needed to ensure that carrier practices, etc. are just, reasonable, and nondiscriminatory or to protect consumers, and that forbearance is in the public interest.

Past forbearance proceedings have arisen at the request of affected carriers, and the Commission has set out procedures, burdens of proof, etc., that apply in that context. However, the statute says that the Commission “shall” forbear if the requirements are met. In the current Order, the Commission interprets that directive as empowering it to act on its own, and without regard to the procedures that would apply to a private party’s forbearance petition.

To conduct its forbearance analysis, the Commission focused on the fact that broadband has never been subject to Title II in the past. The question then became whether imposing particular Title II duties was needed, given that (a) the Commission does not believe that there are serious problems with the terms under which broadband is offered now, and (b) the Commission’s new rules will apply going forward. Given that the Commission’s new rules represent its view of how providers should behave and what protections consumers need, at a high level the Commission’s basic approach to forbearance in the Order effectively guarantees that any forbearance it wished to undertake would be justified.

That said, a key aspect of the Commission’s approach is that it will not forbear from the basic provisions of Title II that require carriers to have rates, terms, practices, etc. that are just, reasonable and non-discriminatory (Sections 201 and 202), as well as the various provisions dealing with enforcement (including complaints against carriers (Sections 206-209 and 216-17)).  Leaving these provisions in place allowed the Commission to generally conclude – as required by the Section 10 forbearance standard – that the service will be provided on just, reasonable, and non-discriminatory terms and that consumers will be protected. The question then becomes whether any other specific provisions of the Act should not be forborne from – that is, should be allowed to apply to broadband and/or broadband providers.

The Commission concluded that certain specific “consumer protection” provisions should apply—Section 222, relating to privacy of “customer proprietary network information,” and Sections 225 and 255, which deal with accessibility of services and equipment to persons with disabilities. The Commission also chose not to forbear from applying Section 224, which (among other things) grants pole attachment rights to telecommunications carriers. By leaving Section 224 in place, the Commission ensures that broadband providers can gain access to poles and similar infrastructure on the same rates, terms and conditions as cable operators and telecommunications carriers. In addition, while the Order forbears from applying the provisions of Section 254 calling for contributions to the Universal Service Fund should not apply “for now,” other provisions of Section 254 (and Section 214(e)) relating to universal service remain in effect.

Essentially all other provisions of the Communications Act (and associated FCC rules) that would otherwise apply to broadband service and/or broadband providers were forborne from. As with the Commission’s reclassification analysis, the dissenters strongly challenge the Commission’s forbearance analysis. First, they point out that the standards under Sections 201 and 202 are so vague and general that the Commission could impose almost any regulation—including price regulation, which the majority disclaims—under those standards. Second, they argue that the Commission’s approach to analyzing the power to forbear is inconsistent with precedent and likely to be reversed. Third, they argue that the public notice for this matter did not adequately advise the public that forbearance on such a large scale was contemplated. The validity of these latter two arguments, as with the dissenters’ other points, will be resolved when the order is appealed.

First Amendment and “Takings” Analysis

Giving short shrift to broadband providers’ constitutional arguments, the Order rejects claims that imposing its rules on broadband providers would violate their First Amendment rights. It holds that with respect to broadband, the providers are not “speakers,” but instead are merely conduits for others’ speech, an approach that arguably tries to define any First Amendment rights of broadband providers out of existence. Under this theory, the fact that broadband providers have not in the past exercised editorial rights with respect to the content delivered over broadband supposedly means that they have forfeited or perhaps never had such rights in the first place. Alternatively, the Order concludes that any impact on broadband provider speech is incidental to an important government purpose, so that new regulations would survive “intermediate scrutiny,” if that test were to be applied.

The FCC also rejects claims that its rules constitute an impermissible “taking” of broadband providers’ property, in violation of the Fifth Amendment. Specifically, the Order rejects claims that the regulations are a “per se” taking (because no physical invasion of their property is involved); it rejects claims that the regulations are a “regulatory taking” (because the unsettled state of the law on this issue, over an extended period of time, means that broadband providers could not have had “reasonable” expectations that the regulations would not be put into place); and rejects claims that any taking is “uncompensated” (because broadband providers can charge for their services and thereby recover from their customers any costs of compliance).