MCN Guest Blog

The FCC's Legal Gymnastics

Why Wheeler's Title II Approach to Network Neutrality Will Lead to Litigation 2/22/2015 6:00 PM

Federal Communications Commission chairman Tom Wheeler earlier this month formally announced what everybody already knew was a foregone conclusion:  His agency will abandon the bipartisan approach to light-touch regulation of the Internet and reclassify broadband Internet access as a common-carrier telecommunications service under Title II of the Communications Act. 

 

Not wanting to be a total killjoy, however, Mr. Wheeler stated that reclassification will not mean your grandmother’s Title II of the old Bell Telephone monopoly era, but rather a “moderniz[ed] Title II, tailor[ed] for the 21st century.” Indeed, according to the fact sheet provided by the FCC, while the proposed plan will prohibit blocking, throttling and paid prioritization—as well as, for the first time, regulate the rates, terms and conditions of interconnection agreements between broadband service providers (“BSPs”) and edge providers — the FCC also plans to forbear from all tariffing requirements under Section 203. While we have yet to see the agency’s legal rationale for such a tortured interpretation of Title II, we do know this: To ensure this proposal passes the “giggle test” with a reviewing court, the agency will engage in more legal gymnastics than a Cirque du Soleil show on the Las Vegas Strip. 

 

The first hoop the FCC needs to jump through is to explain why its original finding that broadband Internet access is a Title I information service (upheld by the Supreme Court in the 2005 NCTA vs. Brand X case) is now wrong.  While the Supreme Court’s 2012 decision in FCC v. Fox Television provides administrative agencies great latitude to change policies provided they articulate a clear reason for doing so, given the plain statutory definitions set forth for both “telecommunications services” and “information services,” it is not clear that reclassification is simply a change in FCC “policy” or whether it’s a change in facts regarding how the Internet works. It’s a mundane, in-the-weeds distinction, but an important one upon which the entire scheme rests.

 

Assuming the FCC can get past the Brand X problem, it must then provide an explanation for forbearing from mandatory tariffing of retail broadband service and for the terminating access service needed by edge providers to reach customers. In the past, the agency has granted forbearance from price regulation (e.g., wireless rates, long distance rates, incumbent local-exchange carrier IP-based broadband services) based on the presence and effectiveness of competition.  The rationale is based on the idea that competition — rather than regulated rates — will protect consumers. When the agency has found a lack of competition, it has uniformly denied forbearance from rate regulation. 

 

The problem here is that the agency has rejected the presence of competition in the relevant markets at issue in the Open Internet rulemaking.  Earlier, the agency defined (and the D.C. Circuit in Verizon v. FCC upheld) the relevant product market for net-neutrality regulation as “terminating access” and the relevant geographic market as each individual BSP. Thus, as Wheeler likes to gleefully remind us, each BSP is a “terminating monopolist.”  As to the retail market, the FCC’s recent decision to change the definition of broadband to 25 Megabits per second now means that half of U.S. households have only a single broadband provider. In the presence of these alleged monopolists, how will the commission convince the courts that forbearance does not abandon the principles of “just and reasonable” and not “unduly discriminatory’ rates?  It’s a difficult task that signals a highly-contrived legal argument. 

 

But there is more. If the FCC is nevertheless successful in convincing the court on forbearance in the face of monopoly, how will it reconcile this reasoning with its decisions both to suspend special-access deregulation because it found that two firms (a duopoly) in the relevant market were insufficient to constrain prices and to deny Qwest’s petition to forbear from residual unbundling obligations in the Phoenix MSA because it also found that duopoly was insufficient to constrain pricing (a decision that was upheld by the 10th Circuit)?  What’s changed, other than the politics?

Finally, perhaps the greatest threat to its legal case is what the FCC believes to be its greatest ally—the “just and reasonable” standard in Section 201 of Title II.  Using this section, Wheeler plans to prevent paid prioritization, throttling or blocking of traffic.  In 2014’s Verizon v. FCC, however, the U.S. Court of Appeals for the D.C. Circuit concluded that the bans on paid prioritization, throttling or blocking is “zero price” regulation.  Since the “just and reasonable” standard prohibits a “confiscatory” (i.e., “below cost”) rate, the FCC must devise an argument that makes a rate of zero acceptable under the “J&R” standard.  It will not be an easy sell.  If the FCC fails, then Wheeler’s plan will require all broadband service providers to charge edge providers for access to its customers (something they do not do in the unregulated world we have today).  As such, Mr. Wheeler would do well to heed the D.C. Circuit’s admonition that the phrase “just and reasonable” is not “a mere vessel into which meaning must be poured.”

 

The commission’s use of the “unreasonable discrimination” standard of Section 202 in this context also has its problems, because under Section 202 a carrier doesn’t have to offer the same rates to all comers.  Instead, all that a carrier must do is offer the same service at the same price to “similarly situated” customers. This leeway was upheld by the D.C. Circuit in Orloff v. FCC, which specifically held that once the FCC forbears, “[r]ates are determined by the market, not the Commission, as are the level of profits.”  Chairman Wheeler’s plan appears to be to forbear from rate regulation but to continue to regulate rates (at a price of zero, no less). It’s clever, but perhaps too much so.  If the legal challenge to the FCC’s new rules is framed in the context of zero-price regulation, then the agency is likely in deep trouble. 

 

Unfortunately, the legal questions I touch on here are just the tip of the iceberg. To wit, the FCC still has to justify why wireless is not different from wireline, and how it plans to avoid dragging broadband Internet access into the universal service morass.  (Indeed, how do you define an “intra-state” broadband service?)  Similarly, is the FCC going now going to reverse years of precedent and regulate VoIP under Title II? Given that the FCC’s anticipated 332-page order is likely to be driven more by naked politics than thoughtful analysis, the possibilities for legal missteps are endless.  

 

Let the litigation begin.

 

Lawrence J. Spiwak is president of the Washington, D.C.-based Phoenix Center for Advanced Legal & Economic Public Policy Studies.