A guide to today’s net neutrality oral arguments

We’ll be delving into today’s oral arguments at our live-streamed TechFreedom/ICLE event at 12:30 EDT — and tweeting on the #NetNeutrality hashtag.

But here are a few thoughts to help guide the frantic tea-leaf reading everyone will doubtless be engaged in after (and probably even during) the arguments:

While most commentators have focused on ancillary jurisdiction questions, the FCC first and foremost asserts that Section 706 of the Telecommunications Act gives it direct authority to regulate the Internet.

• The FCC purports to find this authority primarily in the language of the Section 706, which directs the Commission to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans… by utilizing… measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

• The DC Circuit in Comcast suggested that this language might constitute a direct grant of authority, but in that case it’s clear the court was talking about a grant of authority sufficient to constitute the basis for ancillary jurisdiction. Here, the FCC explicitly claims that the language confers direct authority (although the Commission still claims other sections as the basis for ancillary authority).

• In any case, the court in Comcast didn’t address the substance of the Commission’s claim, and despite some commentators’ claims to the contrary, nothing in the court’s analysis of Section 706 in Comcast directly forecloses the arguments the FCC makes in this case (although some of its language suggests the court may be uncomfortable with the FCC’s claim of authority).

• Rather, because the FCC had not yet offered the revised interpretation of Section 706 contained within the Open Internet Order, the court in Comcast simply accepted the FCC’s then-current interpretation that Section 706 conferred no direct authority on the Commission to regulate broadband information services.

• Since then, however, the FCC has changed course, and it now asserts such authority in the OIO. It is worth noting, as Commissioner McDowell discussed in his dissent from the OIO, that the process by which the FCC majority repudiated its previous interpretation and set up the basis for its authority under Section 706 was remarkably disingenuous and underhanded. The court may or may not take notice of this, but it should serve as a caution.

Thus the case is likely to hinge primarily on whether the court accepts the FCC’s claim that Section 706 grants direct authority, and, if so, whether the Open Internet Order adduces sufficient evidence to justify the FCC’s claim that Section 706 constitutes a valid basis for the specific regulations encompassed in the OIO.

• The FCC’s arguments that it has ancillary jurisdiction under other provisions of the Telecommunications Act aren’t likely to get any more traction than last time.

• The analysis of Section 706 as a basis for direct or ancillary jurisdiction is similar — and the court may well agree with Verizon that the FCC is really still claiming ancillary jurisdiction with a different label. So why does the distinction matter?

In order to establish Section 706 as the jurisdictional basis for the OIO under ancillary jurisdiction, the FCC would have to demonstrate that the OIO is necessary to implementation of Section 706’s (Section 4(i) of the Act says the FCC “may perform any and all acts, make such rules and regulations, and issue such orders … as may be necessary in the execution of its functions”). But if Section 706 confers authority for the OIO directly, the FCC need only show that its interpretation of the provision authorizing the Order is reasonable and not arbitrary and capricious. In other words, the FCC is trying to significantly lower its factual burden for using Section 706 (even as it claims that section confers authority narrower in scope than would ancillary authority). If the court accepts this argument, it could accept the FCC’s argument (however poorly supported and contrary to Congress’s clear intent) that the regulation of ISPs in order to encourage broadband deployment is a legitimate action under Section 706.

But the analysis doesn’t end there. Authority may exist in the abstract, but that doesn’t mean that this particular implementation of Section 706 is appropriate (or consistent with the Communications Act or the Constitution).

• Rather, the plain language of Section 706 demands regulation that encourages deployment by means of removing barriers to infrastructure deployment. It is thus a sort of effects-based standard, and the FCC’s implementation of it is permitted only to the extent that its regulation actually has the effect of encouraging deployment.

• This means that the FCC must adduce evidence sufficient to support the claim that, on net, its regulation will encourage deployment. To us, the FCC hasn’t met its burden.

• The problem for the FCC is that, while the OIO contains a raft of assertions that prohibiting discrimination against, and forbidding the blocking of, edge content will encourage demand for, and thus deployment of, broadband infrastructure, the Order gives short shrift to the obvious reality that, at the same time, constraining broadband providers will reduce their incentive to invest in infrastructure.

• It is an empirical question which effect is stronger, and, in theory, the Commission may be correct that the OIO meets the obligations imposed on it by Section 706.

• But it is not enough simply to argue, as the FCC has done, that the OIO will encourage deployment along one dimension, while dismissing the other.

• Unfortunately for the FCC, the OIO does just that (and badly, it must be added. Not only does the record clearly demonstrate only the most minimal instances of non-neutrality, but most of these were resolved without FCC intervention. Moreover, despite its bold claims, the economic evidence connecting neutrality and infrastructure deployment is vanishingly thin, to say the least).

It seems clear that the FCC is reading Section 706 with the wrong emphasis. The provision is not meant to be a broad grant of power (and to its credit the FCC asserts that it understands there are some limits to the provision and whatever powers it might confer). But in contorting the provision to find a basis for the OIO, the FCC doesn’t go far enough in accepting the limits of Section 706.

• Properly understood, Section 706 is meant rather to be a broad limitation on the FCC’s power, requiring it to act, but only insofar as doing so encourages, on net, deployment, increases competition and removes barriers. This obligation is the most likely reason why the FCC had previously minimized the importance of Section 706.

• The NTIA, for example, seems to understand this. As it wrote in a letter to the FCC in 1998, “the legislative history of section 706 suggests that it would operate only in the event that competition failed to produce reasonable and timely broadband deployment.” In asserting this the NTIA cites to, among other things, a statement from then Sen. Burns that “If competition is stalled, the [bill] gives the FCC authority to quicken the pace of competition and deregulation to accelerate the deployment of advanced telecommunications infrastructure.”

• Quite clearly, the provision is not meant to authorize regulation except where regulating will improve the status quo — will “quicken the pace of competition.”

The evidence required to defend a regulation promulgated under this provision thus must include evidence not only that the regulation is intended to increase competition relative to the status quo, but that it actually does so. The OIO contains no such evidence. Instead, the FCC

• identifies vanishingly few instances of discrimination by ISPs and fails to note that most of these wouldn’t be affected by the OIO or were resolved without the FCC’s intervention;

• asserts that ISPs have an ill-defined “incentive” to foreclose content providers and offers no baseline from which to assess whether foreclosure, if it exists, would actually cause consumer harm;

• merely asserts that the benefits of the OIO outweigh its costs;

• draws only a tenuous connection between neutrality and broadband deployment;

• does not address how excluding vertically integrated broadband providers from profiting from the “virtuous circle of innovation” will affect net outcomes;

• neglects to establish the requisite baseline showing that that competition and deployment have stalled in the status quo and that they will improve under its rules.

• fails to confront the possibility that its expansive reading of its authority will further deter investment and innovation; and

• fails to analyze the rules within the well-established framework of consumer welfare economics.

The Commission may be correct that “[e]ach round of innovation increases the value of the Internet for broadband providers, edge providers, online businesses, and consumers.” But the OIO explicitly forbids broadband providers from capturing these rents in any but the most blunt fashion, ensuring that whatever positive effects edge content innovation will confer, they will not substantially be enjoyed by the companies actually making infrastructure investment decisions.

• Moreover, directly flouting Section 706’s mandate, the Order contains a number of explicit exceptions (for, e.g., CDNs, VPNs, peering arrangements, game consoles and app stores) that collectively have the effect of enshrining the competitive conditions of the status quo rather than encouraging innovation. These exceptions are well-taken and clearly benefit consumers. But by acknowledging that many aspects of today’s Internet are appropriately non-neutral and by establishing exceptions for these existing technologies, but not for the non-neutral technologies of tomorrow that will also benefit competition and consumers, the OIO impedes rather than quickens the pace of competition.

Even if the FCC gets this far, it still has to establish that it hasn’t violated the Communications Act by imposing common carrier status on broadband providers, which the FCC has classified as a Title I non-common-carrier service. To win here, the court would have to find that the Net Neutrality rules leave room for “commercially reasonable negotiation” — as it did in upholding the FCC’s mandate that wireless carriers offer data roaming to the subscribers of other carriers. The Order insists that the FCC hasn’t regulated negotiations with consumers, which the agency claims is all that matters. But that’s clearly inconsistent with Judge Tatel’s analysis in the data roaming order, which focused on whether the data roaming rule left room for such negotiations on the other side of the market— between carriers. So look for Judge Tatel to ask tough questions about this point today.

FInally, Verizon’s Constitutional arguments remain, and while they present an uphill battle, the court may press the FCC on whether its regulations are consistent with the the First and Fifth Amendments — the core of TechFreedom’s amicus brief.

There will be much more to say following the oral argument, but we wanted to offer these preliminary thoughts to guide court watchers. In sum, as a technical legal matter, we believe that the court will not focus on the ancillary jurisdiction question and will likely defer substantially to the FCC’s interpretation of its direct jurisdiction to regulate broadband information providers under the Telecommunications Act. But the real action will be in the court’s evaluation of the FCC’s claimed support for its specific implementation of its authority. And if the Court seems open to the FCC’s arguments, it will have to delve into the common carriage and constitutional questions.

We add one note in conclusion: The type of analysis and resulting regulation called for under even the FCC’s interpretation of Section 706 should look an awful lot like a rule of reason foreclosure analysis under antitrust law. The rule is effects-based and calls for a case by case evidentiary determination that complained of conduct results in anticompetitive foreclosure relative to the but-for world without the conduct. We can certainly imagine Judge Tatel striking down the rule, upholding the assertion of jurisdiction, and offering guidance to the FCC that it might cure its error by implementing a rule that effectively embodies the well-established law and economics of an antitrust rule of reason analysis. Or perhaps we could cut out the middleman and just let the FTC apply antitrust laws directly.