Archives For Section 706

As I explain in my new book, How to Regulate, sound regulation requires thinking like a doctor.  When addressing some “disease” that reduces social welfare, policymakers should catalog the available “remedies” for the problem, consider the implementation difficulties and “side effects” of each, and select the remedy that offers the greatest net benefit.

If we followed that approach in deciding what to do about the way Internet Service Providers (ISPs) manage traffic on their networks, we would conclude that FCC Chairman Ajit Pai is exactly right:  The FCC should reverse its order classifying ISPs as common carriers (Title II classification) and leave matters of non-neutral network management to antitrust, the residual regulator of practices that may injure competition.

Let’s walk through the analysis.

Diagnose the Disease.  The primary concern of net neutrality advocates is that ISPs will block some Internet content or will slow or degrade transmission from content providers who do not pay for a “fast lane.”  Of course, if an ISP’s non-neutral network management impairs the user experience, it will lose business; the vast majority of Americans have access to multiple ISPs, and competition is growing by the day, particularly as mobile broadband expands.

But an ISP might still play favorites, despite the threat of losing some subscribers, if it has a relationship with content providers.  Comcast, for example, could opt to speed up content from HULU, which streams programming of Comcast’s NBC subsidiary, or might slow down content from Netflix, whose streaming video competes with Comcast’s own cable programming.  Comcast’s losses in the distribution market (from angry consumers switching ISPs) might be less than its gains in the content market (from reducing competition there).

It seems, then, that the “disease” that might warrant a regulatory fix is an anticompetitive vertical restraint of trade: a business practice in one market (distribution) that could restrain trade in another market (content production) and thereby reduce overall output in that market.

Catalog the Available Remedies.  The statutory landscape provides at least three potential remedies for this disease.

The simplest approach would be to leave the matter to antitrust, which applies in the absence of more focused regulation.  In recent decades, courts have revised the standards governing vertical restraints of trade so that antitrust, which used to treat such restraints in a ham-fisted fashion, now does a pretty good job separating pro-consumer restraints from anti-consumer ones.

A second legally available approach would be to craft narrowly tailored rules precluding ISPs from blocking, degrading, or favoring particular Internet content.  The U.S. Court of Appeals for the D.C. Circuit held that Section 706 of the 1996 Telecommunications Act empowered the FCC to adopt targeted net neutrality rules, even if ISPs are not classified as common carriers.  The court insisted the that rules not treat ISPs as common carriers (if they are not officially classified as such), but it provided a road map for tailored net neutrality rules. The FCC pursued this targeted, rules-based approach until President Obama pushed for a third approach.

In November 2014, reeling from a shellacking in the  midterm elections and hoping to shore up his base, President Obama posted a video calling on the Commission to assure net neutrality by reclassifying ISPs as common carriers.  Such reclassification would subject ISPs to Title II of the 1934 Communications Act, giving the FCC broad power to assure that their business practices are “just and reasonable.”  Prodded by the President, the nominally independent commissioners abandoned their targeted, rules-based approach and voted to regulate ISPs like utilities.  They then used their enhanced regulatory authority to impose rules forbidding the blocking, throttling, or paid prioritization of Internet content.

Assess the Remedies’ Limitations, Implementation Difficulties, and Side Effects.   The three legally available remedies — antitrust, tailored rules under Section 706, and broad oversight under Title II — offer different pros and cons, as I explained in How to Regulate:

The choice between antitrust and direct regulation generally (under either Section 706 or Title II) involves a tradeoff between flexibility and determinacy. Antitrust is flexible but somewhat indeterminate; it would condemn non-neutral network management practices that are likely to injure consumers, but it would permit such practices if they would lower costs, improve quality, or otherwise enhance consumer welfare. The direct regulatory approaches are rigid but clearer; they declare all instances of non-neutral network management to be illegal per se.

Determinacy and flexibility influence decision and error costs.  Because they are more determinate, ex ante rules should impose lower decision costs than would antitrust. But direct regulation’s inflexibility—automatic condemnation, no questions asked—will generate higher error costs. That’s because non-neutral network management is often good for end users. For example, speeding up the transmission of content for which delivery lags are particularly detrimental to the end-user experience (e.g., an Internet telephone call, streaming video) at the expense of content that is less lag-sensitive (e.g., digital photographs downloaded from a photo-sharing website) can create a net consumer benefit and should probably be allowed. A per se rule against non-neutral network management would therefore err fairly frequently. Antitrust’s flexible approach, informed by a century of economic learning on the output effects of contractual restraints between vertically related firms (like content producers and distributors), would probably generate lower error costs.

Although both antitrust and direct regulation offer advantages vis-à-vis each other, this isn’t simply a wash. The error cost advantage antitrust holds over direct regulation likely swamps direct regulation’s decision cost advantage. Extensive experience with vertical restraints on distribution have shown that they are usually good for consumers. For that reason, antitrust courts in recent decades have discarded their old per se rules against such practices—rules that resemble the FCC’s direct regulatory approach—in favor of structured rules of reason that assess liability based on specific features of the market and restraint at issue. While these rules of reason (standards, really) may be less determinate than the old, error-prone per se rules, they are not indeterminate. By relying on past precedents and the overarching principle that legality turns on consumer welfare effects, business planners and adjudicators ought to be able to determine fairly easily whether a non-neutral network management practice passes muster. Indeed, the fact that the FCC has uncovered only four instances of anticompetitive network management over the commercial Internet’s entire history—a period in which antitrust, but not direct regulation, has governed ISPs—suggests that business planners are capable of determining what behavior is off-limits. Direct regulation’s per se rule against non-neutral network management is thus likely to add error costs that exceed any reduction in decision costs. It is probably not the remedy that would be selected under this book’s recommended approach.

In any event, direct regulation under Title II, the currently prevailing approach, is certainly not the optimal way to address potentially anticompetitive instances of non-neutral network management by ISPs. Whereas any ex ante   regulation of network management will confront the familiar knowledge problem, opting for direct regulation under Title II, rather than the more cabined approach under Section 706, adds adverse public choice concerns to the mix.

As explained earlier, reclassifying ISPs to bring them under Title II empowers the FCC to scrutinize the “justice” and “reasonableness” of nearly every aspect of every arrangement between content providers, ISPs, and consumers. Granted, the current commissioners have pledged not to exercise their Title II authority beyond mandating network neutrality, but public choice insights would suggest that this promised forbearance is unlikely to endure. FCC officials, who remain self-interest maximizers even when acting in their official capacities, benefit from expanding their regulatory turf; they gain increased power and prestige, larger budgets to manage, a greater ability to “make or break” businesses, and thus more opportunity to take actions that may enhance their future career opportunities. They will therefore face constant temptation to exercise the Title II authority that they have committed, as of now, to leave fallow. Regulated businesses, knowing that FCC decisions are key to their success, will expend significant resources lobbying for outcomes that benefit them or impair their rivals. If they don’t get what they want because of the commissioners’ voluntary forbearance, they may bring legal challenges asserting that the Commission has failed to assure just and reasonable practices as Title II demands. Many of the decisions at issue will involve the familiar “concentrated benefits/diffused costs” dynamic that tends to result in underrepresentation by those who are adversely affected by a contemplated decision. Taken together, these considerations make it unlikely that the current commissioners’ promised restraint will endure. Reclassification of ISPs so that they are subject to Title II regulation will probably lead to additional constraints on edge providers and ISPs.

It seems, then, that mandating net neutrality under Title II of the 1934 Communications Act is the least desirable of the three statutorily available approaches to addressing anticompetitive network management practices. The Title II approach combines the inflexibility and ensuing error costs of the Section 706 direct regulation approach with the indeterminacy and higher decision costs of an antitrust approach. Indeed, the indeterminacy under Title II is significantly greater than that under antitrust because the “just and reasonable” requirements of the Communications Act, unlike antitrust’s reasonableness requirements (no unreasonable restraint of trade, no unreasonably exclusionary conduct) are not constrained by the consumer welfare principle. Whereas antitrust always protects consumers, not competitors, the FCC may well decide that business practices in the Internet space are unjust or unreasonable solely because they make things harder for the perpetrator’s rivals. Business planners are thus really “at sea” when it comes to assessing the legality of novel practices.

All this implies that Internet businesses regulated by Title II need to court the FCC’s favor, that FCC officials have more ability than ever to manipulate government power to private ends, that organized interest groups are well-poised to secure their preferences when the costs are great but widely dispersed, and that the regulators’ dictated outcomes—immune from market pressures reflecting consumers’ preferences—are less likely to maximize net social welfare. In opting for a Title II solution to what is essentially a market power problem, the powers that be gave short shrift to an antitrust approach, even though there was no natural monopoly justification for direct regulation. They paid little heed to the adverse consequences likely to result from rigid per se rules adopted under a highly discretionary (and politically manipulable) standard. They should have gone back to basics, assessing the disease to be remedied (market power), the full range of available remedies (including antitrust), and the potential side effects of each. In other words, they could’ve used this book.

How to Regulate‘s full discussion of net neutrality and Title II is here:  Net Neutrality Discussion in How to Regulate.

The American concept of “the rule of law” (see here) is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution, and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law (see here).  It holds that the executive must comply with the law because ours is “a government of laws, and not of men,” or, as Justice Anthony Kennedy put it in a 2006 address to the American Bar Association, “that the Law is superior to, and thus binds, the government and all its officials.”  (See here.)  More specifically, and consistent with these broader formulations, the late and great legal philosopher Friedrich Hayek wrote that the rule of law “means the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  (See here.)  In other words, as former Boston University Law School Dean Ron Cass put it, the rule of law involves “a system of binding rules” adopted and applied by a valid government authority that embody “clarity, predictability, and equal applicability.”  (See here.)

Regrettably, by engaging in regulatory overreach and ignoring statutory limitations on the scope of their authority, federal administrative agencies have shown scant appreciation for rule of law restraints under the current administration (see here and here for commentaries on this problem by Heritage Foundation scholars).  Although many agencies could be singled out, the Federal Communications Commission’s (FCC) actions in recent years have been especially egregious (see here).

A prime example of regulatory overreach by the FCC that flouted the rule of law was its promulgation in 2015 of an order preempting state laws in Tennessee and North Carolina that prevented municipally-owned broadband providers from providing broadband service beyond their geographic boundaries (Municipal Broadband Order, see here).   As a matter of substance, this decision ignored powerful economic evidence that municipally-provided broadband services often involve wasteful subsidies for financially–troubled government-owned providers that interfere with effective private sector competition and are economically harmful (my analysis is here).   As a legal matter, the Municipal Broadband Order went beyond the FCC’s statutory authority and raises grave constitutional problems, thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law (see here).  The Order lacked a sound legal footing in basing its authority on Section 706 of the Telecommunications Act of 1996, which merely authorizes the FCC to promote local broadband competition and investment (a goal which the Order did not advance) and says nothing about preemption.   In addition, the FCC’s invocation of preemption authority trenched upon the power of the states to control their subordinate governmental entities, guaranteed to them by the Constitution as an essential element of their sovereignty in our federal system (see here).   What’s more, the Chattanooga, Tennessee and Wilson, North Carolina municipal broadband systems that had requested FCC preemption imposed content-based restrictions on users of their network that raised serious First Amendment issues (see here).   Specifically, those systems’ bans on the transmittal of various sorts of “abusive” language appeared to be too broad to withstand First Amendment “strict scrutiny.”  Moreover, by requiring prospective broadband enrollees to agree not to sue their provider as an initial condition of service, two of the municipal systems arguably unconstitutionally coerced users to forgo exercise of their First Amendment rights.

Fortunately, on August 10, 2016, in Tennessee v. FCC, the U.S. Court of Appeals for the Sixth Circuit struck down the Municipal Broadband Order, pithily stating:

The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities. This is shown by the fact that no federal statute or FCC regulation requires the municipalities to expand or otherwise to act in contravention of the preempted state statutory provisions. This preemption by the FCC of the allocation of power between a state and its subdivisions requires at least a clear statement in the authorizing federal legislation. The FCC relies upon § 706 of the Telecommunications Act of 1996 for the authority to preempt in this case, but that statute falls far short of such a clear statement. The preemption order must accordingly be reversed.

The Sixth Circuit’s decision has important policy ramifications that extend beyond the immediate controversy, as Free State Foundation Scholars Randolph May and Seth Cooper explain:

The FCC’s Municipal Broadband Preemption Order would have turned constitutional federalism inside out by severing local political subdivisions’ accountability from the states governments that created them. Had the agency’s order been upheld, the FCC surely would have preempted several other state laws restricting municipalities’ ownership and operation of broadband networks. Several state governments would have been locked into an unwise policy of favoring municipal broadband business ventures with a track record of legal and proprietary conflicts of interest, expensive financial failures, and burdensome debts for local taxpayers.

The avoidance of a series of bad side effects in a corner of the regulatory world is not, however, sufficient grounds for breaking out the champagne.  From a global perspective, the Sixth Circuit’s Tennessee v. FCC decision, while helpful, does not address the broader problem of agency disregard for the limitations of constitutional federalism and the rule of law.  Administrative overreach, like a chronic debilitating virus, saps the initiative of the private sector (and, more generally, the body politic) and undermines its vitality.  In addition, not all federal judges can be counted on to rein in legally unjustified rules (which in any event impose costly delay and uncertainty, even if they are eventually overturned).  What is needed is an administration that emphasizes by word and deed that it is committed to constitutionalist rule of law principles – and insists that its appointees (including commissioners of independent agencies) share that philosophy.  Let us hope that we do not have to wait too long for such an administration.

Remember when net neutrality wasn’t going to involve rate regulation and it was crazy to say that it would? Or that it wouldn’t lead to regulation of edge providers? Or that it was only about the last mile and not interconnection? Well, if the early petitions and complaints are a preview of more to come, the Open Internet Order may end up having the FCC regulating rates for interconnection and extending the reach of its privacy rules to edge providers.

On Monday, Consumer Watchdog petitioned the FCC to not only apply Customer Proprietary Network Information (CPNI) rules originally meant for telephone companies to ISPs, but to also start a rulemaking to require edge providers to honor Do Not Track requests in order to “promote broadband deployment” under Section 706. Of course, we warned of this possibility in our joint ICLE-TechFreedom legal comments:

For instance, it is not clear why the FCC could not, through Section 706, mandate “network level” copyright enforcement schemes or the DNS blocking that was at the heart of the Stop Online Piracy Act (SOPA). . . Thus, it would appear that Section 706, as re-interpreted by the FCC, would, under the D.C. Circuit’s Verizon decision, allow the FCC sweeping power to regulate the Internet up to and including (but not beyond) the process of “communications” on end-user devices. This could include not only copyright regulation but everything from cybersecurity to privacy to technical standards. (emphasis added).

While the merits of Do Not Track are debatable, it is worth noting that privacy regulation can go too far and actually drastically change the Internet ecosystem. In fact, it is actually a plausible scenario that overregulating data collection online could lead to the greater use of paywalls to access content.  This may actually be a greater threat to Internet Openness than anything ISPs have done.

And then yesterday, the first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS “plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission’s new network-neutrality rules unless the company strikes a free peering deal ASAP.” In other words, CNS is asking for rate regulation for interconnectionshakespeare. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road.

This was another predictable development that many critics of the Open Internet Order warned about: there was no way to really avoid rate regulation once the FCC reclassified ISPs. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication. Whether it is rate regulation according to Title II (which the FCC ostensibly didn’t do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.

In sum, while neither of these actions were contemplated by the FCC (they claim), such abstract rules are going to lead to random complaints like these, and companies are going to have to use the “ask FCC permission” process to try to figure out beforehand whether they should be investing or whether they’re going to be slammed. As Geoff Manne said in Wired:

That’s right—this new regime, which credits itself with preserving “permissionless innovation,” just put a bullet in its head. It puts innovators on notice, and ensures that the FCC has the authority (if it holds up in court) to enforce its vague rule against whatever it finds objectionable.

I mean, I don’t wanna brag or nothin, but it seems to me that we critics have been right so far. The reclassification of broadband Internet service as Title II has had the (supposedly) unintended consequence of sweeping in far more (both in scope of application and rules) than was supposedly bargained for. Hopefully the FCC rejects the petition and the complaint and reverses this course before it breaks the Internet.

By a 3-2 vote, the Federal Communications Commission (FCC) decided on February 26 to preempt state laws in North Carolina and Tennessee that bar municipally-owned broadband providers from providing services beyond their geographic boundaries.  This decision raises substantial legal issues and threatens economic harm to state taxpayers and consumers.

The narrow FCC majority rested its decision on its authority to remove broadband investment barriers, citing Section 706 of the Telecommunications Act of 1996.  Section 706 requires the FCC to encourage the deployment of broadband to all Americans by using “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”  As dissenting Commissioner Ajit Pai pointed out, however, Section 706 contains no specific language empowering it to preempt state laws, and the FCC’s action trenches upon the sovereign power of the states to control their subordinate governmental entities.  Moreover, it is far from clear that authorizing government-owned broadband companies to expand into new territories promotes competition or eliminates broadband investment barriers.  Indeed, the opposite is more likely to be the case.

Simply put, government-owned networks artificially displace market forces and are an affront to a reliance on free competition to provide the goods and services consumers demand – including broadband communications.  Government-owned networks use local taxpayer monies and federal grants (also taxpayer funded, of course) to compete unfairly with existing private sector providers.  Those taxpayer subsidies put privately funded networks at a competitive disadvantage, creating barriers to new private sector entry or expansion, as private businesses decide they cannot fairly compete against government-backed enterprises.  In turn, reduced private sector investment tends to diminish quality and effective consumer choice.

These conclusions are based on hard facts, not mere theory.  There is no evidence that municipal broadband is needed because “market failure” has deterred private sector provision of broadband – indeed, firms such as Verizon, AT&T, and Comcast spend many billions of dollars annually to maintain, upgrade, and expand their broadband networks.  Indeed, far more serious is the risk of “government failure.”  Municipal corporations, free from market discipline and accountability due to their public funding, may be expected to be bureaucratic, inefficient, and slow to react to changing market conditions.  Consistent with this observation, an economic study of government-operated municipal broadband networks reveals failures to achieve universal service in areas that they serve; lack of cost-benefit analysis that has caused costs to outweigh benefits; the inefficient use of scarce resources; the inability to cover costs; anticompetitive behavior fueled by unfair competitive advantages; the inefficient allocation of limited tax revenues that are denied to more essential public services; and the stifling of private firm innovation.  In a time of tight budget constraints, the waste of taxpayer funds and competitive harm stemming from municipal broadband activities is particularly unfortunate.  In short, real world evidence demonstrates that “[i]n a dynamic market such as broadband services, government ownership has proven to be an abject failure.”  What is required is not more government involvement, but, rather, fewer governmental constraints on private sector broadband activities.

Finally, what’s worse, the FCC’s decision has harmful constitutional overtones.  The Chattanooga, Tennessee and Wilson, North Carolina municipal broadband networks that requested FCC preemption impose troublesome speech limitations as conditions of service.  The utility that operates the Chattanooga network may “reject or remove any material residing on or transmitted to or through” the network that violates its “Accepted Use Policy.”  That Policy, among other things, prohibits using the network to send materials that are “threatening, abusive or hateful” or that offend “the privacy, publicity, or other personal rights of others.”  It also bars the posting of messages that are “intended to annoy or harass others.”  In a similar vein, the Wilson network bars transmission of materials that are “harassing, abusive, libelous or obscene” and “activities or actions intended to withhold or cloak any user’s identity or contact information.”  Content-based prohibitions of this type broadly restrict carriage of constitutionally protected speech and, thus, raise serious First Amendment questions.  Other municipal broadband systems may, of course, elect to adopt similarly questionable censorship-based policies.

In short, the FCC’s broadband preemption decision is likely to harm economic welfare and is highly problematic on legal grounds to boot.  The FCC should rescind that decision.  If it fails to do so, and if the courts do not strike the decision down, Congress should consider legislation to bar the FCC from meddling in state oversight of municipal broadband.

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. “An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive,” said Geoffrey Manne, Executive Director of ICLE. “If the Internet really is ‘open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?”

“The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation,” said Berin Szoka, President of TechFreedom. “In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.”

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. “So-called reclassification risks catching other Internet services in the crossfire,” explained Szoka. “The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess — essentially hitting the pause button on better broadband.”

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. “This is an absurd interpretation,” said Szoka. “This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.”

A better approach. “The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years,” said Manne. “That means a general presumption that innovative business models and other forms of ‘prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears.” “If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation,” added Szoka. “A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission,” he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: “The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.”

For some of our other work on net neutrality, see:

“Understanding Net(flix) Neutrality,” an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

“The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Berin Szoka and Geoffrey Manne in

“That startup investors’ letter on net neutrality is a revealing look at what the debate is really about,” a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ‘96 Telecom Act is Long Overdue,” a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

With Berin Szoka.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

No one’s against an open Internet. The notion that anyone can put up a virtual shingle—and that the good ideas will rise to the top—is a bedrock principle with broad support; it has made the Internet essential to modern life. Key to Internet openness is the freedom to innovate. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive. If the Internet really is “open,” shouldn’t all companies be free to experiment with new technologies, business models and partnerships? Shouldn’t the FCC allow companies to experiment in building the unknown—and unknowable—Internet of the future?

The best approach would be to maintain the “Hands off the Net” approach that has otherwise prevailed for 20 years. That means a general presumption that innovative business models and other forms of “prioritization” are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. And they should start with existing legal tools—like antitrust and consumer protection laws—before imposing prior restraints on innovation.

But net neutrality regulation hurts more than it helps. Counterintuitively, a blanket rule that ISPs treat data equally could actually harm consumers. Consider the innovative business models ISPs are introducing. T-Mobile’s unRadio lets users listen to all the on-demand music and radio they want without taking a hit against their monthly data plan. Yet so-called consumer advocates insist that’s a bad thing because it favors some content providers over others. In fact, “prioritizing” one service when there is congestion frees up data for subscribers to consume even more content—from whatever source. You know regulation may be out of control when a company is demonized for offering its users a freebie.

Treating each bit of data neutrally ignores the reality of how the Internet is designed, and how consumers use it.  Net neutrality proponents insist that all Internet content must be available to consumers neutrally, whether those consumers (or content providers) want it or not. They also argue against usage-based pricing. Together, these restrictions force all users to bear the costs of access for other users’ requests, regardless of who actually consumes the content, as the FCC itself has recognized:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

The rules that net neutrality advocates want would hurt startups as well as consumers. Imagine a new entrant, clamoring for market share. Without the budget for a major advertising blitz, the archetypical “next Netflix” might never get the exposure it needs to thrive. But for a relatively small fee, the startup could sign up to participate in a sponsored data program, with its content featured and its customers’ data usage exempted from their data plans. This common business strategy could mean the difference between success and failure for a startup. Yet it would be prohibited by net neutrality rules banning paid prioritization.

The FCC lacks sound legal authority. The FCC is essentially proposing to do what can only properly be done by Congress: invent a new legal regime for broadband. Each of the options the FCC proposes to justify this—Section 706 of the Telecommunications Act and common carrier classification—is deeply problematic.

First, Section 706 isn’t sustainable. Until 2010, the FCC understood Section 706 as a directive to use its other grants of authority to promote broadband deployment. But in its zeal to regulate net neutrality, the FCC reversed itself in 2010, claiming Section 706 as an independent grant of authority. This would allow the FCC to regulate any form of “communications” in any way not directly barred by the Act — not just broadband but “edge” companies like Google and Facebook. This might mean going beyond neutrality to regulate copyright, cybersecurity and more. The FCC need only assert that regulation would somehow promote broadband.

If Section 706 is a grant of authority, it’s almost certainly a power to deregulate. But even if its power is as broad as the FCC claims, the FCC still hasn’t made the case that, on balance, its proposed regulations would actually do what it asserts: promote broadband. The FCC has stubbornly refused to conduct serious economic analysis on the net effects of its neutrality rules.

And Title II would be a disaster. The FCC has asked whether Title II of the Act, which governs “common carriers” like the old monopoly telephone system, is a workable option. It isn’t.

In the first place, regulations that impose design limitations meant for single-function networks simply aren’t appropriate for the constantly evolving Internet. Moreover, if the FCC re-interprets the Communications Act to classify broadband ISPs as common carriers, it risks catching other Internet services in the cross-fire, inadvertently making them common carriers, too. Surely net neutrality proponents can appreciate the harmful effects of treating Skype as a common carrier.

Forbearance can’t clean up the Title II mess. In theory the FCC could “forbear” from Title II’s most onerous rules, promising not to apply them when it determines there’s enough competition in a market to make the rules unnecessary. But the agency has set a high bar for justifying forbearance.

Most recently, in 2012, the Commission refused to grant Qwest forbearance even in the highly competitive telephony market, disregarding competition from wireless providers, and concluding that a cable-telco “duopoly” is inadequate to protect consumers. It’s unclear how the FCC could justify reaching the opposite conclusion about the broadband market—simultaneously finding it competitive enough to forbear, yet fragile enough to require net neutrality rules. Such contradictions would be difficult to explain, even if the FCC generally gets discretion on changing its approach.

But there is another path forward. If the FCC can really make the case for regulation, it should go to Congress, armed with the kind of independent economic and technical expert studies Commissioner Pai has urged, and ask for new authority. A new Communications Act is long overdue anyway. In the meantime, the FCC could convene the kind of multistakeholder process generally endorsed by the White House to produce a code enforceable by the Federal Trade Commission. A consensus is possible — just not inside the FCC, where the policy questions can’t be separated from the intractable legal questions.

Meanwhile, the FCC should focus on doing what Section 706 actually demands: clearing barriers to broadband deployment and competition. The 2010 National Broadband Plan laid out an ambitious pro-deployment agenda. It’s just too bad the FCC was so obsessed with net neutrality that it didn’t focus on the plan. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

[Cross-posted at TechFreedom.]

Today the D.C. Circuit struck down most of the FCC’s 2010 Open Internet Order, rejecting rules that required broadband providers to carry all traffic for edge providers (“anti-blocking”) and prevented providers from negotiating deals for prioritized carriage. However, the appeals court did conclude that the FCC has statutory authority to issue “Net Neutrality” rules under Section 706(a) and let stand the FCC’s requirement that broadband providers clearly disclose their network management practices.

The following statement may be attributed to Geoffrey Manne and Berin Szoka:

The FCC may have lost today’s battle, but it just won the war over regulating the Internet. By recognizing Section 706 as an independent grant of statutory authority, the court has given the FCC near limitless power to regulate not just broadband, but the Internet itself, as Judge Silberman recognized in his dissent.

The court left the door open for the FCC to write new Net Neutrality rules, provided the Commission doesn’t treat broadband providers as common carriers. This means that, even without reclassifying broadband as a Title II service, the FCC could require that any deals between broadband and content providers be reasonable and non-discriminatory, just as it has required wireless carriers to provide data roaming services to their competitors’ customers on that basis. In principle, this might be a sound approach, if the rule resembles antitrust standards. But even that limitation could easily be evaded if the FCC regulates through case-by-case enforcement actions, as it tried to do before issuing the Open Internet Order. Either way, the FCC need only make a colorable argument under Section 706 that its actions are designed to “encourage the deployment… of advanced telecommunications services.” If the FCC’s tenuous “triple cushion shot” argument could satisfy that test, there is little limit to the deference the FCC will receive.

But that’s just for Net Neutrality. Section 706 covers “advanced telecommunications,” which seems to include any information service, from broadband to the interconnectivity of smart appliances like washing machines and home thermostats. If the court’s ruling on Section 706 is really as broad as it sounds, and as the dissent fears, the FCC just acquired wide authority over these, as well — in short, the entire Internet, including the “Internet of Things.” While the court’s “no common carrier rules” limitation is a real one, the FCC clearly just gained enormous power that it didn’t have before today’s ruling.

Today’s decision essentially rewrites the Communications Act in a way that will, ironically, do the opposite of what the FCC claims: hurt, not help, deployment of new Internet services. Whatever the FCC’s role ought to be, such decisions should be up to our elected representatives, not three unelected FCC Commissioners. So if there’s a silver lining in any of this, it may be that the true implications of today’s decision are so radical that Congress finally writes a new Communications Act — a long-overdue process Congressmen Fred Upton and Greg Walden have recently begun.

Szoka and Manne are available for comment at Find/share this release on Facebook or Twitter.

With Berin Szoka

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.