Verizon HQ
(Credit: Bjoertvedt)

The Federal Communications Commission once again came up short in its attempt to regulate broadband Internet service providers, with a divided panel of federal appellate judges striking down the agency’s net neutrality rules for the second time.

The U.S. Court of Appeals for the D.C. Circuit on Tuesday gave the FCC one important victory, establishing for the first time that the agency has the authority to issue rules governing broadband providers. But the agency’s Open Internet Order was improper, the court found, because it treats broadband providers as common carriers, like telephone companies.

“Even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates,” wrote Judge David Tatel, who was joined by Judge Judith Rogers in vacating and remanding the rule. Senior Judge Laurence Silberman dissented in part, concluding the commission did not have authority to issue the order from the start.

FCC Chairman Tom Wheeler in a statement said the court “correctly held” that the FCC has the authority to act. “We will consider all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform,” Wheeler said.

Verizon general counsel Randal Milch said in a written statement that the company looks “forward to working with the FCC and Congress to keep the Internet a hub of innovation without the need for unnecessary new regulations.”

The FCC’s net neutrality rules, issued in 2010, were supposed to be a “third way” according to then-chairman Julius Genachowski, to give the government a “limited but essential role” in making sure broadband providers didn’t block legal content or unreasonably discriminate against traffic on their networks.

Represented by Gibson Dunn & Crutcher partner Helgi Walker, Verizon sued the FCC in 2011, arguing the agency lacked authority to issue the rules, that they were arbitrary and capricious, and that the rules ran afoul of the FCC’s own, still-binding decision to classify broadband providers as more lightly regulated information services, not common carriers.

The agency in 2010 failed in its first bid to regulate broadband, when Tatel—writing for the D.C. Circuit in Comcast Corp. v. FCC—ruled that the agency lacked the authority to oversee Internet service providers based on its theory of ancillary jurisdiction.

The FCC tried again, this time asserting the agency has the authority to issue rules under Section 706(a) and 706(b) of the Telecommunications Act of 1996. The provisions direct the agency to “encourage the development … of advanced telecommunications” services and empower it to take steps to accelerate broadband deployment.

“We think it quite reasonable to believe that Congress contemplated that the Commission would regulate this industry,” Tatel wrote. “To be sure, Congress does not, as Verizon reminds us, ‘hide elephants in mouseholes.’ FCC regulation of broadband providers, the judge wrote, “is no elephant, and section 706(a) is no mousehole.”

The FCC argued that if broadband providers are free to disrupt Internet traffic, it could discourage investment and limit competition—a plausible scenario, according to the court, which said it had “no basis for questioning the Commission’s determination.”

The appeals court recognized that broadband providers “may be motivated to discriminate,” citing, for example, the rise of Voice-over-Internet-Protocol services such as Vonage, which compete with traditional telephone services. Companies such as Netflix and Hulu compete with video offerings from broadband providers.

The panel also found there would be a “powerful incentive” for broadband companies to accept fees from content providers in exchange for priority access or excluding competitors.

The problem, the court found, is that the FCC’s actual regulations impermissibly treat broadband providers as common carriers. The FCC itself previously determined that cable broadband providers are “information service” providers and thus exempt from common-carrier requirements. The Open Internet Order doesn’t change that classification.

The court didn’t buy the FCC’s argument that broadband providers aren’t carriers at all. According to the FCC, the relevant broadband customers are end users sitting in front of their computers who purchase the service. Broadband providers can decide on an individual basis what terms to offer these potential customers, the FCC argued, so they can’t be common carriers.

Tatel said no. “That hardly means that broadband providers could not also be carriers with respect to [content] providers” such as Amazon. As for the requirement imposed on broadband providers not to discriminate against transmitting legal content, the court found that the rule “mirrors, almost precisely … language establishing the basic common carrier obligation.”

However, the court did uphold the portion of the rule that requires broadband providers to disclose accurate information about their network management practices.

In his 18-page dissent, Silberman said the FCC didn’t have “affirmative statutory authority” to move forward with the Open Internet rule in the first place. He also concluded the commission’s position in the case violates the Administrative Procedures Act.

“These differences are important since the majority opinion suggests possible regulatory modifications that might circumvent the prohibition against common carrier treatment,” Silberman wrote.

Section 706 of the federal Telecommunications Act, Silberman wrote, “doesn’t come close to sanctioning the Commission’s regulation,” which he described as “aggressive” and “prophylactic.”

“An unwarranted government interference in a functioning market is likely to persist indefinitely, whereas a failure to intervene, even when regulation would be helpful, is likely to be only temporarily harmful because new innovations are constantly undermining entrenched industrial powers,” Silberman wrote.

Silberman criticized the FCC for, among other things, the agency’s alleged failure “to address whether the trend in the broadband market is towards more or less competition.”

“There is no evidence in the record suggesting that broadband providers are carving up territory or avoiding head-to-head competition,” Silberman wrote. “At least anecdotally, the opposite seems to be true.” Google, the judge noted, “has entered the broadband market as a direct competitor.”

The FCC’s Open Internet regulation, Silberman wrote, “essentially provides an economic preference to a politically powerful constituency, a constituency that, as is true of typical rent seekers, wishes protection against market forces. The Commission does not have authority to grant such a favor.”

Contact Jenna Greene at jgreene@alm.com. Mike Scarcella, who contributed, can be contacted at mscarcella@alm.com.