When the D.C. Circuit ruled April 6 in Comcast Corp. v. Federal Communications Commission that the Internet essentially doesn’t have a federal regulator, prognosticators expected the FCC to respond with an either/or solution: continue to rely on its ancillary authority to regulate under Title I of the Communications Act of 1934 or reclassify broadband Internet access under Title II.

But one month to the day after the court delivered a decision that gutted significant aspects of the agency’s plans for national broadband deployment, FCC Commissioner Julius Genachowski announced a radical shift in broadband classification. Pending a final rule, broadband will neither be regulated solely under Title I or Title II. Instead, Genachowski proposed “The Third Way.”

Under this proposal, the FCC will govern different Internet functions under different statutes, managing Internet service providers (ISPs) such as AT&T and Comcast under Title II of the act, alongside heavily regulated telecommunications networks. Internet content, however, which includes everything from Twitter to NYTimes.com, will remain under the loosely regulated Title I jurisdiction. It’s based on a framework suggested by Supreme Court Justice Antonin Scalia in a 2005 dissent to National Cable and Telecommunications Association v. Brand X Internet Services, Inc.

The goal is to promote innovation while maintaining a competitive market, Genachowski said in a statement. But if the thunderous reaction is any clue, the industry is anything but satisfied with the compromise.

Advocates of net neutrality–the idea that ISPs should treat all traffic equally–were optimistic the FCC’s plan would preserve an open Internet. Many ISPs, however, took the reclassification as a blow to their market, which until now has flourished with minimal government intervention.

“The FCC is essentially saying that despite now offering [broadband as] a single integrated service, we are going to treat it as if it were two separate services,” says Barbara Esbin of the Progress & Freedom Foundation, who filed a brief supporting Comcast in the D.C. Circuit case. “It’s tricky business.”

Class Conflict

The FCC contends that reclassification won’t really change much, that it merely allows the agency to assert authority it thought it already had. That authority was challenged in the D.C. Circuit when Comcast fought a 2008 FCC order that commanded the company to stop interfering with traffic on the peer-to-peer (P2P) file-sharing site BitTorrent.

Comcast blocked or slowed user uploads to BitTorrent, which took up a lot of bandwidth on Comcast’s network, according to a 2007 Associated Press investigation. This revelation released a firestorm of criticism from consumers and activist groups fearing other ISPs would start limiting web traffic and cripple P2Ps, which allow people to easily share large files. Advocacy groups Free Press and Public Knowledge filed a complaint with the FCC, arguing Comcast was guilty of “data discrimination” on its high-speed networks.

After an FCC investigation and the 2008 order, Comcast ended the practice but filed suit in the D.C. Circuit, arguing the FCC can’t regulate ISPs’ network management policies. The court ruled that the FCC overstepped its authority by ordering Comcast to stop restricting BitTorrent traffic.

The FCC’s defense in Comcast relied on its supposed ancillary authority to regulate the Internet under Title I, where the agency controversially situated it in 2002. But that argument didn’t fly in the D.C. Circuit. The court held that the FCC failed to tie its order against Comcast to any legal responsibility, which cast doubt on what right the FCC had to implement many aspects of the recently announced National Broadband Plan, which includes deployment to rural areas and greater ISP transparency.

Now the FCC feels it will be on far firmer legal footing to execute the plan. The May 6 announcement provides an outline of the proposal, but the FCC will soon draft an actual rule for public comment.

“The reclassification will give some sugar and some medicine at the same time,” says Marvin Ammori, former general counsel of Free Press who argued for the group as an intervenor in Comcast. “Legally it gets the FCC back to the position where it hoped to be before Comcast. It’s neither more nor less than they thought they could do before.”

But Esbin thinks reclassification might be pre-emptively protective rather than essential to the broadband plan.

“I don’t necessarily believe that it would be precluded under the Comcast decision, but the answer would depend on how the FCC justified its actions,” she says. “It appears the general counsel has determined those arguments might not have been strong enough.”

Shifting Gears

Throughout the statements released by Genachowski and FCC General Counsel Austin Schlick, the officials emphasize that this third-way approach will be a light touch customized for the Internet.

Title II contains 48 provisions, but the proposed reclassification will likely forbear broadband service from all but six. That handful of provisions will allow the FCC to correct market failures, protect consumers and police discriminatory network management practices such as those debated in Comcast. Content, however, will remain largely unfettered.

“The GC memo asserts this will be sufficient to protect its statutory interests so it can then forbear from the rest [of Title II],” Esbin says. “It’s a sophisticated argument completely untested in court.”

While it is untested in practice, it is directly drawn from the framework Scalia proposed in Brand X, which challenged the 2002 Title I classification. Although the majority opinion deferred to the FCC’s reclassification, Scalia suggested the transmission of content on the Internet and the content itself are two vastly different things.

Market Reaction

Despite assurance that reclassification will maintain the status quo, industry members responded with immediate misgivings. Within the FCC, Commissioners Robert M. McDowell and Meredith A. Baker released a joint statement warning that the proposal “will usher in a tumultuous new age of regulatory uncertainty” that will stifle investment in the broadband infrastructure.

Schlick described the third-way approach as similar to how the FCC regulates wireless communications. He highlighted 2001 testimony from Verizon Senior Vice President Tom Tauke, who said the framework “produced what is arguably one of the greatest successes in the industry in the last 20 years.”

But Tauke’s view today on applying the approach to broadband is very different than what he expressed about wireless services. “We believe that the chairman’s stated approach is legally unsupported,” he said in a statement. “The regulatory and judicial proceedings that will ensue can only bring confusion and delay to … continuing to build the nation’s broadband future.”

Internet content providers, however, hailed the proposal. In a letter from the Open Internet Coalition, signatories including Google, Sony Electronics and Amazon.com praised the middle-ground approach as essential to promoting an open Internet.

Comcast said in a statement it was disappointed by the reclassification but committed to working with the FCC to ensure the approach doesn’t “cast the kind of regulatory cloud that would chill investment and innovation by ISPs.”

But Ammori thinks the third way will promote innovation because it grants all content equal access to Internet transmission.

“The FCC is ensuring that the 21st century infrastructure is open on nondiscriminatory terms. That’s hugely important,” he says. “It’s as though the companies on the electric grid [controlled] what could be plugged in. This preserves the rights to what you can plug into the Internet.”