Research Notes

Strand Consult’s summary of the court case Mozilla v. FCC and what it means for net neutrality regulation in the US, EU and Rest of the World

Last week US courts handed victory to the FCC and light touch internet regulation. Around the world net neutrality is marketed as a consumer-friendly policy, but in reality, it’s a price control favoring Silicon Valley companies over end users and startups. Strand Consult has followed the net neutrality issue around the world for more than a decade and has published dozens of reports and research notes on the topic. In Mozilla v. Federal Communications Commission, US courts upheld the FCC on its reversal of heavy-handed rules adopted in 2015. The case is the ninth lawsuit against the American telecom regulator on this issue. Strand Consult is recognized internationally for our research, wrote this research note which summarizes the court’s decision and the implications for the US, EU, and rest of the world.

It is too simple to say that the old FCC lost and the new FCC won. Indeed, the court has blessed both heavy-handed and light touch approaches. The District Court of Appeals merely decides whether the FCC’s orders are reasonable, not whether they are good policy. Until and unless the US Congress can act, litigation will continue in the US on this highly politicized issue, particularly as individual US states want to impose their own regulation.

This latest decision was a predictable outcome from the landmark 2005 US Supreme Court Case National Cable & Telecommunications Ass’n v. Brand X Internet Services (the so-called Brand X case) which says that if the American Congress makes a law that is ambiguous, the telecom’s regulator’s interpretation shall prevail as long as it is reasonable. Leading internet companies and some Democrat-leading states attempted to challenge the FCC’s 2017 Restoring Internet Freedom Order (RIFO). The RIFO reversed internet regulation adopted in 2015 and restored the light touch approach in which Federal Trade Commission, states, and market competition govern the market, the regime from 1996-2015.  The FCC retained and enhanced the transparency rules for the sale of internet access from 2015. The Court upheld the repeal of the 2015 utility style regulation and the restoration to a light touch approach. Though the ruling marked a solid win for the FCC, the court vacated what it called the FCC’s “Preemption Directive”. The court said that the FCC could not stop states from making their own rules, but it could challenge them if their rules conflict with the FCC.

Litigation will likely continue in the United States. Silicon Valley companies and foundations pump millions of dollars into the policymaking system. There is a business model of litigation for state attorneys general, plaintiff attorneys, and financiers, along with the media value of political drama and symbolic politics. Sadly, this represents millions of dollars which might otherwise be spent on broadband networks, innovation, and connectivity for those in need.

However, this niche question of administrative law is unlikely to move the Supreme Court which gets requests for thousands of cases but hears just a hundred or so each year. The FCC could limit state rulemaking by declaring that any that effort to reinstate the 2015 net neutrality rules conflict with the FCC’s policy are illegal and will be challenged. Any state effort to regulate broadband providers is still subject to the FCC’s conflict preemption authority on a case-by-case basis.  Indeed, states are only able to regulate intrastate internet traffic, that is traffic which both originates and terminates within the state, an extremely small amount of data. Nevertheless, Strand Consult expects that in the coming election year, some partisans may use the ruling to conduct symbolic politics.  For most Americans, however, interest in net neutrality has waned. There is no meaningful record of misbehavior by broadband providers. As Judge Willet noted, the door remains open to resolving the litigation with legislation, but the American people seem more interested in getting access to 5G—mobile wireless speeds as fast as fiber–than the FCC regulating the internet.

When looking at the US from abroad, the ping-pong on the issue looks like madness. The EU and many countries in Latin America have enshrined their laws in legislation. That path largely insulates the regulation from lawsuits. However, it’s still worth asking whether net neutrality even delivers what is promised. Indeed, the diversity of approaches on internet regulation offer a valuable natural experiment.

The EU’s regime has been in place for almost five years.  Strand Consult’s report “Net Neutrality in EU after 2 Years: Why operators keep losing the battle against Internet regulation” analyzes the European Union and its approach. European policymakers promised that net neutrality would “guarantee” internet innovation, however, no one can point to any new innovation that is the result of the net neutrality policy in the EU. Indeed, the European Commission claims that the proof that the regulation is working are the innovation clusters around Europe. However, these clusters predate the regulation by more than a decade and exists largely in cities where other efforts to seed startups took place. The Commission offered no form of evidence (quantitative or otherwise) to justify its assertion. Moreover, the EU still suffers an investment gap which has widened in recent years, and the region is behind on 5G. The US invests in networks at twice the level of the EU per capita and is leading on 5G.

Select Latin American countries and India have nothing to show for their draconian approaches. The digital divide is still apparent, investment is limited, and most notably, Google, Amazon, Facebook, and Apple, the very companies which lobby for the regulation, have disproportionate market share. Sadly, the only countries which have created platforms which rival these companies are Russia and China, countries which have no net neutrality rules at all. It is the case that Russia and China have large populations and digital expertise and may have practiced forms of protectionism to promote their infant industries; these factors may have helped the Russian and Chinese players grow. All the same, India remains the country which should have benefitted most from net neutrality but hasn’t. If the tenets of net neutrality truly worked as described, much of the world would be using Indian apps, but they’re not. 

In practice, policy acts as a price control forcing users to value all internet content the same, even though in reality people have different tastes. This has the perverse effect of entrenching the large, established players and making it difficult, if not impossible, for small firms to differentiate with pricing, bundling, quality of service, and so on. For Google, Amazon, Facebook, Apple, Netflix, and other large players their end game has always been enjoy high speed networks without ever having to pay for them. The net effort for the market is that net neutrality regulation has reduced platforms’ costs (putting 100% of the cost on end users) and has boosted their market share (by prohibiting any market differentiation which could help entrants).

Switzerland remains one country which still manages the issue through self-regulation, a voluntary code of conduct, and arbitration board. It is an effective, low cost model which does not retard innovation or innovation. Moreover, there is little to nothing to litigate.

Following is an overview of the decision in Mozilla v. FCC case with Strand Consult´s commentary.

Broadband is an information, not telecommunications, service
The court affirmed the FCC’s “reasonable policy choice” in designating broadband as an information service and not being subject to common carrier treatment under Title II of the Communications Act. Recall that in Brand X the Supreme Court held that broadband providers use information processing (e.g. caching and DNS) to deliver their services and that these services are “inextricably intertwined” with the transmission element of broadband. The court found unconvincing the argumentation made to the contrary by the petitioners, for example that broadband is used to access third party content and not the ISPs’ walled gardens, or that users could select DNS and caching by non-ISP providers.

Recall that the objective of the petitioners to win on this argument is that it empowers the FCC to regulate broadband service the same way that it regulated the Ma Bell telephone network, setting the price, taxing the service, mandating the conditions and so on. The petitioners’ expectation is that with such rules they can enjoy  “free rides” despite the large volumes of traffic they pump into broadband networks. Moreover, under Title II, the FCC would be able to levy new taxes on broadband which theoretically would be used to fund municipal broadband fiber networks, which presumably would deliver additional video entertainment by YouTube, Hulu, Amazon and so on.

The repealed 2015 policy put the full network cost on consumers regardless of whether they accessed the Silicon Valley services.  The FCC’s decision allows the price of broadband to be set by supply and demand, not weighted in favor of any one actor.  Under the light touch policy, end users and content providers can enjoy the freedom to purchase premiums, discounts, and quality of service to tailor their broadband services to their tastes and needs.

Mobile Broadband is a private mobile service
The US Communications Act distinguishes between “commercial” mobile services subject to common carrier regulation and “private” mobile service which have no such obligations. Similarly, the Court upheld the FCC’s decision on mobile broadband noting that the “Commission has compelling policy grounds to ensure consistent treatment of the two varieties of broadband Internet access, fixed and mobile, subjecting both, or neither, to Title II.”

The court relied on the pre 2015 FCC definition of an “interconnected service” being a service that is “interconnected with the public switched network” that uses the 10-digit North American Numbering Plan. It rejected the 2015 Order’s definition which attempted to extend the definition of the telephone network to all public internet addresses.  It should be noted that US leadership in mobile broadband (in which the number of subscribers exceed the population) and tens of billons of dollars of investment in 4G and 5G have been realized under a regime of private mobile service.

The Court upheld the FCC’s Transparency Rules
In the RIFO, the FCC proposed rules for broadband providers to disclose how their services are offered.  Petitioners sought to find those rules unlawful, saying that such rules created injury. The Court said petitioners provided no evidence of injury and further found the FCC’s transparency rule as lawful, and that the FCC relied on proper authority to issue such a rule.

Whether the order was arbitrary and capricious
Petitioners sought to paint the FCC’s Restoring Internet Freedom Order as arbitrary and capricious. The court addressed each of the following issues.

Effects of Investment
Petitioners claimed that 2015 rules increased investment or at least did not harm it.  The FCC said the 2015 rules caused a decline in investment, and noted that since the repeal, investment has consecutively increased. The court recognized that while there is methodological dispute between the parties on how to calculate investment, it found the FCC’s detailed and sober review of the evidence—showing that heavy handed regulation and Title II classification deters investment in broadband networks—reasonable and justifiable. The court reminded that its job is not to determine what is good policy, but rather whether the FCC follows the law and makes a reasonable determination.

Harms to Content Providers and Consumers
Petitioners claimed that the ISPs have the ability and incentive to harm content providers and consumers and that disclosure does little to protect them. FCC countered that protecting these entities could be achieved at a lower cost via transparency requirements, consumer protection, and antitrust enforcement measures. The court sided with the FCC.

Public Safety
A range of governmental petitioners said that the FCC failed to consider the implications of its decision for public safety. The Court remanded this part of the decision back to the FCC for further explanation. Notably petitioners flooded the court and the media with stories about a throttling incident during the California wildfires, but the court decided only to review the documents that were before the agency at the time of its decision.  As a separate matter, the California wildfires have been deemed by California courts to have been caused by Pacific Gas & Electric Company, a public utility overseen by the California Public Utility Commission. Ironically the 2015 rules created the same set up for broadband internet.

Street Pole Attachments
Governmental Petitioners also claimed that the ruling had impacts on the regulation of pole attachments and that the hitherto regulation applies only to cable television systems and telecommunications services. The Court remanded this issue back to the FCC. Separately pole attachments are an issue of intense debate given the rollout of 5G. The FCC was upheld in a separate court case for its rule that cities could not charge excessive fees for pole attachments. A similar set of petitioners have attempted to sue the FCC to its effort to speed the rollout of 5G.

Lifeline Program
The court also remanded to the FCC what they called a legal error to clear up the statutory basis for broadband’s inclusion in the Lifeline Program, noting that broadband is an information service.

Cost-Benefit Analysis
The court deferred to the FCC’s cost-benefit, finding nothing arbitrary in the FCC’s methodology or the explanation of its conclusions.  Note that there is not a statutory requirement for the FCC to conduct a cost-benefit analysis; this is a matter of some debate in the policy community as the impact of rules have consequences  The Pai-led FCC has created an Office of Economics and Analytics to ensure that FCC rulemaking takes advantage of best in class empirical analysis.

The court appeared to be mindful of the disruptive nature of changing classification and noted that it did not want to vacate the reversal. “We decline to yet again flick the on-off switch of common-carrier regulation under these circumstances,” it noted.  However, the court vacated the portion of the RIFO that expressly preempts “any state or localrequirements that are inconsistent with [its] deregulatory approach”, which the court called the FCC’s “Preemption Directive”. The court explained that Congress gives the FCC jurisdiction on two fronts: (1) “express” authority over common carrier services, radio transmissions, and cable (so-called Title II of the Act); and (2) “ancillary” or related authority to sections II, III and VI. For the FCC make the Preemption Directive, it must use one of these two authorities, but did not. By saying broadband is a Title I information service, the FCC can’t use Title II authority to preempt the state making rules. Notably Judge Williams dissented, which is described below.

The court rejected the FCC’s arguments (1) that the Preemption Directive is justified by the “impossibility exception,” which contemplates federal preemption when it would be impossible to apply state regulation to the intrastate portion of an offering and federal regulation to the interstate portion; and (2) a “federal policy of nonregulation for information services” as a basis for preemption; and (3) conflict preemption supports the Preemption Directive.

The court noted that some case law that supports its view that the Communication Act had a vision of dual federal-state authority. Separately this item could well be litigated as there are many pro and contra examples from a variety of industries.

Individual opinions
All three of the judges issued individual opinions which would seem to set up an en banc review at the District Court, if not an appeal to the Supreme Court.

The Obama-appointed Judge Willet noted, “Brand X compels us to affirm as reasonable the reclassification of broadband as an information service, based on its provision of DNS and caching. But I am deeply concerned that the result is unhinged from the realities of modern broadband service.” She then claims, ”The Commission’s decision to cling to DNS and caching as the acid test for its regulatory classification ‘cannot bear very much reality’” and references T.S. Eliot’s Four Quartets, the poet’s meditation on man and religion. Essentially she makes the ideological argument that broadband is too important to be left to the market.

Judge Wilkinson, also Obama-appointed, does not go as far but notes, “… revisiting Brand X is a task for the Supreme Court, not us.”

Senior Justice Stephen Williams, appointed by president Reagan and veteran judge of disputes of regulated industries, wrote a 20-page dissent to the majority’s vacatur of the FCC’s Preemption Directive. The judge also wrote a blistering dissent in USTA v. FCC, the eighth net neutrality case which challenged the 2015 rules.

Williams believes the FCC is right to argue the “impossibility exception” because of the impossibility of segregating flows of Internet data into discrete intrastate and interstate buckets for different regulatory treatment. He notes that a federal agency’s authority to preempt state law need not be expressly granted. The statute, its history, and its interpretation give ample reason to infer a congressional intent that the FCC is authorized to preempt state laws. Williams invokes Shakespeare to make his point, “The enactors of the 2018 Order, though surely no Macbeths, might nonetheless feel a certain kinship, being told that they acted lawfully in rejecting the heavy hand of Title II for the Internet, but that each of the 50 states is free to impose just that.”

Williams critiqued the majority by saying that they only support preemption when it protects affirmative federal regulations. But a national policy can also be a deregulatory one which is also entitled to respect by the states. The judge underscores the hypocrisy of the other two judges noting that while they agree the 1996 Act affords the FCC authority to apply Title II to broadband, or not, they will only bless preemption for the choice of Title II.

It’s understandable that learning more about this case will make one confused at a higher level. The problem lies within the term ”net neutrality” itself, which sounds good on the surface, but is actually a moniker designed for the benefit of big tech companies. Moreover, the US regulatory landscape is complex, making the explanation even more difficult. In any case, the academic literature and empirical tests for net neutrality find that the policy has ambiguous results. In practice the policy has overwhelmingly rewarded large technology platforms. Strand Consult houses a number of the world’s leading experts on net neutrality and is the leading provider of empirical analysis and international comparisons on this issue.

The report Net Neutrality in EU after 2 Years: Why the operators are losing the battle against net neutrality regulation and the report: Understanding Net Neutrality and Stakeholders’ Arguments was written by Strand Consult’s internet policy team, a group composed of economic and regulatory experts, recognized internationally for their research contributions. Buy this report so that you can get the real story behind BEREC’s efforts to regulate the internet.

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