FCC Warns ISPs May be Regulated as Utilities

by White & Case LLP

On April 30, 2014, Tom Wheeler, Chairman of the Federal Communications Commission ("FCC") warned major players in the broadband cable and telecommunications industry that the FCC is willing to resort to reclassifying broadband Internet service providers ("ISPs") as public utilities if necessary to preserve an open Internet.1 These comments were a response to speculation over how the FCC will next attempt to enforce "net neutrality" – the concept of treating all Internet content and data the same, regardless of its source, in delivering it to consumers.2

Under Title II of the Federal Communications Act of 1934, as amended (the "Act"), the FCC has broad power to regulate entities that are designated as "common carriers," by requiring them to implement "just and reasonable" business practices in delivering their services and to refrain from "unjust or unreasonable discrimination."3 The current definition of "common carrier" includes telecommunications services providers but excludes ISPs because of a 2002 FCC decision to classify broadband cable companies' Internet services as "information services," which are distinct from telecommunications services under the Act.4 According to a D.C. Circuit decision this past January which has sparked much commentary and review, this separate classification renders ISPs outside the FCC's power to impose blanket non-discrimination prohibitions and similar restrictions.5

While the issue has been widely covered in the press because of the potential adverse effects on consumers' Internet experience and costs, there are also important commercial implications. A regulatory scheme enforcing net neutrality benefits so-called "edge providers" – companies such as Netflix and Spotify who provide Internet content to consumers but rely on ISPs to deliver it.6 Non-discrimination regulations essentially prohibit common carriers from making individualized or case-by-case decisions with respect to the terms upon which they provide their services.7 Prohibiting ISPs from discriminating among edge providers in deciding whose content will reach consumers and when (e.g., at what connectivity speeds) prevents ISPs from charging edge providers access fees or "pay-for-priority" fees. Such fees not only affect how consumers receive edge providers' content but could also create barriers to entry for start-up edge providers and other newcomers in the industry who cannot afford to pay to compete with established edge providers.

The implications of the D.C. Circuit's January decision are that, to enforce net neutrality, the FCC must either:

  • develop a new regulatory scheme that effectively curbs ISPs' ability to discriminate among edge providers without prohibiting it outright (as the latter would constitute per se common carrier regulation), or
  • re-classify ISPs as common carriers and thereby permit the FCC to extend the Act's non-discrimination and similar rules to ISPs.8  

According to Chairman Wheeler, the FCC's next rulemaking attempt, which is expected to be released for public comment next week, will pursue the first option by enabling the FCC to determine whether ISPs' dealings with edge providers are "commercially reasonable" on a case-by-case basis.9 Chairman Wheeler further prefaced that the FCC would not consider a practice "that harms consumers" such as the creation of Internet "fast lanes" to be commercially reasonable, nor would a practice that gives preferential service to the ISPs' affiliates be acceptable.10

In its decision, the D.C. Circuit indicated that a "commercial reasonableness" inquiry might provide a sufficient degree of flexibility to avoid being deemed per se common carrier regulation, but only if it left "substantial room for individualized bargaining and discrimination in terms."11 Given Chairman Wheeler's position on what activities the FCC would find to be not commercially reasonable, it is unclear how the new proposed rules could effectively maintain protections for edge providers without being ruled to be impermissible per se common carrier regulation like their predecessor rules (if, for example, the FCC's application of the "commercially reasonable" standard is challenged).12

While the Chairman's remarks on his blog and his recent speaking engagement indicate his willingness to pursue the second option – reclassification of ISPs – the FCC's proposal of a case-by-case "commercially reasonable" inquiry suggests otherwise. The FCC may be unsuccessful in persuading the courts (both of law and of public opinion) that such a "commercially reasonable" inquiry is an adequate and appropriate way to preserve net neutrality.

The FCC has already established an  email address to receive public comment on the new proposed rules ahead of their release on May 15th, a clear sign that it expects a high volume of comments; as of May 7th, 22,619 comments have already been filed.13 Edge providers large and small, as well as consumers, could be drastically affected by the regulatory route that is ultimately taken to preserve net neutrality and should stay abreast of developments in the rulemaking process this year.

1 - Tom Wheeler, Chairman, FCC, Remarks at the National Cable and Telecommunications Association Cable Show (Apr. 30, 2014), available at http://www.fcc.gov/document/chairman-tom-wheeler-remarks-ncta.  
2 - See Verizon v. FCC, 740 F.3d 623, 628 (D.C. Cir. 2014).
3 - See 47 U.S.C. § 201 et seq. A "common carrier" is defined under the Act as "any person engaged as a common carrier for hire, in interstate or foreign communication by wire or radio . . . ." 47 U.S.C. § 153(10). See also Report to Congress, FCC, CC Docket No. 96-45, FCC 98-37 (Apr. 10, 1998), at 8, 37-41, available at http://transition.fcc.gov/Bureaus/Common_Carrier/Reports/fcc98067.pdf (explaining the FCC's position that Internet access providers should be considered distinct from "telecommunications" service providers and thus not be subjected to common carrier regulations)
4 - FCC, Declaratory Ruling and Notice of Proposed Rulemaking, GN Docket No. 00-185, FCC 02-77 (Mar. 15, 2002), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-02-77A1.pdf.
5 - Verizon, 740 F.3d at 649-650, 656-58 (holding that the FCC's imposition of anti-discrimination and anti-blocking rules on ISPs impermissibly regulated them as common carriers per se, contrary to the FCC's own binding classifications.)
6 - Id. at 629 (citing the FCC's "Open Internet" Report and Order, GN Docket No. 09-191, FCC 10-201 (Dec. 23, 2010), available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-10-201A1.pdf, parts of which the court vacated for the reasons described above).
7 - Id. at 651.
8 - See id. at 630-31, 636-37, 657-58. The court implicitly invited the FCC to pursue the route of reclassifying ISPs as common carriers in order to preserve net neutrality and may even have considered that to be the only way the FCC could enforce non-discrimination provisions on ISPs.
9 - Wheeler, Finding the Best Path Forward to Protect the Open Internet, OFFICIAL FCC BLOG (Apr. 29, 2014), available at http://www.fcc.gov/blog/finding-best-path-forward-protect-open-internet.
10 - Id.
11 - Verizon, 740 F.3d at 652 (internal citations and quotations omitted).
12 - Id. at 657 ("If the Commission will likely bar broadband providers from charging edge providers for using their service, thus forcing them to sell this service to all who ask at a price of $0, we see no room at all for individualized bargaining.") (internal citations and quotations omitted).
13 - FCC, Most Active Proceedings, available at http://www.fcc.gov/rulemaking/most-active-proceedings (updated weekly).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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