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Verizon Wins Net Neutrality Court Ruling Against FCC

By Andrew Zajac and Todd Shields
January 14, 2014 4:13 PM EST 112 Comments
Verizon Wins Appeal Against FCC’s Open-Internet Regulations
Verizon Wins Appeal Against FCC’s Open-Internet Regulations

Verizon Communications Inc. (VZ) won an appeals court challenge to U.S. equal treatment rules for the Internet that could leave companies such as Netflix Inc. and Amazon.com Inc. facing higher charges for the fastest service.

The U.S. Court of Appeals in Washington today sent the rules governing what’s known as net neutrality back to the Federal Communications Commission, saying the agency overreached in barring broadband providers from slowing or blocking selected Web traffic. The FCC rules, which the agency may attempt to rewrite, required high-speed Internet providers that use fiber- optic or other cable to treat all traffic equally and disclose their network practices.

U.S. Circuit Judge David Tatel, writing for a three-judge panel, said that while the FCC has the power to regulate Verizon and other broadband companies, it chose the wrong legal framework for its open-Internet regulations.

“Given that the commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such,” Tatel wrote.

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The FCC will consider appealing today’s decision, Chairman Tom Wheeler said in an e-mailed statement.

‘Open Platforms’

The agency will ensure “that these networks on which the Internet depends continue to provide a free and open platform for innovation and expression,” Wheeler, a Democrat, said.

The court rejected Verizon’s position that the FCC doesn’t have jurisdiction over broadband access, and at the same time the judges found the agency “could not impose last century’s common carriage requirements on the Internet,” Randal Milch, Verizon’s executive vice president, said in an e-mailed statement.

“Today’s decision will not change consumers’ ability to access and use the Internet as they do now,” Milch said. “The court’s decision will allow more room for innovation.”

The FCC rule, approved on a Democratic-led 3-to-2 vote in 2010, left more freedom for wireless providers.

The rule attracted criticism from the left and right ends of the political spectrum. Open-Internet advocates said it didn’t go far enough, and cited the lighter regulation of increasingly popular mobile services. Republicans, including members of Congress, called the rule an unjustified power grab.

Government Hands

“This ruling stands up for consumers and providers alike by keeping the government’s hands off the Internet,” Representative Fred Upton and Representative Greg Walden, both Republicans, said today in an e-mailed statement. Upton, of Michigan, is chairman of the Energy and Commerce Committee and Walden, of Oregon, heads its communications and technology subcommittee.

Representative Henry Waxman, the commerce committee’s top Democrat, said in an e-mailed statement that the FCC should act quickly “to exercise the authority the court has recognized.”

The FCC passed the rule after the appeals court in April 2010 decided the agency lacked authority to censure Comcast Corp. (CMCSA) for interfering with subscribers’ Internet traffic. That sent the FCC on a search for a legal justification, and the agency concluded it could rely on its broad power over communications.

Whether that foundation was adequate was a primary question in the case decided today by a three-judge panel that included circuit judges Laurence Silberman and Judith Rogers.

Rival Services

Proponents, including Web companies, say regulations are needed to keep Internet-service providers from interfering with rival video and other services. Those companies don’t pay today for what’s known as last-mile Web content delivery.

They say that without rules, Internet providers could favor wealthier, established players at the expense of startups, squelching innovation.

Craig Aaron, president of Free Press, a policy group based in Washington and Northampton, Massachusetts that advocates affordable universal Internet access, said the ruling enables broadband providers to “establish fast lanes for the few giant companies that can afford to pay exorbitant tolls and reserve the slow lanes for everyone else.”

Common Carrier

Michael Copps, a former Democratic FCC commissioner who voted for the rejected rules, urged the commission to put broadband service under the common carrier legal framework, which explicitly restricts discrimination on the basis of charges or services.

“Without prompt corrective action by the commission to reclassify broadband, this awful ruling will serve as a sorry memorial to the corporate abrogation of free speech,” Copps said in an e-mailed statement from Common Cause, for which he is an adviser.

Verizon, based in New York, told the appeals court on Sept. 9 that the FCC’s rules may make it more difficult to manage increasing network traffic, and would damp investment in more Internet capacity.

Verizon wants a “two-sided market” involving payment for Internet service by subscribers and by companies who want to reach them, Helgi Walker, a lawyer for Verizon, told the appeals panel.

“I’m authorized to state from my client today that but for these rules we would be exploring those types of arrangements,” said Walker, then with Wiley Rein LLP.

Infrastructure Investment

Silberman dissented in part from Tatel’s opinion, arguing that the FCC’s power to regulate broadband companies is limited to measures promoting competition in local telecommunications markets and to removing barriers to infrastructure investment.

The FCC engaged in “sheer speculation” about the potential harm resulting a lack of regulation, Silberman said in his dissent.

“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.

“This regulation 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,” Silberman wrote. “The Commission does not have authority to grant such a favor.”

Oral arguments in the case lasted almost two hours, three times longer than scheduled, reflecting both the stakes and the complexity of the issue.

The case is Verizon v. Federal Communications Commission, 11-1356, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporters on this story: Andrew Zajac in Washington at azajac@bloomberg.net; Todd Shields in Washington at tshields3@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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