A Troubling New Legal Standard for Section 706…

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Last week, the D.C. Circuit in Verizon v. FCC issued its much-anticipated ruling on the Federal Communications Commission’s Open Internet Order.  In this decision, the court found that because the FCC had determined that broadband is not being deployed on a reasonable and timely basis to all Americans, Section 706 of the 1996 Telecommunications Act vests the agency “with affirmative authority to enact measures encouraging the deployment of broadband infrastructure” and, by extension, the power “to promulgate rules governing broadband providers’ treatment of Internet traffic.” (Slip Op. at 4.)  While the court remanded both the “no blocking” and “non-discrimination” portions of the Open Internet Order, make no mistake:  this decision is a significant victory for the FCC.  By accepting Section 706 as an independent grant of jurisdiction, the court has greatly expanded the agency’s regulatory authority over the Internet and over broadband service providers.

Indeed, Verizon v. FCC was a tremendous victory for network neutrality generally, settling, at least from a precedential perspective, the longstanding dispute about whether such regulation is even needed.  As stated by the court, not only did “nothing in the record gives us any reason to doubt the Commission’s determination that broadband providers may be motivated to discriminate against and among edge providers” (Slip Op. at 36-37), but that that the FCC was also correct to find that broadband service providers “have the technical and economic ability to impose such restrictions.”  (Id.)  In fact, the court went so far as to uphold the Commission’s findings that given high switching costs and limited competitive alternatives, broadband service providers act in the role of a “gatekeeper” and have a “terminating monopoly” with respect to edge providers who might seek to reach end-user subscribers.  (Id. at 38-39.)  And to demonstrate that such findings were not “merely theoretical”, the court pointed to the Commission’s highlighting of a total of four prior instances of purported discrimination. (Id. at 42.) 

However, a finding that broadband providers have both the incentive and ability to engage in discriminatory conduct against edge providers is not sufficient to invoke Section 706.  And so, the court went the additional step by buying the FCC’s “virtuous cycle” theory of broadband investment—i.e., edge providers create demand for new supply from the core network suppliers; ergo, disruption of this new demand deters additional investment—which the court determined was “uncontroversial”, “rational” and grounded in “substantial evidence.”  (Id. at 34.)  Indeed, the D.C. Circuit specifically found that the Commission had “adequately supported and explained its conclusion that, absent rules such as those set forth in the Open Internet Order, broadband providers represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment.” (Id. at 37.)  Accordingly, by giving its blessing to the populist notion that broadband service providers can never be trusted, the court has now provided the Commission with a sufficient legal cover for the agency to exercise authority under Section 706.  (Of course, while one may question the veracity of the Commission’s “virtuous cycle” theory and whether broadband service providers actually do have the incentive to engage in strategic anticompetitive conduct that would lead to a reduction in their incentive to invest (they likely do not), it seems a bit pointless now.) 

But here’s what really gets me about the Verizon decision:  While the court apparently did not have a problem with the Commission’s “suspicious” decision to reverse its prior factual findings from previous Section 706 Reports (Slip Op. at 31), the court in Verizon did not carefully address the question of whether the FCC’s stated definition of “reasonable and timely” was lawful (presumably because nobody raised this argument before the court).  Had the court more carefully focused on this issue, perhaps we would be looking at a different result.  

That is to say, in its Sixth Annual 706 Report, the FCC changed the definition of  “reasonable and timely” to “ubiquitous and now” (i.e., the lack of ubiquity at the time the FCC issued its Section 706 Report).  As we demonstrated here and here, however, the FCC deliberately ignored its own financial analysis conducted as part of its National Broadband Plan which found that ubiquitous availability using wireline or terrestrial wireless services is unreasonably costly.  On top of that, we showed how the agency rejected the National Broadband Plan’s recommendation that it should consider using satellite, finding that such service to be inferior.  Yet, in a blog I wrote last year entitled The FCC Contradicts Their Facts (Again) To Justify Expanded Broadband Regulation, I pointed out that in the FCC’s 2013 Measuring Broadband America Report, the FCC suddenly found that satellite broadband was the greatest thing since sliced bread. So, with the Commission’s admission that satellite will, in fact, now “support many types of popular broadband services and applications,” the FCC has plainly conceded that the major factual predicate for its definition of “reasonable and timely” under Section 706 is no longer true.   

In sum, while the Verizon decision greatly expands the regulatory power of the FCC on the basis that broadband service providers have both the ability and incentive to disrupt the virtuous cycle of investment, the fact that the factual predicate for the Open Internet Order rests upon gerrymandered evidence leaves a bitter taste in my mouth.  What will be interesting to watch for is whether a future Commission has the integrity to sacrifice the agency’s new-found Section 706 jurisdiction to a more rigorous (and honest) look at the evidence. 

Until that day comes, however, let’s hope the current FCC uses its Section 706 authority wisely.