Appeals court strikes down "net neutrality" rules as executive overreach

Yesterday’s oral arguments on the recess-appointment issue demonstrated that the Supreme Court may be ready to pull the reins sharply on the Obama administration’s exercise of power. Today, the DC Court of Appeals did the same thing.  In a unanimous decision (with some dissent on the justification), the court invalidated the Net Neutrality rules imposed by the FCC when Congress refused to approve them:

By classifying Internet access as an “information service” as opposed to a “telecommunications service” — which is the classification used for traditional telephone companies — the FCC cannot impose its “anti-discrimination” and “anti-blocking” rules on Internet providers, the court said.

“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.”

The decision is blow to President Obama, who made net neutrality a campaign pledge in 2008, and erases one of the central accomplishments of former FCC Chairman Julius Genachowski, who pushed the “Open Internet” order.

The order does give the FCC some daylight on rewriting regulations, but that will require the FCC to significantly rethink its broad classifications and regulatory approach, at least according to The Hill’s reporting.  FCC chair Tom Wheeler said he will consider an appeal to the Supreme Court, but he may want to first read Judge Silberman’s partial dissent, especially its conclusion:

The Commission asserts – and the majority accepts – that broadband providers act as “gatekeepers” because each one has a so-called “terminating monopoly” over access to particular end users. These are terms, largely invented,7  the economic significance of which the Commission does not explain. All retail stores, for instance, are “gatekeepers.” The term is thus meaningful only insofar as the gatekeeper by means of a powerful economic position vis-a-vis consumers gains leverage over suppliers.8  The Commission made no effort to construct an analytic framework to measure this supposed gateway advantage – it is a rather slippery concept – nor did it adduce evidence to establish the economic power it would supposedly afford all broadband providers against all edge providers. …

On the other hand, the Commission asserts that broadband customers may have few alternatives or they may be locked into long-term contracts with early-termination fees. To be sure, some difficulty switching broadband providers is certainly a factor that might contribute to a firm’s having market power, but that itself is not market power. There are many industries in which switching between competitors is not instantly achieved, but those industries may still be heavily disciplined by competitive forces because consumers will switch unless there are real barriers. By pointing to potential difficulties consumers may encounter switching broadband providers, the Commission is simply implying that broadband providers have market power (market power lite?), without actually examining if and where they do. …

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. The Commission does not have authority to grant such a favor.

The “rent seekers” in this case are Google and Netflix, who worry that carriers will charge more for transmitting their products because, er, it costs more in terms of bandwidth to do so.  That opinion may carry a lot of weight at the next level, especially with a Supreme Court growing increasingly suspicious of executive-branch overreach as it is. A harsher ruling from above may close off the regulatory avenue of escape this decision seems to allow. On the other hand, this ruling effectively stops Net Neutrality enforcement immediately (unless stayed), and it will take some time for the FCC to rejigger its regulations to meet the appellate court’s scrutiny. Wheeler may decide that discretion is the better part of valor, and leave bad enough alone.

Commissioner Ajit Pai wants the FCC to stop altogether:

For the second time in four years, the D.C. Circuit has ruled that the FCC exceeded its authority in attempting to regulate the Internet. It is time for the Commission to take no for an answer. Unless Congress acts, we should stay our hand and refrain from any further attempt to micromanage how broadband providers run their networks. We should focus on removing regulatory barriers to broadband deployment, not imposing unnecessary rules that chill infrastructure investment.

That would at least be a refreshing change, yes.