Verizon v. Federal Communications Commission

For the second time in four years, we are confronted with a Federal Communications Commission effort to compel broadband providers to treat all Internet traffic the same regardless of source—or to require, as USCA Case #11-1355 Document #1474943 Filed: 01/14/2014 Page 3 of 81

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it is popularly known, "net neutrality.” In Comcast Corp. v. FCC, 600 F.3d 642 (D.C. Cir. 2010), we held that the Commission had failed to cite any statutory authority that would justify its order compelling a broadband provider to adhere to open network management practices. After Comcast, the Commission issued the order challenged here—In re Preserving the Open Internet, 25 F.C.C.R. 17905 (2010) ("the Open Internet Order”)—which imposes disclosure, anti-blocking, and anti-discrimination requirements on broadband providers. As we explain in this opinion, the Commission has established that section 706 of the Telecommunications Act of 1996 vests it with affirmative authority to enact measures encouraging the deployment of broadband infrastructure. The Commission, we further hold, has reasonably interpreted section 706 to empower it to promulgate rules governing broadband providers' treatment of Internet traffic, and its justification for the specific rules at issue here—that they will preserve and facilitate the "virtuous circle” of innovation that has driven the explosive growth of the Internet—is reasonable and supported by substantial evidence. That said, even though the Commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates.

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.

Because the Commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order.

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I.

Understanding this case requires an understanding of the Internet, the Internet marketplace, and the history of the Commission's regulation of that marketplace.

Four major participants in the Internet marketplace are relevant to the issues before us: backbone networks, broadband providers, edge providers, and end users. Backbone networks are interconnected, long-haul fiber-optic links and high-speed routers capable of transmitting vast amounts of data. See In re Verizon Communications Inc. and MCI, Inc. Applications for Approval of Transfer of Control, 20 F.C.C.R. 18433, 18493 ¶ 110 (2005). Internet users generally connect to these networks—and, ultimately, to one another—through local access providers like petitioner Verizon, who operate the "last-mile” transmission lines. See Open Internet Order, 25 F.C.C.R. at 17908, 17915 ¶¶ 7, 20. In the Internet's early days, most users connected to the Internet through dial-up connections over local telephone lines. See In re Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 17 F.C.C.R. 4798, 4802–03 ¶ 9 (2002) ("Cable Broadband Order”). Today, access is generally furnished through "broadband,” i.e., high-speed communications technologies, such as cable modem service.

See In re Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, 25 F.C.C.R. 9556, 9557, 9558–59 ¶¶ 1, 4 (2010) ("Sixth Broadband Deployment Report”); 47 U.S.C. § 1302(d)(1). Edge providers are those who, like Amazon or Google, provide content, services, and applications over the Internet, while end users are those who consume edge providers' content, services, and applications.

See Open Internet Order, 25 F.C.C.R. at 17910 ¶ 13. To pull the whole picture together with a slightly oversimplified USCA Case #11-1355 Document #1474943 Filed: 01/14/2014 Page 5 of 81

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example: when an edge provider such as YouTube transmits some sort of content—say, a video of a cat—to an end user, that content is broken down into packets of information, which are carried by the edge provider's local access provider to the backbone network, which transmits these packets to the end user's local access provider, which, in turn, transmits the information to the end user, who then views and hopefully enjoys the cat.

These categories of entities are not necessarily mutually exclusive. For example, end users may often act as edge providers by creating and sharing content that is consumed by other end users, for instance by posting photos on Facebook. Similarly, broadband providers may offer content, applications, and services that compete with those furnished by edge providers. See Open Internet Order, 25 F.C.C.R. at 17915 ¶ 20.

Proponents of net neutrality—or, to use the Commission's preferred term, "Internet openness”—worry about the relationship between broadband providers and edge providers.

They fear that broadband providers might prevent their end-user subscribers from accessing certain edge providers altogether, or might degrade the quality of their end-user subscribers' access to certain edge providers, either as a means of favoring their own competing content or services or to enable them to collect fees from certain edge providers. Thus, for example, a broadband provider like Comcast might limit its end-user subscribers' ability to access the New York Times website if it wanted to spike traffic to its own news website, or it might degrade the quality of the connection to a search website like Bing if a competitor like Google paid for prioritized access.

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Since the advent of the Internet, the Commission has confronted the questions of whether and how it should regulate this communications network, which, generally speaking, falls comfortably within the Commission's jurisdiction over "all interstate and foreign communications by wire or radio.” 47 U.S.C. § 152(a). One of the Commission's early efforts occurred in 1980, when it adopted what is known as the Computer II regime. The Computer II rules drew a line between "basic” services, which were subject to regulation under Title II of the Communications Act of 1934 as common carrier services, see 47 U.S.C. §§ 201 et seq., and "enhanced” services, which were not. See In re Amendment of Section 64.702 of the Commission's Rules and Regulations, 77 F.C.C.2d 384, 387 ¶¶ 5–7 (1980) ("Second Computer Inquiry”). What distinguished "enhanced” services from "basic” services was the extent to which they involved the processing of information rather than simply its transmission.

Id. at 420–21 ¶¶ 96–97. For example, the Commission characterized telephone service as a "basic” service, see id. at 419 ¶ 94, because it involved a "pure” transmission that was "virtually transparent in terms of its interaction with customer supplied information,” id. at 420 ¶ 96. Services that involved "computer processing applications . . . used to act on the content, code, protocol, and other aspects of the subscriber's information”—a definition that encompassed the services needed to connect an end user to the Internet—constituted enhanced services. Id. at 420 ¶ 97.

By virtue of their designation as common carriers, providers of basic services were subject to the duties that apply to such entities, including that they "furnish . . . communication service upon reasonable request,” 47 U.S.C. § 201(a), engage in no "unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services,” id. § 202(a), and charge "just and reasonable” rates, id. USCA Case #11-1355 Document #1474943 Filed: 01/14/2014 Page 7 of 81

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§ 201(b). Although the Commission applied no such restrictions to purveyors of enhanced services, it imposed limitations on certain entities, like AT&T, which owned the transmission facilities over which enhanced services would be provided. Second Computer Inquiry, 77 F.C.C.2d at 473–74 ¶¶ 228–29. These restrictions included, most significantly, requirements that such entities offer enhanced services only through a completely separate corporate entity and that they offer their transmissions facilities to other enhanced service providers on a common carrier basis. Id.

For more than twenty years, the Commission applied some form of the Computer II regime to Internet services offered over telephone lines, then the predominant way in which most end users connected to the Internet. See, e.g., In re Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, 17 F.C.C.R. 3019, 3037–40 ¶¶ 36–42 (2002). Telephone companies that provided the actual wireline facilities over which information was transmitted were limited in the manner in which they could provide the enhanced services necessary to permit end users to access the Internet. Id. at 3040 ¶ 42. They were also required to permit third-party Internet Service Providers (ISPs), such as America Online, to access their wireline transmission facilities on a common carrier basis. Id.

It was against this background that Congress passed the Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56. Tracking the Computer II distinction between basic and enhanced services, the Act defines two categories of entities: telecommunications carriers, which provide the equivalent of basic services, and information-service providers, which provide the equivalent of enhanced services. 47 U.S.C. § 153(24), (50), (51), (53); see National Cable & Telecommunications Ass'n v. Brand X Internet Services, 545

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U.S. 967, 976–77 (2005). The Act subjects telecommunications carriers, but not information-service providers, to Title II common carrier regulation. 47 U.S.C. § 153(53); Brand X, 545 U.S. at 975–76.

Pursuant to the Act, and paralleling its prior practice under the Computer II regime, the Commission then classified Digital Subscriber Line (DSL) services—broadband Internet service furnished over telephone lines—as "telecommunications services.” See In re Deployment of Wireline Services Offering Advanced Telecommunications Capability, 13 F.C.C.R. 24012, 24014, 24029–30 ¶¶ 3, 35–36 (1998) ("Advanced Services Order”). DSL services, the Commission concluded, involved pure transmission technologies, and so were subject to Title II regulation. Id. at 24030–31 ¶ 35. A DSL provider could exempt its Internet access services, but not its transmission facilities themselves, from Title II common carrier restrictions only by operating them through a separate affiliate (i.e., a quasi-independent ISP). Id. at 24018 ¶ 13.

Four years later, however, the Commission took a different approach when determining how to regulate broadband service provided by cable companies. Instead of viewing cable broadband providers' transmission and processing of information as distinct services, the Commission determined that cable broadband providers—even those that own and operate the underlying last-mile transmission facilities—provide a "single, integrated information service.” Cable Broadband Order, 17 F.C.C.R. at 4824 ¶ 41. Because cable broadband providers were thus not telecommunications carriers at all, they were entirely exempt from Title II regulation. Id. at 4802 ¶ 7.

For the forgoing reasons, although we reject Verizon’s challenge to the Open Internet Order’s disclosure rules, we vacate both the anti-discrimination and the anti-blocking rules.