PLG Partner William Baker Publishes Article on FCC’s Net Neutrality Order with The International Association of Privacy Professionals

The following piece by PLG’s William Baker was posted to the International Association of Privacy Professionals’ (IAPP) Privacy Tracker in two parts on March 31 and April 2.  The post is reprinted in its entirety below with permission from the IAPP.

The FCC’s Net Neutrality Order Part 1: What It Says and How We Got Here

Privacy Tracker | Mar 31, 2015

The Federal Communications Commission’s (FCC’s) recent “Net Neutrality Order” is intended to shape the regulatory framework for broadband Internet access services for years to come. By now you are likely aware of the most important aspects of the order:

  • Both wireline and wireless broadband Internet access providers are reclassified as common carriers under Title II of the Communications Act;
  • The FCC adopted three specific “Open Internet” rules: No blocking, no throttling and no paid prioritization;
  • Sections 201 (just and reasonable rates), 202 (no unreasonable discrimination), 222 (customer privacy) and 208 (complaint process) will now apply to Internet service providers (ISPs);
  • Unreasonable interference with or unreasonable disadvantage to consumers or “edge” providers (such as Netflix, Google, Amazon or other websites or streaming services) is prohibited;
  • Because the order also determined that interconnection is part of broadband Internet access service, commercial arrangements for the exchange of traffic with a broadband Internet provider are subject to common carriage, but not to the Open Internet rules;
  • New “transparency” requirements mean broadband providers must always disclose promotional rates, all fees and surcharges and all data caps or allowances;
  • Broadband providers are permitted to engage in “reasonable network management” where justified by technical grounds, but the term does not include other business practices.

The FCC defines “broadband Internet access service” as a “mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints, including any capabilities that are incidental to and enable the operation of the communications service, but excluding dial-up Internet access service.”

To prevent circumvention of the new rules, the FCC swept within the definition any service that it finds to be providing a “functional equivalent” of broadband service. Excluded from the definition are enterprise services, virtual private network services, web hosting or data storage services, or to premises operators that offer broadband Internet access service (e.g., Starbucks, conferences, personal hotspots).

Background: The FCC’s History of Regulating Information Service Access Providers

Despite the controversy surrounding the Net Neutrality Order, it is consistent with several decades of FCC efforts to regulate facilities-based transmission providers in order to protect competition among services that connect on the “other end” of a transmission. In general, the FCC has sought to protect competition, first in long distance and now information services, by regulating the transmission provider (usually a local telephone company) to prevent it from discriminating in favor of, or cross-subsidizing, its own services.

As the order mentions, elements of the story date back to 1968 and the Carterfone decision, in which the FCC first opened the door to competition in devices that connect to the telephone network. For our purposes, such devices include modems.

But we’ll pick up the story in 1970, when the FCC initiated the Computer Inquiry proceedings to consider what rules would apply to the offering of computerized services by telephone companies, which came to be called “enhanced services.”

At a high level, the proceedings, which spanned 16 years, resulted in a regulatory framework that separated “enhanced” information services from the underlying transmission services to which they connected. The latter were regulated as common carriers under Title II of the Communications Act. The framework was designed primarily to prevent monopoly telephone services from favoring their own enhanced services either by cross-subsidization from monopoly ratepayers or by discriminating in how access was provided to enhanced services. Enhanced services were regarded as competitive and left unregulated.

During this same time, the Justice Department’s antitrust litigation against the Bell System came to an end resulting in AT&T divesting the regional Bell Operating Companies while retaining its long distance network. As part of that decree, the local Bell telephone companies were prohibited from providing most information services.

One consequence of this separation was a need for a new regulatory framework to govern how AT&T and emerging rival interexchange carriers (such as MCI and Sprint) accessed the local networks to originate and terminate calls. To that end, the FCC established a system of non-discriminatory “access charges” which required the local exchange carriers to charge the same rates to all interexchange carriers for equal quality connections. An important feature of the access-charge regime was a per-minute charge that long distance carriers were required to pay.

By the late 1980s, independent providers such as PRODIGY, CompuServe and America Online, as well as companies in such disparate businesses as alarm services, were beginning to offer innovative “online services.” Customers almost always accessed these services via a dial-up connection using a screeching modem. To the local telephone network, these enhanced service providers (ESPs) resembled long distance carriers because they used the local networks in similar ways.

Given this, it might have been logical to assess ESPs the same kind of usage-sensitive access charges, but ESPs fiercely opposed that idea on the grounds that per-minute charges would gravely hinder the development of online services. Ultimately, the FCC decided to exempt ESPs, including those that featured access to the new thing known as the Internet among their offerings, from the usage-sensitive access charges due to a desire not to harm the nascent online industry. The FCC thus established the concept that online services were not treated as long distance telephone carriers but rather as a category of end users.

The Telecommunications Act of 1996 significantly rewrote the legal environment. Among other things, it established new definitions of “information” services (essentially what the FCC called “enhanced” services) and telecommunications services. Congress also added Section 706, which directed the FCC to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans” by, as appropriate, “price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market or other regulating methods that remove barriers to infrastructure investment.”

It took only a few more years before transmission capabilities improved to such an extent that broadband services such as DSL and cable modems became widespread. These did not fit neatly into the paradigm of regulated dial-up to unregulated modem services of the 1990s.

Thus, in its Cable Modem Declaratory Ruling, the FCC found that cable broadband services were “information services” because they combined computer processing and information provision with a non-separable transmission component to form a “single, integrated service that enables the subscriber to utilize Internet access service.” On appeal, the 9th Circuit reversed, ruling that the transmission element constitutes a “telecommunications service” under the 1996 amendments. Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir. 2003). However, the Supreme Court reversed in National Cable and Telecommunications Association v. Brand X Internet Services, 545 U.S. 967, 980-81 (2005) (“Brand X”), holding that the FCC’s construction of ambiguous terms deserved deference.

In 2005 the FCC reclassified broadband DSL services—which until then were regulated as common carrier telecommunications services—as information services. That decision placed DSL services on the same basis as cable broadband services. It also meant that neither cable nor DSL providers were required to offer wireline broadband transmission separately from the integrated Internet access service.

Also in 2005, in an effort to protect users’ access to the Internet over the cable and DSL information services, the FCC issued an “Internet Policy Statement” declaring that, subject to “reasonable network management,” consumers had a right to:

(1)  “access the lawful Internet content of their choice;”

(2)  “run applications and use services of their choice;”

(3)  “connect their choice of legal devices that do not harm the network,” and

(4)  enjoy “competition among network providers, application and service providers and content providers.”

A few years later, the FCC declared that wireless broadband service was a private carrier service, not a “commercial mobile service” that could be subject to regulation as a common carrier. The FCC then conditioned its approval of the ABC/AT&T, Verizon/MCI and Comcast/NBC Universal mergers on adherence to these principles, which it also applied to a wireless broadband spectrum allocation.

As the Internet Policy Statement and the merger conditions suggest, by the mid-2000s, concerns began to arise that broadband providers might favor their own services, or disfavor others, to pressure edge providers for more lucrative carriage arrangements. The FCC in 2008 issued an order against Comcast for degrading users’ ability to access peer-to-peer networks, which the company claimed was necessary to manage network capacity. That order rested on the FCC’s so-called “ancillary” jurisdiction (jurisdiction reasonably necessary to carry out its statutory duties); however, in Comcast v. FCC, the Court of Appeals held that the FCC could not rely on its “ancillary” jurisdiction to enforce the Internet Policy principles against Comcast, —although it did not foreclose the possibility that the FCC might find other support for its enforcement.

In response, the FCC tried again, issuing an Order in 2010 that prohibited broadband providers from engaging in blocking and unreasonable discrimination and requiring transparency. It did not prohibit paid prioritization per se, but noted that the practice was potentially problematic. Although the U.S. Court of Appeals for the District of Columbia Circuit tossed out the agency’s Net Neutrality in rules in Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014), it paved the path for this month’s Order.

In particular, the Verizon court ruled that Section 706 gave the FCC authority to regulate broadband Internet service providers and upheld the agency’s position that rules such as the Open Internet rules were justifiable. However, the court ruled that the FCC lacked authority under Section 706 to establish the no blocking and antidiscrimination rules, because those treated broadband providers as common carriers, which was inconsistent with the FCC’s past classification of broadband services as “information” services. The Verizon court also found that applying the no blocking rule to mobile broadband services conflicted with the FCC’s earlier decision that mobile broadband is a private carrier service rather than a commercial mobile service.

The FCC then instituted a new, and very contentious, proceeding which culminated in the Net Neutrality Order. Spurred by public interest groups, more than four million public comments were filed in the proceeding. Even President Obama weighed in, calling for the agency to treat ISPs as common carriers.

The 2015 Net Neutrality Order

The FCC’s Order applies, as did its 2010 order, to broadband Internet services. The Order determined that changed circumstances now justify reclassifying broadband Internet access service is a “telecommunications service” subject to common carrier regulation. Factoring into this decision was the important “gatekeeper” role of wireline and wireless ISPs.

The FCC also determined that it would not enforce against ISPs many statutory and regulatory provisions normally applicable to common carrier services, using its unusual statutory authority to “forbear” from applying provisions of the Communications Act it deems not necessary to protect consumers. However, it did say that it would enforce sections 201, 202, and 208 (along with key enforcement provisions) of the Communications Act, which require just and reasonable rates, prohibit unreasonable discrimination and establish a complaint process.

The FCC concluded that broadband Internet access providers have the ability and incentives to discriminate in favor of certain services or to impair users’ access to services. For example, it concluded that Internet video is at risk from cable broadband operators because they compete directly with video services offered by the cable companies. It cited Comcast’s exempting of the Xfinity online video application on Xbox from Comcast’s data cap without a similar exemption for unaffiliated over-the-top video services as an example.

The Order applies the Open Internet rules to retail services, but while the FCC asserted jurisdiction over interconnection, it chose not to apply the Open Internet rules to interconnection.

As with the 2010 rules, this Order contains an exception for “reasonable network management” practices, specifically noting that paid prioritization would not be considered a means of managing a network.

In the next post, we’ll take a look at what may happen next and how the Order will affect different parts of the Internet community.

The FCC’s “Net Neutrality” Order Part 2: What Will Happen and What Will Be the Effect on the Internet Ecosystem

Privacy Tracker | Apr 2, 2015

At one level, the Federal Communication Commission’s (FCC’s)  Net Neutrality Order is undoubtedly correct. Broadband Internet access is in practice a public utility in a real sense. Many people today want ready and convenient access to their LTE or WiFi service just as they do to running water and electricity. And perhaps even more than they want access to television and radio, which are not common carrier services. (Just look at the number of attendees at IAPP conferences that demand WiFi access.)

The legal foundation of the FCC’s reclassification of broadband Internet services as common carriers is far more controversial. It is textbook law that a regulatory agency can change its interpretation of a law in response to changing circumstances, so long as it provides a reasoned basis for doing so. The FCC order, of course, has changed interpretation in a big way by treating the entirety of retail broadband Internet access as a common carrier service and extending that regime to wireless broadband services for the first time.

Whether the FCC has successfully threaded its way through the legal minefield outlined by the Brand X and Verizon cases, the Communications Act and the Administrative Procedures Act will ultimately be decided by the courts. The legal issues are a law professor’s dream. The dissenting commissioners alone raised numerous issues such as: whether the order was within the scope of the notice of proposed rulemaking; whether the agency acted properly in reclassifying broadband Internet access as a telecommunications service; whether it stretched the law by extending the reclassification to wireless broadband services despite Section 332, and whether it properly exercised its forbearance authority, to mention just a few. Parties challenging the order undoubtedly will look at the two dissenting statements as guides for how to proceed.

As of publication two appeals of the order have been filed, and there may be more. It may take a year for the cases to be scheduled, briefed, argued and decided by the Court of Appeals—maybe double that if the Supreme Court takes the case.

Unless an appellate court grants a stay, the FCC’s order will take effect 60 days after publication in the Federal Register (except for aspects requiring OMB approval pursuant to the Paperwork Reduction Act), thus becoming the law of the land. The order will affect different components of the Internet ecosystem differently.

Retail consumers

Firing up YouTube, playing video games, shopping and checking the weather online may well see little or no difference. Indeed, that is precisely the point. Most providers of retail Internet access have operated in a manner largely consistent with net neutrality. If ISPs are correct that instances of blocking, throttling and paid prioritization are rare to nonexistent, then the FCC’s prohibition of practices that do not currently take place should make no difference to a user’s experience.

Of course, to the degree any ISPs have, in fact, been engaged in such mischief or want to offer “walled gardens,” they no longer may do so. But it is unclear what actions ISPs will be able to take in the name of “reasonable network management.” And there is a risk that users may see higher bills because telecommunications services are subject to a variety of taxes to which information services are exempt.

ISPs

A number of ISPs do not really object to the concept of net neutrality (although some did). But even those that have no problem with net neutrality in general are concerned about the potential consequences of Title II reclassification. And, to be sure, these effects on broadband Internet service providers will not really be known until some time passes.

Many opponents of Title II reclassification (and a lesser number of opponents of net neutrality) contend that either would dampen the financial incentive to invest. The truth of this is difficult to assess. In theory any regulation that impinges on the ability to make money could dampen investment. Nonetheless, the ability of ISPs to make profitable investments in their networks probably has more to do with economic conditions and the demand for innovative services than with whether a regulatory regime is based on Title II or Section 706. The FCC’s order notes that investment in broadband was the greatest in the years 2010 to 2013, when net neutrality was in effect before being undone by the Verizon decision.

Although the order disclaims any interest in imposing price regulation on broadband ISPs, the dissenting commissioners and other critics note that banning paid prioritization is essentially setting a price for that service at zero. Will the FCC avoid the temptation to wade into other aspects of pricing?

There is also a concern, voiced particularly by dissenting Commissioner Pai, that the reclassification of ISPs as common carriers will result in higher costs for ISPs generally, and severely so for smaller ISPs. Again, however, it may be years before we know whether these fears are justified.

Internet websites and online services

Internet websites and online services, the “edge providers,” are big winners. Netflix might be the biggest winner of all. Under the order, they should not be faced with demands from ISPs for payment in exchange for priority transmission. New offerings should be equally as accessible to end users as established websites.

Will net neutrality eventually lead to a world where broadband Internet distribution of video programming replaces cable systems? HBO and CBS have already announced plans for broadband delivery, and ESPN already does so for many events. Many network programs are available online shortly after being aired. Are we witnessing the early stages of the demise of cable as the primary means of distributing video?

Internet backbone/backhaul services

What the order means for interconnected Internet backbone/backhaul services is less clear. In the order, the FCC determined that those services come within the definition of telecommunications services subject to common carrier status, but chose not to apply any regulations at this time. Presumably, those arrangements will continue on as they have been conducted for many years, but the possibility of FCC oversight through the Section 208 complaint process or otherwise leaves room for a more intrusive regulatory approach in the future.

Privacy Regulation and the Federal Trade Commission

IAPP members may be particularly interested in the ramifications of net neutrality for the privacy practices of ISPs under Title II. Because the Federal Trade Commission (FTC) currently does not have jurisdiction over “common carriers,” the order may prevent the FTC from exercising regulatory oversight over broadband Internet access. Such jurisdiction will now reside in the FCC.

How this will affect the privacy rules applicable to broadband ISPs is not yet known. Unlike the FTC, whose authority over privacy arises under Section 5, the FCC has direct statutory authority to protect Customer Proprietary Network Information (CPNI)—information about a user known only because of the carrier-customer relationship—held by a common carrier under Section 222 of the Communications Act. In addition, while the FTC can bring an enforcement action only if it identifies a deceptive statement or can demonstrate harm, the FCC has rulemaking authority.

The FCC has adopted fairly complex regulations governing how carriers handle CPNI. However, the order determined not to apply those regulations to ISPs. Instead, the FCC will consider how best to apply Section 222 to ISPs in a new proceeding. It also plans to conduct a workshop this month to address broadband ISP privacy practices.

Presumably that proceeding will consider, among other things, what rules may apply to activities such as deep packet inspection (DPI) or Verizon Wireless’s “Supercookie.” Indeed, the order specifically noted that DPI could be harmful to wireless consumers. If the FCC decides to apply an opt-in regime to data collection or sharing, the results could be dramatic.

Some FTC officials bemoan that the order will hinder their ability to be the principal U.S. consumer protection regulator and are using it to press for removal of the common carrier exception to their jurisdiction. Whether Congress will vote to do so remains to be seen. Of course, the two agencies do cooperate in enforcing other laws, including the Do-Not-Call registry and telemarketing generally, and they presumably can coordinate their Internet activities as well.

Certainly the FCC has shown itself capable of enforcement action under Title II. Attentive IAPP members will recall that, last October, the FCC issued enforcement actions against two telecommunications carriers for failing to (a) use reasonable security measures to protect consumer data and (b) notify consumers of security breaches. The FCC determined that those failures violated Section 201, a Title II provision.

Congress

In Congress, expect noise but probably little real action. Republicans in Congress are displeased by the FCC’s reclassification of Internet access services, but their options are limited. Legislation to overturn the order directly would be unlikely to override a presidential veto even if it could pass the Congress, because the order has strong Democratic support. A series of oversight hearings are already underway, and there may be some efforts to restrict the agency’s ability to implement the new regime through riders on appropriations legislation or direct legislation, but these are unlikely to thwart the order.

On the other hand, the reclassification of ISPs may well spur renewed legislative interest in a comprehensive rewrite of the Communications Act. This is an idea that has been germinating in both parties for some time, and the order may cause legislators to push such an overhaul with more purpose. However, a broad rewrite of the Communications Act would involve many interested parties and conflicting viewpoints and may well be difficult to achieve anytime soon.

Finally, as noted, it may cause Congress to consider whether the current common carrier exception to the FTC Act should remain in place, a matter which both the FCC and FTC have said should be examined.

Stay tuned!