D.C. Circuit Upholds FCC Open Internet Order

In a 2-1 decision, the U.S. Court of Appeals for the District of Columbia (D.C. Circuit) recently upheld an order by the Federal Communications Commission (FCC) to reclassify broadband access providers as telecommunications providers subject to common carrier regulation. The FCC’s decision was motivated by its support for “net neutrality,” which requires that all Internet content be treated equally regardless of content or source. Net neutrality precludes Internet Service Providers (ISPs) from providing priority service to content either because they themselves produced it or because the content provider paid for better service.

This decision was the third time in seven years that the D.C. Circuit has ruled on an appeal of the FCC’s attempts to support net neutrality. The FCC has continually sought different sources of authority to regulate ISPs. In its 2010 Open Internet Order (OIO), the FCC classified broadband services as regulated information services. The D.C. Circuit’s rejection of that approach led to the FCC’s 2015 OIO, reclassifying broadband service providers as common carriers. Although the court upheld this approach, the dissenting opinion contends that the 2015 OIO displays a disconcerting trend towards abandoning cost-benefit analysis and economic reasoning.

While some argue that the relationships between ISPs and content providers require no sector-specific rules and could be handled by the same antitrust laws as apply to other industries, the FCC was unlikely to take that approach. The FCC had three other alternatives to handling agreements to give priority service to some content: 1) case-by-case adjudication, with a presumption for such agreements; 2) case-by-case adjudication, with a presumption against such agreements, and 3) blanket prohibition on all prioritization. Case-by-case treatment has an advantage over blanket bans, as it allows legitimate business arrangements and reduces the chance of banning a procompetitive arrangement. The 2010 OIO elected the first option, but the 2015 OIO dismissed this as being too “cumbersome” to enforce. That statement is surprising, given that the FCC has adopted the case-by-case approach in other contexts, such as interconnection disputes.

Moreover, the FCC did not conduct a cost-benefit analysis of its new regulations. That is particularly disturbing because the 2010 OIO used economic models of two-sided platforms to show that zero-pricing rules banning paid prioritization, which were imposed in the 2015 OIO, had ambiguous welfare effects. Thus, the FCC has imposed regulations that have no clear economic justification, and the D.C. Circuit has allowed them the discretion to act this way.

Dr. P. Joseph Ahn has expertise in microeconomics, corporate strategy, and quantitative analysis, with particular focus on technology and media industries. His work has included estimating damages, analyzing proposed regulation, and advising on multi-national tax structure.