February 10, 2011

February 10, 2011 | Commentary on Regulation

Net Neutrality and the Courts: The FCC’s Shaky Legal Case for Internet Regulation

Can government lawyers face sanctions for defending their agency’s actions in court? It’s an unlikely prospect, but attorneys for the Federal Commission may be having some sleepless nights as they contemplate their upcoming defense of the FCC’s new “net neutrality” rules.           

The FCC’s regulations, adopted in the waning days of 2010, essentially require Internet service providers to treat all traffic on their networks equally. This calls into question many techniques that providers use to keep communication flowing smoothly -- and it effectively bans premium service offerings. The rules were met with skepticism by many in Congress, who have launched efforts to rescind, or at least defund, the rules.

The FCC, however, looks to face an even bigger challenge in the courts, where the net neutrality rules have been challenged by both Verizon Communications and wireless provider Metro PCS. Their claim is simple: nothing in any statute gives the agency authority over the Internet.

It’s an embarrassing lack of jurisdiction that the FCC has danced around for years. There is some precedent for the agency to assume “ancillary” jurisdiction over industries services over which it has no specific authority. In the 1960s, for instance, it was allowed to regulate cable TV, because of its effect on broadcast television. But courts today are rightly more skeptical of allowing such close-is-good-enough-to-count jurisdiction.

Just last year, in fact, a federal court rejected an FCC attempt to enforce neutrality principles similar to those adopted in December, rejecting the agency’s claim of ancillary jurisdiction.

The Commission says that the problems have now been solved. Yet, a look at the agency’s written report adopting the rules shows there’s not much new meat in the legal stew.

The primary legal argument now rests on a provision of the Communications Act dealing with “advanced telecommunications incentives.” Added in 1996, the provision -- section 706 of the act -- states that the FCC “shall encourage” the deployment of “advanced communications capabilities,” This, the FCC said, gives it the necessary authority to regulate.

Or does it? First, the FCC’s reading of the critical language is at odds with the intent of section 706. The provision was adopted as part of the Telecommunications Act, and was meant to spur the FCC to reduce regulation, not increase it.

Second, there’s nothing in section 706 that actually grants the FCC any new powers, as opposed to simply directing it to use its existing authority. In fact, the agency itself in 1998 concluded that 706 granted it no new powers.

In any case, it’s more than a stretch for the FCC to say that net neutrality rules are needed to encourage the build-out of broadband networks. More likely, imposing regulation on networks would deter investment and build-out, not encourage it. And it’s an argument the FCC itself has declined to make until now. Even the FCC’s 2009 “National Broadband Plan,” the most comprehensive report on broadband growth ever compiled by the agency, did not include net neutrality among its dozens of recommendations.

The commission offered several other possible sources of authority, including its power to license spectrum users and its authority to regulate telephone service, but these are no more persuasive. The FCC’s case for regulation simply does not hold water.

So why did FCC Chairman Julius Genachowski move forward with the rules?

Perhaps it was a Hail Mary pass, in hopes of a favorable bounce into a friendly court willing to stretch the law. Perhaps the chairman hoped to avoid court altogether. Many providers, such as AT&T, in fact have taken a pass on litigation, convinced the rules could be even worse.

It wouldn’t be the first time an agency exceeded its authority without consequence. Only two years ago, the Treasury Department granted TARP money to Detroit, exceeding the clear limits in the TARP law. No one had standing to sue, so Treasury was never held to account.

The FCC probably won’t be so lucky. Unless it manages to get an unusually sympathetic set of judges, the regulations will be struck down. That’s assuming Congress doesn’t do so first. This likely outcome is no bad thing. The economic case for these rules is as shaky as the legal case. Blocking them will be win for consumers. It will also be a win for the rule of law, underscoring the principle that regulators too must follow the rules.

James Gattuso is a senior fellow at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in Bloomberg