FCC Not Likely To Surrender Following Comcast Defeat

The U.S. Court of Appeals for the District of Columbia decision in Comcast v. FCC – striking down the FCC’s Order prohibiting Comcast from discriminating against customers that download large video files – may seem like a significant defeat for the FCC, but it might turn out to be just the first skirmish in an escalating war.

The Court’s decision dealt a decisive blow to an argument used (once too often) by the FCC under Chairman Martin, attempting to ground the FCC’s jurisdiction on “ancillary authority.”  The Commission contended that it had the power to regulate ISPs from limiting consumer access to certain types of Internet content on a discriminatory basis (known as “net neutrality”), even though Congress has never given the FCC specific statutory authority to do so.  Rather, the Commission constructed a series of arguments that its regulatory power over the Internet – classified for the last decade by the FCC as an “information service” – derived from other statutory powers and congressional policy statements as to the FCC’s responsibilities. 

Conceding that Congress intended the FCC to have jurisdiction to keep pace with technological change, and that the Internet is the most important communications innovation of this generation, the D.C. Circuit nonetheless repeated its warning from prior cases:  “the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammeled freedom to regulate activities over which the statute fails to confer . . . Commission authority.”

Questions immediately turned to the fate of FCC’s recently-announced, broadly acclaimed, National Broadband Plan.   Some elements of the Plan are founded more squarely in statutory jurisdictional grants and confirmations of authority – such as reclaiming broadcast spectrum for broadband uses, enhancing use of broadband for public safety, improving use of broadband in schools, and ensuring better competition for consumer electronics devices to access multichannel video programming (such as cable, satellite, and telco television content) – and will not be hindered by the decision.

So, for example, the Commission’s agenda to spur new competition for set-top boxes and to require a neutral “gateway” device to network together television and Internet content in the home, will remain on the fast-track this year.  Other elements, however, such as accelerating the rollout of broadband service to rural areas and low-income citizens, consumer protection, and net neutrality, will need to find an alternative source of Commission authority. 

Among the potential losers in the net neutrality debate will be not just P2P services.  “Over the top” video services (third party video channels delivered over a cable ISP’s pipes) like Hulu, Joost, and YouTube, or alternative video storage and recommendation services like Boxsee or Sezmi, may find the cable companies erecting speed barriers or data limits to their competing video offerings. 

The next battleground will be the FCC itself.  The ink barely dried on the opinion before the Commissioners began baring their opposing positions on the most likely solution:  reclassifying Internet service as a “common carrier” communications medium, just like telephone service.  Commissioner Copps (appointed by Democrats) welcomed the end of “ancillary” authority and urged the Commission to quickly adopt this “Title II” reclassification strategy.  Commissioners McDowell and Baker (appointed by Republicans) opposed reclassification, and preferred to let the market regulate itself. 

Cable and Telco companies already have opened incursions on a second front – Capitol Hill.  Arguing that the real culprit is the current, often ineffective, 1996 Telecommunications Act, these stakeholders suggest that the FCC refrain from piecemeal action while Congress embarks on a multi-year odyssey to reform existing law. 

No matter which solution is chosen, undoubtedly the third theater of war will be the courts.  The FCC could choose to appeal the panel’s decision en banc, or seek certiorari to the Supreme Court.  Given an appeal strategy’s potential to delay the Broadband Plan, however, the FCC likely will undertake reclassification of Internet services as common carrier telecommunications – a move that will trigger a new round of appeals, but this time with a likely armada of ISPs as petitioners and Internet video services and consumer groups as intervenors.

Even if the FCC relents and lets the market decide, cable companies still may live to regret their victory over FCC jurisdiction.  As the Supreme Court concurring opinion observed in Pacific Bell Telephone Co.  v. linkLine Communications, Inc., the power of a regulatory authority to remedy allegedly anticompetitive conduct (there, predatory pricing) can potentially bar an antitrust claim:  “When a regulatory structure exists to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

So, what if Cox or Time Warner Cable gave preferences to their own video-on-demand offerings over transmissions by Netflix or CinemaNow?  Or what if Comcast, after its merger with NBC-Universal, restricted the speed or quality of competitors’ over-the-top services in favor of NBC-Uni-ownedHulu.com?  Such discriminatory practices ironically could leave them more vulnerable to antitrust suits by the many affected Internet services than if they had simply not contested the FCC’s claim of jurisdiction.  Which could mean: more plaintiff class actions, with potentially higher impact and less predictable results, than FCC regulation alone.