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On Thursday, May 15, 2014, the Federal Communications Commission will meet to consider initiating a process to impose “net neutrality” regulations. Net neutrality is the idea that Internet service providers, such as Verizon and Comcast, should treat all internet traffic equally. For years, the principle thrived under market forces and the light-touch regulatory approach of both Democrat and Republican administrations. To maintain a high quality of service on networks, ISPs wanted to implement a tiered service structure. In 2010, however, the FCC abandoned its long-standing precedent and issued overreaching rules — called the Open Internet Order — subjecting broadband providers to tighter regulations. After extensive litigation, the D.C. Circuit Court of Appeals threw out key provisions of those rules in January. The FCC’s new proposed regulations show that it still harbors ambitions to be the gatekeeper of the Internet.

Innovation and Job Growth from a Hands-Off Approach

The Internet economy has driven incredible innovation and job growth. In 2010, when the FCC last proposed net neutrality regulations, the Internet accounted for $684 billion, or 4.7 percent of all U.S. economic activity, according to a study by Boston Consulting Group. It predicts the Internet will grow about 10 percent a year through 2016. Internet architecture has allowed inventive companies such as Twitter, Amazon, and Netflix to reimagine the way Americans learn, speak, and consume.

The growth of the Internet has resulted from a “hands-off approach,” according to FCC Commissioner Michael O’Rielly. The light regulatory touch included classifying broadband providers as “information services” (lightly covered by Title I of the Communications Act) instead of “telecommunications services” (more stringently covered by Title II) to avoid imposing monopoly-era regulations on broadband. Congress never intended to provide the FCC comprehensive regulatory authority over the Internet, and in fact established as the policy of the United States “to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation.” By creating net neutrality regulations or reclassifying broadband under Title II, the government would abandon this policy and stifle innovation among content (or “edge”) providers, such as Facebook and ESPN, and deter investment in new broadband technologies.

FCC Revives Net Neutrality Rules with Newfound Legal Authority

The FCC’s new proposed rule comes in direct response to the D.C. Circuit Court of Appeals decision, Verizon v. FCC, which struck down the commission’s previous attempt to regulate how ISPs treat Internet traffic passing through their networks. It rejected the FCC’s attempts to give itself new authority by applying Title II-like rules to ISPs.

Despite the court’s rejection of the net neutrality regulations, it found that the FCC had some general power to regulate broadband Internet service under section 706 of the Telecommunications Act of 1996. The new interpretation of Section 706 places all lightly regulated “information services” at risk of being subject to heavy FCC oversight. The Verizon holding invited the FCC to propose net neutrality rules on this different, untested legal footing. 

FCC Chairman Tom Wheeler accepted the court’s invitation and wrote an April 24, 2014, blog post articulating the principles of the new FCC Open Internet Rules. According to Chairman Wheeler, the commission will propose:

1. That all ISPs must transparently disclose to their subscribers and users all relevant information as to the policies that govern their network;
2. That no legal content may be blocked; and
3. That ISPs may not act in a commercially unreasonable manner to harm the internet, including favoring traffic from an affiliated entity.

After facing criticism from Democrats about the proposal’s allowance of “fast-lanes” on the “last-mile” of the Internet highway, Wheeler has indicated the proposed rule will “specifically ask whether Title II or Section 706 of the Communications Act is the best way to address the matter of Internet openness.” Reports also suggest that Wheeler will propose language that allows the FCC to examine deals between broadband providers and edge providers.

Government Permission for Commercial Transactions

The FCC should not be empowered to dictate the terms and prices of Internet usage. But that is exactly the effect of Chairman Wheeler’s proposed regulations. Rules that prohibit businesses from acting in a “commercially unreasonable manner,” as Wheeler has proposed, invite the government to interfere in commercial transactions. The meaning of “reasonable” will create marketplace and legal uncertainty for years, and Wheeler apparently envisions the FCC making such judgments on a case-by-case basis. Thus, these rules will inhibit innovation, stifle the marketplace, and create litigation based on unclear language.

The proposal also raises significant concerns that if the FCC has independent authority to regulate the internet, it will likely seek a greater expansion of its power over this integral part of the U.S. economy. In addition to broadband providers, edge providers may be affected by the court’s interpretation of Section 706 of the Telecommunications Act as a newly created authority to govern the Internet. For instance, as O’Rielly has noted, the FCC may use this novel power to impose nondiscrimination regulations on “Google’s or Microsoft’s search algorithms or Apple’s operating system.” Moreover, it is foreseeable that the FCC will interpret Section 706 to regulate other areas where it does not have clear statutory authority such as cybersecurity.

Finding the Right Regulatory Balance

Federal Trade Commissioner Joshua D. Wright previously criticized the FCC for its Open Internet Order and called net neutrality “strikingly poor policy when analyzed from a consumer welfare perspective.” There are legitimate concerns about competition and consumer protection. At this point, the FTC is well-equipped to handle these challenges. Additionally, the FTC may be better positioned to advance flexible enforcement to ensure consumers and businesses are not harmed by broadband provider management of networks.

Instead of mandating ill-advised regulations, the FCC should work with Congress to develop clear statutory authority. Due to the changing landscape of the marketplace, Congress could look at potential options to reform the Communications Act to adapt to a quickly evolving and robust technology sector.