Children try out Samsung laptops at a Samsung D'light showroom in Seoul, March 27, 2012.
Children try out Samsung laptops at a Samsung D'light showroom in Seoul, March 27, 2012.
Bobby Yip / Reuters

For almost a decade, net neutrality, or the equal treatment of all websites by Internet Service Providers (ISPs), has been one of the most contentious technology policy issues in the United States. On one side, ISPs have argued that websites that want priority of service should be able to pay for it, much as first-class flyers or FedEx customers pay for better or quicker service. On the other side are most web-based content providers, which want to be treated equally.

In 2010, the Federal Communications Commission (FCC) issued rules under Section 706 of the Communications Act of 1934 that endorsed broad principles of net neutrality but stopped short of a blanket ban on paid priority. Complaints against ISPs, the rules clarified, were to be adjudicated on a case-by-case basis, with the presumption that any arrangement in which a website paid for premium service would violate the FCC’s new rules.

After a legal challenge brought by Verizon in January 2014, the U.S. Court of Appeals for the D.C. Circuit overturned the rules, finding them to be tantamount to common carriage, which obligates carriers to furnish service to all comers at reasonable and nondiscriminatory rates. The court left the FCC with two paths. It could reverse the presumption that paying for service would violate FCC rules and place the initial burden of proof instead on the complaining content provider—all while continuing to ground the rules under 706. Or it could leave the presumption in place and ground the rules under the tougher regulatory system envisioned by Title II of the Communications Act, meant to apply to common carrier monopolies, such as the old AT&T.

The FCC opted for the first, and got to work readying a new set of rules. But in February 2015, after U.S. President Barack Obama all but ordered the independent commission to change course, it opted for a third path: new rules under Title II. These new rules jettisoned the case-by-case process and established a full prohibition on paid priority.

ISPs challenged the commission’s new rules immediately, with oral arguments held in December 2015. The D.C. Circuit will likely make a decision on the matter very soon. The stakes could not be higher: a win for the FCC means that the smallest-edge providers will never be beholden to the whims of an ISP; a loss means that ISPs would be free to ask the largest-edge providers to make contributions to the funding of broadband networks. Since the decision will come well before the election, it will have significant political consequences as well.

Federal Communications Commission (FCC) hearing room is seen in Washington, February 26, 2015.
Federal Communications Commission (FCC) hearing room is seen in Washington, February 26, 2015.
Yuri Gripas / Reuters
First, no matter what the court decides, it will anger someone. The decision will surely become a political football during this wild political season. On the Republican side, candidate Ted Cruz has renounced the FCC’s order and Donald Trump has yet to take a position. On the Democrat side, Hillary Clinton has vowed to enforce “strong net neutrality.”

Second, the D.C. Circuit’s decision in favor of the FCC’s reclassification could set in motion a slew of state-based universal service fees (USF) on broadband service. USF is presently assessed at both the federal and state level on long-distance voice services, a shrinking rate base that cannot sustain the growing demands the FCC is placing on it to increase broadband penetration. Although the FCC does not need to reclassify Internet service to expand the federal revenue base to include broadband—it has authority to do so under section 254(d) of the Communications Act—the states cannot subject broadband to existing state-based telecom fees until broadband is reclassified as a telecom service. Recognizing this dynamic, the FCC preempted states in its 2015 order from moving forward with their own telecom-based fees on broadband unless and until the FCC imposed such fees at the federal level—a decision that is being held up until the November election. A broadband tax at the federal and state level would soon become additional political footballs.

Given the stakes, it is worth handicapping five possible outcomes for the court’s decision.

In the first scenario, the court finds that the process by which the 2015 order was developed violated the “fair notice” requirements of the Administrative Procedure Act, which require agencies to open the regulatory process to public scrutiny.

A recent Senate report strongly criticized the FCC for seeming to abandon, at the last minute, a less restrictive version of the order after the president took the unprecedented step of posting a video on the White House website endorsing the reclassification of broadband service under Title II. Judge David Tatel, one of the judges hearing the case, aggressively questioned the FCC’s general counsel on the reason for the commission’s sudden change of heart at the oral argument in December. He did not seem to be satisfied.

The FCC’s notice of proposed rulemaking did not specifically state the agency’s intention to reclassify the Internet as a public utility under Title II. For this reason, this outcome seems highly likely, a decision that would send the entire matter back to the FCC. If the FCC wanted to go forward with the existing order, it would have to solicit another round of comments. Broadband providers would likely point to the decline in investment since the 2015 order, and supporters of Title II would reiterate their previous arguments.

If the FCC could do all this quickly, while Democrats have a majority of commission membership, the 2015 order would simply be issued again, albeit with the proper notice and briefing. Broadband providers might try another legal challenge, but assuming the D.C. Circuit blesses the reclassification decision while ruling narrowly on APA violations, ISPs would have an uphill challenge.

In the second scenario, application of Title II to wireless carriers would be struck down and the rest of the order would be sustained. This outcome is highly likely because section 332(c)(2) of the Communications Act, as amended, creates a separate statutory ban on common carriage of certain mobile services, such as mobile broadband. Under the Supreme Court’s Brand X decision, discussed below, the FCC has broader statutory freedom to do what it wants when regulating wireline communications.

Such an outcome would split the broadband industry, so that wireless broadband providers would be free to offer more innovative “zero-rating plans” (under which the packets from certain content providers are not counted against a mobile broadband operator’s data caps). Meanwhile, wireline providers—that is, those providers whose services are wired—would seek to challenge the ruling before the Supreme Court and seek congressional support for a bill overturning the ruling. The success of that effort would depend on the outcome of the 2016 elections. If the Democrats take the Senate or the presidency, then there is no chance of a legislative reversal.

A third scenario is that the court strikes down application of Title II to both wireless and wireline carriers.This outcome is moderately likely, depending on how the appeals court reads the Supreme Court’s 2005 Brand X decision, which gave broad deference to statutory interpretations by the FCC. Taking advantage of that deference, the FCC argued that Brand X bolsters its decision to regulate Internet access under Title II. The ISPs countered that Brand X does not apply because the FCC’s order focused on the relationship between ISPs and edge providers, whereas Brand X focused on the last-mile relationship between ISPs and their direct customers. Even if Brand X applies, in an amicus brief, Penn Law Professor Christopher Yoo pointed out that the FCC’s reclassification contradicts the technical principles that determined the Supreme Court’s decision (relating to the definition of a “point” of transmission under section 153 of the Act). Due to this ambiguity, it is hard to predict how reclassification of wireline providers will shake out.

In this case, the FCC would almost certainly appeal the decision to the Supreme Court. If the court were to take the case (iffy), and split 4–4 (assuming no new justice has been confirmed by then), then the D.C. Circuit’s reversal of the FCC’s order would be left in place. At this point, the FCC would likely return to a case-by-case adjudication of paid priority grounded under section 706, but with the burden on proof on complaining websites. In other words, the real outcome would be similar to what the FCC was planning to do before it reversed course.

In addition, as long as Democrats retain a majority, the FCC would very likely ask Congress to give it statutory Title II regulatory authority over broadband. But as long as the House remains in Republican hands, this request would be denied. Alternatively, the FCC might take the Republicans up on their offer to regulate paid priority under a new (non–Title II) source of authority, along the lines of the FCC’s 2010 rules. Republicans prefer a non–Title II alternative because they fear that certain aspects of Title II, such as rate regulation, which have been forborne by this commission as part of reclassification, might be resuscitated under a new commission.

Men take a rest while attending the Mobile World Congress in Barcelona, March 3, 2015.
Men take a rest while attending the Mobile World Congress in Barcelona, March 3, 2015.
Gustau Nacarino / Reuters
An unlikely (fourth) scenario is that the court upholds the 2015 order in its entirety. Given the bill’s procedural and substantive infirmities, it will be difficult for the court to do nothing. If it does, ISPs would appeal to the Supreme Court, with a low probability of winning (although the odds of a court victory could go up if Republicans win the White House and retain control of the Senate, guaranteeing a Republican Supreme Court nominee).

Finally, in a fifth scenario, the court could uphold Title II reclassifications but overturn the FCC’s ban on paid priority. The rationale here would be that it is fine for the FCC to reclassify ISPs as common carriers, but that a ban on paid priority is inconsistent with Title II, which requires telecommunications providers to offer services on a nondiscriminatory basis; paid priority is consistent with Title II so long as it is extended to all comers on the same terms.

Moreover, as Judge Stephen Williams intimated during oral arguments, it defies economic logic for the FCC to prohibit even under Title II what many other private firms do—namely, charge more for providing a higher level of service (in this case, faster and more reliable connections to certain websites). Because certain (non-price) conduct has been banned under Title II, and because so much energy has been focused on reclassification (as opposed to the ban on paid priority), this outcome is remote. But if the court went this way, the FCC would be forced to return to 2010 case-by-case adjudication of discrimination claims.

It is unlikely that the 2015 order will be entirely upheld or entirely struck down, and so the net neutrality battle will rage on. To see how a decision might play out, it is instructive to examine how other advanced countries handle the net neutrality hot potato.

There is no EU-wide policy; the issue is governed by national regulators. In October 2015, the European Parliament voted down four proposed amendments designed to embrace strong net neutrality, including one that mandated that all Internet traffic be treated equally. In the absence of uniform rules, national regulators have to decide thorny matters such as zero rating, congestion management, and “specialized services,” such as telemedicine. Because some amount of discretion is needed in adjudicating these disputes, the absence of bright-line rules is a positive development.

Japan has rejected U.S.-style net neutrality in favor of a requirement that all ISPs meet minimum standards for quality of service. This is a reasonable alternative to banning paid priority. With a floor of service quality, ISPs cannot threaten to degrade the basic service as a penalty for an edge provider’s refusing to pay for enhanced service. In 2012, the Korean Communications Committee set up rules that prohibit telecom operators from refusing to provide service “without justifiable grounds.”Yet the regulator sided with the operators in a recent dispute involving alleged degradation of Voice-over-Internet Protocol service that competed against the operators’ voice services. A permissive approach to an ISP’s dealings with edge providers makes sense, but conduct designed to leverage an ISP’s power into applications such as voice or video should be carefully scrutinized.

Where the United States will end up on this controversial issue is still very much in the hands of the courts and the voting public.

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  • ROBERT LITAN is Adjunct Senior Fellow at the Council on Foreign Relations.
  • HAL SINGER is Principal at Economists, Inc. Both authors are also Senior Fellows at the George Washington Institute for Public Policy.
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