The FCC began circulating a proposed new “net neutrality” order on April 24, with plans to release it to the public on May 15. The new order comes in response to the January 14, 2014 DC Circuit Court of Appeals decision that rejected the “no discrimination” and “no blocking” provisions of the Commission’s original 2010 net neutrality order. While we won’t know for sure exactly what the new order will include until it is made public, some details have already been leaked. Here is what we know so far:

At least for now, the Commission will not attempt to reclassify broadband Internet service as a telecommunications service. However, it is possible the Commission will attempt to gage the current industry temperature on this issue in a further notice of proposed rulemaking (FNPRM) that it will initiate as part of this proceeding

The Commission will assert that its authority over the Internet falls under section 706 of the 1996 Telecommunications Act. This section allows the FCC to take actions to encourage the development of so-called “advanced” services such as broadband. Most importantly, even while it rejected key portions of the original net neutrality order, the DC Circuit agreed that the Commission had authority over the Internet under section 706;

In the most controversial change from the original order, the proposed rules will NOT treat all Internet content the same!  Instead, large companies such as Netflix or Google will be permitted to negotiate agreements to pay more to providers to have faster delivery of their content to consumers.  

The Commission would scrutinize such agreements on a case- by-case basis to ensure that the prices, terms and conditions are “commercially reasonable.” While the specific measurements that will be used to decide whether an agreement is commercially reasonable are not yet spelled out, the evaluation of a specific agreement is expected to include evaluating its effects on competition and on consumers. The further notice of proposed rulemaking will be used to seek industry comments on just how this agreement review process should work. 

The new rules will require broadband Internet service providers from blocking Internet content and to ensure transparency, will require them to disclose how they treat all Internet traffic and require them to make public the terms of their commercial agreements. Additionally, providers would have to reveal whether any of their agreements are with affiliated companies that provide Internet content. Presumably, such agreements would be made available to nonaffiliated companies.

As expected, when news of the FCC’s proposed rules became public on April 23, consumer advocate groups went apoplectic. They claim that on its face, an agreement that is found to be “commercially reasonable” is discriminatory, because, by definition, it favors one company over another. Moreover, they suggest that larger content providers would be happy to pay more to gain favorable service for their product, while limiting any opportunity for start-up companies to compete since they would not have the resources to negotiate similar commercial agreements. Finally, consumer advocates argue that consumers will be the big losers in the end since the higher prices large providers chose to pay will undoubtedly be passed through to them. In, short, consumer groups contend that if the FCC goes ahead with these rule changes, it will be the complete end of the Internet as we know it today.

Large Internet service and content providers responded more cautiously to the leaked proposal, suggesting that there is no reason for the FCC to impose any rules, since the Internet has been working as intended.

As we suggested in our January 25 blog, the approach to net neutrality the Commission is poised to take is probably the best it could take given the limits of its regulatory authority. The DC Circuit has already provided ancillary authority cover for the Commission under section 706, and this section could be used to support the Commission using this authority to control anti-competitive Internet behavior on a case-by-case basis. Importantly, this would allow the Commission to regulate Internet behavior without treating broadband Internet providers as common carriers, which is clearly a legal non-starter. 

The tricky part for the Commission will be defining what will constitute an acceptable commercial agreement. Although the Commission will almost certainly devise a measurement scheme that the Court will find lawful, let’s be clear, these commercial agreements will always favor a specific company and will almost never be available to others. 

For years, the Commission has approved individual company contracts by mandating that they be made available to “similarly situated” companies.  In practice, however, individual agreements include certain volume or term requirements that ensure that no other companies are similarly situated. 

The same scenario is likely to occur with Internet commercial agreements. Opponents may argue that these agreements discriminate against other companies. They would be correct. However, such “legal” discrimination has been accepted for a long time in our industry and is likely to be accepted for the Internet. The key for the Commission will be determining when such discrimination becomes anti-competitive or anti-consumer and therefore “illegal.” There may not be a specific price, term, or condition that would automatically make a given agreement “illegal,” thus each agreement would have to be judged on its merits and impacts. This is clearly not a great outcome for net neutrality, but probably the best compromise that can be found.

Of course, net neutrality proponents will not be satisfied with this type of approach, and will almost certainly continue to pressure the Commission to reclassify broadband Internet service as a telecommunications service. However, based on the multi-year legal battle that would result if it were to attempt such a reclassification, the Commission would be wise to avoid this battle. Any proposal less than reclassification will almost surely lead to appeals by consumer advocates. However, the approach outlined here, as imperfect as it appears to be, would provide the Commission the best chance to successfully defend its rules in the courts.

By Andrew Regitsky, President, Regitsky & Associates