Today's court ruling invalidating the anti-blocking and anti-discrimination rules in the Federal Communication Commission's Open Internet Order was not a surprise to observers who were aware of one inconvenient fact—the FCC really screwed this one up.

The commission's intent was noble. Its order laid down network neutrality rules making it illegal for Internet service providers to block services or charge content providers for access to end users. For example, the order would prevent Verizon from giving Netflix a faster path to consumers in exchange for payment. It would also prevent Verizon, or similar companies, from blocking rival telephone or video services that compete against its own offerings.

Verizon challenged the order and got a big victory today in a ruling (PDF) by the US Court of Appeals for the District of Columbia Circuit.

The FCC's problem was that several years before its 2010 Open Internet Order, it classified ISPs as information services instead of telecommunications services, exempting them from common carrier rules. As Ars wrote in 2010, the common carriage part of US communications law is "the one that said public networks like the telephone must be open to all comers at the same rate and could not discriminate. Even though the old AT&T ran a private network, the company had to complete everyone's calls; blocking critics from using the network was illegal."

If the FCC said broadband providers were common carriers, it would be easier to dictate the terms under which they must pass traffic from content providers to home Internet users. Because the FCC didn't go the common carriage route but still enacted anti-blocking and anti-discrimination rules, the commission had to do some legal gymnastics to justify the Open Internet Order.

In the court case, the FCC said its rules aren't common carrier regulations because "Verizon is free to offer or decline to sell broadband Internet access service to any end user. Verizon need not hold itself out to offer service indifferently to anyone. The only things that Verizon (and other broadband Internet access providers) cannot do are blocking its end users from reaching lawful content and charging edge providers to allow end users to reach them."

“The regulations cannot stand”

Both supporters and opponents of net neutrality laws suspected the appeals court's three-judge panel would find fault with this reasoning, and it did.

"[W]e must determine whether the requirements imposed by the Open Internet Order subject broadband providers to common carrier treatment," judges wrote. "If they do, then given the manner in which the Commission has chosen to classify broadband providers, the regulations cannot stand."

While broadband providers may not be common carriers with respect to their Internet customers (that's you on the couch, surfing the Web), ISPs could be considered common carriers with respect to edge providers, the companies offering video or any other type of service over the ISP's network. By imposing anti-blocking and anti-discrimination requirements, the FCC treated ISPs as common carriers with respect to those edge providers, the appeals court ruled.

"We have little hesitation in concluding that the anti-discrimination obligation imposed on fixed broadband providers has 'relegated [those providers], pro tanto, to common carrier status,'" the court wrote. "In requiring broadband providers to serve all edge providers without 'unreasonable discrimination,' this rule by its very terms compels those providers to hold themselves out 'to serve the public indiscriminately.' Having relied almost entirely on the flawed argument that broadband providers are not carriers with respect to edge providers, the Commission offers little response on this point."

The ruling spans 81 pages, covering various arguments made by both Verizon and the FCC, but it really came down to the common carriage question. For example, the court said there was no need to even consider Verizon's claim that the Open Internet Order violated its First Amendment rights, because the FCC's failure on the common carriage argument rendered that point moot.

The FCC has room to resurrect net neutrality

The court didn't strike down all of the Open Internet Order. It left intact the order's rules requiring ISPs to disclose information about their network management practices.

The appeals court remanded the case back to the FCC "for further proceedings consistent with this opinion." The court did not dispute the FCC's authority to declare ISPs common carriers. Consumer advocacy group Public Knowledge urged the FCC to take today's ruling as an opportunity to classify broadband as a common carriage service or "craft open internet protection[s] that are not full fledged common carrier rules."

Public Knowledge Senior VP Harold Feld acknowledged to Ars that "such a reclassification would be subject to court challenge. But the Court here was pretty clear that it is up to the FCC to make a choice on classification."

Would the FCC do that? Julius Genachowski, the FCC chairman at the time the Open Internet Order was enacted, didn't feel comfortable doing so, perhaps due to pressure from members of Congress. Newly sworn-in Chairman Tom Wheeler has already gone on record as saying ISPs should be able to charge edge providers, one of the very things the commission's Open Internet Order was seeking to prevent.

"I am a firm believer in the market," Wheeler said, as we noted in coverage last month. “I think we’re also going to see a two-sided market where Netflix might say, ‘well, I’ll pay in order to make sure that you might receive, my subscriber receives, the best possible transmission of this movie.’ I think we want to let those kinds of things evolve. We want to observe what happens from that, and we want to make decisions accordingly, but I go back to the fact that the marketplace is where these decisions ought to be made, and the functionality of a competitive marketplace dictates the degree of regulation."

Wheeler today noted that the ruling does affirm that the FCC is allowed "to enact measures encouraging the deployment of broadband infrastructure’ and therefore may ‘promulgate rules governing broadband providers’ treatment of Internet traffic.’" He said the FCC will consider "all available options, including those for appeal, to ensure that these networks on which the Internet depends continue to provide a free and open platform for innovation and expression and operate in the interest of all Americans.”

Although the ruling invalidated the FCC's anti-blocking and anti-discrimination rules, the court did agree with the commission's opinion that without such rules, "broadband providers may be motivated to discriminate against and among edge providers. The Commission observed that broadband providers—often the same entities that furnish end users with telephone and television services—'have incentives to interfere with the operation of third-party Internet-based services that compete with the providers’ revenue-generating telephone and/or pay-television services.'"

Nothing in the court record "gives us any reason" to doubt that determination, judges wrote. "As the Commission noted, Voice-over-Internet-Protocol (VoIP) services such as Vonage increasingly serve as substitutes for traditional telephone services, and broadband providers like AT&T and Time Warner have acknowledged that online video aggregators such as Netflix and Hulu compete directly with their own 'core video subscription service.' … Broadband providers also have powerful incentives to accept fees from edge providers, either in return for excluding their competitors or for granting them prioritized access to end users. Indeed, at oral argument Verizon’s counsel announced that 'but for [the Open Internet Order] rules we would be exploring those commercial arrangements.'"

AT&T is already implementing new fees for content providers in the wireless market, which wasn't subject to all the provisions of the Open Internet Order. We can expect such arrangements to happen in the wired broadband market unless something changes.

Verizon is ecstatic

Today, Verizon hailed the court's decision, saying it "found that the FCC could not impose last century’s common carriage requirements on the Internet, and struck down rules that limited the ability of broadband providers to offer new and innovative services to their customers."

“One thing is for sure," Verizon continued. "Today’s decision will not change consumers’ ability to access and use the Internet as they do now. The court’s decision will allow more room for innovation, and consumers will have more choices to determine for themselves how they access and experience the Internet. Verizon has been and remains committed to the open Internet which provides consumers with competitive choices and unblocked access to lawful websites and content when, where, and how they want. This will not change in light of the court’s decision."

Comcast also weighed in, saying that even though it "consistently supported the Commission's Open Internet Order," it believes the FCC can write balanced rules "while avoiding inappropriate common carrier regulation."

Regardless of today's ruling, Comcast is bound by the Open Internet Order's rules for now because of an agreement related to its purchase of NBCUniversal.

"[W]e agreed in the NBCUniversal Transaction Order to abide by the Open Internet rules for seven years even if the rules were modified by the courts," Comcast said. "We remain comfortable with that commitment because we have not—and will not—block our customers’ ability to access lawful Internet content, applications, or services. Comcast’s customers want an open and vibrant Internet, and we are absolutely committed to deliver that experience."

National Cable & Telecommunications Association CEO Michael Powell said, "The cable industry has always made it clear that it does not—and will not—block our customers' ability to access lawful Internet content, applications, or services." Powell did not say whether its members intend to charge edge providers for preferential access. The NCTA said in a blog post that pay-for-play arrangements, which it called "paid service enhancements," will be "beneficial in supporting and sustaining the growth of next-generation networks."