The Federal Communications Commission has lost in an attempt to preempt state laws that restrict the growth of municipal broadband networks.

The FCC in February 2015 voted to block laws in North Carolina and Tennessee that prevent municipal broadband providers from expanding outside their territories. The FCC, led by Chairman Tom Wheeler, claimed it could preempt the laws because Congress authorizes the commission to promote telecom competition by removing barriers to investment.

But this was a risky legal argument, as the FCC has no specific authority to overturn state laws. Officials in both states appealed the FCC decision, and today a three-judge panel of the US Court of Appeals for the Sixth Circuit ruled in favor of the states (full text).

"The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities," judges wrote. "This is shown by the fact that no federal statute or FCC regulation requires the municipalities to expand or otherwise to act in contravention of the preempted state statutory provisions. This preemption by the FCC of the allocation of power between a state and its subdivisions requires at least a clear statement in the authorizing federal legislation. The FCC relies upon Section 706 of the Telecommunications Act of 1996 for the authority to preempt in this case, but that statute falls far short of such a clear statement. The preemption order must accordingly be reversed."

The decision was essentially unanimous, with judges John Rogers, Joseph Hood, and Helene White all voting to reverse the FCC's order. White concurred in part and dissented in part, writing a separate opinion to address a few issues not covered in the majority opinion.

The loss is a big one for Wheeler. The FCC voted through his net neutrality rules and the muni broadband decision on the same day; he called it “the proudest day of my public policy life.” The FCC's net neutrality decision was upheld by a federal appeals court, but a win on the state law preemption would have allowed Wheeler to make a bigger impact on boosting broadband competition in the United States.

About 20 states have laws restricting the rights of cities and towns to compete against private Internet service providers. Municipal ISPs in Tennessee and North Carolina wanted to expand outside their territories but were blocked from doing so by state laws, and thus asked the FCC to preempt the statutes. If the FCC had won, cities and towns in other states could have followed suit and asked the FCC to overturn restrictive laws throughout the nation.

FCC will review legal and policy options

The FCC could ask for an en banc review in front of all the Sixth Circuit judges, or appeal to the Supreme Court.

"The FCC’s mandate is to make sure that Americans have access to the best possible broadband," Wheeler said in a statement today. "We will consider all our legal and policy options to remove barriers to broadband deployment wherever they exist so that all Americans can have access to 21st Century communications."

Wheeler further said that the judges' ruling "appears to halt the promise of jobs, investment and opportunity that community broadband has provided in Tennessee and North Carolina." Communities that want better broadband, he said, "should not be thwarted by the political power of those who, by protecting their monopoly, have failed to deliver acceptable service at an acceptable price."

The FCC had claimed that its preemption authority "falls within the 'measures to promote competition in the local telecommunications market' and 'other regulating methods' of section 706(a) that Congress directed the Commission to use to remove barriers to infrastructure investment." The FCC argued that Congress doesn't need to "explicitly delegate" the authority to preempt state laws, but failed to persuade judges.

Tennessee argued that the FCC order violated the Constitution by "infringing on the state’s right to determine the boundaries of its political subdivisions," judges noted. Tennessee and North Carolina further argued "that even if Congress has the power to authorize such orders, it has failed to provide the necessary clear statement as required by Nixon," referring to Nixon vs. Missouri Municipal League, a Supreme Court case from 2004.

"The latter argument is persuasive, at least where—as here—the FCC order purports only to restrict the states’ power to make decisions for municipalities that the FCC does not otherwise forbid," judges wrote.