A federal appeals court in Washington on Tuesday struck down the Federal Communications Commission's rules for Net neutrality.

The 2-1 ruling upheld the FCC's right to regulate broadband access, but the court called into question the FCC's authority to impose rules that dictate how broadband providers manage traffic on their networks.

In its decision, the court ruled that, "even though the commission has general authority to regulate in this arena, it may not impose requirements that contravene express statutory mandates. Given that the commission has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act expressly prohibits the commission from nonetheless regulating them as such. Because the commission has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order."

The case, which Verizon filed against the FCC after it imposed these Open Internet rules in 2011, puts to rest, for at least the time being, a very controversial topic that has been debated in Washington, D.C., for nearly a decade. In plain English, the court rejected Verizon's argument that the FCC had overstepped its authority to regulate broadband access, instead acknowledging that the FCC has general authority to impose regulations on broadband and wireless service providers. But because the services these providers offer are classified differently from traditional telecommunication services, the justices reasoned in their decision that they are not subject to the same statutes, which guide the agency in forming its regulatory policies.

Common carriage

The basis for the Net neutrality regulation that the FCC implemented is predicated on a centuries old legal concept known as "common carriage." This concept of "common carriage" has been used not just to regulate telecommunications, but other industries as well. It was developed to ensure that the public retained access to fundamental services that use public rights of way. In the case of the Internet, it means that the infrastructure used to deliver Web pages, video, and audio-streaming services, and all kinds of other Internet content, should be open to anyone accessing or delivering that content.

Other examples of common carriage include transportation services. For example, a ferry operator under the common carrier concept is free to operate a business transporting people and goods across a river, but because he is using a public waterway, he is required to provide service to everyone. He cannot indiscriminately choose to service some customers and not others. And while the ferry operator can determine the price for his services, the prices must be fair and reasonable.

Throughout the 20th century this concept was applied to telecommunications services to ensure that phone companies, which use public rights of way to string wire and cable, service all customers.

Early in the last decade, there was confusion about how broadband should be regulated. Should it be a telecommunications service subject to "common carrier" regulation. Or should it be classified as an information service, which would not have the same requirements.

In 2005, the US Supreme Court ruled in the Brand X case that broadband services should not be classified as telecommunications services. Because broadband is not a telecommunications service, broadband providers' infrastructure is not considered a public right of way and should not be regulated under the common carrier concept.

Justices in the federal appeals court reasoned that because broadband providers are not required to adhere to common carrier rules, the FCC has no authority to impose rules that require them to not discriminate or block traffic.

Net neutrality rules



The FCC adopted its Net neutrality rules in 2011. These rules essentially state that broadband providers cannot block competing traffic on their network or discriminate against another company's services that ride over its network in order to benefit its own competing services.

Net neutrality supporters have long worried that a broadband provider, such as Comcast, may purposely slow down traffic from an Internet company, such as Netflix, that uses its network to deliver services. In this case, Comcast could slow down the video streams of Netflix, making it impossible for Comcast broadband customers to use this service, which competes against Comcast's own on-demand video service.

Another fear among Net neutrality supporters is that broadband providers could create tiers of service that would require Internet companies trying to reach their customers over this infrastructure to pay a fee for a certain quality of service. For example, Amazon may pay Verizon to prioritize its traffic to ensure that its streaming services get a better quality of service or so that its Web pages load more quickly. Net neutrality supporters say such a system would relegate smaller Internet companies, which cannot afford to pay for priority service, to a slower and less reliable Internet. These Net neutrality advocates say this will stifle innovation.

On the other side of the argument, network operators, such as Comcast, AT&T and Verizon, have argued that imposing such rules on their networks makes it difficult for them to manage congestion on their networks. It also makes it difficult to develop new business models and revenue streams. They agree that it's unfair to block traffic, but they argue the FCC should deal with such cases individually. They also believe that the free market and competition will ensure that broadband providers do not prevent consumers from accessing any Internet content.

Winners and losers

The ruling is a big win for these broadband providers. Verizon Communications is the company that challenged the rules in court. The ruling has implications mostly for fixed broadband providers, since the Net neutrality rules were most restrictive for them. But the decision will also affect wireless operators, which under the regulation were subject to less strict rules about blocking traffic and managing their networks.

In a statement, Randal Milch, Verizon's executive vice president, head of public policy, and general counsel, said that Verizon is committed to keeping the Internet open too. But he said the court's ruling will actually spur more innovation on the Internet.

"One thing is for sure: today's decision will not change consumers' ability to access and use the Internet as they do now," he said. "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.

The court ruling could pave the way for broadband operators and backbone Internet providers, which provide the nationwide infrastructure for the Internet, to create new revenue streams by charging Internet companies, such as Amazon, Google, and Netflix fees for offer priority delivery of their content.

And it's likely to mean that wireless operators that have been considering new ways of generating revenue for their data networks may consider new business models.

But consumer rights advocates, Internet companies, and Net neutrality supporters say that court ruling will likely have a chilling effect on innovation.

"The D.C. Circuit's decision is alarming for all Internet users," Harvey Anderson, senior vice president of business and legal affairs for Mozilla, said in a statement. "Thanks to a legal technicality, essential protections for user choice and online innovation are gone. Giving Internet service providers the legal ability to block any service they choose from reaching end users will undermine a once free and unbiased Internet. In order to promote openness, innovation, and opportunity on the Internet, Mozilla strongly encourages the FCC and Congress to act in all haste to correct this error."

Harold Feld, senior vice president for the advocacy group Public Knowledge agreed. He said the decision may also jeopardize the modernization of the phone network, as well.

"We're disappointed in today's decision," he said in a statement. "The court has taken away important FCC flexibility, and its opinion could complicate FCC efforts to transition the phone network to IP technology, promote broadband build-out, and other matters.

Even though the court decision struck down the FCC's authority to impose the specific Net neutrality rules it adopted in 2011, it did not reach further in its decision. And the ruling did not strip the FCC of all its authority to regulate the Internet. Feld said the fact that the court agreed that the FCC had some authority will hopefully provide a window of opportunity to adopt different rules to protect an open Internet. It could also reopen discussions at the FCC regarding how and if broadband services should be reclassified.

"The court did uphold broad commission authority to regulate broadband," Feld said. "To exercise that authority, the FCC must craft open Internet protection that are not full-fledged common carrier rules. Alternatively, if the FCC needs broader authority it can classify broadband as a title 2 common carrier service. "

But the two Republican FCC commissioners believe it's time to put to rest FCC rule-making to ensure openness on the Internet.

"For the second time in four years, the D.C. Circuit has ruled that the FCC exceeded its authority in attempting to regulate the Internet," Republican commissioner Ajit Pai said in a statement. "It is time for the commission to take no for an answer. Unless Congress acts, we should stay our hand and refrain from any further attempt to micromanage how broadband providers run their networks. We should focus on removing regulatory barriers to broadband deployment, not imposing unnecessary rules that chill infrastructure investment."

Not a total loss for the FCC

FCC Chairman Tom Wheeler did not comment specifically on the fact that the struck down its rules, but he applauded the court for upholding the FCC's authority to regulate the Internet.

"The D.C. Circuit has correctly held that 'Section 706...vests [the commission] with affirmative authority to enact measures encouraging the deployment of broadband infrastructure' and therefore may 'promulgate rules governing broadband providers' treatment of Internet traffic,'" he said in a statement.

He went on to state the the agency is "committed" to ensuring that innovative services and products are still developed. And he said that the agency will continue to ensure that the Internet is a place where First Amendment rights for free speech are protected.

"We 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," he said.

Public Knowledge's Feld said his group and other Net neutrality supporters are still reviewing the court decision and will need to decide whether to appeal the decision further.

"In some respects, no one got what they wanted out of this decision," he said. "Confusion over the proper role of the FCC is greater than ever. In the coming days, all parties (including Public Knowledge) will need to consider whether or not to appeal this decision. In the meantime, we look forward to working with the FCC under the existing authority the court recognized today."

The court decision could spur Congress to act by passing a law that would either reclassify broadband services or would in some other way protect the openness of the Internet. But such efforts in Congress have failed in the past. In 2006, Democrats and their allies supported an effort to explicitly grant the FCC the power to regulate broadband providers' network management practices. That failed in both a House floor vote and in a Senate committee vote.

Still, the court in its decision acknowledged the FCC's conclusion that without Net neutrality or Open Internet rules, network operators may abuse their power.

"Equally important, the commission has adequately supported and explained its conclusion that, absent rules such as those set forth in the Open Internet Order, broadband providers represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment," the justices write. "Nothing in the record gives us any reason to doubt the Commission's determination that broadband providers may be motivated to discriminate against and among edge providers.

Last update at 10:44 a.m. PT This story has been updated with response statements, more details from the court ruling, and more background information, regarding Net neutrality.