An appeals court in Washington on Tuesday ruled that the FCC’s “net neutrality” rules, which prevent companies like Verizon(s vz) from favoring some types of internet traffic over others, are invalid. The 81-page ruling, which was decided by a 2-1 vote with one judge dissenting in part, has big implications for content providers, consumers and the future of the internet. (Here is year-by-year timeline of the legal battles).

In a key passage at the start of the ruling, embedded below, the court wrote:

That said, 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 court’s ruling is a game-changer because it upsets the FCC’s current practice of requiring broadband internet providers to act akin to “common carriers.” In plain English, this means that they have had to behave in a similar way to phone companies and not give special preference to one type of call (or traffic) over another.

Going into the case the FCC’s ability to regulate broadband providers was not clear cut and some speculated the court would reject the Open Internet Order, which defined the FCC’s network neutrality rules entirely. Instead, the court decided the case on technical grounds, ruling the agency had to go back and implement formal common carrier standards if it wanted to make ISPs act like common carriers — meaning the rules are dead for now but could return in the future.

The ruling did, however, preserve the FCC’s current power to require Verizon and other broadband obligations to disclose their activities — in other words, to reveal how they are managing traffic: “Verizon does argue that the disclosure rules are not severable, insisting that if the anti-discrimination and anti-blocking rules fall so too must the disclosure requirements. We disagree […] we are satisfied that the Commission would have adopted the disclosure rules absent the rules we now vacate, which, we agree, operate independently.”

The upshot of Tuesday’s ruling is that it could open the door for internet giants like Verizon and Time Warner to cut deals with large content providers — say Disney or Netflix — to ensure that their web content was delivered faster and more reliably than other sites. This could not only restrict consumer choice but also provide a threat to smaller websites that do not have the resources to pay for any “express lanes” that the broadband providers but choose to create.

The ruling, however, may leave latitude for the FCC to reassert its authority over the broadband providers by rewriting the rules once again (to see how this might shake out, see my colleague Stacey Higginbotham’s take here as well as a viewpoint from Gigaom Research’s Paul Sweeting). FCC Chairman Tom Wheeler also suggested the agency may appeal:

“I am committed to maintaining our networks as engines for economic growth, test beds for innovative services and products, and channels for all forms of speech protected by the First Amendment. 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,” said Wheeler in a statement. An appeal would go to the Supreme Court.

In a statement, Verizon suggested that the court decision would not result in significant change:

One thing is for sure: 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. We look forward to working with the FCC and Congress to keep the Internet a hub of innovation without the need for unnecessary new regulations that seek to manage the explosive dynamism of the Internet.

The appeals court itself appeared clearly aware of the heavy policy implications of its decision, noting that those in favor of net neutrality feared that “a broadband provider like Comcast might limit its end-user subscribers’ ability to access the New York Times website if it wanted to spike traffic to its own news website.” But the judges also refer to the remarks of two FCC Commissioners’ who recently opposed the anti-blocking rules on the grounds they might impede innovation.

Net neutrality advocates expressed dismay at the ruling, but suggested the FCC can still take action.

“The court clearly left the FCC authority to do something,” said Harold Feld of Public Knowledge, a net neutrality advocate, by email, adding that Congress could also write new laws to further empower the FCC.

The Internet Association, which represents big Silicon Valley firms like Google, said in a statement:

“The Internet creates new jobs, new technologies, and new ways of communicating around the globe. Its “innovation without permission” ecosystem flows from a decentralized, open architecture that has few barriers to entry. Yet, the continued success of this amazing platform should not be taken for granted.”

The full text of the ruling follows below:

DC Net Neutrality ruling

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