U.S. Markets open in 3 hrs 41 mins

Net neutrality rules protecting Netflix, YouTube face court hearing

Aaron Pressman

Federal net neutrality rules protecting online services like Netflix (NFLX) and YouTube from discrimination by Internet service providers are back in court this week, facing a third legal challenge. But after being struck down twice before, the latest policy appears more likely to survive the challenge.

This time around, the Federal Communications Commission (FCC) rules, adopted in February, rely on regulating broadband Internet service as a common carrier of information, much like last century's telephone networks. That's exactly the approach suggested by the Court of Appeals for the District of Columbia Circuit when it struck down the FCC's previous effort in 2014.

"The FCC has a good legal case that they are following a path this court laid out in its previous opinion," says Kevin Werbach, a professor at the Wharton School at the University of Pennsylvania and a former FCC lawyer. Still, the agency left some legal vulnerabilities in the policy, he says.

The agency first took action almost a decade ago after discovering that some Internet service providers were slowing access to some web sites and blocking use of some online software. Concerns have only grown since, particularly as the big online video services have increasingly created competition for cable TV offered by the same companies that often provide Internet access.

The latest rules, based on the FCC's long-settled authority to regulate common carriers, prohibit Internet service providers from blocking or slowing down web sites. Internet service providers also cannot collect fees to give some content faster connections to customers. That doesn't just protect major players like Netflix and Google's (GOOGL) YouTube, but also small, innovative startups trying to break into the market. Comments backing the rules have flowed into the court from all kinds of Internet-based businesses including craft sales site Etsy (ETSY), fundraising site Kickstarter, social networking site Twitter (TWTR), and reviews app Yelp (YELP).

But Internet service providers ranging from giants like Verizon Communications (VZ) and AT&T (T) to small, local companies like Alamo Broadband in Elmendorf, Texas, argue that the modern Internet is very different from the old telecom system. The net neutrality rules bar legitimate business deals and discourage investment in the network, they say.

Regulators have been struggling for more than a decade to craft open Internet rules. An initial 2008 FCC order was overturned by the D.C. Appeals Court in 2010 and a broader 2010 order was struck down last year.

In the prior attempts at net neutrality regulations, the FCC exempted Internet service from common carrier rules and tried to find other legal justifications governing information services. That was a mistake, since Internet service providers are performing much the same role as the phone network by moving information from place to place on behalf of others, says Barbara Cherry, a telecommunications professor at Indiana University who has worked at both the FCC and AT&T.

"Classifying broadband as an information service was a radical shift," she says. "We've had problems ever since."

Still, opponents have raised a host of procedural and constitutional objections, some of which may garner support from the court, says UPenn's Werbach. For example, the FCC's May 2014 notice of proposed rules suggested the agency would continue to exempt Internet service from common carrier rules, although it did ask for comments about the possibility of reversing the classification. The big switch came after President Obama called for stronger net neutrality protection under common carrier authority.

"It’s unusual for the outcome of a proceeding to shift so far during the comment period," Werbach says. "The court may find there was insufficient notice for the policy direction the FCC ultimately took."

A ruling in the case is expected to take three to six months, although the three judge panel may signal how it is leaning based on its questions at Friday's oral argument. Either side could then appeal to the Supreme Court.

Even if the court upholds the net neutrality rules, some Republican Congressional leaders have vowed to try to block the policy via legislation. President Barack Obama came out strongly in favor of net neutrality laws, so the legislative turn-back would probably have to wait until after the presidential election.

"The fight's just going to move to another forum," Cherry says. "What's really going to matter is the presidential election."