Among the suggested changes is FCC Chairman Genachowski’s proposal, dubbed the “Third Way,” a method that would classify only the transmission component of broadband access service as a telecommunications service.  Doing so would render the transmission component subject to Section 202(a) of the Communications Act, which forbids any common carrier to “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services with like communication service.”  In effect, the “Third Way” would enable the FCC to implement net neutrality regulations on the transmission component of an ISP service without otherwise extending the full brunt of Title II telecommunications service regulations to the information service components of an ISP.

Since the proposal was initially released, advocates on both sides of the net-neutrality debate have voiced concerns that this reclassification may be beyond the Commission’s authority.  Just weeks ago, 171 Republican and 73 Democratic Congressmen urged the Commission not to take unilateral action in creating a new regulatory scheme by reclassifying broadband as a modified Title II telecommunications service.  Instead, they are insisting that any such classification change be implemented through legislative channels.  The FCC’s recent action appears to be a polite “No thanks” to those Members of Congress.

The FCC has explained that there is a legal basis for reclassifying broadband without legislative action.  A statement by the Commission’s General Counsel pointed out that in his dissent in National Cable and Telecommunications Association v. Brand X Internet Services, Inc., Justice Scalia said that the “computing functionality” and “broadband transmission component” of an ISP must be acknowledged as “two separate things,” the former an unregulated service under Title II and the latter a telecommunications service which could, in Scalia’s view, be a regulated Title II service.  In the FCC’s view, Scalia’s dissent is “consistent with, although not compelled by, the majority opinion in Brand X.”  The FCC is therefore confident that the Third Way approach will pass judicial scrutiny.

The reclassification of the transmission component under Title II would not place immediate restraints on ISPs, but some ISPs and analysts are concerned that this would lead to further price regulations that could potentially thwart investment opportunities in the broadband space.  AT&T explained that the Notice of Inquiry issuance is disconcerting as “it will create investment uncertainty at a time when certainty is most needed.  It will no doubt damage jobs in a period of far-too-high unemployment.”  Joining the opposition, Verizon suggested that these measures will have “negative consequences for online users and the Internet ecosystem would be severe and have ramifications for decades.”  While it is difficult to predict the precise impact additional regulations might have, the reclassification would undoubtedly extend regulatory authority to the Commission and leave ISPs susceptible to greater oversight.

In an effort to combat increased agency regulation, ISPs have suggested alternatives that allow for more flexible standards and less regulatory control of network management.  Comcast, in its reply comments, insisted that the FCC “should not adopt an absolute ban on discrimination” as this would “prohibit ‘socially beneficial discrimination’ and stifle innovation and investment.” Instead, Comcast explains that the rules should allow the Commission the power to supervise ISPs’ practices and address practices that are questionable while still giving ISPs “the flexibility to innovate and experiment with technologies and business models.”  Comcast further suggests that the regulations created by the FCC should operate in conjunction with independent third-party expert groups to “understand, refine, and address the various technical issues underlying key policy determinations.”   This would create industry-wide cooperation by integrating practical standards with current FCC policies.

Last week, in an effort to reclaim control of the network management debate, notable industry executives formed the Broadband Internet Technical Advisory Group (BITAG).  The purpose of the group is to “develop consensus on broadband network management practices or other related technical issues that can affect users’ Internet experience.”  The group is poised to inform and advise governmental agencies on technical and operational issues facing internet service and content providers that will help establish network management policies.

Regardless of the outcome of the regulatory debate, ISPs must continue managing bandwidth congestion within FCC policies and constraints.  Depending on the breadth of expansion of the regulatory controls, ISPs may seek alternative pricing structures as a way of managing network traffic without employing intense discriminatory network-management practices and running afoul of net neutrality principles or regulations.  Indeed, AT&T’s recent decision to eliminate “all you can eat” mobile data plans in favor of metered billing was intended, in part, to rein in the small number of users that consume a disproportionate amount of data.  AT&T hopes the new scheme will alleviate stress on the networks and help manage congestion.  This move may change the entire economic model for the wireless industry as other wireless providers follow suit.

Congress will obviously continue to debate the implications and necessities of having an unelected agency construct overarching broadband regulations.  However, it is clear that amending the Communications Act will take time and be especially difficult during an election year.

The FCC is accepting comments on the proposed reclassification methods through July 15th.  We’re not sure whether the coming weeks and months will provide much clarity, but we anticipate that there will be opportunities amidst the uncertainty.

**Julie Hanus, a summer associate with the Firm, assisted in the preparation of this post.

We had previously written about the original sanction order, in which the FCC found that Comcast had violated the non-binding net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  Comcast appealed the ruling, asserting that the FCC did not have the appropriate authority to issue the sanction.

The Circuit Court’s decision rested, in large part, on where the regulations governing ISPs fall within the provisions of the Communications Act.  In 2002, the FCC defined ISP services as “information” carriers, subject to Title I of the Communications Act, rather than as “telecommunications” services governed by Title II.  That distinction proved fatal to its attempt to sanction Comcast. 

FCC itself conceded that it did not have the express authority under Title I to regulate an ISP’s network management practices.  The FCC was therefore compelled to rely on the broad provisions of Section 4(i) of the Act, which authorizes the Commission to “perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.”  Under prior DC Circuit precedent, this “ancillary” authority may only be used if the FCC can demonstrate that its action, is “reasonably ancillary to the effective performance of its statutorily mandated responsibilities.”  The FCC relied on several Congressional statements of policy to show that regulating Comcast and other ISPs was within its “statutorily mandated responsibilities.”  But as the appeals court decision pointed out, Supreme Court and DC Circuit case law has held on numerous occasions that such statements of policy cannot create “statutorily mandated responsibilities.”  The Court went on to reject the FCC’s claim of “ancillary authority” and vacated the sanction order against Comcast.

So where does this leave the FCC’s net neutrality initiatives?  Several proponents of expanded FCC authority have suggested that the FCC reclassify ISPs as “telecommunications” services under Title II of the Communications Act.  Title II expressly makes it unlawful for common carriers “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service”.  Such language would appear to provide solid footing for implementing and enforcing the net neutrality principles.

Indeed, immediately after the DC Circuit’s decision was handed down, FCC Commissioner Michael Copps released a statementurging the FCC to reverse its earlier 2002 determination and treat ISPs as telecommunications services saying “It is time that we stop doing the ‘ancillary authority’ dance and instead rely on the statute Congress gave us to stand on solid legal ground in safeguarding the benefits of the Internet for American consumers.” 

Congress may yet get into the action as well.  Last August, the Internet Freedom and Preservation Act of 2009 was introduced.  The Act expressly makes it unlawful to block, interfere with, discriminate against, impair, or degrade” access to any lawful content from any lawful application or device.”  However, no action has been taken on the bill since its introduction.

Stay tuned.

The FCC’s inquiry involves Google’s call-blocking policy.  In June, Google began noticing extremely high-cost calls to a concentrated number of rural destinations which generated vastly disproportionate costs.  Its internal investigations, using data filters to sort out call patterns, revealed that the top 10 telephone prefixes (the area code plus the first three digits of a seven digit number) to US destinations generated more than 160 times the expected amount and accounted for 26.2 percent of its monthly U.S. costs.  By August, Google began restricting calls to certain high-cost destinations.  Google’s response letter to the FCC describes the Google Voice service and explains Google’s investigation into and rationale behind its call blocking policy.  It claims that its engineers developed a “tailored solution” so that Google Voice currently restricts calls to fewer than 100 specific phone numbers, a practice which Google’s counsel believes is necessary to “prevent these schemes from exploiting the free nature of Google Voice.” 

While Google has only recently began blocking costly calls, the practice whereby rural telecoms charge long distance carriers exorbitant rates to connect and terminate calls from their networks is not new.  In may cases these telecoms partner and share revenue with adult chat service, conference calling centers and others to attract traffic to their networks.  AT&T, and other long-distance carriers, have long complained and sued over these so-called traffic pumping schemes.  However, as common carriers subject to FCC regulations, they were banned in 2007 from blocking calls and are required to deliver phone calls without discrimination to all numbers dialed.  AT&T’s complaint to the FCC is rooted in its contention that Google’s call blocking policy is enabling it to dance around this ban that applies to other carriers.

However, this recent skirmish over Google Voice is really part of a larger debate currently playing out in the regulatory stage over “network neutrality” rules being reexamined by the FCC and AT&T has framed Google’s actions as part of the debate. 

In its Statement on Google Voice and Net Neutrality, AT&T stated that “By openly flaunting the call blocking prohibition that applies to its competitors, Google is acting in a manner inconsistent with the spirit, if not the letter, of the FCC’s fourth principle contained in its Internet Policy Statement.“   The FCC’s fourth principle on net neutrality states that “consumers are entitled to competition among network providers, applications, and service providers, and content providers.“  

Some members of Congress are also concerned about the adverse impact on the market and support for universal service if Google is allowed to operate its telephone services outside of the rules that govern carriers.  As they stated in their letter to the FCC “[I]t is our opinion that a company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation.”

Google responded to these charges by stating that “The FCC’s open Internet principles apply only to the behavior of broadband carriers – not the creators of Web-based software applications.” Google claims that AT&T is attempting to blur the distinction between Google Voice and traditional phone service but maintains that web applications like Google Voice and Skype shouldn’t be treated like traditional phone service.

Google distinguishes Google Voice from traditional phone carriers by explaining that unlike traditional carriers which charge users for their services, Google Voice is a free, web-based software application similar to e-mail rather than a telecom service designed to “supplement and enhance existing phone lines, not replace them” and should therefore be exempt from common carrier rules.   The service is currently available to a limited number of users on an invitation-only basis.  Users are still required to have an existing land or wireless line in order to use Google Voice and are still able to make outbound calls on any other phone device.  Therefore, because Google Voice is a software application, not a telephone company, Google believes that its service is not and should not be subject to common carrier laws or the FCC’s jurisdiction.

Distinctions aside, with nearly 1.5 million users, the increasingly popular service is viewed by some as running a rival service to traditional phone companies.  The heart of the FCC’s inquiry is whether Google Voice is a telecom service or an online software application and whether this distinction really matters.  How different is a call traveling directly over carrier lines from one that goes through software applications?  As of now, the difference appears to be the ability to block less than 100 calls, an option not available to AT&T and other carriers.

Whether the FCC agrees with Google’s characterization of its service and its interpretation of the current open Internet principles may have a dramatic impact on both the telecom and internet marketplaces.  And the FCC’s newly proposed rules on network neutrality may also play a prominent role in this debate.  We will continue to monitor the proceedings and keep you posted.

• The New York Times, owners of Boston.com, and GateHouse Media agreed on the eve of trial to settle their copyright lawsuit.  As part of the settlement, the complete details of which aren’t available, the headlines and first sentences from GateHouse articles will be removed from listings on Boston.com, although Boston.com will continue to link to GateHouse.  While the settlement appears to be a victory for GateHouse, some are questioning whether GateHouse’s objections to the content in the links made business sense as Boston.com was sending traffic to GateHouse.  The new restrictions may cause Boston.com to think twice about doing that in the future.  Other smaller media and content sites may want to consider these ramifications in raising similar issues.  Read here for more on the dispute.
• Controversy is already brewing at the President’s virtual home regarding privacy issues.  In what some called a “YouTube exemption” to the privacy policy at WhiteHouse.gov, YouTube was apparently permitted to plant tracking cookies on the computers of visitors to the White House site.  When objections were raised, the policy was quickly amended to limit the placement of cookies only on machines that actually click on the video.  The debate seems to point to the tricky nature of balancing the optimal privacy policy with the transparency of the actual terms of that policy.   More on the issue is here.
• In what may be the first of its kind corporate policy, Ireland’s largest ISP, Eircom, has agreed to implement a “three strikes and you’re shut down” policy for P2P file sharers.  The policy is the result of a settlement in a lawsuit against Eircom that was broght by the Irish branches of EMI, Warner, Universal and Sony.  While the concept of a graduated response has been debated before (it was actually specifically rejected by the European Parliament last year), Eircom now appears to be set to be the first ISP in the world to voluntarily cut off P2P users without court orders.    For more on this issue, read here.
• North Carolina joins a list of states now considering charging sales tax on digital downloads to help raise revenue for the state – a move that could deter customers who are already facing tough times.  More details here.
• In a move that is being widely criticized, Cox Communications, the third-largest cable company, has announced plans to test a system to manage Internet congestion by rating traffic based on its urgency and importance.   Coincidentally, Google released a new set of tools to enable users to find out if their ISPs are hindering traffic.  Read here for more.

The technology platform promises that the incoming administration “will work to ensure the full and free exchange of information through an open Internet and use technology to create a more transparent and connected democracy” and “will encourage the deployment of modern communications infrastructure to improve America’s competitiveness and employ technology to solve our nation’s most pressing problems — including improving clean energy, healthcare costs, and public safety.”  These are pretty lofty goals.  But there are a few specific issues in the platform that are worth mentioning.

First, in unequivocal terms, the incoming administration states its support for net neutrality.  This is a topic we’ve written about before (here and here).  The net neutrality issue may also become a higher profile issue on Capitol Hill when the next Congress convenes.  Senator Byron Dorgan, who introduced the Internet Freedom Preservation Act in 2007 (a bill which went nowhere), has indicated that he will introduce the legislation again, in the hopes that support from the White House may give the bill needed momentum.

The second issue worth noting in the platform is a pledge to appoint the nation’s first CTO.  This position appears to be different from the position of IP enforcement “czar” that was created by the IP-PRO Act (discussed here).  While there has been speculation as to who will be appointed (some familiar names have been tossed out and at least one (Eric Schmidt, CEO of Google) has already said he’s not interested), the more critical issue is what the CTO will be able to accomplish.  According to the technology agenda, the CTO’s role will be “to ensure the safety of our networks and lead an interagency effort, working with chief technology and chief information officers of each of the federal agencies, to ensure that they use best-in-class technologies and share best practices.”  Again, lofty goals and perhaps the makings of a major bureaucratic turf war.  But it appears that the incoming administration wants its CTO’s primary focus to be on transparency to ensure that the government operates in an open and accessible environment.

Lastly, even though the long presidential campaign is over, the Obama administration will continue to use the Web as a primary means for communicating to and involving people in its policy decision-making and implementation process. The centerpiece of that effort will be www.change.gov, the website established the day after the election, which, along with news, videos, information on the transition and detailed policy papers, enables visitors to register on-line to receive e-mail updates directly from the administration.  Whether or not this will make for more effective governance is a judgment that will have to wait.  But we appear to be on the verge of the first Web 2.0 presidency.

The bill was introduced as the FCC was investigating Comcast for allegedly instituting measures to slow down P2P traffic on by its users. On August 1, the FCC entered an order finding that Comcast had, in fact, violated FCC net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  The order directed Comcast to suspend the network management practices that violated the FCC rules, with the intention of making the suspension permanent. 

As expected, on September 4, Comcast filed suit in the US Court of Appeals for the DC Circuit seeking to overturn the FCC ruling.  While Comcast has said it will comply with the directives in the order, it was appealing the order because, in the words of a Comcast spokesperson, “the Commission’s action was legally inappropriate and its findings were not justified by the record.”

Stay tuned . . .