NSR Policy: Court Overturns FCC Title II Order
What’s New: As expected (LINK), the 6th Circuit overturned the 2024 FCC order classifying broadband providers as Title II common carriers, thereby eliminating various rules including those requiring “net neutrality.” The court also set aside the FCC decision to apply similar rules to wireless. In this note, we provide what we think are the key points for investors.
What the Court did.
Relied on traditional tools of statutory construction to find no authority. The court looked at the law and held that the 2024 FCC had misinterpreted the statute.[1]
Eliminated rules for mobile broadband. In the same vein the court overturned the FCC rules requiring net neutrality for mobile broadband.[2]
Relied on new court power through Loper and the end of Chevron Deference. The court relied in part on the end of Chevron deference to say that “Applying Loper Bright means we can end the FCC’s vacillations” (on whether broadband is a Title I or Title II service.)[3]
Did not address the Major Question Doctrine. The court explicitly declined to address the ISP argument that the FCC rule violated the Major Question Doctrine. [4]
Implications for Investors
Decision was expected.
- When the case was assigned to the Sixth Circuit, we (and everyone else) expected the court to overturn the FCC rule.
- Even if we were wrong, the Trump FCC would have changed the rules so the market impact about the Rosenworcel rules going away has long since been priced in.
No change in how wired broadband providers operate or in their economics.
- There was a time when broadband speeds were low enough that there were incentives to discriminate in the delivery of services.
- With increasing speeds offered by both cable and telco providers, those incentives have gone away.
- As California (which has a state net neutrality law) demonstrates, where there is a state law mandating net neutrality when federal law did not, a net neutrality requirement or absence of such a requirement does not change the economics of the ISPs.
- To the extent that investors were concerned about a future FCC imposing rate regulation or mandatory unbundling, that threat is largely gone
- In short, we were skeptical that the FCC order presented a material economic challenge to the ISPs, but we also did think winning creates a material upside for them.[5]
Some potential upsides for wireless carriers, though the election already provided those upsides.
- Because of spectrum limits, the incentives for wireless providers to discriminate are greater than for wired providers.
- During the debate over the 2024 rulemaking, wireless interests expressed concerns that the rule could constrict network slicing and other network management tools to enable more efficient and targeted spectrum use.
- The court decision likely eliminates those concerns.
By not addressing the Major Question Doctrine, creates a slightly bigger window for future FCC to revisit the issue but we highly doubt that will happen.
- A future FCC could bring back the Title II analysis and hope to have it challenged in a different circuit, perhaps more favorable to the Title II analysis.
- By not addressing the Major Question Doctrine, it is slightly easier for a future FCC to win as that FCC would only have to jump over one hurdle, not two.
- But that is not a likely scenario anytime in the investment horizon for any investors.
The court did nothing to undercut state rules regulating broadband.
- Nothing the court wrote appears to argue that the law not only limits FCC authority but also preempts state law.
- The prevailing rule now is the 2018 Pai FCC order which tried to preempt states but the Court of Appeals that upheld that order in its classification analysis rejected the Pai preemption argument.
- So, the new decision keeps open the door to state action.
The court did nothing to undercut the Second Circuit opinion upholding state mandates for broadband providers.
- The Sixth Circuit essentially returned the state of the law to where it was when the Second Circuit upheld a New York State law mandating that ISPs offer a low-income broadband service at a speed and price set by the law.
- As we discussed in a note in December (LINK) the Supreme Court declined to hear an ISP challenge to the Second Circuit opinion. a New York State law mandating that ISPs offer a low-income broadband service at a speed and price set by the law.
The decision also affects Rosenworcel’s (and any future FCC) efforts related to border gateway security
- Rosenworcel is attempting to require large broadband providers to file confidential reports on Border Gateway Protocol security to enable the FCC and others with a mandate to protect national security to collect more up to-date information about internet routing intersection.
- This effort also relies on broadband being classified as a Title II service for its legal authority.[6]
Calls by Chairwomen Rosenworcel and Commissioner Gomez for Congress to codify the net neutrality rules are highly unlikely to succeed.
- Both issued statements calling on Congress to act.
- We think the odds of Congress acting as requested are zero.
Bottom Line: For more than 20 years, “net neutrality” has dominated headlines for political debates at the FCC. We think that run is now at an end.[7] There likely will be more debates at the state level, but such state laws on net neutrality are unlikely to materially change the economics of the ISPs, though state laws on pricing, such as New York low-income mandate, could affect the economics.
[1] The court wrote that “Using ‘the traditional tools of statutory construction,’, we hold that Broadband Internet Service Providers offer only an ‘information service’ under 47 U.S.C. § 153(24), and therefore, the FCC lacks the statutory authority to impose its desired net-neutrality policies through the “telecommunications service” provision of the Communications Act, id. § 153(51).
[2] The court wrote, “Nor does the Act permit the FCC to classify mobile broadband—a subset of broadband Internet services—as a “commercial mobile service” under Title III of the Act (and then similarly impose net-neutrality restrictions on those services).
[3] Academics in law schools will argue about whether the decision is a direct consequence of the Loper decision or whether this court would have come to the same decision even if Chevron deference was still the law of the land. Our read is that this panel would have overturned this FCC rule under any legal circumstance, relying on the analysis of Harvard Law Professor Cass Sunstein who wrote that as to Loper, “If the goal is to predict whether a court of appeals will strike down an agency's interpretation of law, it may be more important to know whether the panel consists of Republican or Democratic appointees, and whether the agency's interpretation leans left or right, than to know whether Chevron or Loper Bright is the governing law.” But investors should be indifferent as to the cause of the decision and focus on the implications of the decision on the wired and wireless ISPs.
[4] The court wrote, “Given our conclusion that the FCC’s reading is inconsistent with the plain language of the Communications Act, we see no need to address whether the major questions doctrine also bars the FCC’s action here.”
[5] While opinion writers (such as the Wall Street Journal) and Republican policy types (on the Hill and at the FCC) have predicted financial doom and gloom for the ISPs if the Title II rules go into effect, as far as we know, during the Biden Administration, the topic has never come up on a quarterly call and no ISP CFO talking to investors in a public forum has raised it has a material risk. Meaning no disrespect to opinion writers and policy types, when it comes to gauging reality, we tend to give more weight to the clues provided by CFOs.
[6] In paragraphs 99 and 100 of the NPRM, the FCC cites Title II as its legal authority for the action.
[7] Blair wrote his first Wall Street note on the yet to be named net neutrality issue in December 2001. In the spirit of the recent Dylan biopic “A Complete Unknown,” which begins and ends with the Woody Guthrie song “so long, its’s been good to know yuh,” Blair wishes to say that as to net neutrality, so long, it’s been good to know yuh.