“Net neutrality” has become one of the most hotly debated issues before lawmakers and regulators in Washington this year.  Proponents of net neutrality argue that the government should regulate the conduct of broadband Internet Service Providers to ensure that the Internet is not divided into “fast lanes” and “slow lanes,” and to prevent them from offering preferential treatment to providers of content, applications, or services that pay more for priority access to the consumer.  Opponents of net neutrality argue that network owners should be able to manage traffic on their networks without government intervention.  They complain that regulation of Internet services will inhibit competition and innovation, and will create disincentives for network owners to upgrade their networks. 

Although the debate has been going on for more than a decade, the Federal Communications Commission (FCC) is set to consider new rules this summer and fall.  The two main points of contention in the public debate over net neutrality before the FCC are: (i) whether the FCC should reclassify broadband Internet service as common carrier service, and (ii) whether the FCC should prohibit or regulate paid prioritization deals.  This debate is significant for every company whose products or services depend on broadband Internet access, and especially for those in the video game industry whose businesses depend on consistently high-quality, low-latency service.  The FCC released its latest proposals on May 15, 2014 and has opened a proceeding for public comment on the proposals with deadlines on July 15 and September 10. 

The FCC issued its new proposals in response to a decision in January by the U.S. Court of Appeals for the District of Columbia Circuit, which invalidated portions of the rules the FCC adopted in 2010.  Those rules incorporated three major components:  (i)  transparency rules, which required broadband service providers to disclose accurate information regarding their network management practices and terms of service; (ii) a “no blocking” rule, which prohibited broadband providers from blocking lawful content, applications and services, subject to reasonable network management; and (iii) an anti-discrimination rule, which did not apply to mobile broadband providers, but prohibited providers of fixed broadband services from discriminating in the transmission of lawful network traffic over a consumer’s broadband Internet access service.

Verizon and others challenged the rules on the basis that the FCC lacked statutory authority to adopt them and that the statute prohibited the FCC from treating broadband providers as common carriers.  The Court of Appeals held that, although the FCC had authority to adopt regulations to promote deployment of broadband services under Section 706 of the Communications Act, it could not impose traditional common carrier obligations on providers of those services. It found that the Communications Act expressly prohibits the FCC from regulating non-telecommunications services as “common carrier” services, and the FCC has consistently refrained from applying common carrier regulations to broadband services.  The Court of Appeals vacated the no blocking and antidiscrimination rules because they appeared to be common carrier rules, but it upheld the rules requiring transparency as they were consistent with other statutory requirements.

In its new proceeding, the FCC proposes to enhance the transparency rules to give consumers, edge providers, and regulators greater access to disclosures of network congestion and notice of any new practices by broadband providers that might impact consumers’ use of online services.  It also proposes to reinstitute the previous no blocking rule and to adopt a new rule that would incorporate an enforceable legal standard of conduct barring practices by broadband service providers that threaten the “openness” of the Internet. 

The FCC seeks to address the controversy surrounding “paid prioritization” of Internet traffic using the proposed enforcement mechanism.  Although the rules the FCC adopted in 2010 did not expressly prohibit paid prioritization, the FCC stated that paid prioritization deals were unlikely to be permitted given the prohibition on unreasonable discrimination.  The Court of Appeals examined this issue closely in its assessment of the FCC’s statutory authority to adopt the rules.  Focusing on the FCC’s statement concerning paid prioritization, the Court of Appeals determined that the FCC had left no room for individualized bargaining with edge providers.  The FCC’s new proposal asks commenters whether it should prohibit paid prioritization deals outright, or whether there are other methods it may use to ensure that broadband providers do not treat consumers, edge providers, and innovators unfairly.  It also asks for information on private transactions between edge providers and broadband providers and how these deals affect the market.

Regardless of what rules the FCC ultimately adopts concerning paid prioritization, the FCC will have to articulate a more sound statutory basis for the rules than it did in 2010 if they are to survive judicial challenge.  The FCC proposes to continue to rely on Section 706 of the Communications Act, but to do so in a manner that is more consistent with its statutory authority, as interpreted by the Court of Appeals.  The FCC has also asked for comment as to whether it should instead use its authority under Title II of the Communications Act to reclassify broadband Internet service as a “telecommunications” service, subject to common carrier regulation.  Edge providers such as Netflix and Mozilla have publicly supported this approach, as have many advocacy groups. 

Net neutrality will be a significant issue in the context of merger review proceedings before the FCC and antitrust authorities this year.  Several major providers of broadband services have voluntarily agreed to abide by the 2010 rules until new rules are in place.  Net neutrality has also generated considerable interest on Capitol Hill and may become the catalyst for a long-awaited overhaul of federal communications laws to bring them in line with present-day technologies. 

The rules the FCC adopts will impact the video game industry as they will affect all online video streaming and other Internet-based services, particularly as games become more interactive and utilize more bandwidth.  While the proposed transparency rules will likely help video game companies and consumers assess whether broadband providers are living up to expected levels of service, increased scrutiny of private contracts between broadband providers and online game companies and other regulations on edge services may be unwelcome.  Video game companies should be assessing how the proposed rules could affect them and should be developing their legislative and regulatory strategies now to ensure that their input in the public comment process is most effective.

© 2014 Perkins Coie LLP