Federal Preemption, the Dormant Commerce Clause, and State Regulation of Broadband: Why State Attempts to Impose Net Neutrality Obligations on Internet Service Providers Will Likely Fail

90 Pages Posted: 8 Aug 2018 Last revised: 30 Aug 2018

Graham Owens

TechFreedom

Date Written: July 19, 2018

Abstract

On December 14, 2017, the Federal Communications Commission (FCC) voted 3-2 to repeal the 2015 Open Internet Order (2015 OIO)—which reclassified broadband Internet service providers (ISPs) as Title II common carriers and imposed “net neutrality” regulation upon them—and replace that Order with the light-touch Restoring Internet Freedom Order (RIFO). Twenty-one states quickly announced plans to challenge the RIFO in court. Such suits will inevitably fail: The Supreme Court long ago upheld the FCC’s ruling that cable companies providing broadband Internet access did not provide “telecommunications service,” and hence could not be regulated as common carriers under Title II of Communications Act. In addition to challenging the RIFO, almost fifteen states have—whether through legislation or executive orders—also attempted to reimpose the 2015 OIO’s net neutrality obligations on ISPs, generally by one of two mechanisms: (1) directly imposing net neutrality requirements on ISPs by recreating a version of the 2015 OIO at the state level or (2) conditioning an ISP’s ability to do business with, or within, the state, on the ISP’s state-wide adherence to certain net neutrality principles with regard to all customers as a condition of eligibility for any state contracts, access to rights of ways, or video service franchises. Both forms of state regulation are likely unconstitutional, for two broad reasons: 1. Preemption: The Constitution makes the “laws of the United States … the supreme law of the land.” Interpreting the Communications Act, the FCC’s RIFO sets forth “a calibrated federal regulatory regime based on the pro-competitive, deregulatory goals of the 1996 [Telecommunications] Act,” and makes clear that broadband service should be governed “by a uniform set of federal regulations, rather than by a patchwork that includes separate state and local requirements.” Accordingly, the RIFO “preempt[s] any state or local measures that would effectively impose rules or requirements that we have repealed or decided to refrain from imposing in this order or that would impose more stringent requirements for any aspects of broadband service that we address in this order.” 2. Commerce Clause: The Internet—described as a “network of networks” connecting local systems to regional systems all the way to national and international sys-tems—naturally extends beyond the boundaries of any state, and the effects of any state regulation will similarly extend beyond state borders, thus implicating the “Dormant Commerce Clause.” This doctrine limits the states’ ability to institute regulations that act as barriers to interstate commerce, even in instances where the state may be acting within its traditional police powers to protect public health and safety, or to protect its citizens from unfair or deceptive trade practices. The Communications Act of 1934 authorized the FCC to make any regulation necessary to establish and maintain a uniform, regulatory environment for interstate communications. The Telecommunications Act of 1996 was even more specific, entrusting the FCC to undertake any measure necessary, “to preserve the vibrant and competitive free market that presently exists for the Internet … unfettered by Federal or State regulation.” The meaning of another provision of that Act, Section 706, has been hotly contested (specifically, whether it confers independent power upon the FCC), but it clearly envisions the FCC using its preemption authority to “promote competition in the local telecommunications market, or …. remove barriers to infrastructure investment.” In accordance with the 1996 Act’s pro-competition, deregulatory purpose, the RIFO declares that broadband should be governed by a “uniform set of federal regulations, rather than by a patchwork that includes separate state and local requirements.” To ensure this uniformity, the RIFO “preempt[s] any state or local measure that would effectively impose rules or requirements that [the FCC] repealed or … that would impose more stringent requirements for any aspect of broadband service that we address in this order.” Under Supreme Court precedent, the FCC’s establishment of a uniform deregulatory framework and clear preemption statement renders the states’ actions void ab initio. The Supreme Court long ago held that “the statutorily authorized regulations of an agency will pre-empt any state or local law that conflicts with such regulations or frustrates the purposes thereof.” Thus, though Congress’ intent remains the critical question, the Supreme Court has tended to hold that “[f]ederal regulations have no less pre-emptive effect than federal statutes.” Perhaps most importantly, that the RIFO adopted a federal policy of deregulation, rather than regulation, in no way undermines that Order’s preemptive force, as the Court has stated that a federal determination that a policy be left “unregulated” carries “as much pre-emptive force as a decision to regulate.” Further, while states acting as “market participants” in a pure propriety manner are “not subject to preemption,” attempts by states to impose net neutrality obligations on ISPs through contract restrictions will also be held invalid. The Supreme Court has long held that states may not use their spending power to regulate areas where Congress or a federal agency has preempted them from doing so, because the “government occupies a unique position of power in our society, and its conduct, regardless of form, is rightly subject to special restraints.” Given this unique power, “it is far from unusual for federal law to prohibit States from making spending decisions in ways that are permissible for private parties.” Thus, masking a regulation as an operation of a state’s spending power will not shield the action from federal preemption, because “[i]t is the conduct being regulated, not the formal description of governing legal standards, that is the proper focus of concern.” Finally, the states’ actions also violate the Dormant Commerce Clause, which prohibits regulation of activities “that inherently require a uniform system of regulation” and “impair the free flow of materials and products across state borders.” As the RIFO declares, “it is impossible or impracticable for ISPs to distinguish between intrastate and interstate communications over the Internet or to apply different rules in each circumstance.” Given this inability to separate the interstate and intrastate components, these state measures would inherently force ISPs to modify their actions outside of the state’s bor-ders—thus violating the Dormant Commerce Clause. In short, while multijurisdictional regulation—both vertically between Federal and state governments and horizontally among the states—is not unique to regulation of the Internet, the uniquely global nature of the Internet and the FCC’s express preemption statement will render the states’ efforts to impose net neutrality obligations on ISPs invalid upon judicial review. 

Suggested Citation

Owens, Graham, Federal Preemption, the Dormant Commerce Clause, and State Regulation of Broadband: Why State Attempts to Impose Net Neutrality Obligations on Internet Service Providers Will Likely Fail (July 19, 2018). Available at SSRN: https://ssrn.com/abstract=3216665 or http://dx.doi.org/10.2139/ssrn.3216665

Graham Owens (Contact Author)

TechFreedom ( email )

1899 L ST NW
12th Floor
Washington, DC 20036
United States

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