2nd Circuit Upholds N.Y. Affordable Broadband Act, Reversing Lower Court

The 2nd Circuit disagreed with the lower court and telecom industry plaintiffs, including USTelecom, CTIA and NTCA, that the state law fails due to field preemption of rate regulating interstate services and conflict preemption due to the FCC’s 2018 order that reclassified broadband as Title I. The decision came the day after the FCC voted 3-2 to reimpose Communications Act Title II regulation on broadband, a move industry will likely challenge (see 2404250004).

The Communications Act doesn't "wholly preempt states from regulating the rates charged for interstate communications services, because the Act does not establish a framework of rate regulation that is sufficiently comprehensive to imply that Congress intended to exclude the states from entering this field,” wrote Judge Alison Nathan in the opinion, which Judge Sarah Merriam joined. As for conflict preemption, the FCC's 2018 order "stripped the agency of its authority to regulate the rates charged for broadband internet, and a federal agency cannot exclude states from regulating in an area where the agency itself lacks regulatory authority,” Nathan said.

Judge Richard Sullivan dissented. “The Communications Act preempts all rate regulation of interstate communication services,” Sullivan wrote. It says that the FCC has exclusive authority over interstate services, "except for certain areas like consumer protection where states have traditionally exercised power,” he said. The ABA frustrates the FCC’s 2018 order, he added. "The FCC’s actions and words evince an obvious" purpose "to foster openness and investment by sheltering broadband internet service from rate regulation.” He disagreed that the FCC lacked power to regulate broadband after the 2018 decision because it still had the ability to reclassify broadband as Title II.

But Sullivan devoted two-thirds of his dissent to process concerns that he had grilled New York on during a January oral argument (see 2301120041). The lower court granted a preliminary injunction in June 2021. To clear an appeals path, the New York attorney general and ISP plaintiffs agreed in July 2021 that the state wouldn't yet enforce the law but reserved the right to appeal. They agreed the court’s holdings on preemption in a June 11 preliminary injunction order resolved legal issues and should be used as a final judgment. Sullivan wrote that such a tactic "is generally not permitted as a shortcut to appellate review."

Telecom industry groups criticized the decision, in a statement that plaintiffs ACA Connects, CTIA, NTCA, the New York State Telecommunications Association, the Satellite Broadcasting & Communications Association and USTelecom endorsed. “We are disappointed by the court’s decision and New York state’s move for rate regulation in competitive industries,” the groups said: “It not only discourages the needed investment in our nation’s infrastructure, but also potentially risks the sustainability of broadband operations in many areas.” New York AG Letitia James (D) didn’t comment.

Friday’s decision could thaw separate litigation over Vermont’s net neutrality law. Vermont is also part of 2nd Circuit territory, and the U.S. District Court of Vermont last year stayed litigation on the state’s open-internet law until the 2nd Circuit addressed the ABA (see 2205050041 and 2204190072).

A Win for States With ‘Curious’ Timing

“It’s a sweeping victory for the state effort to regulate broadband -- if broadband is classified as a Title I service,” said Barbara van Schewick, director of Stanford University’s Center for Internet and Society. It joins other courts rejecting similar industry arguments against Maine’s ISP privacy law and California’s net neutrality law, the professor said in an interview. There remains no circuit split that could make a U.S. Supreme Court review more likely, she said. Meanwhile, it’s now for ISPs to decide what to do in the Vermont case, where the 2nd Circuit decision is now binding precedent, she said. While the 2nd Circuit decision might have “no immediate effect,” given that the decision governs a Title I regime and the FCC just reclassified broadband as Title II without preempting states, “it’s going to really affect the strategic calculus if the administration ever changes again,” van Schewick said.

“This decision was based on the classification as an information service, but the court’s reasoning on conflict and field preemption were spot-on,” said NARUC General Counsel Brad Ramsay. On the question about what would happen if a future FCC reverted to Title I, Ramsay said, “If it flips again, then this is a very good decision.”

The decision comes “at a curious time,” after the FCC approved the new rules “but before the full and final text has been released,” said Cooley’s Robert McDowell, a former FCC member. The court's decision could prove moot if the commission “incorporated strong state preemption language in its rules,” he said: “If it left the preemption issue vaguely addressed or with large gaps, however, states may rush in to regulate broadband like New York did.”

The decision is “great news, not just for New York’s program, but for state authority over broadband generally,” emailed Public Knowledge Legal Director John Bergmayer. The lower court’s opinion “was an outlier,” especially in its finding that the FCC’s 2018 order “would somehow preempt states,” he said: It’s “a bit funny that this zombie legal argument was finally put to bed right after the Title II vote. Of course, the rest of the preemption discussion centered on the Communications Act itself is valuable as well. As the FCC just confirmed yesterday, states and the federal government can work together to protect broadband users.”

“Given that the ABA is far more disruptive to the carefully calibrated federal scheme of incentives to promote universal service than assessing fees, we felt that the court should find that the Communications Act and other federal laws preempt the ABA,” said Digital Progress Institute President Joel Thayer. “We’re disappointed that it didn’t.” While no “silver bullet” will ensure everyone can access affordable high-speed broadband, “federal law, business reality and past experience show that rate regulation is the one policy that is sure to fail in achieving the state’s goal,” he said.

“Whatever you think of New York's law, this industry challenge is just another example of cable and phone companies wanting to have their cake and eat it, too,” said Matt Wood, Free Press vice president-policy. “They lobby the federal government to abdicate its authority over essential internet access service, and then claim that states can't step in and fill the void created when the federal government shirks its duty,” Wood said.

Providers and other big tech companies complain about “facing a patchwork of state regulations, but as we've seen again and again, they have no compunction and no intellectual consistency,” Wood said: “They just seek out the weakest regulations they can find at every level, and try to play both sides against the middle.”

The decision is “based on a mistaken reading of federal law that opens the door to harmful state-level rate regulation of internet services,” emailed Seth Cooper, Free State Foundation director-policy studies. The court rejected “the preemptive effect” of the FCC's 2018 order “based on a lopsided reading of the Communications Act that gives the agency implied preemptive power to preserve Title II-based heavy-handed regulatory regimes -- but not Title I-based light-touch regimes -- from interference by state laws,” Cooper said.

“We think this decision, which is negative for ISPs, was likely timed to the FCC decision on Title II and paints a path that other states will look at as the Affordable Connectivity Program runs out of funds,” New Street’s Blair Levin told investors Friday. With ACP possibly running out of cash in a few weeks, the court decision “provides a road map for other states to follow to join New York in doing what the federal government has thus far failed to do,” said Benton Institute for Broadband & Society Senior Counselor Andrew Schwartzman.

‘Foreseeable Legal Consequences’

“Neither the text and structure of the Communications Act, the history of this type of regulation, nor relevant precedent support the Plaintiffs’ argument that Congress intended to preempt the field of rate regulation of interstate communications services when it passed the Communications Act,” wrote Judge Nathan. "Although we agree that [Section] 152(a) broadly grants the FCC jurisdiction over 'all interstate and foreign communication,' nothing in the text suggests that the FCC has exclusive jurisdiction over interstate communication.”

The act “has no framework for rate regulation over Title I services like broadband, let alone one that is ‘so pervasive ... that Congress left no room for the States to supplement it,'” said Nathan: "This absence of regulation is the exact opposite of" a pervasive federal framework. "The Plaintiffs’ position would create a regulatory vacuum in which the federal government has both declined to regulate an industry and simultaneously prohibited states from regulating.”

It "was quite a stunning claim" for the plaintiffs to argue in district court that the Communications Act preempted all state regulation of interstate services, Nathan said. No court has said that, but "courts in New York and across the country have upheld numerous state regulations of interstate communications services against preemption challenges,” she said. On appeal, the industry argued more narrowly that the act preempted state regulation of interstate rate regulation, said Nathan. “The Plaintiffs have moved the goalposts on the preemption field, but their claim fails anyway.”

When cable was lightly regulated under Title I, many states enacted laws regulating cable rates, Nathan said. The Supreme Court's 1987 decision in Louisiana Public Service Commission v. FCC didn't cleanly divide authority over interstate and intrastate services between the FCC and states, respectively, she said. "Louisiana made clear that the states continue to have a role in regulating communications services, even if such regulations touch on interstate services." Also, the court disagreed with industry that the 2nd Circuit's 1968 decision in Ivy Broadcasting Co. v AT&T stops states. That case pertained to telephone and telegraph companies, but industry argued it extends to all interstate services. However, Nathan said “the Communications Act subjects [broadband] services to an entirely different regulatory regime than telephone and telegraph companies."

"By moving broadband outside of the more comprehensive regulatory regime in Title II, the FCC surrendered the statutory authority to enact any rate regulations on broadband internet providers,” Nathan said about the conflict-preemption argument. The court agreed with the D.C. Circuit (in 2019’s Mozilla case) and the 9th Circuit (in a 2022 decision upholding California’s net neutrality law) that the FCC lacks authority to enact or preempt common carrier-style rules for broadband under Title I. "The fact that the FCC can choose between Title I and Title II does not mean that the FCC can opt to retain its Title II preemption authority after reclassifying broadband as a Title I service,” the judge added.

Many of the plaintiffs lobbied the FCC to classify broadband as Title I, even though "Supreme Court precedent was already clear that when a federal agency lacks the power to regulate, it also lacks the power to preempt,” Nathan noted. “The Plaintiffs now ask us to save them from the foreseeable legal consequences of their own strategic decisions. We cannot."