Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Wright, McSweeny offer differing views on net neutrality rule to House Judiciary Committee, (Mar 27, 2015)

By Greg Hammond, J.D.

FTC Commissioners Joshua D. Wright and Terrell P. McSweeny testified before the U.S. House of Representatives Committee on the Judiciary on March 25, offering differing views on the Federal Communications Commission’s newest regulation of the broadband sector—the net neutrality rule. While McSweeny suggests that the FTC and FCC can work together in the broadband sector, Wright takes the position that the FCC’s regulation does not make sense from an economic perspective and that the FTC is better equipped to regulate this area.

“[T]he FCC’s decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off,” Wright stated in his prepared statement, entitled “Wrecking the Internet to Save It? The FCC’s Net Neutrality Rule.”

“Central to my conclusion that the FCC’s attempts to regulate so-called ‘net neutrality’ in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II,” he explained.

The FCC’s net neutrality rule places a categorical ban on providers’ ability to enter into certain vertical contractual relationships, Wright said. This defies modern economic learning, because the FCC ignores empirical economic research that demonstrates that these kinds of vertical agreements frequently provide substantial benefits for consumers and very rarely result in consumer harm, according to the Commissioner.

The net neutrality rule also creates substantial uncertainty, Wright said, through its broad “general conduct rule,” which allows the FCC substantial discretion to decide whether “new practices” harm consumers or edge providers. Wright suggests that the rule will likely deter firms from engaging in pro-consumer economic activity.

However, Commissioner Wright conceded that, under some circumstances, vertical contracts can result in anticompetitive outcomes. “This raises an interesting question for the FCC,” Wright said. “[I]f an outright ban on vertical restraints in the broadband industry cannot be justified, yet there is a chance that vertical restraints could harm broadband consumers, then what should the FCC do?” The answer, Wright says, is nothing because the FTC is better suited to “pick up the slack.”

Specifically, Wright suggests that the rule of reason is more likely to maximize consumer welfare in the broadband industry, rather than the FCC’s ban, because it better focuses on minimizing the social costs of false positives and false negatives. While the rule of reason is probably more costly to administer in individual cases, the administrative costs the FCC will incur in developing, defining, and defending the net neutrality rule “is not trivial either,” Wright said.

Turning to the issue of consumer protection, “By reclassifying broadband internet providers as common carriers under Title II, the FCC threatens to strip the FTC of its jurisdiction to regulate broadband providers as part of its consumer protection mission,” Commissioner Wright stated. “The FTC has been active in this space over the last 20 years, and the FCC’s regulation would displace much pro-consumer activity. I believe reclassification under Title II will unequivocally harm consumers by depriving consumers of the FTC’s activities in the broadband sector.”

Conversely, Commissioner Terrell McSweeny testified that the FTC and FCC can work together. “There is not an either-or choice that must be made between FCC regulation and FTC enforcement as it relates to an open Internet,” Commissioner McSweeny said. “Both are different tools with different features and both have a role to play when it comes to protecting consumers and ensuring an Internet that continues to foster competition and innovation.”

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