State Action on Net Neutrality Invites Costly Lawsuits

Published February 1, 2007

Having failed to muster support in Congress for regulating Internet transmission, proponents of so-called “network neutrality” are turning to state legislatures for action.

But Internet policy is unquestionably the province of the federal government, as established by statute and an abundance of case law and administrative orders. To circumvent proper legislative and regulatory channels would provoke costly litigation and inhibit broadband investment in states that attempt it.

Michigan was the first stop in the forum-shopping underway by Internet content providers such as Google, Yahoo, and Disney, who want lawmakers to prohibit broadband networks from instituting tiers of transmission services. These content providers contend that priority services such as higher-speed transmissions would destroy the “neutrality” of Internet traffic, which currently moves on a first-come, first-served basis.

Network owners and economists say tier pricing could help generate the revenue needed to expand broadband infrastructure, which is inadequate for widespread delivery of video and other new bandwidth-intensive services.

Eleventh-Hour Effort

The issue was imported to Michigan in December 2006 just as the state Senate was finalizing franchise reforms that will speed deployment of Internet-based video services. Fortunately, eleventh-hour efforts at regulating the Internet failed. Video franchise reform passed (see story, page 6) without a net neutrality clause, and Gov. Jennifer Granholm signed the bill.

Failure in Michigan has not deterred network neutrality proponents. Similar lobbying for net regulation will likely occur in states where video franchise reform is on the legislative agenda.

However, consumers will not benefit if the franchise reforms are delayed by special-interest pleadings for net neutrality regulations. As it is, the courts have already invalidated a number of state laws intended to restrict Internet-related activities. For example:

In Libraries Association v. Pataki, which overturned a New York law restricting online content, U.S. District Court Judge Loretta A. Preska identified the Internet as a “national preserve” in which only the federal government may legislate. As Preska’s ruling stated: “Typically, states’ jurisdictional limits are related to geography; geography, however, is a virtually meaningless construct on the Internet. Regulation by any single state can only result in chaos, because at least some states will likely enact laws subjecting Internet users to conflicting obligations. (T)hese inconsistent regulatory schemes could paralyze the development of the Internet altogether. Haphazard and uncoordinated state regulation can only frustrate the growth of cyberspace.”

In Vonage v. Minnesota, a case that invalidated state regulation of Internet-based phone service, U.S. District Court Judge Michael J. Davis concluded, “State regulation would effectively decimate Congress’s mandate that the Internet remain unfettered by regulation.” The Federal Communications Commission subsequently issued an order exempting Voice over Internet Protocol (VoIP) from state regulation.

In National Cable & Telecommunications Assoc. v. Brand X, the U.S. Supreme Court declared that Internet services transmitted over telephone, cable, and electric power lines are “information services” under the federal Telecommunications Act of 1996 and thus immune from state regulation.

Passage of the Internet Tax Nondiscrimination Act, which pre-empts state authority to levy taxes on online transactions, further illustrates the intent of Congress to shield the Internet from state regulation.

State regulation of the Internet also would violate the U.S. Constitution. Article 1, Section 8, Clause 3 states, “Congress shall have power to regulate commerce among the several states.” This grant of authority to Congress long has been interpreted as conveying a negative (or “dormant”) prohibition against state laws that interfere with interstate commerce. By its very nature, the Internet is interstate and international.

Even assuming state regulation were somehow permissible, there’s simply no benefit to any state becoming widely known as hostile to the broadband industry. Regulatory burdens are anathema to investors, and lawmakers who impose net neutrality rules would put their state at the end of the line for high-tech investments.

Ultimately, state skirmishes over net neutrality will only harm citizens who live there. The most responsible reply to demands for net neutrality regulations is: “No. Go compete in the marketplace.”

Diane S. Katz ([email protected]) is director of science, environment, and technology policy for the Mackinac Center for Public Policy, a research and educational institute in Midland, Michigan. Raymond L. Gifford ([email protected]) is a senior adjunct fellow with the Progress & Freedom Foundation and a partner in the law firm of Kamlet, Shepherd & Reichert in Denver, Colorado.