Second Circuit Preemption Decision Likely Won’t Save New York Broadband Rate Regulation Scheme

I. Introduction and Summary 

Under both Democratic and Republican leadership, the Federal Communications Commission has consistently prohibited broadband rate regulation. But New York recently challenged this bipartisan federal policy by requiring in-state providers to offer a basic tier of service to low-income consumers at state-regulated rates.[1]

Perhaps surprisingly, last month the Second Circuit Court of Appeals upheld New York’s law against a preemption challenge, finding that because the Restoring Internet Freedom (RIF) Order classified broadband as an information service, the FCC lacked authority to regulate broadband rates and therefore the state program did not conflict with federal policy.[2]

The Second Circuit’s decision is well-written but exhibits a narrow understanding of conflict preemption. The RIF Order reflected the agency’s policy judgment that rate regulation and other hallmarks of the public utility model harmed broadband growth and innovation. The Supreme Court has stated that “where failure of federal officials affirmatively to exercise their full authority takes on the character of a ruling that no such regulation is appropriate…states are not permitted to use their police power to enact such a regulation.”[3] Because New York’s law “stood as an obstacle” to the light-touch regulatory framework that the RIF Order “deliberately imposed” on broadband services, the court should have found it preempted.[4]

Fortunately, the Second Circuit’s decision is, to use the court’s own phrase, “not long for this world.”[5] For all its faults, the FCC’s recently adopted Title II order expressly “exercise[s] broad forbearance—including no rate regulation…to ensure that the regulatory environment is properly tailored to protect consumers and achieve other important public interest responsibilities while not unnecessarily stifling investment and innovation.”[6]

The Second Circuit recognized that a decision to forbear from applying Title II’s rate regulation provisions would preempt New York’s law. Therefore, the court should reconsider its decision in light of the FCC’s recent action, and affirm the lower court’s decision to enjoin the act. While it is an important goal to assure low-income families remain online, targeted voucher programs are a better way to meet this objective without distorting broadband markets through price controls.

 II. Analysis

New York’s Affordable Broadband Act requires all wireline, fixed wireless, and satellite broadband providers to offer qualifying low-income consumers a basic service plan of 25 Mbps for $15 per month, or 200 Mbps for $20 per month.[7] Like many low-income subsidy plans, a household is eligible if it is enrolled in one of a menu of other low-income assistance programs.[8] Once every five years, broadband providers may petition the state to increase the regulated rate.[9]

This mandatory, price-controlled basic tier requirement contradicts a long-standing, bipartisan federal policy opposing broadband rate regulation. The Commission’s early classification decisions were anchored in the belief that “broadband services should exist in a minimal regulatory environment that promotes investment and innovation in a competitive market.”[10] While the 2015 Open Internet Order reclassified broadband as a Title II common carrier service, it “expressly eschew[ed]” Title II’s price control provisions.[11]

The Commission stated “there will be no rate regulation”[12] and that it “cannot envision adopting new ex ante rate regulation of broadband Internet access service in the future.”[13] The 2018 Restoring Internet Freedom Order returned broadband to Title I status in part due to concerns that “the Commission could reverse course in the future and impose a variety of costly regulations on the broadband industry—such as rate regulation,” which would undermine broadband growth and investment.[14]

Despite this clear and consistent directive, the Second Circuit ruled that the Affordable Broadband Act does not conflict with federal policy because the Commission lacked authority to preempt state rate regulation.[15] The court explained that Title II includes federal rate regulation authority, so a decision to classify broadband under Title II but forbear from rate regulation would preempt states from adopting such programs.[16] But Title I does not grant the Commission the power to regulate rates, and the court ruled that “[a]bsent the power to act, the FCC has no power to preempt broadband rate regulation.”[17]

While superficially logical, the court’s decision applies conflict preemption too narrowly. The Supremacy Clause preempts a state law that “stands as an obstacle to the accomplishment and execution of the full purposes and objectives” of the federal government.[18] In Geier v. American Honda Motor Co.,[19] the Court found that a state mandatory airbag requirement was preempted by a Department of Transportation regulation requiring automotive manufacturers to equip some, but not all, vehicles with airbags. The justices found that agency chose not to exercise its full regulatory authority because flexibility would facilitate innovation and improve safety overall. As a result, the state airbag requirement was preempted because it would “frustrate the accomplishment of a federal objective.”[20]

Similarly, state-level rate regulation of broadband would “frustrate the accomplishment” of the RIF Order. The Commission chose Title I instead of Title II because a light-touch framework would better encourage broadband growth and innovation. Just as forbearance under Title II would be a regulatory choice preempting state rate regulation, the decision to proceed under Title I was a choice not to exercise its full regulatory authority, informed in part by the agency’s policy judgment. The Commission’s objective, to avoid rate regulation and other burdensome regulatory requirements, is frustrated by New York’s law.

Fortunately for federal policy, the Second Circuit’s decision was itself preempted. The day before the decision was published, the Commission repealed the RIF Order and reinstated Title II classification.[21] Although this order is problematic in many ways, the agency expressly stated that “we do not find ex ante or ex post rate regulation necessary” and thus “we find it in the public interest to forbear from applying sections 201 and 202 insofar as they would permit the adoption of such rate regulations for BIAS in the future.”[22]

The Second Circuit had acknowledged that such a decision would preempt the Affordable Broadband Act under traditional conflict preemption principles.[23] Therefore, the law’s challengers should immediately move for reconsideration of the court’s decision. Alternatively, they should hold the Commission to its promise that it “will not hesitate” to preempt state laws that “are incompatible with the federal regulatory framework.”[24] In a paragraph added after the final vote, the order expressly took no position on existing state programs and asserted “the mere existence of a state broadband affordability program is not rate regulation.”[25] But Commissioner Brendan Carr wrote separately that in his view, New York’s program is “the type of naked rate regulation that is plainly preempted by today’s Order.”[26] And the Commissioner is correct: the Act requires providers to offer a specific plan at a price dictated by the state Department of Public Service, which constitutes “rate regulation” under any meaningful definition of the term.

III. Conclusion

New York’s overall purpose is both worthy and valid. Universal service has long been a cornerstone of communications law, and as more of our lives move online, it becomes increasingly important to ensure that low-income households are not left behind on the wrong side of the digital divide. But rate regulation is the wrong tool to address this problem.

Minimum service requirements and price controls can distort investment and innovation over time, particularly in markets as dynamic as broadband service. Such distortions, ironically, risk locking low-income families into second-rate offerings.

Instead, New York should consider subsidizing low-income households direct-to-consumer aid like vouchers. This would improve the purchasing power of low-income households, allowing them to participate in broadband markets without distorting the operation of those markets for society more broadly. That way, New York could pursue its broader goals without running afoul of the federal government’s long-standing, bipartisan dedication to a broadband marketplace free of government price controls.

Daniel A. Lyons is Professor and Associate Dean of Academic Affairs at Boston College Law School. This essay is adapted from a Perspectives from FSF Scholars originally published by the Free State Foundation on May 10, 2024, and is reprinted with permission.

Broadband Breakfast accepts commentary from informed observers of the broadband scene. Please send pieces to commentary@breakfast.media. The views expressed in Expert Opinion pieces do not necessarily reflect the views of Broadband Breakfast and Breakfast Media LLC. 

[1] Affordable Broadband Act, N.Y. Gen. Bus. Law § 399-zzzzz.

[2] New York State Telecom. Ass’n v. James, __ F.4th __. 2024 WL 1814541 (Apr. 26, 2024).

[3] Ray v. Atlantic Richfield Co., 435 U.S. 151, 178 (1978).

[4] See Geier v. Am. Honda Motor Co., 529 U.S. 861, 881 (2000).

[5] New York State Telecom. Ass’n  at *7 (“The Plaintiffs’ broad claim was stunning, but not long for this world.”).

[6] Safeguarding and Securing the Open Internet, FCC 24-52, ¶ 6, available at https://docs.fcc.gov/public/attachments/FCC-24-52A1.pdf.

[7] N.Y. Gen. Bus. Law § 399-zzzzz.

[8] Id.

[9] Id.

[10] Inquiry re High-Speed Access to Internet Over Cable and Other Facilities, 17 FCC Rcd. 4798, 4802 (2002).

[11] Protecting and Promoting the Open Internet, 30 FCC Rcd. 5601, 5603 (2015).

[12] Id. at 5775.

[13] Id. at 5814.

[14] Restoring Internet Freedom, 33 FCC Rcd. 311, 370 (2018).

[15] New York State Telecom. Ass’n at *1. The Court also found, correctly, that field preemption was inapplicable because federal law has not occupied the field in this area. Id.

[16] Id. at *14.

[17] Id.

[18] Fidelity Fed. Savings & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153 (1982) (quoting Hines v. Davidowitz, 312 U.S. 52, 67 (1941)).

[19] 529 U.S. 861, 873 (2000).

[20] Id. at 873.

[21] Safeguarding and Securing the Open Internet, FCC 24-52.

[22] Id.  ¶ 386.

[23] New York State Telecom. Ass’n, supra note 2, at *14.

[24] Safeguarding and Securing the Open Internet ¶¶ 265, 268.

[25] Id.

[26] Id. (Dissenting Statement of Brendan Carr).