The FCC’s February 2015 meeting yielded two significant and controversial orders premised on the agency’s authority under Section 706 of the Communications Act: its much-publicized Open Internet Order (discussed here), and its less-publicized order preempting state statutes setting limits on municipal broadband providers, including by restricting their geographic extension of service (“Municipal Broadband Order”).  In June 2016, the U.S. Court of Appeals for the D.C. Circuit gave the FCC a boost when it upheld the FCC’s net neutrality rules as a valid exercise of its authority under Title II of the Communications Act as well as Section 706.  Yesterday, in State of Tennessee v. FCC, Nos. 15-3291/3555, the U.S. Court of Appeals for the Sixth Circuit reversed the FCC’s assertion of sweeping preemption authority under Section 706 and remanded its Municipal Broadband Order.

The FCC’s Municipal Broadband Order asserted broad and unprecedented authority under Section 706 to preempt state laws limiting the ability of the state to control the provision of broadband by a state’s own political subdivisions.  In the FCC’s crosshairs were state laws in Tennessee and North Carolina restricting the service areas of municipal broadband providers to their municipal boundaries.  Invoking alleged authority under Section 706, the FCC declared that the state laws were preempted because they inhibited broadband investment, posed unlawful barriers to entry, and otherwise frustrated competition for broadband services.

The Sixth Circuit rejected the FCC’s assertion of preemption authority under Section 706.  The Court explained that no federal statute or regulation dictates the areas municipal broadband providers must serve or cannot serve.  Those decisions, the Court found, belong instead to the discretion of the municipal broadband provider, unless the state itself had exercised its retained police power authority to make decisions for its political subdivisions, as had Tennessee and North Carolina.  The court therefore held that the FCC exceeded its statutory authority when it attempted to insert itself between the states and their political subdivisions through the vehicle of preemption, because Section 706 nowhere contains a “clear statement” from Congress giving the FCC such broad preemptive authority.

Citing Commissioner Pai’s dissent in the underlying FCC order approvingly, the Court relied heavily on the reasoning of a 2004 United States Supreme Court case, Nixon v. Missouri Municipal League, 541 U.S. 125 (2004).  The Nixon case involved the Supreme Court’s review of an FCC decision not to preempt a Missouri state statute forbidding Missouri municipalities from entering the telecommunications market altogether.  The FCC refused to preempt the Missouri law because it found that there was no clear statement in Section 253 of the Act to do so.  The Supreme Court agreed with the FCC in that case and found that a clear statement was needed because federal preemption would “trench on the States’ arrangements for conducting their own governments.”

If the FCC wishes to continue to push the policy reflected in the Municipal Broadband Order, it must either seek congressional authorization or locate some other basis for its preemption authority.  Initial reactions from the FCC commissioners who voted for the Municipal Broadband Order suggest the FCC may instead “turn the page” for now, as Commissioner Pai urged in a statement following the Sixth Circuit’s ruling.  As a practical matter, it will be up to the next FCC, not this one, to re-assess its policy in light of the court’s rejection of its preemption authority under Section 706.  How the FCC ultimately proceeds may well be influenced by the upcoming November Presidential election.

It is important to bear in mind as well that the Sixth Circuit’s holding is a limited one.  The Court’s decision is consistent with other decisions that have been skeptical of the FCC’s broad assertions of authority under Section 706.  But the Court did not answer all of the questions posed by the parties, including, for example, whether Section 706 gives the FCC any preemptive power, or whether Congress could give the FCC power to preempt state municipal broadband laws.  For now, the decision means that the states, rather than the FCC, will retain authority to make legislative judgments about the wisdom of their political subdivisions getting into the broadband business, whether allocation of resources to such projects promotes the public interest, as well as what, if any, regulations should govern municipal broadband endeavors.