Net Neutrality’s Fifth Amendment Problem – A Discussion with Prof. Daniel A. Lyons

by Mike Wendy on September 5, 2013

Next Monday, Verizon will argue its case against the FCC’s Net Neutrality rules in front of the U.S. Court of Appeals for the D.C. Circuit.  Little noticed (or reported on) in its appeal is its argument that the rules effect an unconstitutional “takings,” essentially depriving the company of its private property without just compensation. I was able to catch up with Boston College Law School’s Daniel A. Lyons, who wrote, “Virtual Takings: The Coming Fifth Amendment Challenge to Net Neutrality Regulation,” to get a better understanding of “takings” jurisprudence as it might apply to Net Neutrality in the upcoming case.

The following is an excerpt from that discussion:

Mike Wendy: What’s wrong with the Fifth Amendment; why does it seem to get such short shrift?

Daniel Lyons: You know, most property rights scholars would probably tell you that property is sort of the redheaded stepchild of constitutional law.  Property rights are taken seriously except when they’re not.   And so, even when you think about the Mahon case (Pennsylvania Coal Co. v. Mahon), which is the case that gave rise to regulatory takings back in 1922, the Court’s recognizing that when a regulation goes too far it can be a taking.  Yet at the same time, the Court says something like, “The Government could hardly go on if to some extent the values incident to property couldn’t be diminished without paying for it every time the law changed.”

You have this sort of issue that individual property rights sometimes need to yield to the community’s greater good.  And I think the difficulty is trying to figure out which intrusions on property are OK, and which ones are not.  And so, we have a world in which we can draw those lines politically, and that’s what the legislative process does.  Or, we can draw them judicially through court decisions on the boundaries of the Fifth Amendment.  And for all the sturm and drang we hear about judicial activism, I think courts are kind of reluctant to engage in that line drawing exercise, at least in regard to property rights at the expense of some other public good.

MW: What are the essential rights for network providers?

DL: In theory, networks providers have the same bundle of rights that all of us have when we own property.  You have the right to use your property to accomplish your ends.  You have the right to exclude anyone – all or nobody else – if you choose.  And you have the right to dispose of the property.  When you’re done, you get to determine who gets the property next and at what price.

That right to exclude is what we’re talking about most here in the Net Neutrality context.    The Supreme Court has repeatedly said this is the most important right in the bundle of rights.  That’s what allows one to decide who gets access to the property and at what terms, which means it’s what allows network providers to sell broadband services to the general public.

Now, it’s important to add one caveat. Common carriage has at times limited network operators’ right to exclude.  So telephone and telegraph companies are treated differently than other property owners because the law said they provided what many considered essential services, and because historically they were considered natural monopolies. Consequently, the law required them to provide service to all interested parties in their service area at just and reasonable rates.  They couldn’t arbitrarily say we’re not serving you, or we’re charging you a much higher price than your neighbor, unless they had a good reason for doing so.  But this has only limited applicability to the Net Neutrality debate for two reasons. One, the FCC has gone out of its way to say that it is not imposing a common carriage regime on the Internet.  And two, there are ways in which the Net Neutrality provision goes far beyond the limitations that traditional common carriage placed on a telephone company.

MW:  Who or what does the Fifth Amendment protect against?

DL: The Fifth Amendment usually protects against the government from coming in and taking your property.  “I need to put a road through here, you need to give me your house.  If you don’t sell it to me, I’m going to take it from you anyway.”   So, that’s an eminent domain seizure, and the law requires that they can only do it for public use, and if they do it, they have to give you just compensation.

As it applies to Net Neutrality, that’s not really what’s going on here, though.  There’s nobody actually saying, “Verizon, you have to give your network to the government.”  They still get to own their network, but it’s use is limited, regulated to a certain extent.   Since 1922, the law has said that although the government has the power to regulate how you use your property, a regulation that goes too far can be considered the equivalent of a takings.  A regulation that infringes too much on our property rights has taken some of those sticks in your bundle of property rights in a way that the public ought to compensate you for.

Regulatory taking claims usually fall under the three-prong Penn Central balancing test (Penn Central Transportation Co. v. New York City).  Now, the problem with that sort of analysis is that all three prongs are very squishy.  And so there’s no real clarity in Penn Central cases as to when something is a regulatory takings and when it’s not.  In order to avoid the squishiness and uncertainty that comes with Penn Central, the Supreme Court came up with Loretto (Loretto v. Teleprompter Manhattan CATV Corp.), which creates a per se carve out to Penn Central.  If you can make a claim under Loretto, you don’t have to undergo the balancing test of Penn Central.  You automatically win.

The Loretto test says that if the regulation at issue requires a permanent physical occupation of your property, then you’re entitled to compensation regardless of whether you satisfy the other elements of the Penn Central test.  That’s, I think, the stronger argument that Verizon has in this case, and the one that if they’re going to succeed on is probably the one that’s going to get most attention at argument.

MW: How could this not be a permanent physical occupation?  Net Neutrality requires 24/7/365 occupancy, a permanent digital easement of sorts.

DL:  A lot of the problem comes from people having some trepidation about the technology at issue.  It helps to bring it down to basics.  Let’s look at what was going on in Loretto.  The claimant in Loretto owned an apartment complex, and the New York City government adopted a regulation that required her to install some cable company equipment on her roof so that all of her tenants could get cable service.  She thought that if they’re going to put something on her roof permanently, she should be compensated for that, because that’s space she couldn’t use, and it was allowing somebody onto her property without her permission, which was a burden that would carry over to the next landlord as well.  And the Court said, “Yeah. If somebody else gets permanent physical occupation of your property without your consent, then you get compensation.”

There’s another case in California, called Nollan v. California Coastal Commission, where the government tried to impose an easement across somebody’s private beach so that the public could walk from one side of the beach to the other.  And the Court mentioned in passing that if this was a regulation that requires an easement for the pubic to walk back and forth, that would be a permanent physical occupation, which would require compensation under Loretto.

What’s going on here isn’t any different.  The Net Neutrality ruling says if you own a broadband network, you must allow any and all content providers to use your network to reach customers whether you like it or not.  And by the way, be paid zero for it.  And although the medium is different – Loretto was talking about the top of an apartment building, and Nollan was talking about a beach backyard, whereas now we’re talking about wires – the fundamental impact is the same whether you’re talking about people walking across the sand, or packets coming through the wire: It’s physical material that is not owned by the property owner taking up an amount of space on the property, space that the property owner then cannot use.  And if the pubic is being allowed access to private property against the property owner’s will in a way that permanently occupies an easement across the network, under Loretto and Nollan, compensation is required.

MW:  It’s a state-imposed servitude, appropriating the fruits of one’s labor for some “greater good.”

DL:  Yes, it is.  You talk about it being, in the context of you and me, an appropriation of our labor.  In the context of a corporation, it’s the appropriation of their capital.  Some amount of that capital that has been invested in their network has now been seized and dedicated toward a public end. Certainly they can do that, but the Fifth Amendment says if you’re going to limit property rights in that way you need to provide just compensation.

MW: Though it’s not directly stated in the rule, the FCC imposes rate regulation on network providers.   

DL: That’s right – a rate of zero.  It’s essentially fixing the rate of content and applications providers at zero, with the hope that the amount that the broadband providers can squeeze from consumers will more than make up for it. Any economist will tell you that if you’re cutting off one source of potential revenue, it means that for the other source, price is going to go up.

MW:  This hamstrings the whole Internet ecosystem, too.  

DL: I think generally, you want to give broadband providers the ability to innovate, the ability to come up with different business models that might serve the marketplace better than the existing models.  Any time you impose homogeneity on the market, what you’re doing is limiting one place on which companies can compete.

High profits attract more competitors. Low profits signal this is probably not a very good business model, one that shouldn’t be replicated.  When regulators come in and short circuit that process, they’re saying that they can plan the future better than the unplanned market can.   And I think that planning the future is always difficult.

MW: I look at Net Neutrality as governing through a loophole on something that is ambiguous at best.  Many people say there’s no clear authority for the agency to do so in the Act.  In any event, there’s clearly a question here.  And we see the FCC going ahead regardless of the constitutional issues, regardless of the questions in the statute and the unintended consequences. It has granted power unto itself regardless of these questions.  And, really, that’s offensive on a number of levels.  

DL:  That raises two different questions.  Specifically with regard to takings, it’s important to note that Verizon doesn’t have to have an airtight claim to succeed on its takings challenge to Net Neutrality because agencies are not Congress; agencies are not allowed to skirt the boundary of constitutional behavior the same way that Congress will.   What I mean by that is there is a canon of statutory interpretation that’s called the canon of constitutional avoidance.  If the regulation at issue raises a serious constitutional question, then the court will resolve the ambiguity by deciding in favor of the constitutional result.

It seems to me the fact that this is a colorable question, this takings claim is enough itself to say the agency shouldn’t be adopting Net Neutrality without an explicit statement from Congress that, yes, we recognize there may be a constitutional violation here, and if so, we will pay.  It’s very different if Congress is giving the agency marching orders than if the agency is acting without some sort of congressional authority.

More generally, I think you’re absolutely right.  What you’re getting at is an agency that has moved far from reading the will of Congress and carrying it out, and making up the rules that fit the interstices of the grand plan adopted by Congress. It has become an agency that is making up a common law of Internet regulation.

The organic statute – the Communications Act – didn’t really anticipate broadband.  The Internet’s mentioned only a handful of times in the 1996 Telecommunications Act, the latest big statutory overhaul of the FCC’s jurisdiction.  Congress simply hasn’t spoken to the question of what, if any, regulation the FCC should apply over the Internet.  The agency’s just sort of making it up as it goes along.   And that’s a departure from the traditional Chevron model of administrative law (Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.), which takes as its premise that Congress makes the law and the agency only carries it out by filling in the details.  The closer we get to a world in which the agency makes the law, the closer you get to potential non-delegation doctrine issues – that is, the delegation of legislative power away from elected representatives in Congress and to politically insulated commissioners.

MW: Where do you think the Court will come out on this case in light of the Supreme Court’s recent ruling in City of Arlington (City of Arlington v. FCC)?

DL: From a logical perspective, it can’t possibly be right that a statement from Congress that the FCC shall have the ability to regulate communications by wire or radio alone allows the FCC to do anything it wants to communications by wire or radio.  That would mean everything in Titles II, III and VI are superfluous.  So, structurally, that’s illogical.

That having been said, though, I think there is a fair amount of sentiment by those favoring Net Neutrality that there needs to be some sort of police on the beat.  And, if Congress isn’t going to get its act together, we’ll let the agency run forward with this.  If the courts end up blessing the agency’s robust view of its Title I authority, it’s sort of a shot across the bow to Congress that says, “Hey, you need to write a statutory scheme about the Internet, or else the agency’s going to do it for you.”  That’s what happened to cable.  It was the FCC repeatedly trying to regulate cable through its ancillary authority, and courts accepting some things and not accepting others.  That dialogue between the agency and the courts signaled to Congress that it needed to put together a Cable Act, creating a Title VI, so the agency wasn’t making it up as it was going along.

MW: Ultimately we’re talking whatever happens in this appeal going to the Supreme Court, right? 

DL:  I think that’s quite possible.  I think the DC Circuit sent a pretty strong shot across the bow in its earlier Comcast (Comcast Corp. v. FCC) case.  We’ll see whether it sticks to its guns.  I am not as confident as I once was that they would, however.  Reading the tealeaves is somewhat difficult to determine.  It seems that the earlier Comcast decision closed off most of the routes to jurisdiction independently of City of Arlington because the FCC had not been relying upon Chevron deference at all.  It simply wasn’t a Chevron case.  But, City of Arlington certainly is a suggestion from the Supreme Court that the agency’s jurisdictional claims should be taken very seriously.

What I’ve learned as an administrative law professor is to never bet against the agency in a court case.  The deck is almost always stacked against the litigant in any agency litigation because of the standard of review.  That’s why you’re seeing much more of a rise in constitutional claims, where there is no thumb on the agency side of the scale.

MW: Do you think the Fifth Amendment issue will be important or featured?

DL: I certainly hope so.  I would like to see the court at least engage the question substantively. I fear, however, that because the principal litigant hasn’t dedicated much space to it that the court will take it as a cue not to dedicate much space to it either.  I don’t know how much interest the court will give to the claim.

Win or lose, I’d like to see a robust judicial engagement with the theory and see how it plays out.


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