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The D.C. Circuit Court ruled yesterday (PDF) that the Federal Communications Commission (FCC) doesn’t have authority over the Internet. Back in 2007, Comcast was filtering the Internet connections of users who were suspected of using file-sharing programs and eating up a lot more bandwidth than expected. The FCC told Comcast to cut it out, under the concept of net neutrality, which required that all packets of data sent over the Internet be treated equally. Comcast challenged the FCC’s right to do that, and yesterday the court agreed with the Philly-based company.

The FCC had argued that it had the right under the authority given to it by Title I of the Communications Act of 1934, which established the FCC. According to the FCC’s argument, Title I empowered the commission to regulate Internet connectivity as an “ancillary” authority, even though it wasn’t explicitly charged to do so by Congress in the act (which, after all, was passed more than half a century before the World Wide Web was launched). The D.C. Circuit Court said no, Title I does not give the FCC that authority. While the decision can be appealed to the Supreme Court, which could reverse the ruling, even proponents of a strong net neutrality role for the FCC admit the decision is pretty solid.

While the case is technically a “win” for Comcast (their challenge was upheld) some observers say it could turn out to be a Pyrrhic victory. Now the FCC could claim authority to regulate Internet communication under its Title II powers. Regulating the Internet under Title II, which covers “common carriers,” would require Internet service providers (ISPs) to adhere to net neutrality as a common carrier requirement. This means that physical providers of an Internet connection to your house (in other words, traditional phone and cable companies that have evolved into ISPs) would be limited in their ability to manage the information going over their networks — unable to prioritize some data over other data — much as phone companies have no control over whom you talk to over your phone line.

This is apocalyptically referred to as “the nuclear option,” as it would result in a radical change in how telecommunications firms view Internet connectivity. Title II would require them to behave more like utilities. Proponents of this idea say its potential upside would be increased competition in services provided over that connection. Critics, including the ISPs themselves, say the potential downside is that ISPs could lose a big incentive (profit maximization) to invest in our residential broadband connections, which are lagging behind other countries like South Korea.

In its own discussions of a National Broadband Plan, the FCC has avoided the Title I vs Title II debate. However, with this ruling, the appeals court has forced the commission’s hand. The best solution for the FCC could be to go before Congress for clarification of its role in regulating the internet. As our friend Brian Wingfield points out, it’ll be a tech lobbying fight, but the FCC would have a better chance with a Democratic Congress than it’s likely to have in the courts.

The appeals court has ruled that the FCC lacks the authority to regulate Internet, but it may also lack the ability. The communications sector is changing rapidly. Some ISPs are acquiring content creators, and others are providing mobile services only previously seen in Dick Tracy cartoons. The FCC was established to regulate what was then regarded as a “natural” telephone monopoly. What’s needed is either an FCC with a dramatically transformed mandate or — maybe better — a new entity dedicated to protecting the environment for continuous innovation on the Internet.