A U.S. appeals court dealt a setback to the Federal Communications Commission's authority to oversee the Internet, tossing out an agency ruling that forced Comcast Corp to change the way it managed its broadband network.

For years the FCC, Internet providers and public interest groups have squared off over potential regulations for governing access and management of high-speed Internet service, often described as the Net Neutrality debate.

The decision issued Tuesday will likely have major implications for future regulation of Internet access in the United States and consequences for the FCC and its Democratic chairman, Julius Genachowski, who has made broadband his flagship issue.

The FCC in 2008, in response to customer complaints, cited Comcast for blocking users from some peer-to-peer applications -- often used to distribute large files such as television shows and movies -- and ordered the company to stop.

While Comcast had said it would change its network management practices to ensure all Internet traffic was treated essentially the same, it asked an appeals court to review whether the FCC had the authority to impose such requirements.

Comcast also defended its practice of blocking services like BitTorrent, saying it was trying to manage Web traffic flowing over its network to prevent degradation of service for the majority of its users.

The U.S. Court of Appeals for the District of Columbia sided with Comcast and said that the FCC failed to show that it had the necessary authority to impose such restrictions on the provider's network operations.

It relies principally on several congressional statements of policy, but under Supreme Court and D.C. Circuit case law statements of policy, by themselves, do not create 'statutorily mandated responsibilities,' the three-judge panel said.

The commission also relies on various provisions of the Communications Act that do create such responsibilities, but for a variety of substantive and procedural reasons those provisions cannot support its exercise of ancillary authority over Comcast's network management practices, they said.

IMPACT LIKELY DOWN THE ROAD

The FCC, which has argued it has broad authority, last month unveiled an ambitious plan to upgrade Internet access for all Americans and shift spectrum from television broadcasters to support the huge demand for smartphones and other wireless devices.

The ruling could have major consequences and will likely set off a flurry of lobbying at the FCC by Internet access and content providers like Google Inc, Verizon Communications Inc and AT&T Inc.

An FCC spokeswoman said that the agency was still committed to pushing for unfettered Internet service.

It will rest these policies -- all of which will be designed to foster innovation and investment while protecting and empowering consumers -- on a solid legal foundation, said FCC spokeswoman Jen Howard.

The agency could ask the full appeals court to reconsider the decision or seek review by the U.S. Supreme Court.

The FCC could also seek help from Congress, where lawmakers could rewrite the laws to provide the agency more explicit authority, or it could also try to rewrite its own rules to address the issue.

A Comcast spokeswoman said the company remained committed to the FCC's principles for an open Internet, and had filed the suit to clear our name and reputation.

We will continue to work constructively with this FCC as it determines how best to increase broadband adoption and preserve an open and vibrant Internet, said spokeswoman Sena Fitzmaurice.

The decision could free broadband providers from numerous requirements in the short term, however the FCC could try to reclassify the service into a different category that would permit the agency to apply more regulations, one analyst said.

Although today's decision is an immediate victory for broadband providers, they may have won the battle only to face a larger war, said Stifel Nicolaus analyst Rebecca Arbogast.

The case was Comcast Corp v Federal Communications Commission, U.S. Court of Appeals for the District of Columbia, No. 08-1291.

(Reporting by Jeremy Pelofsky; Editing by Maureen Bavdek and Tim Dobbyn)

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