North Carolina and other states can regulate municipal broadband networks, a federal appeals court ruled Wednesday. The decision strikes down a ban imposed on such legislation by the Federal Communications Commission last year.

The deal is a major defeat for the FCC and its chair Tom Wheeler, who also have been involved in an ongoing net neutrality debate. The FCC recently won a court ruling in favor of the FCC’s move under Wheeler to regulate the Internet as a utility.

The states of North Carolina and Tennessee had filed the court case against the FCC decision.

Whether the FCC will appeal the broadband decision is not yet clear.

“The FCC’s mandate is to make sure that Americans have access to the best possible broadband,” Wheeler said in a statement released after the broadband decision was announced. “We will consider all our legal and policy options to remove barriers to broadband deployment wherever they exist so that all Americans can have access to 21st Century communications.”

When the FCC made its municipal broadband decision by a 3-2 vote, it in effect overruled a North Carolina law. “That dog won’t hunt,” Wheeler declared.

North Carolina has sought to limit municipal broadband efforts such as Greenlight in Wilson, outside of a city’s limits. Greenville supported the FCC decision.

Tennessee legislation also was included in the court fight.

Lawmakers have argued that private broadband providers will have difficulty competing with service subsidized by local governments. Attorneys for Tennessee and North Carolina had argued the issue is one of state sovereignty.

Tennessee Attorney General Herbert H. Slatery III said in a statement that he was pleased with the ruling, according to The Associated Press. The case was not about access to broadband, but instead it was about preventing the federal government from exercising power over the states that it does not have, Slatery said.

“Today’s decision preserves Tennessee’s right to determine the authority and market area of a political subdivision organized under Tennessee law,” Slatery said.

The appeals court said its ruling was a limited one, and it does not address other issues debated in the case, including whether the FCC has any pre-emptive power at all under the Telecommunications Act of 1996, The AP noted.

“We do not question the public benefits that the FCC identifies in permitting municipalities to expand Gigabit Internet coverage,” the ruling said.

The FCC majority had claimed Congress provided power to the commission to govern communications.

Opponents claimed the FCC was overreaching its authority.

“The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities,” judges said in the decision.

“This is shown by the fact that no federal statute or FCC regulation requires the municipalities to expand or otherwise to act in contravention of the preempted state statutory provisions. This preemption by the FCC of the allocation of power between a state and its subdivisions requires at least a clear statement in the authorizing federal legislation. The FCC relies upon Section 706 of the Telecommunications Act of 1996 for the authority to preempt in this case, but that statute falls far short of such a clear statement. The preemption order must accordingly be reversed.”

TechFreedom, a non-partisan think tank in Washington, D.C., hailed the decision.

“It took enormous chutzpah for the FCC to try to preempt state broadband laws, so this is a well-deserved rebuke for an agency run amuck,” said Berin Szóka, President of TechFreedom.

“It should have been obvious that the FCC would lose, since the Supreme Court rejected the idea that the FCC could preempt such laws over a decade ago — under far clearer statutory language. The court shredded the FCC’s claim that, while it could not require states to allow muni broadband, it could regulate the conditions under which they governed the networks that cities were allowed to build. This was Federalism 101: the FCC was unconstitutionally interfering with the division of power between state legislatures and municipalities by doing so without a ‘clear statement’ of authorization from Congress.”