325 F.3d 1114 (9th Cir. 2003), 01-17161, Pac-Bell v. Pac West Telecomm

Docket Nº:Nos. 01-17161, 01-17166, 01-17181
Citation:325 F.3d 1114
Party Name:PACIFIC BELL, a California corporation, Plaintiff-Appellant, and UNITED STATES OF AMERICA, Intervenor, v. PAC-WEST TELECOMM, INC.; PUBLIC UTILITIES COMMISSION OF THE CALIFORNIA; RICHARD A. BILAS, Commissioner of the Public Utilities Commission of the State of California in their official capacity; HENRY M. DUQUE; JOEL Z. HYATT; JOSIAH NEEPER; CARL
Case Date:April 07, 2003
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1114

325 F.3d 1114 (9th Cir. 2003)

PACIFIC BELL, a California corporation, Plaintiff-Appellant,

and

UNITED STATES OF AMERICA, Intervenor,

v.

PAC-WEST TELECOMM, INC.; PUBLIC UTILITIES COMMISSION OF THE CALIFORNIA; RICHARD A. BILAS, Commissioner of the Public Utilities Commission of the State of California in their official capacity; HENRY M. DUQUE; JOEL Z. HYATT; JOSIAH NEEPER; CARL W. WOOD, Commissioners of the Public Utilities Commission of the State of California in their official capacities, Defendants-Appellees.

VERIZON CALIFORNIA, INC., Plaintiff-Appellant,

and

UNITED STATES OF AMERICA; RCN TELECOMMUNICATIONS SERVICES OF CALIFORNIA, INC., Intervenors,

v.

CALIFORNIA TELECOMMUNICATIONS COALITION, Defendant,

and

AT&T COMMUNICATIONS OF CALIFORNIA INC.; ICG TELECOM GROUP; MCIMETRO ACCESS TRANSMISSION SERVICES, INC.; MFS INTELENET OF CALIFORNIA, INC.; PAC-WEST TELECOM, INC.; TELEPORT COMMUNICATIONS GROUP INC.; WINSTAR TELECOMMUNICATION, INC.; CALIFORNIA PUBLIC UTILITIES COMMISSION; RICHARD A. BILAS, President of the Public Utilities Commission of the State of California; JOEL Z. HYATT; CARL W. WOOD, Commissioner of the Public Utilities Commission; HENRY M. DUQUE, Commissioner of the Public Utilities Commission; JOSIAH L. NEEPER, Commissioner of the Public Utilities Commission, Defendants-Appellees.

PACIFIC BELL, a California corporation, Plaintiff-Appellant,

WORLDCOM, INC., Intervenor-Appellee,

and

UNITED STATES OF AMERICA; RCN TELECOMMUNICATIONS SERVICES OF CALIFORNIA, INC.; AT & T COMMUNICATIONS OF CALIFORNIA INC.; ICG TELECOM GROUP; MCIMETRO ACCESS TRANSMISSION SERVICES, INC.; MFS INTELENET OF CALIFORNIA, INC.; COMMUNICATIONS GROUP INC.; AT & T COMMUNICATIONS OF CALIFORNIA INC.; WINSTAR WIRELESS INCORPORATED, PAC-WEST TELECOM, INC.; TELEPORT Intervenors,

v.

CALIFORNIA PUBLIC UTILITIES COMMISSION; RICHARD A. BILAS, President of the Public Utilities Commission of the State of California; JOEL Z. HYATT; CARL W. WOOD, Commissioner of the Public Utilities Commission; HENRY M. DUQUE, Commissioner of the Public Utilities Commission; JOSIAH L. NEEPER, Commissioner of the Public Utilities Commission, Defendants-Appellees.

Nos. 01-17161, 01-17166, 01-17181

United States Court of Appeals, Ninth Circuit

April 7, 2003

Argued July 8, 2002 Submitted December 12, 2002 San Francisco, California

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COUNSEL

Kevin M. Fong, Pillsbury Winthrop LLP, San Francisco, California, for plaintiff-appellant Pacific Bell.

Gerald F. Masoudi, Kirkland & Ellis, Washington, D.C., for plaintiff-appellant Verizon California, Inc.

Kimberly Lippi, San Francisco, California, for defendant-appellee California Public Utilities Commission.

D. Anthony Rodriguez, Morrison & Foerster LLP, San Francisco, California, for defendant-appellee Pac-West Telecomm, Inc.

Darryl M. Bradford, Jenner & Block, LLP, Chicago, Illinois, for intervenor-appellee WorldCom, Inc.

Appeal from the United States District Court for the Northern District of California, D.C. Nos. CV-99-03973-CW, CV-99-04479-CW, CV-99-04480-CW, Claudia Wilken, District Judge, Presiding.

Before: Mary M. Schroeder, Chief Judge, Raymond C. Fisher and Richard A. Paez, Circuit Judges.

OPINION

PAEZ, Circuit Judge:

Congress passed the Telecommunications Act of 1996 ("the Act"), Pub. L. 104-104, Page 1118

110 Stat. 56 (codified in part at 47 U.S.C. §§ 251-261), to foster competition in local and long distance telephone markets by neutralizing the competitive advantage inherent in incumbent carriers' ownership of the physical networks required to supply telecommunication services. Sections 251 and 252 of the Act require established incumbent local exchange carriers ("ILECs") 1 to allow new competitive local exchange carriers ("CLECs") to interconnect with their existing networks. See 47 U.S.C. §§ 251, 252. In addition, all local exchange carriers are required to "establish reciprocal compensation arrangements [in their interconnection agreements] for the transport and termination of telecommunications." 47 U.S.C. § 251(b)(5). These compensation provisions allow ILECs and CLECs to negotiate the terms under which they will terminate calls from each other's customers. One of the negotiated terms in an interconnection agreement is the amount of reciprocal compensation that an ILEC will pay to a CLEC when an ILEC customer calls a CLEC customer, and vice versa. 2 These new arrangements under §§ 251 and 252 of the Act have generated significant regulatory battles and litigation between ILECs, the long-established telephone companies that were providing local telecommunication services before 1996, and CLECs, the new competitors that entered the telecommunications market after the passage of the Act and now seek to take advantage of the new competitive environment.

When Congress drafted the Act, it did not foresee the dramatic increase in Internet usage and the subsequent increase in telecommunications traffic directed to Internet Service Providers ("ISPs") like America OnLine or Earthlink. Not long after Congress adopted the Act, newly formed CLECs began targeting ISPs to benefit from the reciprocal compensation provisions in interconnection agreements and the compensation they would receive from the one-way traffic that flows into ISP customers but does not flow in the opposite direction.

For example, when an Internet user with telephone service provided by an Page 1119

ILEC, like Pacific Bell, connects to the Internet, the user may dial into an ISP served by a CLEC, like Appellee Pac-West Telecomm, Inc. ("Pac-West"). Under the reciprocal compensation provisions of the interconnection agreement, Pacific Bell must pay the CLEC for the completion of its customer's call to the ISP. The Internet user will likely make many extended calls to the ISP, but the ISP will rarely call the Pacific Bell customer. Thus, CLECs with ISP customers receive far more compensation from the ILEC for completing its customers' calls than they pay to the ILEC because ISPs do not reciprocate with calls back to the originating ILEC. These three consolidated appeals arise from a dispute over the inclusion of telecommunications traffic bound for ISPs in the reciprocal compensation provisions of interconnection agreements between ILECs and CLECs. In two of the appeals, Appellants3 Pacific Bell and Verizon California ("Verizon"), two ILECs, challenge the district court's summary judgment in favor of Appellees.4 The district court upheld two generic rulemaking orders by the California Public Utilities Commission ("CPUC"). The generic orders required that reciprocal compensation provisions in interconnection agreements in California apply to calls made to ISPs. In the third consolidated appeal, Pacific Bell challenges the results of an arbitration proceeding before the CPUC in which the CPUC approved an arbitrated interconnection agreement between Pacific Bell and Pac-West that required reciprocal compensation for calls to ISPs.

First, we address Appellees' challenge to our jurisdiction. We conclude that after the Supreme Court's decision in Verizon Maryland, Appellees' jurisdictional challenge must fail. Verizon Md., Inc. v. Pub. Serv. Comm'n, 122 S.Ct. 1753 (2002). The Eleventh Amendment does not bar Appellants' claims against the CPUC and there is nothing in the Act that limits federal question jurisdiction under 28 U.S.C. § 1331. Second, we conclude that the CPUC's generic orders are contrary to the Act because they exceed the CPUC's statutory authority under § 252 over interconnection agreements, and accordingly reverse the district court's summary judgment rulings in appeal numbers 01-17181 and 01-17161. Finally, we affirm the district court's summary judgment ruling in appeal number 01-17166, and thereby uphold the CPUC's Order approving the Pacific Bell/Pac-West interconnection agreement because the arbitrated agreement between Pac-West was consistent with the Act.

I. STATUTORY FRAMEWORK

Sections 251 and 252 of the Act require ILECs to allow CLECs to interconnect with their existing networks. See 47 U.S.C. §§ 251, 252. In addition, all local exchange carriers are required to "establish reciprocal compensation arrangements for the transport and termination of telecommunications." Id. Under the Act, "reciprocal Page 1120

compensation" means that when a customer of one local exchange carrier calls a customer of a different local exchange carrier who is within the same local calling area, the first carrier pays the second carrier for completing, or "terminating," the call. Under the Federal Communications Commission's ("FCC") current regulations, § 251(b)(5)'s mandatory reciprocal compensation obligations "apply only to traffic that originates and terminates within a local area." In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996 (First Report & Order), 11 F.C.C.R. 15499, 16013 (¶ 1034), 1996 WL 452885 (1996) (subsequent history omitted). The Act directs the ILECs and the CLECs to negotiate in good faith to reach an agreement over the terms of an interconnection arrangement. See 47 U.S.C. §§ 251(c)(1), 252(a). 5 If an ILEC and a CLEC are unable to agree, the Act provides for binding arbitration by the state public utilities commission. See id. at § 252(b). After a state commission approves an arbitrated agreement, any "aggrieved" party to the agreement may bring an action in district court "to determine whether the agreement . . . meets the requirements" of the Act. See id. at § 252(e)(6). Once the terms are set, either by agreement or arbitration, and the state commission approves the agreement, it becomes a binding contract.

II. PROCEDURAL HISTORY

A. THE CPUC GENERIC ORDERS AND THE FCC'S IMPLEMENTATION ORDERS

On March 18, 1998,...

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