At&T Corp. v. F.C.C., 03-1431.

• Decision Date: 14 January 2005
• Docket Number: No. 03-1431.,03-1431.
• Citation: 394 F.3d 933
• Parties: AT&T CORPORATION, Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents
• Court: U.S. Court of Appeals — District of Columbia Circuit

394 F.3d 933

AT&T CORPORATION, Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents

No. 03-1431.

United States Court of Appeals, District of Columbia Circuit.

Argued November 12, 2004.

Decided January 14, 2005.

On Petition for Review of an Order of the Federal Communications Commission.

David W. Carpenter argued the cause for petitioner. With him on the briefs were Peter H. Jacoby, James F. Bendernagel, Jr., C. John Buresh, and Michael J. Hunseder.

Laurence N. Bourne, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the briefs were Robert B. Nicholson and Steven J. Mintz, Attorneys, U.S. Department of Justice, John A. Rogovin, General Counsel, Richard K. Welch, Associate General Counsel, John E. Ingle, Deputy Associate General Counsel, and Rodger D. Citron, Counsel. Laurel R. Bergold, Counsel, entered an appearance.

Before: GINSBURG, Chief Judge, and TATEL and ROBERTS, Circuit Judges.

Opinion for the Court by Circuit Judge ROBERTS.

ROBERTS, Circuit Judge.

AT&T Corporation petitions for review of a Federal Communications Commission order interpreting AT&T's tariff on resales of 800 telephone service. A provision of that tariff allows resellers to transfer their business, so long as the recipient assumes all of the transferor's obligations. Based on this provision, AT&T denied one reseller's request to move the "traffic" under its 800 plans to another reseller without a transfer of the corresponding obligations. The Commission interpreted the tariff transfer provision as not addressing the movement of traffic, and ultimately held that AT&T could not refuse the transfer. We conclude that traffic is a type of service covered by the transfer provision, and that the Commission's contrary interpretation would render the provision meaningless. We grant the petition for review.

I.

This case concerns the transfer of toll-free 800 telephone service. At the time of the events in question, AT&T was the dominant carrier of such service, which it provided pursuant to tariffs filed with the FCC. Under the Communications Act of 1934, as amended, and the "filed rate doctrine" incorporated therein, neither the carrier nor its customers could depart from the terms set forth in AT&T's tariffs. See 47 U.S.C. § 203(c); AT&T v. Cent. Office Tel., Inc., 524 U.S. 214, 221-24, 118 S.Ct. 1956, 1963-64, 141 L.Ed.2d 222 (1998); Orloff v. FCC, 352 F.3d 415, 418 (D.C.Cir.2003).

The tariff at issue here — AT&T Tariff FCC No.2 — allowed companies to purchase and resell 800 service to small businesses around the country. The tariff refers to this resale business, as well as the underlying service itself, as Wide Area Telecommunications Service (WATS). Any company could qualify as a reseller so long as it met the requirements of one of several plans described in the tariff. Companies qualified by aggregating the WATS usage of multiple small businesses into a single plan, and, under the tariff, the companies obtained AT&T's service for these "end-user" businesses at a discounted rate. In return, the reseller or "aggregator" company agreed to meet certain obligations set forth by the carrier, including commitments to purchase a certain volume of use.

In the early 1990s, as other carriers began to acquire a share of the 800 market, the FCC began to loosen its regulation of AT&T. Starting in 1991, the Commission no longer forced the carrier to offer WATS only through the generic plans set forth in Tariff No. 2. Instead, the FCC gave AT&T the option of individually negotiating "contract tariffs" with particular resale companies. As contract tariffs could be drawn to offer discounts greater than those available under Tariff No. 2, many resellers naturally sought to obtain them.

Alfonse Inga, a New Jersey businessman who owned several aggregator companies, was one such reseller. In 1994, Mr. Inga undertook a series of transactions designed to move his business from Tariff No. 2 to a more lucrative contract tariff. First, his companies — each of which operated under CSTP II, a type of plan offered under Tariff No.2 — transferred all nine of their plans to a new entity, Combined Companies, Incorporated (CCI). As required by Section 2.1.8 of Tariff No. 2, CCI expressly agreed to assume all obligations of the transferor companies. The transfer also stipulated that CCI would pass 80 percent of its profits on to the transferor companies. Second, CCI attempted to negotiate a contract tariff with AT&T. Third, as temporary cover until this envisioned contract tariff became a reality, or as a permanent alternative in case it never did, Mr. Inga planned another transfer — one between CCI and Public Services Enterprises of Pennsylvania (PSE). PSE already had a contract tariff with AT&T at a substantially larger discount on AT&T's 800 service than that available to CCI under Tariff No. 2.

AT&T resisted this series of transactions. Fearing that CCI would not have the assets to meet its obligations under the transferred plans, AT&T initially refused to implement the first transfer (from the Inga companies to CCI) unless CCI paid a deposit — a requirement not found in Section 2.1.8 of Tariff No. 2. In 1995, the Inga companies and CCI brought suit against AT&T in federal district court in New Jersey, and the court ordered AT&T to drop the deposit requirement and implement the transfer. Combined Companies, Inc. v. AT&T, No. 95-908 (D.N.J. May 19, 1995) (unpublished opinion).

Meanwhile, CCI's negotiations for its own contract tariff failed and CCI entered into the second transfer, moving substantially all the 800 service in its CSTP II plans to PSE. As with the first transfer, the CCI-PSE agreement called for PSE to pass much of the realized profit back to CCI. The second transfer, however, differed from the first in an important respect. The parties attempted to structure the transaction to avoid Section 2.1.8 of Tariff No. 2, so that PSE would not have to assume CCI's obligations on the transferred service. To do this, the parties asked AT&T to move just the service to particular end-user businesses — the "traffic" under CCI's plans — and to leave the plans themselves otherwise intact. The parties hoped that, as a result, 800 service would be billed under PSE's substantially lower contract tariff rates, while CCI would remain responsible for the obligations to the carrier under Tariff No. 2.

AT&T balked at this second transfer as well. AT&T maintained that Section 2.1.8 applied to the transaction, and that PSE thus had to assume CCI's obligations in order for the transfer to go through. In addition, AT&T argued that the proposed transfer violated the tariff's "fraudulent use" provisions, as CCI almost certainly would fall short of its volume commitments once the traffic was moved to PSE's account, and AT&T had reason to believe that CCI would not have sufficient assets to pay the resulting penalties.

The same district court that compelled AT&T to accept the first transfer declined to rule on the second, holding that tariff interpretation issues were within the primary jurisdiction of the FCC. Id. at *15. When none of the parties brought the primary jurisdiction matter to the agency, however, the district court went ahead and issued its own decision interpreting the tariff. See Combined Companies, Inc. v. AT&T, No. 95-908 (D.N.J. Mar. 5, 1996) (unpublished opinion). The Third Circuit vacated this ruling as inconsistent with the primary jurisdiction referral, and ordered the sides to bring the matter to the FCC's attention. Combined Companies, Inc. v. AT&T, No. 96-5185 (3d Cir. May 31, 1996) (unpublished opinion).

The specific question referred to the FCC was "whether section 2.1.8 permits an aggregator to transfer traffic under a plan without transferring the plan itself in the same transaction." Id. at *3. While the case was pending before the Commission, AT&T entered into a settlement with CCI, extinguishing its WATS plans and releasing all claims between the two parties. Apparently as a result of this settlement, the Commission took no action on the case for seven years. The Inga companies, however, continued to claim damages stemming from AT&T's denial of the CCI-PSE transfer, and in 2003 the Commission finally addressed the Third Circuit referral.

The Commission held that Section 2.1.8 did not govern, and therefore did not preclude, the movement of traffic without attendant obligations. FCC Memorandum Opinion and Order at 6-8. In particular, the Commission reasoned that Section 2.1.8 applied only to the transfer of entire tariffed plans, and not to the transfer of just the traffic component of such plans. Id. at 7. The Commission also held that, even assuming the transaction constituted fraud under the tariff, the tariff did not allow AT&T to remedy such fraud by denying the transfer. Id. at 8-10. In light of these holdings, the Commission ruled that AT&T could not refuse the CCI-PSE transfer. Id. at 14. The Inga companies, whose involvement in the federal district court action in New Jersey is still ongoing, view the Commission's ruling as entitling them to millions of dollars in damages.

AT&T now petitions for review of the FCC order.

II.

Our inquiry is governed by the Administrative Procedure Act, which requires us to uphold an FCC order unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). To clear this threshold, the FCC's tariff interpretations must be "reasonable [and] based upon factors within the Commission's expertise." Global NAPs, Inc. v. FCC, 247 F.3d 252, 258 (D.C.Cir.2001) (citation omitted and alteration in original). Thus, we will reverse the FCC only if its interpretations are "not supported by substantial evidence, or the [Commission] has made a clear error in judgment." Id. (same).

The Commission's order in this case is entirely predicated on its determination that ...