Global Naps, Inc. v. Verizon New England, Inc.

• Decision Date: 05 July 2006
• Docket Number: Docket No. 04-4685-cv.
• Citation: 454 F.3d 91
• Parties: GLOBAL NAPS, INC., Plaintiff-Appellant, v. VERIZON NEW ENGLAND, INC., f/k/a New England Telephone & Telegraph Co., d/b/a Bellatlantic Vermont, Inc., Vermont Public Service Board, Michael H. Dworkin, John D. Burke and David C. Coen, Solely in their Capacity as Board Members, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 91

454 F.3d 91

GLOBAL NAPS, INC., Plaintiff-Appellant, v. VERIZON NEW ENGLAND, INC., f/k/a New England Telephone & Telegraph Co., d/b/a Bellatlantic Vermont, Inc., Vermont Public Service Board, Michael H. Dworkin, John D. Burke and David C. Coen, Solely in their Capacity as Board Members, Defendants-Appellees.

Docket No. 04-4685-cv.

United States Court of Appeals, Second Circuit.

Argued: December 13, 2005.

Decided: July 5, 2006.

David John Mullet, David John Mullett, P.C., Montpelier, VT, for Plaintiff-Appellant.

Bruce P. Beausejour and Keefeb. Clemons, Verizon New England, Inc., Boston, MA, for Verizon New England, Inc., Defendant-Appellee.

Sean A. Lev, Scott H. Angstreich and Derek Ho, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, for Verizon New England, Inc., Defendant-Appellee.

Clifford Peterson, Assistant Attorney General for the State of Vermont, Montpelier, VT, for Michael H. Dworkin, John D. Burke and David C. Coen, Defendants-Appellees.

Before FEINBERG, B.D. PARKER, and CUDAHY,^* Circuit Judges.

CUDAHY, Circuit Judge.

This telecommunications appeal involves a question about how the prevailing regulatory regime — rooted as it is in legacy technology — applies to products and services far from contemplation at the time the regime developed. The Telecommunications Act of 1996 (the 1996 Act), Pub.L. No. 104-104, 110 Stat. 56 (codified as amended in scattered sections of 47 U.S.C.), which deregulated the industry primarily to promote competition, also took major steps toward updating the law in an attempt to keep pace with technology. The current appeal is a direct fallout from the move toward deregulation, for it involves a competitive local-exchange carrier's (CLEC's) challenge to acquire a portion of the incumbent's market share.

Global NAPs, Inc. (Global), a CLEC in Vermont, challenges two rulings of the Vermont Public Service Board (the Board) that bear on Global's interconnection agreement with Verizon New England, Inc. (Verizon), Vermont's incumbent local exchange carrier (ILEC).¹ Specifically, Global contends that the Board erred in concluding that Board-determined local calling areas² would continue to control whether a call is a toll call or a local call and in prohibiting Global from offering virtual NXX service.³ The district court affirmed these rulings, denied Global's motion for summary judgment, granted Verizon's cross-motion for summary judgment and denied the individual defendants' motion for summary judgment as moot. Because we conclude that the Board properly exercised jurisdiction over these matters and properly applied the 1996 Act, we affirm the judgment of the district court.

I. BACKGROUND

An elementary knowledge of telecommunications law and terminology is helpful toward understanding what is at stake in this appeal. We accordingly provide a sketch of the services that Global provides and of the regulatory structure framing the issues before analyzing the dispute between Global and Verizon.

A. Global's Services

Global is a CLEC in Vermont with its principal place of business in Quincy, Massachusetts. Global's customer base consists primarily of 20 dial-up Internet Service Providers (ISPs), which in turn serve about 150,000 dial-up users in Vermont.⁴ Most of Global's ISPs have chosen to locate their equipment in Global's Quincy facility rather than in each local calling area.

Global's system interconnects with Verizon's in Brattleboro, Vermont. Pursuant to their interconnection agreement, Verizon delivers all of Global's traffic to that Brattleboro interconnection point. Global then aggregates the Internet calls it receives from around the region and delivers them to its ISP customers in Quincy. To accomplish this aggregation, Global relies on virtual NXX technology, which uses nongeographically correlated telephone numbers to identify callers. This arrangement spawned the dispute in the present case; Global essentially contends that Verizon is using its relatively more powerful position as the ILEC to prevent it from doing business, while Verizon asserts that Global is forcing Verizon to shoulder the costs of Global's services by taking advantage of Verizon's sunk costs in the infrastructure and offering services just different enough to sidestep the prevailing regulatory regime.

B. The 1996 Act

The basis for Verizon and Global's interconnection agreement — indeed, for Global's very existence — is the 1996 Act, which (as its preamble indicates) represents an effort "to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies." Pub.L. No. 104-104, 110 Stat. 56 pmbl. A major purpose of the 1996 Act was to end local telephone monopolies and develop a national telecommunications policy that strongly favored local telephone market competition. Verizon Md., Inc. v. Pub. Serv. Comm'n of Md., 535 U.S. 635, 638, 122 S.Ct. 1753, 152 L.Ed.2d 871 (2002); AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999); Global Naps, Inc. v. Verizon New England, Inc., 396 F.3d 16, 18 (1st Cir. 2005). Toward this end, the 1996 Act imposes, among other things, a duty on ILECs (such as Verizon) to provide interconnection with their networks and to negotiate in good faith the terms and conditions of the agreements with CLECs (such as Global). 47 U.S.C. § 251(a)(1), (c)(1) (2006). If the parties cannot agree, either party may petition the state commission charged with regulating intrastate operations of carriers to arbitrate any unresolved issues. Id. § 252(b)(1).

The dispute here stands at the crossroads of technology and regulation. Since Global uses the wirelines to serve ISP-bound traffic, we must consider how the wireline-based regulations traditionally addressing voice communications interact with information communications. The dual nature of this traffic means it is subject to a multitude of potential regulations, many of which appear inconsistent, or even contradictory. Resolving these issues requires us to consider the broader themes and trajectory of the regulations, particularly since the 1996 overhaul.

Two prevalent themes of the 1996 Act are emphasis on competition for the benefit of consumers and to further innovation, and a predilection to leave the Internet largely unregulated. The Code of Federal Regulations abounds with rules designed to open local telephone markets to competition. See, e.g., 47 C.F.R. § 51.305 (2006) (requiring ILECs to interconnect with qualifying CLECs); § 51.307 (requiring ILECs to provide unbundled access); § 59.1 (imposing a general duty on ILECs to share their infrastructure with qualifying CLECs); § 59.2 (explaining the conditions for infrastructure sharing). Those regulations are tempered, however, by a concern that would-be competitors may elect to enter the market not so much to expand competition as to take advantage of the relatively rigid regulatory control of the incumbents. In connection with this concern, the FCC has warned time and time again that it will not permit competitors to engage in regulatory arbitrage — that is, to build their businesses to benefit almost exclusively from existing intercarrier compensation schemes at the expense of both the incumbents and consumers. In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Intercarrier Compensation for ISP-Bound Traffic, 16 F.C.C. Rcd. 9151, 9162, ¶ 21 (2001), remanded by WorldCom, Inc. v. FCC, 288 F.3d 429 (D.C.Cir.2002) [hereinafter "2001 Remand Order"]. Finally, although no such claims have been made here, we are sensitive to the possibility that state regulators, who have dealt traditionally only with incumbents, may quite unknowingly tend to share their perspectives.

1. RECIPROCAL COMPENSATION AND ACCESS CHARGES

One issue involved here is the requirement of the 1996 Act that interconnecting local exchange carriers establish reciprocal compensation arrangements for transporting and terminating calls. 47 U.S.C. § 251(b)(5); see also 47 C.F.R. § 51.703. Reciprocal compensation arrangements are structured so that the carrier whose infrastructure is used in making and terminating (or completing) a call receives compensation from another carrier that is using its network. That is, when a CLEC's customer calls an ILEC's customer located in the same local calling area, the CLEC pays the ILEC for terminating the local call. Likewise, when an ILEC's customer calls a CLEC's customer located in the same local calling area, the ILEC pays the CLEC for terminating the local call. Reciprocal compensation is based on minutes of use and is expressly limited to transportation and termination of local traffic. 47 C.F.R. § 51.701(e)(1), see also § 51.707(b)(1).

Long-distance calls (referred to variously as interstate or intrastate exchange service or toll service) are subject, in using local infrastructure, to access charges — not reciprocal compensation. 47 C.F.R. § 69.2(a). Thus, access charges are charges that long-distance companies are required to pay local-exchange carriers for the use of local network facilities. The Federal Communications Commission (FCC) has authority over interstate long-distance calls, and the state commissions have authority over (in addition to local service) intrastate long-distance.

These rules governing intercarrier compensation are relatively straightforward when applied to ordinary telephone voice calls. Parties sometimes disagree about the parameters of the agreements, but it is fairly easy to apply the rules in that normal context. Things become far more contentious, however, in the realm of Internet-bound traffic. The FCC has in recent years considered the question whether Internet telecommunications traffic is subject to reciprocal compensation but has never directly addressed the...