At & T Communications of Cal. Inc. v. Pac–west Telecomm Inc.

• Decision Date: 21 June 2011
• Docket Number: No. 08–17030.,08–17030.
• Citation: 53 Communications Reg. (P&F) 439,11 Cal. Daily Op. Serv. 7560,2011 Daily Journal D.A.R. 9113,651 F.3d 980
• Parties: AT & T COMMUNICATIONS OF CALIFORNIA, INC.; Teleport Communications Group of San Francisco; Teleport Communications Group of Los Angeles; Teleport Communications Group of San Diego, Plaintiffs–Appellants,v.PAC–WEST TELECOMM, INC.; Michael R. Peevey; Geoffrey E. Brown; Dian M. Grueneich; John Bohn; Rachelle Chong, Commissioners of the California Public Utility Commission in their official capacity, Defendants–Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

651 F.3d 980

11 Cal. Daily Op. Serv. 7560

2011 Daily Journal D.A.R. 9113

53 Communications Reg. (P&F) 439

AT & T COMMUNICATIONS OF CALIFORNIA, INC.; Teleport Communications Group of San Francisco; Teleport Communications Group of Los Angeles; Teleport Communications Group of San Diego, Plaintiffs–Appellants,

v.PAC–WEST TELECOMM, INC.; Michael R. Peevey; Geoffrey E. Brown; Dian M. Grueneich; John Bohn; Rachelle Chong, Commissioners of the California Public Utility Commission in their official capacity, Defendants–Appellees.

No. 08–17030.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 6, 2010.Filed June 21, 2011.

Randolph W. Deutsch, Max Fischer, and Mark E. Haddad of Sidley Austin LLP, Los Angeles, CA, for plaintiffs-appellants AT & T Communications of California, Inc., Teleport Communications Group of San Francisco, Teleport Communications Group of Los Angeles, and Teleport Communications Group of San Diego.Robert Allen Brundage of Bingham McCutchen LLP, San Francisco, CA; Tamar Finn of Bingham McCutchen LLP, Washington, DC; and William Carroll Harrelson and James Michael Tobin of Tobin Law Group, LLC, Tiburon, CA, for defendant-appellee Pac–West Telecomm, Inc.Christopher Paul Witteman of the California Public Utilities Commission, San Francisco, CA, for defendants-appellees Michael R. Peevey, Geoffrey E. Brown, Dian M. Grueneich, John Bohn, and Rachelle Chong, Commissioners of the California Public Utility Commission in their official capacities.Laurel Rodnon Bergold and Richard K. Welch of the Federal Communications Commission, Washington, DC, for the Federal Communications Commission as amicus curiae.Appeal from the United States District Court for the Northern District of California, Jeffrey S. White, District Judge, Presiding. D.C. No. 3:06–cv–07271–JSW.Before: STEPHEN REINHARDT and MARSHA S. BERZON, Circuit Judges, and LOUIS H. POLLAK, Senior District Judge.^*

OPINION

BERZON, Circuit Judge:

When a customer of telephone company A places a local call to a customer of telephone company B, the two companies cooperate to complete the call. Traditionally, the telephone company of the individual receiving the call (company B ) would bill the originating phone company (company A ) for completing, or “terminating,” the call, on a per-minute basis. When the phone call went in the opposite direction—from a company B customer to a company A customer—the billing, too, would be reversed. Underlying this “reciprocal compensation” arrangement was the empirically-based assumption that, over time, the telephone traffic going in each direction would even out.

In the late 1990s, however, a technological development undermined that assumption: the explosive growth of dial-up internet access. Unlike calls exchanged between friends and family members, your internet service provider (ISP) ¹ never calls you back; all the telephone traffic originates from your phone line and terminates at the ISP's. Following passage of the Telecommunications Act of 1996, telephone companies were allowed for the first time to compete with each other for local telephone customers. Some of these companies—called “competitive local exchange carriers” (CLECs), as distinct from the state-regulated monopolies that prevailed before 1996, which are now known as the “incumbent local exchange carriers” (ILECs)—realized that, in light of the reciprocal compensation regime, on the one hand, and the massively unidirectional traffic flows to ISPs, on the other, they could make a great deal of easy money by putting the two together. And so many of them did, targeting as their customers ISPs providing dial-up internet access. Each time their ISP customers received a phone call, the CLECs would bill the originating phone company (which tended, at least at first, to be an ILEC) for having terminated its call. But because the ISPs rarely made any outgoing phone calls, the CLECs could receive a great deal of compensation without ever having to put the “reciprocal” in “reciprocal compensation.”

In 2001, the Federal Communications Commission (FCC) addressed this game of regulatory arbitrage in the not-so-succinctly-named 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.R. 9151 [hereinafter, “ ISP Remand Order ”], which imposed a new compensation regime for ISP-bound traffic. In this case, we are asked to decide the proper scope of this alternative compensation regime.

Plaintiff-appellant AT & T (which is a CLEC in California) maintains that the ISP Remand Order applies when the carrier originating the call and the carrier terminating the call are both CLECs. Defendants-appellees Pac–West (also a CLEC) and the California Public Utilities Commission (CPUC) [together, “Appellees”] contend that the ISP Remand Order's compensation regime applies only to traffic between a CLEC and an ILEC. The CPUC agreed with Pac–West's limited reading of the reach of the compensation regime, finding it inapplicable to the ISP-bound traffic originating with AT & T and terminated by Pac–West, and so it assessed against AT & T charges consistent with Pac–West's state-filed tariff. AT & T then sued Pac–West and the CPUC in federal district court, alleging that the ISP Remand Order preempted Appellees' attempts to assess AT & T charges for ISP-bound traffic based on state-filed tariffs. The district court granted summary judgment to Appellees, agreeing with their argument that the ISP Remand Order does not apply to CLEC–to–CLEC traffic.

We agree with AT & T, and with the analysis contained in an amicus brief filed upon our request by the FCC, that the ISP Remand Order's compensation regime applies to ISP-bound traffic exchanged between two CLECs. We therefore reverse.

REGULATORY BACKGROUND

Until passage of the Telecommunications Act of 1996(TCA), Pub.L. No. 104–104, 110 Stat. 56 (codified, as amended, in scattered sections of 47 U.S.C.), local exchange carriers (LECs)—those carriers responsible for telephone traffic within geographically-delineated regions known as Local Access and Transport Areas (LATAs), as distinct from long-distance (or “interexchange”) traffic—operated as government-regulated monopolies. See Global NAPs Cal. v. Pub. Utils. Comm'n of Cal., 624 F.3d 1225, 1228–29 (9th Cir.2010); Pac. Bell Tel. Co. v. Cal. Pub. Utils. Comm'n, 621 F.3d 836, 839–40 (9th Cir.2010); see also Verizon Commcn's, Inc. v. FCC, 535 U.S. 467, 475–76, 122 S.Ct. 1646, 152 L.Ed.2d 701 (2002); AT & T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 371, 119 S.Ct. 721, 142 L.Ed.2d 835 (1999). With the TCA Congress opened up the LEC market to new entrants, eliminating their protected monopoly status. See Verizon Commc'ns, 535 U.S. at 476, 122 S.Ct. 1646; Global NAPs Cal., 624 F.3d at 1228. Both AT & T and Pac–West took advantage of the new statute to compete with the two companies that had previously enjoyed monopoly LEC status in different parts of California, Verizon and Pacific–Bell (now SBC California). Thus, for purposes of the local telephone markets relevant to this case, AT & T and Pac–West are CLECs, and Verizon and SBC California are ILECs.

The TCA imposed special obligations on ILECs to mitigate their dominant market position. See 47 U.S.C. § 251(c)(2). But it also imposed on all “carriers” ² the duty “to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers.” Id. § 251(a)(1). “Interconnection allows customers of one LEC to call the customers of another, with the calling party's LEC (the ‘originating’ carrier) transporting the call to the connection point, where the called party's LEC (the ‘terminating’ carrier) takes over and transports the call to its end point.” Global NAPs Cal., 624 F.3d at 1228 (quoting Verizon Cal. v. Peevey, 462 F.3d 1142, 1146 (9th Cir.2006)).

Interconnection, however, is not costless. The TCA therefore obligates LECs “to establish reciprocal compensation arrangements for the transport and termination of telecommunications.” ³ 47 U.S.C. § 251(b)(5); see also Global NAPs Cal., 624 F.3d at 1228. “Under a reciprocal compensation arrangement, the originating LEC must compensate the terminating LEC for delivering its customer's call to the end point.” Peevey, 462 F.3d at 1146; see also 47 C.F.R. § 51.701(e). Shortly after the passage of the TCA, the FCC clarified that “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, Interconnection Between Local Exchange Carriers and Commercial Mobile Radio Service Providers, 11 F.C.C.R. 15499, 16013 ¶ 1034 (1996) [hereinafter, “ Local Competition Order ”].

Traditionally—that is, before the widespread adoption of dial-up internet connectivity—reciprocal compensation arrangements required the originating LEC to pay the terminating LEC for each minute of each call (i.e., each “minute of use,” or “mou”). See, e.g., ISP Remand Order, 16 F.C.C.R. at 9162 ¶ 19 (discussing “the traditional assumptions of per minute pricing”). The logic behind this system was that, over time, the number of calls going each way would be essentially the same, and no LEC would pay more than its fair share of the costs associated with terminating other LECs' traffic. See id. at 9162 ¶ 20, 9183 ¶ 69.

With the advent of dial-up internet access, however, this arrangement led to a classic example of regulatory arbitrage.⁴ Certain CLECs (including Pac–West) took advantage of the traditional reciprocal compensation scheme to target as its customers a species of company that received a high number of telephone calls but originated very few—namely, ISPs offering dial-up internet access. See ISP Remand Order, 16 F.C.C.R. at 9153 ¶ 2, 9161 ¶ 21, 9183–84 ¶ ¶ 69–70. Not only do ISPs rarely, if ever, make...