At & T Corp. v. Core Commc'ns, Inc.

• Decision Date: 25 November 2015
• Docket Number: 14–1664.,Nos. 14–1499,s. 14–1499
• Citation: 806 F.3d 715
• Parties: AT & T CORP.; Teleport Communications of America, LLC v. CORE COMMUNICATIONS, INC.; Robert F. Powelson, Chairman of the Pennsylvania Public Utility Commission in his official capacity; John F. Coleman, Jr., Vice Chairman of the Pennsylvania Public Utility Commission in his official capacity; Wayne E. Gardner; James H. Cawley; Pamela A. Witmer, Commissioners of the Pennsylvania Public Utility Commission in their official capacity Robert F. Powelson, John F. Coleman, Jr., James H. Cawley, Wayne E. Gardner and Pamela A. Witmer, Appellants in No. 14–1499 Core Communications, Inc., Appellant in No. 14–1664.
• Court: U.S. Court of Appeals — Third Circuit

806 F.3d 715

AT & T CORP.; Teleport Communications of America, LLC

v. CORE COMMUNICATIONS, INC.; Robert F. Powelson, Chairman of the Pennsylvania Public Utility Commission in his official capacity; John F. Coleman, Jr., Vice Chairman of the Pennsylvania Public Utility Commission in his official capacity; Wayne E. Gardner; James H. Cawley; Pamela A. Witmer, Commissioners of the Pennsylvania Public Utility Commission in their official capacityRobert F. Powelson, John F. Coleman, Jr., James H. Cawley, Wayne E. Gardner and Pamela A. Witmer, Appellants in No. 14–1499Core Communications, Inc., Appellant in No. 14–1664.

Nos. 14–1499

14–1664.

United States Court of Appeals, Third Circuit.

Argued Nov. 19, 2014.

Opinion Filed Nov. 25, 2015.

Shaun A. Sparks, Esquire, (Argued), Colin W. Scott, Esquire, Kathryn G. Sophy, Esquire, Pennsylvania Public Utility Commission, Harrisburg, PA, for Appellants Robert F. Powelson, John F. Coleman, Jr., James H. Cawley, Wayne E. Gardner and Pamela A. Witmer.

Christopher F. Van de Verge, Esquire, (Argued), Core Communications, Inc., Annapolis, MD, Mark D. Bradshaw, Esquire, Stevens & Lee, Harrisburg, PA, for Appellant Core Communications, Inc.

Christopher S. Comstock, Esquire, (Argued), Theodore A. Livingston, Esquire, Mayer Brown, Chicago, IL, for Appellees.

Scott H. Angstreich, Esquire, Kellogg Huber Hansen Todd Evans & Figel, Washington, DC, for Amicus Curiae Verizon.

OPINION

ROTH, Circuit Judge:

The members of the Pennsylvania Public Utility Commission (PPUC) and Core Communications, Inc., appeal the District Court's ruling granting summary judgment in favor of AT & T Corp. Core billed AT & T for terminating phone calls from AT & T's customers to Core's Internet Service Provider (ISP) customers from 2004 to 2009. When AT & T refused to pay, Core filed a complaint with the PPUC, which ruled in Core's favor. AT & T then filed suit in federal court seeking an injunction on the ground that the PPUC lacked jurisdiction over ISP-bound traffic because such traffic is the exclusive province of the Federal Communications Commission. Because we find that the FCC's jurisdiction over local ISP-bound traffic is not exclusive and the PPUC orders did not conflict with federal law, we will vacate the judgment of the District Court and remand this case for entry of judgment in favor of Core and the members of the PPUC.

I.

A.

Congress passed the Telecommunications Act of 1996¹(TCA) to “fundamentally restructure[ ] local telephone markets.”²Before the TCA, local telephone service companies operated as government-regulated monopolies. “States typically granted an exclusive franchise in each local service area to a local exchange carrier (LEC).”³One of the TCA's principal aims “was to end local telephone monopolies and develop a national telecommunications policy that strongly favored local telephone market competition.”⁴The TCA thus created two classes of LECs: the new market entrants are considered “competitive” LECs (CLECs) and the former state-regulated monopolies are designated “incumbent” LECs (ILECs).⁵

Recognizing the considerable barriers to entry associated with building out a network, the TCA required ILECs to allow CLECs to connect to their preexisting networks.⁶“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.”⁷Without mandatory interconnection, a CLEC's customers would not be able to connect with friends or family who are customers of other phone companies—whether ILEC or CLEC.

Interconnection, of course, costs money. The TCA aimed to solve the problem of cost allocation by requiring reciprocal payment arrangements, best understood as an “originator pays” rule. “In basic terms, when a customer of Carrier A places a local call to a customer of Carrier B, Carrier A must pay Carrier B for terminating the call, and vice versa.”⁸“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.”⁹Thus, all LECs have “[t]he duty to establish reciprocal compensation arrangements for the transport and termination of telecommunications.”¹⁰But because the incumbents' established market power gave them a potentially overwhelming advantage in negotiations, ILECs have a duty to negotiate interconnection agreements in good faith (as does the requesting telecommunications carrier).¹¹

Congress also provided an enforcement mechanism to ensure the formation of interconnection agreements. Under 47 U.S.C. § 252, either party to an interconnection agreement may request that the relevant state commission participate in contract negotiations and mediate any differences.¹²If that fails, either LEC may petition the same state commission to arbitrate unresolved issues.¹³But because § 252proceedings govern only ILEC–CLEC disputes, it “leaves something of an enforcement gap: CLECs have statutory duties to interconnect with other LECs ..., but there is no procedure specified for one CLEC to require another CLEC to enter into an interconnection agreement that would govern the terms of those duties.”¹⁴Accordingly, CLECs sometimes transmit traffic to each other without interconnection agreements.

B.

The advent of dial-up Internet invalidated the assumptions behind reciprocal arrangements. Suddenly, many customers called ISPs with longer-duration calls that, unlike calls to friends and family, were never returned. The FCC soon realized that this situation “creat[ed] an opportunity for regulatory arbitrage.”¹⁵“Because traffic to ISPs flows one way, so does money in a reciprocal compensation regime,” ¹⁶and if a carrier could create a customer base entirely out of ISPs, it could be paid to terminate calls, without ever reciprocating. Indeed, “[b]efore long, reciprocal compensation on ISP-bound traffic was costing ILECs billions.”¹⁷

The FCC sought to address the problem in its 1999 Declaratory Ruling.¹⁸Because the FCC generally has jurisdiction over interstate communications and not purely intrastate communications,¹⁹the FCC first considered its own jurisdiction using its traditional end-to-end jurisdictional analysis.²⁰The FCC found that although calls to the ISP itself were local, “the ultimate destination” is an “Internet website that is often located in another state,” so it asserted jurisdiction over ISP-bound traffic.²¹More specifically, the FCC found that local ISP-bound traffic was “jurisdictionally mixed” because it “appears to be largely interstate.”²²

Following the same reasoning, the FCC found that the reciprocal compensation scheme of § 251, which applies to local traffic,²³does not apply to ISP-bound traffic.²⁴The FCC noted that, until it adopted a rule creating a new compensation structure, parties could voluntarily, but were not required to, include ISP-bound traffic in their otherwise mandatory interconnection agreements under §§ 251and 252.²⁵Despite the non-local nature of the traffic, the FCC still saw a role for state commissions to decide, as part of the § 252arbitrations, whether reciprocal compensation should be required in a specific case.²⁶

After the FCC issued the Declaratory Ruling,ILECs petitioned for review in the Court of Appeals for the District of Columbia Circuit.²⁷The court vacated the ruling reasoning that, because the FCC considered the traffic local for some purposes, the FCC had failed to justify why § 251did not apply to the admittedly local traffic despite its “largely interstate” character.²⁸

Although the standard end-to-end jurisdictional analysis was valid on its own terms, the FCC had extended the reasoning to determine that the traffic was non-local for substantive rules. The court held that the FCC provided no rationale for that inferential leap.²⁹Notably, the court did not question or alter the jurisdictional analysis; it merely noted that the FCC had not demonstrated that the analysis was appropriate for any otheruse.

In 2001, the FCC responded with the ISP Remand Order,reaching the same substantive conclusion—that local ISP-bound traffic is not subject to reciprocal compensation—but on different legal grounds. The FCC found that it had previously erred by trying to rigidly classify ISP-bound traffic as either local or long-distance for the purposes of § 251(b)(5), and the Commission should instead have recognized that such traffic is a hybrid.³⁰Accordingly, the FCC ceased construing § 251(b)(5)using that dichotomy, instead reading § 251(g)to “limit[ ] the reach of the reciprocal compensation regime mandated in section 251(b).”³¹Thus, all local traffic would be governed by the reciprocal compensation scheme unless it fell into one of the three categories outlined in § 251(g): “exchange access, information access, and exchange services.”³²The FCC found that ISP-bound traffic is indeed “information access,” and is therefore exempt from § 251(b)(5).

Having established a new rationale for exempting ISP-bound traffic from reciprocal compensation, the FCC invoked its general powers under § 201(b)“to address the market distortions under the current intercarrier compensation regimes for ISP-bound traffic.”³³The Commission set forth a new “interim” compensation including four specific rules, the most important of which is the rate cap: an upper bound to the prices LECs could charge for ISP-bound traffic. This cap would, over time, move from $0.0015 per minute of use (MOU) to $0.0007/MOU, where it now continues to reside.³⁴The FCC made clear that these caps are caps,not rates, and as such they “have no effect to the extent that states have ordered LECs to exchange ISP-bound traffic either at rates below the caps or on a bill and keep basis (or otherwise have not required payment of compensation for this traffic).”³⁵

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