Global Naps, Inc. v. Verizon New England

• Citation: 444 F.3d 59
• Decision Date: 11 April 2006
• Docket Number: No. 05-2657.,05-2657.
• Parties: GLOBAL NAPS, INC., Plaintiff, Appellant, v. VERIZON NEW ENGLAND, INC., d/b/a Verizon Massachusetts; Massachusetts Department of Telecommunications and Energy; Paul B. Vasington, in his capacity as Commissioner; James Connelly, in his capacity as Commissioner; W. Robert Keating, in his capacity as Commissioner; Deirdre K. Manning, in her capacity as Commissioner; Eugene J. Sullivan, Jr., in his capacity as Commissioner, Defendants, Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

444 F.3d 59

GLOBAL NAPS, INC., Plaintiff, Appellant, v. VERIZON NEW ENGLAND, INC., d/b/a Verizon Massachusetts; Massachusetts Department of Telecommunications and Energy; Paul B. Vasington, in his capacity as Commissioner; James Connelly, in his capacity as Commissioner; W. Robert Keating, in his capacity as Commissioner; Deirdre K. Manning, in her capacity as Commissioner; Eugene J. Sullivan, Jr., in his capacity as Commissioner, Defendants, Appellees.

No. 05-2657.

United States Court of Appeals, First Circuit.

Heard January 11, 2006.

Decided April 11, 2006.

Andrew Good, with whom Philip G. Cormier, Good & Cormier, William J. Rooney, and Jeffrey Melick were on brief, for Global NAPs, Inc.

Scott H. Angstreich, with whom Bruce P. Beausejour, Keefe B. Clemons, Sean A. Lev, and Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C. were on brief, for Verizon New England, Inc.

Thomas A. Barnico, Assistant Attorney General, with whom Thomas F. Reilly, Attorney General, and Daniel J. Hammond, Assistant Attorney General, were on brief, for the Massachusetts Department of Telecommunications and Energy and its Commissioners.

Joel Marcus, Counsel, Samuel L. Feder, General Counsel, and Daniel M. Armstrong, Associate General Counsel, on brief for the Federal Communications Commission, amicus curiae.

Before LYNCH, Circuit Judge, CAMPBELL, Senior Circuit Judge, and HOWARD, Circuit Judge.

LYNCH, Circuit Judge.

The Massachusetts Department of Telecommunications and Energy (DTE), acting as an arbitrator of a dispute over an interconnection agreement between Verizon New England, Inc. and Global NAPs, Inc., issued an order requiring Global NAPs to pay Verizon compensation for certain phone calls; the amount Global NAPs owes is at least $42 million. The question before the DTE involved a particular variant on a larger question of allocation of compensation for telephone calls placed to internet service providers (ISPs). The larger question has been addressed in a series of orders from the Federal Communications Commission (FCC). At the heart of this case is one such order, the ISP Remand Order.

The DTE, in an arbitration order, required Global NAPs to pay Verizon access charges for all "virtual NXX" traffic, including non-local ISP-bound traffic, rejecting Global NAPs' argument that state commissions were preempted by the ISP Remand Order from regulating intercarrier compensation for all ISP-bound traffic. Global NAPs filed suit challenging the DTE's conclusion in federal district court. Verizon and the DTE argued that the DTE retained authority to decide the issue because the FCC order only preempted state commission regulation of "local" traffic sent to an ISP, and the FCC did not hold that virtual NXX traffic is such local traffic.

The district court never reached the preemption issue, because it found that Global NAPs had implicitly consented to the "jurisdiction" of the DTE to resolve the dispute, and so could not later challenge the DTE's jurisdiction to impose access charges for ISP-bound traffic. It granted Verizon and the DTE's motions for partial summary judgment. No party on appeal agrees with that reasoning.

In the end, we affirm, though on different grounds. A party contesting an issue of whether federal law has preempted a state commission's authority does not waive judicial review of the argument by first presenting it to the commission in the course of an arbitration under the Telecommunications Act of 1996. Because the preemption question was not waived, it must be addressed. The issue is one of federal law over which the federal court exercises de novo, not deferential, review. We reach the merits and hold that the FCC did not expressly preempt state regulation of intercarrier compensation for non-local ISP-bound calls as are involved here, leaving the DTE free to impose access charges for such calls under state law.

I. Regulatory Background

Prior history between these parties is set forth in our opinions in Global Naps, Inc. v. Verizon New England, Inc. (Global Naps I), 396 F.3d 16 (1st Cir.2005), and Global Naps, Inc. v. Massachusetts Department of Telecommunications & Energy (Global Naps II), 427 F.3d 34 (1st Cir.2005).

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.), was enacted "to end the local telephone monopolies and create a national telecommunications policy that strongly favored competition in local telephone markets." Global Naps I, 396 F.3d at 18; P.R. Tel. Co. v. Telecomms. Regulatory Bd., 189 F.3d 1, 7 (1st Cir.1999); see also Verizon Md. Inc. v. Pub. Serv. Comm'n, 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). To achieve this goal, the TCA requires the former local phone monopolies, called incumbent local exchange carriers (ILECs), to allow competitive local exchange carriers (CLECs) to interconnect with their networks. See 47 U.S.C. § 251(c)(2). Interconnection permits customers of one local exchange carrier to make calls to, and receive calls from, customers of other local exchange carriers. Global Naps II, 427 F.3d at 36. The TCA also requires the ILECs to negotiate in good faith the terms of interconnection agreements with the CLECs. See 47 U.S.C. § 251(c)(1). "These agreements provide the terms of interconnection and `fulfill the duties' enumerated in § 251." Global Naps II, 427 F.3d at 37 (quoting 47 U.S.C. § 251(c)(1)).

Section 252 prescribes the process by which interconnection agreements are to be formed. 47 U.S.C. § 252. Under this provision, if negotiations between local exchange carriers do not result in a final agreement, either party can petition the relevant state commission to arbitrate unresolved issues. See id. § 252(b)(1). The state commission must limit its consideration of the agreement to the matters specifically presented in the petition for arbitration and in the response. See id. § 252(b)(4)(A). The state commission has "the authority to decide the open issues between the parties, and to impose conditions on the parties for the implementation of the terms of arbitration into an agreement," Global Naps I, 396 F.3d at 19 (citing 47 U.S.C. § 252(b)(4)(C)), so long as its resolutions are consistent with § 251 and any regulations promulgated by the FCC, see 47 U.S.C. §§ 252(c)(1), 253(a). Once an agreement is concluded, it is submitted to the state commission for final approval. Id. § 252(e).

State commission decisions are subject to judicial review in federal court under 47 U.S.C. § 252(e)(6):

In any case in which a State commission makes a determination under this section, any party aggrieved by such determination may bring an action in an appropriate Federal district court to determine whether the agreement or statement meets the requirements of section 251 of this title and this section.

A. Reciprocal Compensation and Access Charges

The underlying issue on appeal is whether, as Global NAPs argues, the FCC's ISP Remand Order preempted state commissions from regulating intercarrier compensation for all ISP-bound calls. Verizon and the DTE take the position that the FCC only expressly preempted state regulation of intercarrier compensation for "local" ISP-bound calls. This issue requires a brief discussion of the distinction between local and "interexchange" calling and the different mechanisms of intercarrier compensation that apply to them.

The FCC and the DTE have maintained a distinction between "local" and "interexchange" traffic. See Local Competition Provisions in the Telecommunications Act of 1996 (Local Competition Order) ¶¶ 1033-35, 11 F.C.C.R. 15499, 16012-14, 1996 WL 452885 (1996) (drawing the distinction). Local traffic stays within the boundaries of a local calling area. Interexchange (or "non-local") traffic crosses the boundaries of a local calling area and is generally subject to toll or long-distance charges paid by the calling party.¹ Traditionally, local calling areas have been geographically defined.

Intercarrier compensation comes into play whenever two or more carriers collaborate to complete a phone call. Whether a call is "local" or "interexchange" generally makes a difference in what regime of intercarrier compensation — reciprocal compensation or access charges — applies to that call.

The TCA requires interconnecting local exchange carriers (LECs) to establish "reciprocal compensation arrangements," 47 U.S.C. § 251(b)(5), under which the originating LEC compensates the terminating LEC for the transport and termination of telecommunications traffic. See Global Naps II, 427 F.3d at 36 (citing 47 C.F.R. § 51.701). The FCC, in its initial regulations implementing the TCA, limited reciprocal compensation obligations "to [telecommunications] traffic that originates and terminates within a local area," leaving interexchange calls outside the reciprocal compensation regime. See Local Competition Order ¶ 1034, 11 F.C.C.R at 16013, 1996 WL 452885; see also Global Naps II, 427 F.3d at 36-37.

In those regulations, the FCC made clear that it was leaving in place the preexisting access charge regime that applied to interexchange calls:

[A]s a legal matter, . . . transport and termination of local traffic are different services than access service for long distance telecommunications. . . . The [TCA] preserves the legal distinctions between charges for transport and termination of local traffic and interstate and intrastate charges for terminating long-distance traffic.

Local Competition Order ¶ 1033, 11 F.C.C.R. at 16012-13, 1996 WL 452885; see also id. ¶ 1035, 11 F.C.C.R. at 16013, 1996 WL 452885 ("Traffic originating or terminating outside of the applicable local area would be subject to interstate and intrastate access charges.").

Importantly, the FCC's initial TCA regulations also reaffirmed the ability of states to regulate intrastate access...