Peerless Network, Inc. v. Mci Commc'ns Servs., Inc.
| Decision Date | 16 March 2018 |
| Docket Number | No. 14 C 7417,14 C 7417 |
| Parties | PEERLESS NETWORK, INC., et al., Plaintiffs-Counterclaim Defendants, v. MCI COMMUNICATIONS SERVICES, INC., VERIZON SERVICES CORP., and VERIZON SELECT SERVICES, INC., Defendants-Counterclaim Plaintiffs. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
This matter presents a billing dispute between two telecommunications companies. On September 23, 2014, Peerless Network, Inc. and its subsidiaries1brought suit to recover amounts allegedly owed by Verizon2 for telephone exchange traffic that Verizon either delivered to or received from Peerless's network beginning sometime in 2008. Verizon admits it has withheld payment on portions of Peerless's invoices, but denies Peerless is entitled to collect the full amounts billed. Currently before the Court are the parties' cross-motions for partial summary judgment. R. 159; R. 170. For the reasons that follow, both motions are denied in part and granted in part.
As a general matter, telephone exchange services4 in the United States are divided into two service categories based on the distance of a call: (1) local exchangeservices, which involve calls that originate (i.e., begin with a calling party) in one exchange service area5 and terminate (i.e., end to a called party) in the same exchange service area; and (2) interexchange services, which involve calls that originate in one exchange area and terminate in a different exchange area.6 Interexchange services provide the "middle portion" of calls crossing local exchange area boundaries, and can be either intrastate (i.e., calls that are exchanged within the same state) or interstate (i.e., calls that are exchanged over state boundary lines). In common parlance, local exchange services may be referred to as "local calling" or "local service," and interexchange services may be referred to as "long distance calling" or "long distance service," though these terms are imprecise.
In 1996, Congress adopted the Telecommunications Act of 1996, codified at various provisions in 47 U.S.C. §§ 153 et seq. (the "1996 Act"). The 1996 Act requires all telecommunications carriers to interconnect their networks "directly or indirectly with the facilities and equipment of other telecommunications carriers." 47 U.S.C. § 251(a). Interconnection ensures that consumers can place calls to and receive calls from consumers served by a different telecommunications carrier.7 Historically, the Federal Communications Commission ("FCC") has exercisedjurisdiction over interstate calls, while each individual state's public service commission has exercised jurisdiction over intrastate calls.
To enable carriers to exchange calls between their customers, the FCC has adopted a compensation structure which requires local exchange service companies ("LECs") to allow interstate exchange service companies ("IXCs") to use their telephone lines to originate and terminate interexchange service telephone calls.8 Thus, when a consumer makes an interexchange call, the consumer's LEC originates the call, performs switching functions and delivers the call (i.e., "hands the call off") to an IXC, and the IXC then hands the call off to the terminating LEC so that the call can be delivered to the called party. A common example of this would be a long-distance call from Chicago to St. Louis. In that example, AT&T Illinois (the incumbent9 LEC in Chicago) performs transport and switching functions and originates the call on its network, and hands the call over to an IXC, such as Sprint Long-Distance, which carries the call to St. Louis. Sprint then hands the call off to AT&T Missouri (the incumbent LEC in St. Louis), which performsswitching functions and delivers the call to the called party. While the process sounds cumbersome, in practice it happens in fractions of seconds.
To compensate LECs for use of their networks, IXCs are required to pay "access service charges," also known as "switched exchange access services,"10 for originating and terminating interexchange telephone calls and for the transport of these calls. These access service charges are set forth either in negotiated agreements between the LECs and IXCs, or in regulated terms of service and price lists—known as tariffs—filed either with a state public service commission for calls originating and terminating within each state, or with the FCC for calls originating and terminating across state lines.
Until the 1970s, AT&T and its subsidiaries maintained a virtual monopoly over interstate wire telephone services, including both long distance and local wire telephone services. See MCI Telecomms. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 220 (1994). AT&T provided long-distance services to consumers, while the Belloperating companies, twenty-two local telephone companies wholly owned by AT&T, provided local services to consumers. See Access Charge Reform Price Cap Order,11 12 FCC Rcd. at 15991. Beginning in the 1970s, new IXCs began entering the long-distance market to compete with AT&T. But because AT&T controlled the Bell operating companies, AT&T could freeze out competition by having its LECs charge higher prices to competing IXCs. Id. The federal government challenged these activities in an antitrust lawsuit against AT&T, which resulted in AT&T agreeing to divest itself of all twenty-two Bell operating companies. Id. The former Bell LECs are now known as incumbent LECs, or ILECs. Id.
After the break-up of AT&T, consumers, specifically the caller and the call recipient, were able to choose their LECs. In doing so, they pay the LECs' charges for local telephone services, but they do not pay the LEC for the switched access services that the LEC provides to the IXC to complete the call. Rather, the IXC must pay those charges. Although the divestiture ended AT&T's anticompetitive control over the ILECs, the ILECs themselves had few competitors, and could use their local monopoly power to charge the IXCs unreasonable and discriminatory switched access rates. To avoid this problem, the FCC began regulating ILEC rates by requiring ILECs to file and maintain tariffs with the FCC for interstate switched access services.
After years of experimenting with permissive detariffing of both ILECs and CLECs12, the FCC determined that some CLECs were taking advantage of the system by filing tariffs setting unreasonably high switched access rates that were "subject neither to negotiation nor to regulation designed to ensure their reasonableness." In re Access Charge Reform, 16 F.C.C. Rcd. 9923 at ¶ 2 (2001). As it turned out, CLECs, like ILECs, were generally "insulated from the effects of competition," because the caller and call recipient who choose their LECs (but do not pay for terminating switched access services) have "no incentive to select an [LEC] with low rates." Id. at ¶ 28. Under this framework, the IXCs had to pay whatever rate was set by the CLECs in their tariffs in order to provide phone service to their customers, because the customers that actually choose the terminating CLEC do not also pay their access charges and have no incentive to select CLECs with low rates. Id. The CLECs therefore could impose rates far higher than the ILECs (whose rates were regulated), with no risk that those high rates would drive away the CLECs' individual customers. See Developing a Unified Intercarrier Comp. Regime, 16 FCC Rcd. 9610 at ¶ 133 (2001).
In response to this regulatory arbitrage opportunity, the FCC issued the Access Reform Order in 2001, revising its CLEC tariffing system and conducting a new forbearance analysis. In re Access Charge Reform, 16 F.C.C. Rcd. 9923 (2001). In this order, the FCC first established a "benchmark" level for CLEC rates basedon the rates charged by the ILEC or ILECs operating in a CLEC's service area. In re Access Charge Reform, 16 F.C.C. Rcd. at 9941. A CLECs' tariffed rates would be "presumed to be just and reasonable" as long as they did not exceed the benchmark rate. Id. at 9938. Second, the FCC revised its decision in the Hyperion Order;13 rather than give CLECs free rein to choose whether to file tariffs, the FCC decided to exercise its forbearance authority "only for those CLEC interstate access services for which the aggregate charges exceed our benchmark" by requiring CLECs that sought to charge rates above the benchmark to negotiate agreements with IXCs. In re Access Charge Reform, 16 F.C.C. Rcd. at 9957.
In re AT&T Servs. Inc., 30 F.C.C. Rcd. 2586, 258-889 (2015), review denied in part, cause remanded by Great Lakes Comnet, Inc. v. Fed. Commc'ns Comm'n, 823 F.3d 998 (D.C. Cir. 2016).
With two exceptions, the Peerless subsidiaries are CLECs,15 while Verizon is an IXC that provides telephone services nationwide.16 See R. 155, JSOF, ¶¶ 3, 4. Peerless seeks compensation for unpaid access charge rate elements and related services beginning in 2008. Specifically, Peerless seeks payment of billed charges for switched access services, both originating and terminating, provided to Verizon at an "end office" and at a "tandem....
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