St IA v. FCC

United States Court of Appeals

FOR THE DISTRICT OF COUMBIA CIRCUIT

Argued January 24, 2000 Decided June 27, 2000

No. 99-1149

State of Iowa and

Iowa Telecommunications and Technology Commission,

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

Bell Atlantic Telephone Companies, et al.,

Intervenors

On Petition for Review of an Order of the

Federal Communications Commission

Michael D. Hays argued the cause for petitioners. With

him on the briefs were Kenneth D. Salomon and J.G. Har-

rington.

James M. Carr, Counsel, Federal Communications Com-

mission, argued the cause for respondents. With him on the

briefs were Christopher J. Wright, General Counsel, Daniel

M. Armstrong, Associate General Counsel, and John E. Ingle,

Deputy Associate General Counsel. Catherine G. O'Sullivan

and Nancy C. Garrison, Attorneys, U.S. Department of Jus-

tice, entered appearances.

Donald M. Falk, Michael E. Glover, Edward H. Shakin,

Dan L. Poole, Robert B. McKenna, William F. Maher, Jr.,

Stephen L. Goodman, Richard White Jr., Michael S. Pabian,

David Cosson, Lawrence E. Sarjeant, Linda Kent, Keith

Townsend, John Hunter and Julie Rones were on the brief

for intervenors. L. Marie Guillory and Lawrence W. Katz

entered appearances.

Before: Ginsburg, Sentelle, and Rogers, Circuit Judges.

Opinion for the Court filed by Circuit Judge Ginsburg.

Ginsburg, Circuit Judge: The State of Iowa and the Iowa

Telecommunications and Technology Commission (collective-

ly, Iowa) petition for review of a declaratory ruling by the

Federal Communications Commission. The Commission held

that the Iowa Communications Network (ICN) is not a com-

mon carrier and therefore not a "telecommunications carrier"

within the meaning of s 254(h) of the Telecommunications

Act of 1996, 47 U.S.C. s 254(h). Consequently, the ICN is

ineligible for direct universal service support for the discount-

ed telecommunications services it provides to schools, librar-

ies, and rural health care providers. See Federal-State Joint

Board on Universal Service, Declaratory Ruling, 14 F.C.C.R.

3040 (1999) (Declaratory Ruling).

Iowa raises two arguments in its petition for review. First,

Iowa claims the Commission erred by determining that the

ICN is not a common carrier. Second, Iowa claims that

regardless whether the ICN is a common carrier, it is a

"telecommunications carrier" within the meaning of the 1996

Act, and therefore is eligible for direct universal service

support. To the extent the latter claim is not foreclosed by

our recent decision in Virgin Islands Tel. Corp. v. FCC, 198

F.3d 921, 922, 925 (1999) (upholding as reasonable FCC's

position that " 'telecommunications carrier' means essentially

the same as common carrier"), it is foreclosed by the defer-

ence we owe the Commission's reasonable interpretation of

the statute it administers, pursuant to step two of the analysis

in Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).

With respect to Iowa's first claim, however, the Commis-

sion failed to address Iowa's argument that offering services

to all potential customers to whom the carrier, under state

law, may provide services makes the ICN a common carrier

for purposes of the 1996 Act. We therefore grant the petition

for review and remand this matter to the Commission to

consider Iowa's argument in the first instance.

I. Background

The Iowa legislature established the ICN in 1989 to pro-

vide heavily subsidized high-speed telecommunications ser-

vices throughout the state, particularly to areas that may be

underserved by the local exchange carrier. The legislature

did not, however, authorize the ICN to serve everyone in the

state that could use its services; in particular, the ICN may

not provide services to individuals or to most private busi-

nesses. Rather, the ICN may provide service only to "public

and private agencies," Iowa Code s 8D.11(2), defined as

follows:

"Private agency" means an accredited nonpublic school, a

nonprofit institution of higher education eligible for tu-

ition grants, or a hospital licensed pursuant to chapter

135B or a physician clinic to the extent provided in

section 8D.13, subsection 16.

"Public agency" means a state agency, an institution

under the control of the board of regents, the judicial

branch ... a school corporation, a city library, a regional

library ... a county library ... or a judicial district

department of correctional services ..., an agency of the

federal government, or a United States post office which

receives a federal grant for pilot and demonstration

projects.

Iowa Code s 8D.2(4)-(5).

Iowa Code s 8D.9 further divides the class of "public and

private agencies" into two subclasses. First, Certifying

Users, which are institutions of higher education, area edu-

cation agencies, and certain United States Post Offices, were

required to certify by July 1, 1994 their intention to connect

to the network. Any Certifying User that did not certify its

intention by that date may not use the ICN without specific

legislative authorization. Any Certifying User that did timely

certify its intention to connect to the ICN must receive all its

telecommunications services from the ICN unless it obtains a

waiver based upon certain objective criteria specified in the

statute. See id. s 8D.9(2). Second, Preauthorized Users,

which are all other public and private agencies, may connect

to the ICN at any time without further authorization from the

legislature, and may choose which telecommunications ser-

vices to take from the ICN. Although Iowa points to no

statute requiring that the ICN serve all authorized users, the

parties agree that in practice the ICN will provide service to

any Preauthorized User and to any timely Certifying User

that requests service.

Under s 254(h)(1) of the 1996 Act, a "telecommunications

carrier" must provide services at discounted rates to schools,

libraries, and rural health care providers, and is entitled to

receive from the Commission, in an amount equal to the

aggregate discount given to such entities, either a reimburse-

ment or an offset against the carrier's obligation to partici-

pate in or contribute to the universal telecommunications

service fund. 47 U.S.C. s 254(h)(1). "Telecommunications

carrier" is defined as "any provider of telecommunications

services," id. s 153(44), and "telecommunications service" is

defined as "the offering of telecommunications for a fee

directly to the public, or to such classes of users as to be

effectively available directly to the public, regardless of the

facilities used," id. s 153(46).

The Commission determined that "telecommunications ser-

vices" means "only telecommunications provided on a com-

mon carrier basis." Federal-State Joint Board on Universal

Service, Report & Order, 12 F.C.C.R. 8776, 9177 p 785 (1997).

Therefore, in the Commission's scheme for administering

s 254, a carrier that provides a service on a non-common

carrier basis is not a "telecommunications carrier" and hence

is ineligible for universal service support with respect to that

service.

In response to Iowa's request for a declaratory ruling, the

Commission held that the ICN is not a common carrier. See

14 F.C.C.R. at 3056 p 29. Specifically, the Commission noted

that the primary characteristic of a common carrier is that it

"holds [it]self out to serve indifferently all potential users," id.

at 3050 p 21, and determined that the ICN failed this test for

two reasons: The ICN does not hold itself out to serve all

users, but is instead limited to serving only "public and

private agencies," as defined by the statute law of Iowa, see

id. p p 22, 24-25; and the ICN impermissibly discriminates

among users in the terms upon which it offers service, see id.

at 3051 p 23. Iowa petitions for review of the Declaratory

Ruling.

II. Analysis

Before the Commission, Iowa argued, among other things,

that the ICN is a common carrier because it offers service to

all the users it is authorized by law to serve:

[T]he case law firmly establishes that ICN only need

serve a specified clientele indifferently to qualify as a

common carrier.... [ICN's] customers are determined

by its governing statute, not by the ICN itself. Under

that statute the Legislature designated broad classes of

potential customers and required the ICN to serve all of

the members of those classes.

In its brief to this court, Iowa reiterates this argument and

relies primarily upon two cases for support: FCC v. Midwest

Video Corp., 440 U.S. 689 (1979), and National Ass'n of

Regulatory Util. Comm'rs v. FCC (NARUC), 525 F.2d 630

(D.C. Cir. 1976).

In Midwest Video the Commission had promulgated regu-

lations requiring cable television systems to allocate channels

for public, educational, government, and leased access users.

440 U.S. at 693. Although the regulations required that the

public and leased access channels be open to all potential

users, use of the educational and government access channels

was limited respectively to "local educational authorities" and

the "local government." 47 C.F.R. s 76.254(a)(2)-(3) (1977).

A private organization could not air an educational program

on the educational access channel because it would not come

within the class of users authorized by law. Yet the Supreme

Court held that the access rules, by "transferr[ing] control of

the content of access cable channels from cable operators to

members of the public" had "relegated cable systems, pro

tanto, to common-carrier status." 440 U.S. at 700-01.

In NARUC this court reviewed the Commission's determi-

nation that Specialized Mobile Radio Systems (SMRS) provid-

ing transmission services were not common carriers. 525

F.2d at 639. The court announced a test for common car-

riage that focused primarily upon whether the carrier holds

itself out indiscriminately to serve all to whom it can "legally

and practically be of use." Id. at 640-42. We wrote:

It is not an obstacle to common carrier status that SMRS

offer a service that may be of practical use to only a

fraction of the population, nor that the [FCC's] Order

limits possible subscribers to SMRS services to eligibles

under Sections 89, 91, and 93 of the Regulations. The

key factor is that the operator offer indiscriminate ser-

vice to whatever public its service may legally and prac-

tically be of use.

Id. at 642.

Both Midwest Video and NARUC can be read as approving

the general rule that a carrier offering its services only to a

legally defined class of users may still be a common carrier if

it holds itself out indiscriminately to serve all within that

class. That is precisely Iowa's argument.

Although the Commission expressly recognized in the De-

claratory Ruling that the ICN's customer base is restricted

by state law rather than by the carrier's own choice, see 14

F.C.C.R. at 3053 p 25, it did not respond to this argument.

Before this court, the Commission first claims that the argu-

ment was not clearly enough presented before the agency to

elicit an answer. True it is that the State did not cite cases

before the agency, but it clearly made the argument--as is

evident in the passage quoted in the first paragraph of this

part of our opinion. The Commission's only substantive

response is that Midwest Video and the other cases cited by

Iowa involved the provision of a specialized service that

"necessarily limited the class of customers that the carrier

would serve." This response fails to address the issue wheth-

er a legal prohibition upon serving some potential customers

to whom the service would be of use--in Midwest Video, for

example, those capable of producing video programming suit-

able for the government and educational access channels--is

inconsistent with being a common carrier.

We are not suggesting that Midwest Video or NARUC or

the other cases Iowa cites require a decision in Iowa's favor.

Rather, our point is that the Commission's failure to address

Iowa's argument requires that we remand this matter for the

Commission's further consideration. See, e.g., Frizelle v.

Slater, 111 F.3d 172, 177 (D.C. Cir. 1997) (remanding where

agency "did not respond to two ... arguments, which do not

appear frivolous on their face and could affect the [agency's]

ultimate disposition"); AT&T Corp. v. FCC, 86 F.2d 242, 247

(D.C. Cir. 1997) (remanding where Commission "completely

failed to address" argument raised in ex parte letter).

The Commission also ruled that the ICN is not a common

carrier because it impermissibly discriminates among users in

the terms of service it offers. The Commission identified

three distinct forms of discrimination: (1) Certifying Users

but not Preauthorized Users must take all or none of their

telecommunications services from the ICN; (2) some Certify-

ing Users may receive waivers of the all-or-none requirement;

and (3) those that did not timely certify, as well as all

potential users that are not public or private agencies, are

excluded entirely from using the ICN. Declaratory Ruling,

14 F.C.C.R. at 3051 p 23.

In its opening brief to this court, Iowa pointed out that

common carriers typically treat different classes of customers

differently, and that the Communications Act itself contem-

plates reasonable distinctions in the terms and conditions of

service offered to different classes of customers. See 47

U.S.C. s 201(b) ("communications ... may be classified into

... such [ ] classes as the Commission may decide to be just

and reasonable, and different charges may be made for the

different classes of communications"). In its responsive brief,

the Commission reiterated but did not meaningfully argue its

first and second grounds for saying that the ICN unduly

discriminates. We therefore follow the Commission's lead in

focusing exclusively upon the third form of discrimination.

See SEC v. Banner Fund Int'l, 211 F.3d 602, 613-14 (D.C.

Cir. 2000) (declining to address "asserted but unanalyzed"

argument not developed after being challenged by adverse

party). Even as to that ground, the Commission's defense is

conclusory:

[W]hile common carriers may permissibly engage in

some discrimination among classes of users ... [the]

exclus[ion of] entire classes of potential users from its

customer base simply because they do not fit the Iowa

Code's definition of a private or public agency ... is

irreconcilable with well-established principles of common

carriage.

Moreover, as the Commission conceded at oral argument, this

claim of discrimination raises precisely the same question as

the Commission's first reason for denying the ICN common

carrier status: Whether holding out service only to the class

of users authorized by law to receive it is inconsistent with

being a common carrier. Therefore, discrimination of the

sort here claimed is not an independent basis for denying the

ICN's common carrier status, and does not alter our conclu-

sion that we must remand this matter for the Commission's

further consideration.

III. Conclusion

The Commission failed to address Iowa's argument that the

ICN is a common carrier because it holds out service indis-

criminately to all the users it is authorized by law to serve.

Therefore, we grant the petition for review and remand this

case for further consideration by the Commission.

So ordered.