Qwest Services Corp. v. Federal Communications Commission

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 2, 2007 Decided December 4, 2007

No. 06-1274

QWEST SERVICES CORPORATION,

PETITIONER

V.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

VERIZON COMMUNICATIONS, ET AL.,

INTERVENORS

Consolidated with

06-1298, 06-1309

On Petitions for Review of an Order of the

Federal Communications Commission

Steven J. Perfrement argued the cause for petitioner

Qwest Services Corporation. With him on the briefs was

Robert B. McKenna.

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Bruce D. Sokler argued the cause for petitioner iBasis,

Inc. On the briefs were Michael H. Pryor, Kemal Hawa,

Robert G. Kidwell, and Helen Gerostathos Guyton.

Richard K. Welch, Associate General Counsel, Federal

Communications Commission, argued the cause for

respondents. With him on the brief were Thomas O. Barnett,

Assistant Attorney General, U.S. Department of Justice,

Catherine G. O’Sullivan and Nancy C. Garrison, Attorneys,

Samuel L. Feder, General Counsel, Federal Communications

Commission, John E. Ingle, Deputy Associate General

Counsel, and Laurel R. Bergold, Counsel. Eric D. Miller,

Counsel, entered an appearance.

Helgi C. Walker argued the cause for intervenors AT&T

Corporation and Verizon Communications Inc. With her on

the brief were Michael E. Glover, Edward Shakin,

Christopher M. Miller, Eve Klindera Reed, Gary L. Phillips,

David W. Carpenter, and James P. Young. Christopher T.

Shenk and David L. Lawson entered appearances.

Before: SENTELLE and TATEL, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: This case involves

phone calls made with two kinds of prepaid calling cards.

The first kind uses internet protocol (“IP”) technology to

transport part or all of a telephone call (“IP-transport cards”).

The second offers a menu-driven interface through which

users can either make a call or access several types of

information (“menu-driven cards”). In the order under review

the Federal Communications Commission determined that

both types of cards offer “telecommunications services” and

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that providers of those cards are therefore subject to access

charges, Universal Service Fund contributions, and other

obligations under the Communications Act. In the Matter of

Regulation of Prepaid Calling Card Services, 21 FCC Rcd

7290 (2006) (“Order”).

These consolidated petitions for review do not challenge

the substantive merits of that decision. Rather, they attack the

Commission’s decisions as to the retroactivity of its

substantive interpretation of the statute. iBasis contests the

decision to make the Order retroactive as to IP-transport

cards, and Qwest contests the decision to make it prospective-

only as to menu-driven cards.

We find no manifest injustice in applying the Order

retroactively to IP-transport cards and thus deny iBasis’s

petition for review. But we can discern nothing in the record

that justifies the Commission’s decision to foreclose

retroactive application of the Order’s statutory interpretation

to menu-driven cards in the calculation of a provider’s

liability for access charges. Accordingly, we grant Qwest’s

petition for review and vacate the Order insofar as it purports

to bar such an application.

* * *

Under the Communications Act of 1934, as amended by

the Telecommunications Act of 1996, providers of

telecommunications services are regulated as common

carriers, but providers of information services are not. 47

U.S.C. § 153(20), (44), (47); Nat’l Cable & Telecomm. Ass’n

v. Brand X Internet Servs., 545 U.S. 967, 975 (2005); see also

Brand X, 545 U.S. at 976-77 (describing the historical basis

for that distinction). In 2003, AT&T petitioned the

Commission for a declaratory ruling that its “enhanced”

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prepaid calling cards—enhanced by the addition of an

advertising message from the card’s retailer—were

“jurisdictionally interstate” and provided information services.

See Am. Tel. & Tel. Co. v. FCC, 454 F.3d 329, 331 (D.C. Cir.

2006) (“AT & T”). While that petition was still pending,

AT&T alerted the Commission that it had developed menu-

driven cards and was considering the transport of calls via

prepaid calling cards using IP technology. Letter from Judy

Sello, Senior Attorney, AT&T, to Marlene H. Dortch,

Secretary, FCC (Nov. 22, 2004). AT&T amended its petition

to add a request for a declaratory ruling that these new

variations on its prepaid calling cards would be treated as

interstate information services. Id.

On February 23, 2005, the Commission released an Order

and Notice of Proposed Rulemaking in response to AT&T’s

petition. AT&T Corp. Petition for Declaratory Ruling

Regarding Enhanced Prepaid Calling Card Services, 20 FCC

Rcd 4826 (2005) (“Prepaid Card Order” or “NPRM”). As to

the enhanced prepaid cards described in AT&T’s original

petition, the Commission determined that those cards offered

telecommunications services—not information services—and

that the calls made with them are intrastate when they

originate and end in the same state, regardless of a call’s

actual route. Id. at 4830 ¶ 14, 4833 ¶ 22; see also AT & T, 454

F.3d at 331. The Commission declined, however, to extend

its declaratory ruling to menu-driven and IP-transport cards; it

stated that “[r]ather than try to address each possible type of

calling card offering through a declaratory ruling,” the

Commission was initiating a rulemaking “to consider the

classification and jurisdiction of new forms of prepaid calling

cards.” Id. at 4826 ¶ 2. Opening a new docket for that

proceeding, the Commission requested comment on the

proper classification of menu-driven and IP-transport cards.

Id. at 4839-41 ¶¶ 38-43.

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The Commission released the Order at issue here on June

30, 2006. In a part of that Order that it labeled a declaratory

ruling, the Commission announced that IP-transport and

menu-driven cards “are telecommunications services and that

their providers are subject to regulation as

telecommunications carriers,” 21 FCC Rcd at 7293 ¶ 10, and

thus subject to the obligation to pay access charges to local

exchange carriers, id. at 7300 ¶ 27. It also indicated that

jurisdiction over calls would be governed by the traditional

end-to-end analysis, meaning that calls made with prepaid

cards that originate and end in the same state are intrastate,

regardless of a call’s actual route. Id. at 7290 ¶ 1, 7300 ¶ 27;

see also Prepaid Card Order, 20 FCC Rcd at 4827 ¶ 5. Both

aspects of the substantive decision—the requirements that IP-

transport and menu-driven card providers pay access charges

and that they pay the (generally higher) intrastate access

charges for those calls when appropriate—were thus against

iBasis’s interests as a provider of IP-transport cards and in

favor of Qwest’s interests as a local exchange carrier of calls

made by both types of cards.

Turning to the issue of remedy, the Commission said that

a declaratory ruling was, notwithstanding the proceedings’

launch as a rulemaking, “a form of adjudication” and

recognized that “[g]enerally, adjudicatory decisions are

applied retroactively.” Id. at 7304-05 ¶ 41. The Commission

decided that it would apply that “general rule” to IP-transport

cards but would “decline to give retroactive effect to our

ruling on menu-driven cards to avoid a manifest injustice.”

Id. at 7305 ¶ 41. iBasis and Qwest both take issue with the

retroactivity rulings, which in each case are adverse to their

respective interests. They filed petitions for review; AT&T

and Verizon intervened in opposition to Qwest. We

consolidated the petitions.

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* * *

iBasis argues that the Order announces a rule rather than

an adjudicatory order, and thus that it cannot apply

retroactively, citing Bowen v. Georgetown University

Hospital, 488 U.S. 204, 208-09 (1988). In the alternative,

iBasis argues that even if the Order was an adjudication, its

retroactive application to IP-transport cards used before the

Commission announced its decision works a manifest

injustice. We reject both contentions.

The section of the Order that classifies IP-transport and

menu-driven cards as telecommunications services is labeled a

declaratory ruling. The Commission is authorized to issue a

declaratory ruling “to terminate a controversy or remove

uncertainty,” 5 U.S.C. § 554(e); see also 47 C.F.R. § 1.2, and

there is no question that a declaratory ruling can be a form of

adjudication, see, e.g., AT & T, 454 F.3d at 332. iBasis argues

that—despite the Commission’s characterization of its

action—the Order did not qualify as an adjudication because

the Commission’s initial pronouncement purporting to start a

rulemaking, the process it employed, and the result it reached

all bespeak a rulemaking. iBasis’s argument, then, is that if it

walks like a rule and talks like a rule, it must be a rule.

iBasis is clearly correct that the process started out as a

rulemaking and in part preserved that form. But the

Commission indisputably split the proceeding into a dual one,

half rulemaking and half adjudication, or at least purported to

do so. iBasis appears to assume that such a split is inherently

improper. But it points to no case and to nothing in the

Administrative Procedure Act or Communications Act that

bars such a bifurcation. Obviously if a party adversely

affected by the adjudication argued that the switch deprived it

of any right to which it would be entitled in an adjudication,

we would have to assess that deprivation under conventional

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principles governing adjudications. But iBasis’s opening

brief, except for the circular argument that the switch

triggered a traditional characteristic of adjudication (the

possibility of retroactive application), pointed to no such

deprivation.

In its reply brief iBasis finally identified a possible

deprivation: the NPRM’s failure to provide interested parties

with notice that there was a risk of retroactive effect. Properly

raised, this would be an extremely serious claim against the

Commission’s curious way of doing business. But we

ordinarily do not consider claims raised for the first time in a

reply brief, Carter v. George Washington Univ., 387 F.3d 872,

883 (D.C. Cir. 2004), and we note here that even iBasis’s

reply brief fails to point to any fact or argument that it might

have adduced materially beyond what the Commission

actually discussed. For reasons unknown to us, other

participants in the proceedings filed materials on whether

Commission action should have retrospective effect. See

Joint Appendix (“J.A.”) 338-39 (Sprint), 342-43 (Verizon),

344-46 (AT&T), 347 (Verizon), 348-52 (Verizon), 353-65

(AT&T).

iBasis also argues that such a broadly applicable order as

in fact came forth—determining the classification of all IP-

transport and menu-driven cards—can only take the form of a

rule, and thus must be prospective only. There is no such

general principle. Most norms that emerge from a rulemaking

are equally capable of emerging (legitimately) from an

adjudication, NLRB v. Bell Aerospace Co., 416 U.S. 267, 294-

95 (1974), and accordingly agencies have “very broad

discretion whether to proceed by way of adjudication or

rulemaking,” Time Warner Entertainment Co. v. FCC, 240

F.3d 1126, 1141 (D.C. Cir. 2001). iBasis identifies nothing in

the problem of applying a statute to two discrete kinds of

prepaid calling cards that requires use of rulemaking.

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Apart from its attack on the switch from rulemaking to

adjudication, iBasis argues the Commission’s determination

that IP-transport cards offer telecommunications services

cannot be applied retroactively because to do so works a

manifest injustice. We review an agency’s conclusions on

manifest injustice with “‘no overriding obligation to the

agency[’s] decision.’” Maxcell Telecom Plus, Inc. v. FCC,

815 F.2d 1551, 1554 (D.C. Cir. 1987) (alteration in original)

(quoting Retail, Wholesale & Dep’t Store Union v. NLRB, 466

F.2d 380, 390 (D.C. Cir. 1972)). Despite proceeding without

deference to the Commission’s determination, we find that

retroactive application of the Order to IP-transport cards does

not work a manifest injustice for the very same reasons that

persuaded the Commission. As the Commission put it:

“These calling cards offer the customer no capability to do

anything other than make a telephone call, and therefore they

are just like basic prepaid calling cards that the Commission

always has treated as telecommunications services.” Order,

21 FCC Rcd at 7305 ¶ 43. Moreover, the Commission had

already determined that the IP-transport of traditional long-

distance calls “did not change the regulatory classification of

the service at issue.” Id. at 7306 ¶ 43. And while that

previous determination was not strictly applicable to IP-

transport cards, it certainly “provided ample notice that

merely converting a calling card call to IP format and back

does not transform the service from a telecommunications

service to an information service.” Id. Under those

circumstances, it works no manifest injustice (indeed, no

injustice at all) to apply the declaratory ruling retroactively to

IP-transport card providers.

* * *

The classification of calls made via menu-driven prepaid

calling card affects Qwest as a local exchange carrier that

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provides access for the origin and termination of such calls

over its facilities. As we mentioned earlier, the Commission’s

substantive decision was in Qwest’s favor: the determination

that IP-transport and menu-driven cards provide

telecommunications services meant that Qwest could collect

access charges, and the Order also clarified that for calls

originating and ending in a single state card providers were

liable for intrastate access charges, which according to the

parties are typically higher than for interstate service. Here

Qwest objects solely to that part of the Order precluding

retroactive application of the ruling to menu-driven cards.

Except to the extent that the Order directly adjudicated a

specific controversy between Qwest and a provider of menu-

driven prepaid calling card services, however, one might

question whether Qwest has standing to challenge the Order

on this basis. After all, the Commission’s opinion on

retroactivity, standing alone, is not necessarily the final word.

Disputes over collection of tariffed charges often proceed

before state agencies (when the charges are wholly intrastate)

or in federal district court, and these disputes can only

sometimes come before the Commission under 47 U.S.C.

§§ 207 and 208 because the Commission does not entertain

actions for unpaid tariffed charges. See In the Matter of

Petition for Declaratory Ruling that AT&T’s Phone-to-Phone

IP Telephony Services Are Exempt From Access Charges, 19

FCC Rcd 7457, 7471 ¶ 23 n.93 (2004) (“[T]he Commission

does not act as a collection agent for carriers with respect to

unpaid tariffed charges.”); see also Beehive Telephone, Inc. v.

Bell Operating Cos., 10 FCC Rcd 10562 ¶ 37 & n.90 (1995)

(same). In fact, Qwest’s briefs pointed out that the federal

district court for the District of Colorado was then

adjudicating Qwest’s claim against AT&T for tariffed charges

for access provided to AT&T for prepaid calling card calls.

Moreover, Qwest argued that here the Commission’s

retroactivity decision should enjoy no deference, and that

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argument presumably would extend to the district court

adjudication. Qwest’s claim to standing (in so far as it

indirectly addressed the point) was, as we understand it,

essentially that it was currently injured by the risk that the

court would defer to the opinion stated in the Order.

We were thus startled to learn—just the day before we

were originally scheduled to hear arguments—that the District

of Colorado had approved a stipulated dismissal of Qwest’s

claims against AT&T two months earlier. We learned this

information not from Qwest, but from a letter sent by

intervenor AT&T. Qwest later admitted that “[a]s this

litigation had formed the basis for some of the factual and

legal analysis in both Qwest’s briefs to this Court and the

Order on Review itself, the [stipulated dismissal] appears to

raise the question of whether Qwest’s appeal has been

rendered moot.” Letter from Counsel for Qwest to Mark

Langer, Clerk, U.S. Court of Appeals for the D.C. Circuit

(Sept. 20, 2007). Despite this recognition, Qwest provided no

excuse for failing to bring this development to the immediate

attention of this court, suggesting that its failure to do so was

in fact inexcusable.

We nonetheless find that Qwest’s petition for review is

saved from potential mootness—and Qwest saved from

potential sanctions—by Qwest’s continuing dispute with

Verizon over access charge liability related to the “Golden

Retriever” menu-based card offered by Verizon’s

predecessor-in-interest MCI. While we are uncertain whether

standing could rest on the mere prospect of a possible dispute

whose outcome might depend on the Order’s views on

retroactivity, here the Commission’s Order specifically

reached out and touched the Golden Retriever service. See 21

FCC Rcd at 7294 ¶ 11, 7296 ¶ 15. It declared that the Golden

Retriever Card was “a telecommunications service and

therefore subject to interstate and intrastate access charges,”

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but expressly denied the attempt by a local exchange carrier

(not Qwest, but Frontier Telephone of Rochester) to obtain a

declaratory ruling that it was entitled to access charges for

services rendered before the effective date of the Order. Id. at

7307 n.121. This statement appears to foreclose with one

hundred percent certainty any hope that the Commission

would consider Verizon liable to Qwest for pre-Order access

charges (e.g., in an action before it for the recovery of

overcharges, see 47 U.S.C. §§ 203(c), 207-209), and to

militate significantly against Qwest’s success in litigation in

federal district court or before state commissions or courts.

We find these injuries sufficient to sustain Qwest’s standing.

On to the merits. The Commission determined that its

“decision that menu-driven calling cards offer

telecommunications services and that their providers are

subject to regulation as telecommunications carriers shall have

prospective effect only.” Order, 21 FCC Rcd. at 7307 ¶ 45.

The Commission was not merely agnostic as to retroactive

application; it set forth its express intent to relieve menu-

driven card providers of the “burdensome” obligations

imposed by statute upon telecommunications carriers,

including liability to local exchange carriers for “access

charges” arising from the use of their services. Id.; see also

id. at 7307 n.121 (applying rule to Golden Retriever card).

Thus the Commission purported to foreclose retrospective

application of its own interpretation of the statute.

The reasoning the Commission offered to support its

decision was contained in a single paragraph, the relevant part

of which reads:

Unlike the case of cards using IP transport, the

Commission’s prior decisions did not clearly point in the

direction of treating providers of menu-driven prepaid

calling cards as telecommunications carriers. Indeed,

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during the pendency of this proceeding, the Supreme

Court released the Brand X decision, which informs the

Commission’s analysis in this Order. Given the lack of

clarity in the law on this issue, both before and as a result

of the NPRM, we are concerned that retroactive

application of this Order to menu-driven prepaid calling

cards would be so unfair to providers of such cards as to

work a “manifest injustice.” For example, we recognize

that retroactive application of our decision would be

burdensome for menu-driven prepaid calling card

providers, in that the decision subjects them to access

charges, Universal Service Fund contribution obligations,

and the full panoply of Title II obligations. We also

recognize that, given the state of the law at the time,

parties may have relied on the assumption that they

would not be subject to these burdens.

Id. at 7306-07 ¶ 45 (footnotes omitted).

Thus, the Commission found that retroactivity would

work a manifest injustice, giving four reasons for that

conclusion: (1) a baseline lack of clarity in the law, (2) a

further obfuscation of the applicable law supposedly wrought

by the Commission’s NPRM, (3) the intervention and

clarifying force of the Supreme Court’s decision in Brand X,

and (4) the possible reliance of “menu-driven prepaid calling

card providers” on all this legal uncertainty.

We start with the presumption of retroactivity for

adjudications. As we said recently, reviewing the

Commission’s decision to give retroactive application to its

order on AT&T’s “enhanced” prepaid calling cards,

Retroactivity is the norm in agency adjudications no less

than in judicial adjudications. . . . For our part we have

drawn a distinction between agency decisions that

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“substitut[e] . . . new law for old law that was reasonably

clear” and those which are merely “new applications of

existing law, clarifications, and additions.” The latter

carry a presumption of retroactivity that we depart from

only when to do otherwise would lead to “manifest

injustice.”

AT & T, 454 F.3d at 332 (alteration and second omission in

original) (citations omitted).

In reviewing agency decisions on retroactivity, it appears

that we have generally shown little or no deference to

agencies’ rejection of claims that retroactivity produced

manifest injustice, see Retail, Wholesale, 466 F.2d at 390; see

also Maxcell Telecom Plus, 815 F.2d at 1554 (following

Retail, Wholesale in a rulemaking context where the

retroactivity issue is now moot because of Bowen v.

Georgetown University Hospital), but have been quite

deferential to decisions regarding the retroactive effect of

agency action where retroactivity would not work a manifest

injustice, see AT & T, 454 F.3d at 334; Retail, Wholesale, 466

F.2d at 393. None of the parties has offered any arguments

that might justify any alteration of that structure (even if this

panel had authority to make such an alteration, which it does

not). Here, unusually, the Commission has simply offered no

plausible grounds to overcome the presumption of

retroactivity; its finding of manifest injustice is completely

unconvincing, and it offers no other reason for precluding

retroactive application of its statutory interpretation.

First, a mere lack of clarity in the law does not make it

manifestly unjust to apply a subsequent clarification of that

law to past conduct. Clarifications, which obviously fall on

the no-manifest-injustice side of the line drawn in the above

passage from AT & T, must presuppose a lack of antecedent

clarity. They stand in contrast to rulings that upset settled

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expectations—expectations on which a party might

reasonably place reliance. See, e.g., AT & T, 454 F.3d at 332

(“AT & T does not and indeed cannot point us to a settled rule

on which it reasonably relied.”); Verizon Tel. Cos. v. FCC,

269 F.3d 1098, 1111 (D.C. Cir. 2001) (“Because the object of

the [petitioners’] reliance was neither settled . . . nor ‘well-

established,’ we are skeptical that retroactive liability against

the [petitioners] would actually impose a manifest injustice.”

(citation omitted)). Clarifying the law and applying that

clarification to past behavior are routine functions of

adjudication.

Nor is the Commission on firmer ground in imputing a

muddying effect to the NPRM or an enlightening effect to the

Brand X decision. The NPRM merely reinforced the general

understanding that the relevant law was unsettled. And while

the Supreme Court’s decision in Brand X may well have

“inform[ed] the Commission’s analysis” that menu-driven

cards offered telecommunications services, Order, 21 FCC

Rcd at 7307 ¶ 45, that decision deferred to and affirmed the

Commission’s own March 2002 interpretation of the relevant

statutory definitions. See Brand X, 545 U.S. at 997-1000.

The NPRM and Brand X decision are just further evidence of

what the Commission already recognized: that the application

of the statutory terms “telecommunications service” and

“information service” to these prepaid calling cards was

uncertain and subject to reasonable debate.

The Commission’s analysis observes that “parties may

have relied on the assumption that they would not be subject

to the[] burdens [imposed on telecommunications carriers].”

Order, 21 FCC Rcd at 7307 ¶ 45 (emphasis added). Perhaps

so. But for reliance to establish manifest injustice, it must be

reasonable—reasonably based on settled law contrary to the

rule established in the adjudication. The mere possibility that

a party may have relied on its own (rather convenient)

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assumption that unclear law would ultimately be resolved in

its favor is insufficient to defeat the presumption of

retroactivity when that law is finally clarified.

Here, the proper classification of services provided by

various “enhanced” prepaid calling cards has been long the

subject of active debate. In particular, the Commission has

been scrutinizing IP-transport and menu-driven cards at least

since AT&T’s November 2004 letter to the Commission

seeking a declaratory ruling classifying those prepaid calling

card variants. As we have said in another context, once the

issue was “expressly drawn into question . . . we do not see

how the Commission could possibly find that [those objecting

to retroactive application] reasonably relied upon [their view

of the law].” Pub. Serv. Co. of Colo. v. FERC, 91 F.3d 1478,

1490 (D.C. Cir. 1996).

Finally, we note the Commission’s complete disregard of

the obvious fact that every loss that retroactive application of

its statutory interpretation would inflict on providers of menu-

driven card services is matched by an equal and opposite loss

that non-retroactivity would inflict on access suppliers such as

Qwest. The Commission having determined the liability for

such access costs under its interpretation of the statute, we see

no reason why the users should not pay in accord with that

interpretation. Even if the particular circumstances of an

individual case might conceivably support such forbearance

(which the Commission nowhere suggests), that potential

offers no reason for the Commission’s attempt at a sweeping

release from apparently applicable statutory obligations.

Thus, the Commission has offered only an unsustainable

theory of manifest injustice to support its decision against

retroactivity, pointing to nothing else in the record that would

support a departure from the presumption of retroactivity.

Accordingly, the Order must be vacated to the extent that it

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foreclosed application of its substantive ruling in the

calculation of access charges before the Order’s issuance.

So ordered.