Core Communications, Inc. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 16, 2009 Decided January 12, 2010

No. 08-1365

CORE COMMUNICATIONS, INC.,

PETITIONER

v.

FEDERAL COMMUNICATIONS COMMISSION AND UNITED

STATES OF AMERICA,

RESPONDENTS

EARTHLINK, INC., ET AL.,

INTERVENORS

Consolidated with 08-1393, 09-1044, 09-1046

On Petitions for Review of Orders

of the Federal Communications Commission

Michael B. Hazzard argued the cause for petitioner Core

Communications, Inc. and supporting intervenors. With him

on the briefs were Joseph P. Bowser, Adam D. Bowser,

Joshua M. Bobeck, and Ross A. Buntrock.

2

Jonathan D. Feinberg argued the cause for petitioners

People of the State of New York and Public Service

Commission of the State of New York, intervenors

Pennsylvania Public Utilities Commission and the National

Association of State Utility Consumer Advocates, and amicus

curiae Arizona Corporation Commission. On the briefs were

John C. Graham, James Bradford Ramsay, Robin K. Lunt,

David Cleveland Bergmann, Joseph Kevin Witmer, and

Maureen A. Scott.

Joshua M. Bobeck, Ross A. Buntrock, and Michael B.

Hazzard were on the brief for intervenors in support of

petitioners. Adam D. Bowser and Joseph P. Bowser entered

appearances.

Joseph R. Palmore, Deputy General Counsel, Federal

Communications Commission, argued the cause for

respondents. With him on the brief were Richard K. Welch,

Deputy Associate General Counsel, and Laurence N. Bourne,

Counsel. Nancy C. Garrison and Catherine G. O'Sullivan,

Attorneys, U.S. Department of Justice, and Daniel M.

Armstrong III, Associate General Counsel, Federal

Communications Commission, entered appearances.

Scott H. Angstreich argued the cause for intervenors in

support of respondents. With him on the brief were Michael

K. Kellogg, Kelly P. Dunbar, Michael E. Glover, Karen

Zacharia, Christopher M. Miller, Gary L. Phillips, John T.

Nakahata, Carl W. Northrop, Stephen B. Kinnaird, Timothy J.

Simeone, Joseph C. Cavender, and John E. Benedict. Robert

B. McKenna Jr. entered an appearance.

Before: SENTELLE, Chief Judge, WILLIAMS AND

RANDOLPH, Senior Circuit Judges.

3

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: When a customer

accesses the internet via “dial-up,” his or her call goes to a

local exchange carrier (“LEC”), which commonly hands the

call off to another LEC, which in turn connects the customer

to an internet service provider (“ISP”).1 The ISP links the

customer to the web. At least as early as 1999 the Federal

Communications Commission was concerned that the

regulatory procedures under which the sending LEC

compensated the recipient LEC were leading to the imposition

of excessive rates, and that these rates in turn were distorting

the markets for internet and telephone services. The

Commission in due course responded with an alternative

regulatory regime, principally taking the form of rate caps set

well below the rates that had prevailed before.

In the order under review here, In the Matter of

Implementation of the Local Competition Provisions in the

Telecommunications Act of 1996, Developing a Unified

Intercarrier Compensation Regime, Intercarrier

Compensation for ISP-Bound Traffic (CC Docket Nos. 96-45,

96-98, 99-68, 99-200, 01-92), FCC 08-262, __ FCC Rcd __

(Nov. 5, 2008) (the “Order”), the Commission has set forth

the basis of its authority to institute the rate cap system,

namely, 47 U.S.C. § 201. That section (excerpted in an

appendix to this opinion) requires that the charges of “every

common carrier engaged in interstate or foreign

1

Data in the record suggest that dial-up, though being rapidly

replaced by various forms of higher-speed service, still accounts for

a non-trivial share of internet access: about 20.4% in 2007, 10.5%

in 2009, and (a prediction, obviously) 4.6% in 2014. Joint

Appendix 102.

4

communication by wire” for “such communication service” be

“just and reasonable,” and authorizes the Commission to

“prescribe such rules and regulations as may be necessary . . .

to carry out the provisions of this chapter.” Id. Petitioners

assail the Commission’s analysis on a variety of grounds,

most powerfully on the theory that §§ 251-252 of Title 47,

added by the Telecommunications Act of 1996, Pub.L. No.

104-104,110 Stat. 56, 47 U.S.C. §§ 151-714 (the “1996 Act”),

withdraw from the Commission whatever support § 201 might

have afforded its rate cap decision. Finding no legal error in

the Commission’s analysis, we affirm its order.

* * *

Before the FCC imposed a rate cap system, rates for the

transfer of calls from an originating LEC to the ISP’s LEC

were governed, in practice, by the “reciprocal compensation”

provisions of the 1996 Act. That act, in the interest of

opening the telephone market to competition, had imposed a

number of obligations on all local exchange carriers, including

a duty to “establish reciprocal compensation arrangements for

the transport and termination of telecommunications.” 47

U.S.C. § 251(b)(5). Reciprocal compensation arrangements

require that when a customer of one carrier makes a local call

to a customer of another carrier (which uses its facilities to

connect, or “terminate,” that call), the originating carrier must

compensate the terminating carrier for the use of its facilities.

See In re Core Communications, Inc., 455 F.3d 267, 270

(D.C. Cir. 2006) (“Core 2006”). Subsection 251(c) imposes

extra duties on “incumbent local exchange carriers”

(“ILECs”). (ILECs are a subset of LECs, comprising mainly

the Bell Operating Companies that succeeded to the local

operations of AT&T on the occasion of the latter’s dissolution

as a result of an antitrust settlement. See United States v.

AT&T, 552 F.Supp. 131 (D.D.C. 1982). “Competitive local

5

exchange carriers” (“CLECs”) constitute the remainder of the

LEC universe.) Among the § 251(c) obligations is a “duty to

negotiate in good faith in accordance with [§ 252] the

particular terms and conditions of agreements to fulfill the

duties described in” § 251(b), including the reciprocal

compensation obligations, and to provide interconnection with

its own “network” for requesting telecommunications carriers.

47 U.S.C. § 251(c). Section 252 allows ILECs to satisfy their

§ 251 obligations by privately negotiating terms with CLECs,

but also grants parties the right to refer the negotiations to

state commissions for mediation or arbitration.

The Order arises out of the Commission’s concern with

the results of applying the reciprocal compensation system to

ISP-bound traffic, a concern perhaps most clearly expressed in

an order responding to our initial remand of the matter:

Because traffic to ISPs flows one way, so does money in

a reciprocal compensation regime . . . . It was not long

before some LECs saw the opportunity to sign up ISPs as

customers and collect, rather than pay, compensation

because ISP modems do not generally call anyone. . . . In

some instances, this led to classic regulatory arbitrage

that had two troubling effects: (1) it created incentives for

inefficient entry of LECs intent on serving ISPs

exclusively and not offering viable local telephone

competition, as Congress had intended to facilitate with

the 1996 Act; (2) the large one-way flows of cash made it

possible for LECs serving ISPs to afford to pay their own

customers to use their services, potentially driving ISP

rates to consumers to uneconomical levels.

Implementation of the Local Competition Provisions in the

Telecommunications Act of 1996, Intercarrier Compensation

for ISP-Bound Traffic, 16 FCC Rcd 9151 (2001) (the “ISP

Remand Order”) ¶ 21.

6

The Commission’s first step into this arena was its

issuance of In the Matter of Implementation of the Local

Competition Provisions in the Telecommunications Act of

1996, Inter-carrier Compensation for ISP-Bound Traffic, 14

FCC Rcd 3689 (1999) (“Declaratory Ruling”). There it

applied its so-called “end-to-end” analysis (as it does in the

order under review), under which the classification of a

communication as local or interstate turns on whether its

origin and destination are in the same state. Because a

customer’s venture into the web characteristically reaches

servers out of state (and often out of the country), the

Commission concluded that under the end-to-end principle

dial-up internet traffic was interstate. Id. ¶ 18. As such traffic

was “jurisdictionally mixed,” id. ¶ 19, however, the

Commission chose not to disturb state commissions’

application of interconnection agreements to that traffic

“pending adoption of a rule establishing an appropriate

interstate compensation mechanism,” id. at ¶ 21. In review of

the order in Bell Atlantic Tel[]. Cos. v. FCC, 206 F.3d 1 (D.C.

Cir. 2000), we found the Commission’s conclusions in

apparent conflict with various prior statements, and possibly

with the statute; we vacated the order and remanded the

matter for its further analysis. Id. at 9.

On remand the Commission instituted substantially the

same rate cap system that it defends here. See ISP Remand

Order ¶ 8. But it claimed as supporting authority 47 U.S.C.

§ 251(g), which required LECs to comply with certain FCC

regulations promulgated prior to the enactment of the 1996

Act. In WorldCom, Inc. v. FCC, 288 F.3d 429 (D.C. Cir.

2002), we rejected that claim, finding that § 251(g) was

“worded simply as a transitional device” and thus could not be

relied on for authority to promulgate new regulations. Id. at

430. Recognizing that the Commission’s rules might well

have other legal bases, however, we did not vacate the order.

Id. at 430, 434.

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Between the ISP Remand Order and the present Order

there have been several additional visits to our court. In July

2003 Core Communications, Inc. (“Core”) petitioned the FCC

to forbear from enforcing its rate caps and associated

provisions, a petition that the FCC partly granted. Petition of

Core Communications, Inc. for Forbearance Under 47 U.S.C.

§ 160(c) from Application of the ISP Remand Order, 19 FCC

Rcd 20179, ¶¶ 23-24, ¶ 27 (2004). We upheld the order

against challenges by both CLECs and ILECs. Core 2006,

455 F.3d 267.

In June 2004 Core filed a petition seeking mandamus

requiring the FCC to respond to the WorldCom remand.

Based on the FCC’s representations about its efforts to meet

the remand, we denied Core’s petition “without prejudice to

refiling in the event of significant additional delay.” In re:

Core Communications, Inc., No. 04-1179 (D.C. Cir. May 24,

2005). In October 2007 Core filed a second petition, which

we granted, “direct[ing] the FCC to explain the legal basis for

its ISP-bound compensation rules within six months of” May

5, 2008. In re Core Communications, Inc., 531 F.3d 849, 850

(D.C. Cir. 2008) (“Core 2008”).

On the last permissible day, November 5, 2008, the FCC

released the current Order. Petitions for review followed,

filed by Core and by Public Service Commission of the State

of New York and National Association of Regulatory Utility

Commissioners (the “state petitioners”); we consolidated the

petitions.

* * *

As we noted at the outset, the Commission relies

primarily on § 201 for its authority to regulate ISP-bound

traffic. See Order ¶ 21. That section prohibits carriers

8

engaged in the delivery of interstate communications from

charging rates that are not “just and reasonable,” and grants

the FCC authority to prescribe regulations to implement the

1934 Act, which include all provisions of the 1996 Act. See

AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 377-78 (1999)

(observing that “Congress expressly directed that the 1996

Act . . . be inserted into the Communications Act of 1934” and

holding that “the grant in § 201(b) means . . . [that] [t]he FCC

has rulemaking authority to carry out the ‘provisions of this

Act,’ which include §§ 251 and 252”). A savings clause

attached to § 251, namely § 251(i), fortifies the Commission’s

position, providing: “Nothing in this section shall be

construed to limit or otherwise affect the Commission’s

authority under section 201.” Further, all parties agree that

the familiar principles of Chevron USA v. Natural Resources

Defense Council, 467 U.S. 837 (1984), apply to the FCC’s

construction of the Communications Act. State Pet’rs Br. 8;

Core Pet’r Br. 27-28; Resp. Br. 19-20. Finally, except as

discussed below, the petitioners accept the end-to-end analysis

and its application to ISP-bound calls, as announced by the

Commission in the Declaratory Ruling in 1999 (described

above) and restated in the Order, ¶ 21 & n.69.

Against the Commission’s reliance on § 201, petitioners

claim that “Congress’s specific choice” on the matter of inter-

LEC compensation, manifested in §§ 251-252, must trump the

FCC’s “general rulemaking authority under section 201.”

Core Interv. Br. 18. They cite Norwest Bank Minnesota

National Association v. FDIC, 312 F.3d 447, 451 (D.C. Cir.

2002), for the “cardinal rule of statutory construction . . . that

where both a specific and a general provision cover the same

subject, the specific provision controls.” State Pet’r Br. 27.

But it is inaccurate to characterize § 201 as a general

grant of authority and §§ 251-252 as a specific one. “When

. . . two statutes apply to intersecting sets . . . , neither is more

9

specific.” Hemenway v. Peabody Coal Co., 159 F.3d 255,

264 (7th Cir. 1998). That is the case here. Not all inter-LEC

connections are used to deliver interstate communications,

just as not all interstate communications involve an inter-LEC

connection. A local call to chat with a schoolmate about the

evening’s homework would not—at least under conditions

typical today—involve interstate communications; and a

conventional interstate long distance call, while it will usually

involve interconnection between the long distance provider

and a LEC, will often not involve two LECs connecting

directly with each other. And, as to a LEC’s provision of

access for completion of a long-distance call, the parties agree

that the link between the LEC and the interexchange carrier is

not governed by the reciprocal compensation regime of

§ 251(b)(5). See State Pet’rs Br. 25-26 (citing Global NAPS,

Inc. v. Verizon New England, 444 F.3d 59, 62-63 (1st Cir.

2006), in turn quoting the FCC’s Local Competition

Provisions in the Telecommunications Act of 1996, 11 FCC

Rcd 15499 (1996).

Dial-up internet traffic is special because it involves

interstate communications that are delivered through local

calls; it thus simultaneously implicates the regimes of both

§ 201 and of §§ 251-252. Neither regime is a subset of the

other. They intersect, and dial-up internet traffic falls within

that intersection. Given this overlap, § 251(i)’s specific

saving of the Commission’s authority under § 201 against any

negative implications from § 251 renders the Commission’s

reading of the provisions at least reasonable.

Petitioners next argue that because the call to the ISP

terminates locally, the FCC’s authority over interstate

communications is inapplicable. State Pet’r Br. 30-33.

Section 251(b)(5) applies to “reciprocal compensation

arrangements for the transport and termination of

telecommunications.” Petitioners point to the FCC’s

10

definition (in the Order) of “terminat[ion]” as “the switching

of traffic that is subject to Section 251(b)(5) at the terminating

carrier’s end office switch . . . and delivery of that traffic to

the called party’s premises.” See Order ¶ 13; see also 47

C.F.R. § 51.701(d). State Pet’rs Br. 31-32. Because the

“called party” in the case of dial-up Internet traffic is the ISP,

petitioners say, the § 251(b)(5) telecommunications

“terminat[e]” locally and thus the FCC cannot apply its § 201

authority over these communications.

This argument fails because it implicitly assumes

inapplicability of the end-to-end analysis, which petitioners

have not challenged. And the FCC has consistently applied

that analysis to determine whether communications are

interstate for purposes of § 201. Petitioners do not dispute

that dial-up internet traffic extends from the ISP subscriber to

the internet, or that the communications, viewed in that light,

are interstate. Given that ISP-bound traffic lies at the

intersection of the § 201 and §§ 251-252 regime, it has no

significance for the FCC’s § 201 jurisdiction over interstate

communications that these telecommunications might be

deemed to “terminat[e]” at a LEC for purposes of § 251(b)(5).

Petitioners also appear indirectly to invoke the 8th

Circuit’s conclusion that while the FCC has authority to

impose a methodology on state commissions’ exercise of

power under § 252 (they specifically note “total element long-

run incremental cost” (“TELRIC”)), it has (for certain

purposes) no power to set actual prices. See State Pet’rs Br.

33, citing Iowa Utils. Bd. v. FCC, 219 F.3d 744, 757 (8th Cir.

2000). We take no position on the issue before the 8th

Circuit. It reached its finding for purposes quite different

from the present subject (FCC ratesetting authority for a leg of

an interstate communication), and it did not address the FCC’s

power to implement “just and reasonable” rates under § 201

or how that power was affected by §§ 251-252.

11

Petitioners further argue that it was “arbitrary and

capricious” for the FCC to “discriminate” against dial-up

internet traffic by requiring that LECs be compensated

pursuant to the rate cap regime when terminating such traffic,

but otherwise in accordance with state commissions’

application of the FCC’s TELRIC methodology. Core Pet’r

Br. 43-47; Core Interv. Br. 22-23. See 5 U.S.C. § 706(2)(A).

Our review under the arbitrary and capricious standard is

narrow. See Core 2006, 455 F.3d at 277. Here the agency

action passes handily.

The Commission has provided a solid grounding for the

differences between the treatment of inter-LEC compensation

for delivery of dial-up internet traffic and the regime generally

applicable to inter-LEC compensation under § 251(b)(5). (We

assume arguendo that the concept of discrimination is

relevant to regimes created under entirely different statutory

provisions.) In the context to which reciprocal compensation

is ordinarily applied, it noted, outgoing calls are generally

balanced by incoming ones, so that it matters relatively little

how accurately rates reflect costs. ISP Remand Order ¶ 69.

Such balance is utterly absent from ISP-bound traffic.

Moreover, it found that in fact the rates for such traffic were

so distorted that CLECs were in effect paying ISPs to become

their customers. Id. ¶ 70 & n.134; see also id. ¶ 21. To the

extent that ILECs simply passed the costs on to their

customers generally (rather than having a separate charge for

those making ISP-bound calls), they would force their non-

internet customers to subsidize those making ISP-bound calls,

and the system would send inaccurate price signals to those

using their facilities for internet access (in effect the ISPs and

their customers) and to those not doing so. Id. ¶¶ 68, 87. On

the other hand, the Commission believed that its “failure to act

. . . would lead to higher rates for Internet access, as ILECs

seek to recover their reciprocal compensation liability . . .

from their customers to call ISPs,” id. ¶ 87, presumably

12

meaning rates “higher” than cost, correctly computed. Thus

the continued application of the reciprocal compensation

regime to ISP-bound traffic would “undermine[] the operation

of competitive markets.” Id. ¶ 71.

Core purports to find a discrepancy between our

mandamus order and the Commission’s response. Our order

required the FCC to “explain[] the legal authority for the

Commission's interim intercarrier compensation rules that

exclude ISP-bound traffic from the reciprocal compensation

requirement of § 251(b)(5).” Core 2008, 531 F.3d at 862.

The Order, en route to finding that § 201 authorized the

Commission to impose its rate cap system on the

communications in question, also expressed its view that they

were “subject to the reciprocal compensation regime in

sections 251(b)(5) and 252(d)(2).” Order ¶15; see also id.

¶ 16. Core claims that in so finding the Commission violated

our mandate.

In context it is perfectly plain that our order sought

simply to have the FCC explain the reasoning underlying its

exercise of authority, not to preempt its analytical route. The

sort of argument made by Core here gives pettifoggery a bad

name.

Finally, we note the presence of a number of arguments

introduced outside of the petitioners’ opening briefs. Core

intervened in the appeal filed by the state petitioners before

we consolidated its separate appeal with the latter. Together

with other intervenors, Core filed a brief raising a number of

arguments that it did not raise as petitioner. As we explained

in Illinois Bell Telephone Company v. FCC, 911 F.2d 776

(D.C. Cir. 1990), “An intervening party may join issue only

on a matter that has been brought before the court by another

party.” Id. at 786 (emphasis added). While we acknowledged

in Synovus Financial Corporation v. Board of Governors, 952

13

F.2d 426 (D.C. Cir. 1991), that this rule is prudential and

“should not be applied categorically,” the grounds that

Synovus mentioned for making exceptions are absent here. Id.

at 434. Synovus allowed an intervenor who lacked incentive

to petition for review of the administrative action to present an

additional issue that was “an essential predicate to [a]

question” raised by petitioners. Id. at 434 (internal quotes

omitted). But Core not only had an incentive to petition for

review itself but did so. See United States Telephone

Association v. FCC, 188 F.3d 521, 531 (D.C. Cir. 1999)

(noting that intervenors not only failed to qualify for the

Synovus exception but “present[ed] no reason why it could not

have petitioned in its own right”). And the issues Core raises

as intervenor bear “no substantive connection” to the

challenges petitioners raise in their initial briefs. Synovus, 952

F.2d at 434; Cir. Rule 28(d)(2). Accordingly, we do not

consider the new arguments Core raises as intervenor.

Similarly, we do not consider arguments that first appear in

petitioners’ reply briefs. See, e.g., Bd. of Regents of the Univ.

of Washington v. EPA, 86 F.3d 1214, 1221 (D.C. Cir. 1996)

(“By failing to make any specific objection until their reply

brief, petitioners deprived the [respondents] of the opportunity

to respond. To prevent this . . . , we have generally held that

issues not raised until the reply brief are waived.”).

* * *

The petitions for review are

Denied.

14

Appendix: Text of 47 U.S.C. § 201

§ 201. Services and Charges.

(a) It shall be the duty of every common carrier

engaged in interstate or foreign communication by wire

or radio to furnish such communication service upon

reasonable request therefore; and, in accordance with the

orders of the Commission, in cases where the

Commission, after opportunity for hearing, finds such

action necessary or desirable in the public interest, to

establish physical connections with other carriers, to

establish through routes and charges applicable thereto

and the divisions of such charges, and to establish and

provide facilities and regulations for operating such

through routes.

(b) All charges, practices, classifications, and

regulations for and in connection with such

communication service, shall be just and reasonable, and

any such charge, practice, classification, or regulation that

is unjust or unreasonable is declared to be unlawful:

Provided, That communications by wire or radio subject

to this chapter may be classified into day, night, repeated,

unrepeated, letter, commercial, press, Government, and

such other classes as the Commission may decide to be

just and reasonable, and different charges may be made

for the different classes of communications . . . . The

Commission may prescribe such rules and regulations as

may be necessary in the public interest to carry out the

provisions of this chapter.

47 U.S.C. § 201 (emphasis added).