All American Telephone Co. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 31, 2017 Decided August 11, 2017

No. 15-1354

ALL AMERICAN TELEPHONE COMPANY, INC., ET AL.,

PETITIONERS

v.

FEDERAL COMMUNICATIONS COMMISSION AND UNITED

STATES OF AMERICA,

RESPONDENTS

AT&T CORP.,

INTERVENOR

On Petition for Review of an Order of

the Federal Communications Commission

Jonathan E. Canis argued the cause and filed the briefs for

petitioners.

C. Grey Pash, Jr., Counsel, Federal Communications

Commission, argued the cause for respondents. With him on

the brief were Robert B. Nicholson and Jonathan H. Lasken,

Attorneys, U.S. Department of Justice, Jonathan B. Sallet,

General Counsel at the time the brief was filed, Federal

Communications Commission, David M. Gossett, Deputy

General Counsel, and Richard K. Welch, Deputy Associate

2

General Counsel. Jacob M. Lewis, Associate General Counsel

and Lisa S. Gelb, Attorney, Federal Communications

Commission, entered appearances.

James F. Bendernagel Jr. and Michael J. Hunseder were

on the brief for intervenor in support of respondents.

Before: TATEL, GRIFFITH, and MILLETT, Circuit Judges.

Opinion for the court filed by Circuit Judge MILLETT.

MILLETT, Circuit Judge: The Federal Communications

Commission held that Petitioners All American Telephone Co.,

e-Pinnacle Communications Inc., and Chasecom improperly

engaged in a scheme designed to collect millions of dollars in

unwarranted long-distance access charges from AT&T. All

American and the other petitioning companies do not challenge

that liability determination. They challenge only the

Commission’s award of damages to AT&T and statements in

the Commission’s decision that refer to the merits of the

companies’ state-law claims against AT&T, which are pending

in a separate action in the Southern District of New York. We

uphold the Commission’s award of damages, but vacate those

aspects of the Commission’s order that tread on the merits of

the companies’ state-law claims.

I

A

The Federal Communications Commission regulates

common-carrier providers of wired telephone services,

including the fees that they charge to customers. See 47 U.S.C.

§ 201. One of the fees that the Commission regulates is for

“exchange access services” rendered for long-distance

3

telephone calls. See 47 C.F.R. § 61.26. Those fees are often

referred to as “access charges.” They work like this: When a

person places a long-distance call, a local exchange carrier

operating in the caller’s geographic area will route the call to

an “interstate exchange carrier,” also known as an

“interexchange carrier.” That interexchange carrier, in turn,

will connect the call to the recipient’s local exchange carrier.

When the recipient’s local exchange carrier completes the call

to the recipient, the interexchange carrier must pay an access

charge to the local carrier for the connection service. See

Northern Valley Communications, LLC v. FCC, 717 F.3d 1017,

1018 (D.C. Cir. 2013).

When it comes to determining the amount of that access

charge, however, not all local carriers are the same under

federal communications law. As part of an effort to encourage

competition, federal law divides local carriers into “incumbent

local exchange carriers” and “competitive local exchange

carriers.” See United States Telecom Ass’n v. FCC, 359 F.3d

554, 561 (D.C. Cir. 2004) (noting Congress’s intent “to foster

a competitive market in telecommunications”). Incumbent

carriers are those that, on or prior to February 8, 1996, provided

service to a particular area or were part of an exchange carrier

association. 47 U.S.C. § 251(h). Competitive carriers are all

other local carriers, including new carriers that entered the

market after that time period and compete with the incumbent

carriers within a specific geographic region. See 47 C.F.R.

§ 51.903(a).

Incumbent carriers cannot impose access charges unless

they file a valid tariff with the Commission. See 47 U.S.C.

§ 203(a). Competitive carriers, by contrast, can impose access

charges at or below a Commission-determined rate by filing

their own tariff, or they can impose access charges through a

contract they individually negotiate with the interexchange

4

carrier. See 47 C.F.R. § 61.26(b); Hyperion Telecomms., 12

FCC Rcd. 8596, 8613 (1997).

B

It has been said that “[t]he darkest hour of any man’s life

is when he sits down to plan how to get money without earning

it.” 1 But that does not seem to keep people from trying.

Through a scheme known as “traffic pumping” or “access

stimulation,” some local exchange carriers sought to artificially

inflate the number of local calls they could connect, thereby

increasing both the call volume and the rates that they could

charge interexchange carriers. More specifically, a local

exchange carrier would enter into a contractual relationship

with a company that generates a high volume of telephone

calls, such as a conference calling provider or a provider of

sexually explicit chat lines. The local carrier would house the

phone-call-generating partner’s equipment on its premises for

free and would sometimes even provide the equipment itself at

no cost. Not only would the local carrier forgo charging its

partner for the phone calls that came in, but in fact the carrier

would pay the partner a share of the per-minute long-distance

access rates it charged the interexchange carriers. See, e.g.,

Qwest Communications Corp. v. Free Conferencing Corp., 837

F.3d 889, 893–894 (8th Cir. 2016); Northern Valley, 717 F.3d

at 1018.

Those traffic-pumping arrangements were a “win-win” for

the local carrier and its phone-call-generating partner.

Northern Valley, 717 F.3d at 1018. The local carrier received

a higher call volume and thus more revenue from access

charges, while the partner got free service for its business plus

a cut of the local carrier’s revenue. On the losing end, however,

1

Attributed to Horace Greeley.

5

were the public and the interexchange carriers “who ha[d] to

* * * pay significant amounts to” the local exchange carriers in

the form of artificially inflated and distorted access charges to

complete the long-distance calls. Id. at 1018–1019.

Starting in 2010, the Commission issued a series of orders

concluding that such traffic-pumping schemes were unlawful

under Sections 201(b) and 203(c) of the Communications Act,

47 U.S.C. §§ 201(b), 203(c). The Commission ruled in

particular that local exchange carriers could not charge

interexchange carriers to connect long-distance calls to a non-

paying end user. See, e.g., Qwest Communications Co. v.

Sancom, Inc., 28 FCC Rcd. 1982 (2013); Qwest

Communications Co. v. Northern Valley Communications,

LLC, 26 FCC Rcd. 8332 (2011), aff’d, Northern Valley, 717

F.3d at 1017; AT&T Corp. v. YMax Communications Corp., 26

FCC Rcd. 5743 (2011); Qwest Communications Corp. v.

Farmers & Merchants Mut. Tel. Co., 24 FCC Rcd. 14801

(2009), aff’d, Farmers & Merchants Mut. Tel. Co. v. FCC, 668

F.3d 714 (D.C. Cir. 2011).

We have twice upheld that interpretation of the

Communications Act by the Commission. See Northern

Valley, 717 F.3d at 1019; Farmers, 668 F.3d at 724.

Accordingly, it is now “well-settled that a [local exchange

carrier] cannot bill an [interstate exchange carrier] under its

tariff for calls ‘terminated’ at a conference call bridge when the

conference calling company does not pay a fee for th[ose]

services.” Qwest Communications, 837 F.3d at 894.

C

Petitioners All American Telephone Co., e-Pinnacle

Communications, Inc., and Chasecom (collectively, “the

Companies”) have held themselves out as competitive local

6

exchange carriers authorized to operate in Utah and Nevada.

Standing behind them were Beehive Telephone Company, Inc.

of Nevada, and Beehive Telephone Company, Inc. of Utah

(collectively, “Beehive”), which operated as incumbent local

exchange carriers in rural Nevada and Utah, respectively. Joy

Enterprises, Inc., is a Nevada corporation that provides

conferencing and sexually explicit chat line services. Until the

early 2000s, Joy and Beehive were engaged in a classic traffic-

pumping scheme: Beehive paid Joy kickbacks in exchange for

the inflated traffic that Joy’s conference and sexually explicit

chat line services generated. Beehive, however, soon became

a victim of its own success: As its traffic numbers skyrocketed,

its access charge rates, which were determined by a filed tariff,

began to plummet.

Unwilling to let a good scheme end, Beehive worked to

create competitive local exchanges—the Companies—that

would have greater rate flexibility. Beehive then had the

Companies take its place in the arrangement. Beehive assisted

the Companies in preparing and filing tariffs, and worked free

of charge to obtain the necessary approval for All American to

operate in the state of Utah. Beyond the regulatory paperwork,

Beehive provided material support to all three Companies by

serving as the co-lessee/guarantor for equipment rentals,

installing and maintaining the Companies’ equipment at

Beehive’s facilities, assigning them telephone numbers

Beehive had obtained, and managing and coordinating the

Companies’ billings.

All American began operating in Beehive’s territory in

Utah in 2004, although it did not apply for a certificate of public

convenience from the Utah Public Service Commission until

2006. See In the Matter of the Consideration of the Rescission,

Alteration, or Amendment of the Certificate of Authority of All

American to Operate as a Competitive Local Exchange Carrier

7

within the State of Utah at 1, No. 08-2469-01 (Utah Pub. Serv.

Comm’n April 26, 2010) (“Utah Commission Order”). Shortly

after All American obtained its certificate, Beehive and All

American entered into an interconnection agreement that

allowed All American to use Beehive’s equipment for a fee,

despite the fact that the Utah state license prohibited All

American from operating in Beehive’s territory. Id. at 6; see

47 U.S.C. § 252(d)(1) (addressing interconnection

agreements).

The Companies that Beehive helped to create have never

marketed their services to the general public or to businesses in

Utah or Nevada. From the time it began operating, All

American has served only a single client: Joy Enterprises. In

addition, All American has never charged Joy Enterprises for

its services.

Similarly, e-Pinnacle and Chasecom have only ever

serviced conference-calling companies and have never charged

them for their services. Like Joy Enterprises, e-Pinnacle and

Chasecom engaged in a traffic-pumping kickback scheme with

Beehive prior to becoming independent carriers.

In exchange for all of its free aid, Beehive was paid

through the interconnection agreement with All American and

through revenue-sharing schemes with e-Pinnacle and

Chasecom. Beehive also directly benefited from the increased

traffic generated by All American’s arrangement with Joy

Enterprises, and by e-Pinnacle’s and Chasecom’s arrangements

with their conference-call providers, because Beehive could

directly charge interexchange carriers other types of fees (such

as tandem switching and transport fees) associated with the

inflated traffic. Petitioners e-Pinnacle and Chasecom ceased

operations in 2007. In 2010, the Utah Commission rescinded

All American’s certificate to operate as a competitive local

8

exchange carrier, concluding that it was “a mere shell

company, paying others for technical services, management

fees, consulting fees and equipment fees.” Utah Commission

Order at 18; see also id. at 35.

D

1

In 2007, the Companies filed a civil suit against AT&T

Corporation in the United States District Court for the Southern

District of New York. In their complaint, the Companies

represented that they and AT&T were “telecommunications

common carriers, and their interstate service offerings are

subject to the jurisdiction of the FCC.” First Amended

Complaint ¶ 11, All American Tel. Co. v. AT&T Corp., No. 07-

cv-861 (S.D.N.Y. filed March 6, 2007). The Companies

alleged that, pursuant to valid tariffs filed with the

Commission, they had provided access services to AT&T for

which AT&T had refused to pay. Id. ¶¶ 37–42. The

Companies sought recovery of those access fees under both a

tariff collection action, id. ¶¶ 73–76, and a state-law quantum

meruit claim, id. ¶¶ 103–107.

In response, AT&T filed a counterclaim alleging that the

Companies existed “for the sole purpose of executing ‘traffic

pumping’ schemes, not to offer wireline local telephone service

to the residents” in their service areas. Counterclaim ¶ 16, All

American Tel. Co. v. AT&T Corp., No. 07-cv-861 (S.D.N.Y.

filed March 26, 2007). As relevant here, AT&T claimed that

the Companies’ conduct violated their filed tariffs and Sections

201 and 203 of the Communications Act, 47 U.S.C.

§§ 201, 203. Id. ¶¶ 34, 43.

9

In March 2009, the district court sua sponte decided to

refer AT&T’s counterclaims arising under the

Communications Act to the Federal Communications

Commission pursuant to the primary jurisdiction doctrine.

Memorandum & Order at 7, All American Tel. Co. v. AT&T

Corp., No. 07-cv-861 (S.D.N.Y. March 16, 2009). Under the

primary jurisdiction doctrine, if “adjudicating a claim would

‘require[] the resolution of issues which, under a regulatory

scheme, have been placed within the special competence of an

administrative body,’” a court may “suspend the judicial

process ‘pending referral of such issues to the administrative

body for its view.’” United States v. Phillip Morris USA Inc.,

686 F.3d 832, 837 (D.C. Cir. 2012) (alteration in original;

citation omitted). The case is not “referr[ed]” to the agency in

the traditional sense because there is usually “no mechanism

whereby a court can on its own authority demand or request a

determination from the agency[.]” Reiter v. Cooper, 507 U.S.

258, 268 n.3 (1993). Instead, the court “merely stay[s] its

proceedings while the [parties] file[] an administrative

complaint” and the agency disposes of it. Id.

Following the March 2009 referral, the district court

entered a second order supplementing the issues referred and

staying the litigation. Order Referring Issues to the Federal

Communications Commission at 2, All American Tel. Co. v.

AT&T Corp., No. 07-cv-861 (S.D.N.Y. Feb. 5, 2010)

(“Referral Order”).

The key questions referred by the district court to the

Commission were whether: (1) the Companies engaged in

unreasonable conduct under the Communications Act; (2) the

Companies provided services “pursuant to the terms of valid

and applicable tariffs”; (3) the Companies “provide[d] some

other regulated service to AT&T for which they are entitled to

compensation”; (4) any recovery by the Companies “under a

10

quantum meruit, quasi-contract, or constructive contract

theory” was permissible (i.e., not preempted); and (5) AT&T

“violate[d] § 201(b) or 203(a), or any other provision of the

Communications Act” when it failed to pay the billed charges.

Referral Order, supra, at 1, Ex. A.

2

To effectuate the referral, AT&T filed a complaint with the

Commission. In its complaint, AT&T raised the first, second,

third, and fourth questions. It also elected to bifurcate liability

and damages, as permitted by Commission rules, see 47 C.F.R.

§ 1.722(d). AT&T’s complaint alleged that the Companies,

Joy, and Beehive engaged in a modified version of a traffic-

pumping scheme, with the Companies serving as sham entities

designed to unlawfully and unreasonably inflate the rate of

access charges billed to AT&T. 2

The Commission issued a decision on liability concluding

that the Companies had “participated in an access stimulation

scheme designed to collect in excess of eleven million dollars

of improper terminating access charges from AT&T[.]” AT&T

Corp. v. All American Tel. Co., 28 FCC Rcd. 3477, 3477 ¶ 1

(2013) (“Liability Order”). In its Liability Order, the

Commission found that the Companies were “‘sham’ [carriers]

created to ‘capture access revenues that could not otherwise be

obtained by lawful tariffs,’” in violation of Section 201(b) of

2

The Companies, in turn, filed a complaint that raised the fifth

question. The Commission denied that complaint on the ground that

the Communications Act does not regulate AT&T when it is acting

as a customer. All American Tel. Co. v. AT&T Corp., 26 FCC Rcd.

723, 732 ¶ 21 (2011) (“The law is settled that a carrier-customer’s

failure to pay tariffed access charges does not violate either section

201(b) or section 203(c) of the Act.”). The Companies have not

sought our review of that aspect of the Commission’s decision.

11

the Communications Act, 47 U.S.C. § 201(b). Liability Order,

28 FCC Rcd. at 3487 ¶ 24.

The Commission further ruled that the Companies “had no

intention at any point in time to operate as bona fide [carriers]

or provide local exchange service to the public at large.”

Liability Order, 28 FCC Rcd. at 3488 ¶ 25. The Commission

found that the Companies “neither owned nor leased facilities,

nor did they purchase unbundled network elements typically

used by [carriers] to provide any telecommunications services

to the public.” Id. Rather, “Beehive installed and maintained

their equipment (which was collocated in Beehive’s facilities),

coordinated and managed their billing and collection services,

and provided power and other services” needed by the

Companies. Id. at 3483 ¶ 16 (footnotes omitted). Beehive’s

creation of the Companies “allowed the access stimulation

arrangements [between Beehive and Joy] to continue at rates”

that otherwise “would have been unsustainable.” Id. at 3489

¶ 27. On top of that, Beehive benefited from charging AT&T

“for tandem switching and transport of the stimulated traffic.”

Id. at 3489 ¶ 28.

The Commission concluded that this arrangement

“constitute[d] an unjust and unreasonable practice in violation

of Section 201(b) of the Act.” Liability Order, 28 FCC Rcd. at

3488 ¶ 24. It also ruled that the Companies’ charges to AT&T

were not made under a valid tariff because all of the customers

served by the three Companies paid nothing for the service

provided. Id. at 3494–3495 ¶ 38. Therefore, under Farmers

and Northern Valley, the access charges were not incurred for

switching services to an end user within the meaning of the

Communications Act. Id. The Commission also noted that the

Companies charged AT&T under a tariff for services that

ended in Nevada, even though the actual “end user” was the

conferencing equipment at Beehive’s facility in Utah. Id. at

12

3492–3495 ¶ 35. Because the Companies did not have any

valid tariffs for access charges applied to calls terminating in

Beehive’s territory in Utah, they had no authority under the

Communications Act to charge AT&T for those services. Id.

at 3493 ¶ 34.

The Commission denied the Companies’ petition for

reconsideration. See AT&T Corp. v. All American Tel. Co., 29

FCC Rcd. 6393 (2014). The Companies did not seek further

review of the Commission’s liability determination or its

factual findings.

3

Because of the bifurcation of liability and damages, the

Commission conducted a second proceeding to determine

whether AT&T should be awarded damages. The Companies

objected that the Commission lacked jurisdiction over them,

having found them to be sham entities. The Commission

disagreed, reasoning that it had jurisdiction because the

Companies had “held themselves out as ‘providing services as

common carriers,’ and * * * operated with nationwide

authority under” the Communications Act. AT&T Corp. v. All

American Tel. Co., 30 FCC Rcd. 8959, 8960 ¶ 8 (2015)

(“Damages Order”) (footnote omitted). Additionally, the

Companies had “obtained state certificates to operate as [local

exchange carriers], filed tariffs for their interstate services, and

billed for those services[.]” Id. at 8961 ¶ 8; see also id. at 8961

¶ 10 (“Defendants presented themselves to the public as

common carriers and therefore are themselves subject to

Section 208.”).

The Commission then ordered the Companies to refund

the $252,496.37 that AT&T had previously paid them in access

charges. Damages Order, 30 FCC Rcd. at 8962 ¶ 11. The

13

Commission noted that the Companies “admit[ted]” that

Beehive was the entity that actually provided AT&T with

interconnection services. Id.

The Companies filed a timely petition for review.

II

We will “uphold the Commission’s decision unless it is

arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.” Achernar Broadcasting Co. v. FCC, 62

F.3d 1441, 1445 (D.C. Cir. 1995) (quoting 5 U.S.C.

§ 706(2)(A)); see 47 U.S.C. § 402(g) (providing for review of

FCC orders “in the manner prescribed by section 706 of Title

5”). An order from the Commission that exceeds the scope of

its statutory authority is, by definition, not in accordance with

the law and subject to vacatur. See, e.g., American Library

Ass’n v. FCC, 406 F.3d 689, 708 (D.C. Cir. 2005).

We hold that the Commission’s damages award was

lawful, but that those portions of the Commission’s decision

touching on the merits of the Companies’ state-law claims are

without legal effect.

A

The Companies’ opening salvo is jurisdictional.

Specifically, they contend that, because the Commission’s

Liability Order found them to be sham entities rather than

genuine common carriers, the Commission’s jurisdiction over

them evaporated, leaving it powerless to award damages. The

Companies cannot wiggle out of responsibility for their

violations of the Communications Act that easily.

14

The Commission has jurisdiction over complaints alleging

“anything done or omitted to be done by any common carrier

* * * in contravention of the provisions” of the

Communications Act. 47 U.S.C. § 208(a). Thus, for “common

carriers,” taking actions that run afoul of the Communications

Act does not get them out from under the Commission’s

authority.

A “common carrier,” in turn, is “any person engaged as a

common carrier for hire, in interstate or foreign communication

by wire or radio.” 47 U.S.C. § 153(11). To “engage” someone

in the business context is to hire or secure the services of that

entity. 3 OXFORD ENGLISH DICTIONARY 173–174 (def. 5a)

(1933) (reprint 1978) (defining “engage” as “[t]o hire, secure

the services of (a servant, workman, agent, etc.)” and “[t]o

enter into an agreement for service”). 3 Thus, at the very least,

a “common carrier” includes entities providing services

pursuant to a tariff—an agreement—filed with the

Commission, even if the tariffs are subsequently determined to

be invalid.

In addition, in deciding whether the Companies are

“common carriers,” we look to the common law meaning of

that phrase. See, e.g., National Ass’n of Regulatory Util.

Comm’rs v. FCC (“NARUC”), 525 F.2d 630, 640–642 (D.C.

Cir. 1976) (turning to the common law to interpret the statutory

definition of common carrier); see also Cellco P’ship v. FCC,

700 F.3d 534, 545–546 (D.C. Cir. 2012).

3

See also WEBSTER’S NEW INTERNATIONAL DICTIONARY 847

(transitive def. 8; intransitive def. 2) (2d ed. 1934) (defining

“engage” as “[t]o secure or bespeak the services of (a person); to hire;

enlist” and “[t]o embark in a business; * * * to employ or involve

oneself”).

15

Importantly, under the common law, “one may be a

common carrier by holding oneself out as such[.]” NARUC,

525 F.2d at 643. As this Court has recognized, the “primary

sine qua non of common carrier status is a quasi-public

character,” which arises out of the “undertaking ‘to carry for

all people indifferently[.]’” National Ass’n of Regulatory Util.

Comm’rs v. FCC, 533 F.2d 601, 608 (D.C. Cir. 1976) (italics

added); see also Verizon v. FCC, 740 F.3d 623, 651 (D.C. Cir.

2014) (“[T]he basic characteristic that distinguishes common

carriers from ‘private’ carriers” is the “common law

requirement of holding oneself out to serve the public

indiscriminately[.]”) (citation omitted); Southwestern Bell Tel.

Co. v. FCC, 19 F.3d 1475, 1481 (D.C. Cir. 1994) (“[T]he

indiscriminate offering of service on generally applicable terms

* * * is the traditional mark of common carrier service.”)

(emphasis added).

Substantial evidence supports the Commission’s

determination that the Companies held themselves out to the

public, including AT&T, as common carriers for hire. They

offered to provide their common-carrier services pursuant to an

agreement—a tariff that was filed with the Commission. They

also obtained state certificates to operate as common carriers,

and they represented in their district court complaint that they

were common carriers. Furthermore, the Companies sought to

obtain the benefits of common carrier status, such as the

protections of the filed-rate doctrine. See Oral Argument Tr. at

6:11–13 (Petitioners’ Counsel: “[W]e sought the benefits of

being a common carrier, the benefit of being able to file a tariff,

to collect regulated access fees under that tariff, and [to] us[e]

the filed rate doctrine[.]”). Indeed, an important predicate for

the Companies’ district court action is that AT&T accepted

access services and the Companies billed AT&T for those

services pursuant to a tariff filed with the Commission, albeit

one later found to be invalid.

16

Notably, in Farmers, supra, we rejected a similar

jurisdictional argument as “flatly wrong.” 668 F.3d at 719.

There, the defendant company Farmers, as part of a traffic-

pumping scheme, had “held itself out as a common carrier

providing access service” to interexchange carriers, and billed

for that service pursuant to a tariff. Id. We held that the

Commission’s ruling that Farmers had violated the

Communications Act by improperly charging for its services

“could not immunize [Farmers] from the complaint process.”

Id.

Likewise here, having held themselves out as common

carriers and having charged AT&T for services under a

common-carrier tariff, the Companies were “engaged as a

common carrier for hire,” 47 U.S.C. § 153(11), and thus were

subject to the Commission’s jurisdiction. They cannot now

wield their violation of the Communications Act as a shield

against remedial liability for that same wrongdoing.

B

Turning to the merits, we hold that the Commission’s

damages award was permissible. The Commission’s

conclusion that the Companies did not render any service to

AT&T chargeable under the Communications Act is supported

by substantial evidence in the record. Damages Order, 30 FCC

Rcd. at 8962 ¶¶ 11, 13.

To begin with, the Companies themselves repeatedly

conceded that Beehive, not they, provided the access services

that AT&T received. See, e.g., Answer and Affirmative

Defenses ¶ 3, AT&T Corp. v. All American Tel. Co., File No.

EB-09-MD-010 (FCC filed Dec. 1, 2014) (“Nevertheless, [the

Companies] admit that they billed AT&T for Local Switching

17

service that was provided by Beehive[.]”); id. ¶ 57 (“[The

Companies] admit that Beehive carried all traffic relevant to

the case at bar, and was responsible for the routing and

termination of the calls that AT&T’s customers made to chat

and conference service providers.”); id. ¶ 59 (“[The

Companies] admit that all of the traffic at issue was routed from

AT&T to its point of termination in Beehive’s facilities by

Beehive.”).

In addition, the Companies stipulated that the amount of

the award—$252,496.37—was the amount that AT&T had

paid to the Companies for access services. Damages Order, 30

FCC Rcd. at 8962 ¶ 11.

Finally, the Commission reasonably concluded that the

Companies were obligated to reimburse AT&T the amount that

AT&T paid to them for what turned out to be no qualifying

access service. There is nothing arbitrary or capricious about

the Commission’s decision that paying something for nothing

that is properly chargeable under the Communications Act is a

compensable harm.

The Companies argue that the proper measure of damages

should have been AT&T’s actual pecuniary loss, not the rate

they paid. They contend specifically that AT&T failed to prove

that it suffered an actual pecuniary loss because it received a

connection service and, whether rendered by Beehive or the

Companies, AT&T owed the same amount of money either

way. Paying the Companies rather than Beehive directly thus

took nothing extra out of AT&T’s pockets.

The Companies are correct that AT&T bore the burden of

showing both a violation of the law and “actual damages

suffered as a consequence of such violation.” New Valley

Corp. v. Pacific Bell, 15 FCC Rcd. 5128, 5134 ¶ 14 (2000); see

18

also Communications Satellite Corp., 97 F.C.C.2d 82, 91 ¶ 26

(1984) (“It is also well established that in a complaint

proceeding, the complainant has the burden of proving both the

fact and the amount of damages[.]”).

But New Valley and Communications Satellite stand only

for the proposition that the party seeking damages must prove

a financial loss that was caused by the alleged violation. See

New Valley, 15 FCC Rcd. at 5133 ¶ 12 (party had not proven

how the defendant’s failure to file tariff charges for services

actually rendered had caused any injury); Communications

Satellite, 87 F.C.C.2d at 92 ¶ 30 (party failed to show how its

failure to win a Department of Defense bid was the proximate

cause of any loss of profits).

AT&T met that burden. AT&T presented expert

declarations evidencing the amount of money it paid the

Companies for no actual access service authorized by the

Communications Act, and the parties ultimately stipulated to

that measure of damages. In addition, unlike New Valley and

Communications Satellite, AT&T causally linked its damages

to the Companies’ traffic-pumping scheme, showing that, in

the eyes of the Communications Act, they were sham entities

that rendered no chargeable access services to AT&T.

The Companies’ actual-loss argument, at bottom, reduces

to the claim that its liability should be excused because AT&T

might have owed Beehive those same access charges. The

Commission, however, permissibly held the Companies

financially responsible for the payments they received as a

result of their own conduct. See Damages Order, 30 FCC Rcd.

at 8958 ¶ 1 (“Because Defendants may charge only for services

they actually provide, it would be unjust to allow them to retain

the amounts AT&T paid.”).

19

C

Finally, the Companies contend that the Commission

improperly analyzed the merits of their state-law quantum

meruit claims, which include a claim of unjust enrichment.

Those state common law claims fall outside the Commission’s

wheelhouse, and are still pending before the district court. We

agree that a few aspects of the Commission’s decision have

strayed beyond its authority, and hold that those portions are

invalid to the extent that they speak to the merits of the

Companies’ state-law claims.

The controverted language in the Commission’s liability

order appears in two places. First, in responding to the

Companies’ assertion of an unjust enrichment defense to

AT&T’s damages claim, the Commission explained that the

Companies had failed to show “that they may plead equitable

defenses in a Section 208 complaint proceeding,” Damages

Order, 30 FCC Rcd. at 8963 ¶ 13. Fair enough. The problem

is that the Commission went on to say that, “[e]ven assuming”

such a common-law claim could be decided by the

Commission, the Companies’ unjust enrichment claim is

without merit because the Companies had “failed to establish

the necessary elements for unjust enrichment, because they did

not provide a service to, or confer a benefit on, AT&T.” Id.

Second, at the end of its decision, the Commission

dismissed the remaining referred issues as moot—which

included the quantum meruit claims, see Referral Order, supra,

at Ex. A, ¶ 2—because the Companies “did not provide any

service to AT&T.” Damages Order, 30 FCC Rcd. at 8966 ¶ 21.

20

1

Before proceeding to the merits of the Companies’

challenge to those aspects of the Commission’s decision, we

must first address the Commission’s threshold challenges to

our ability to decide that question.

First, the Commission argues that the Companies lack

standing to raise these arguments because the Commission’s

statements do not injure them. The Commission contends that

the Companies will not be harmed by the decisional language

unless the district court gives effect to it in its own proceedings.

To establish standing, the Companies must demonstrate

either actual injury from the Commission’s ruling, a “certainly

impending” injury, or “substantial risk” of such an injury.

Susan B. Anthony List v. Driehaus, 134 S. Ct. 2334, 2341

(2014). To have standing, then, the Companies must

demonstrate a substantial risk that the district court will credit

the Commission’s determinations in resolving the Companies’

common law claims. In this rather unique context, such a

substantial risk of injury to the Companies exists because,

going forward, the district court will be powerless to set aside

any erroneous Commission determinations pertaining to their

state-law claims. That is because the Hobbs Act vests

exclusive jurisdiction to review final decisions of the

Commission in the federal courts of appeals, not the district

courts. 28 U.S.C. § 2342(1); see also FCC v. ITT World

Communications, Inc., 466 U.S. 463, 468 (1984) (“Exclusive

jurisdiction for review of final [Commission] orders * * * lies

in the Court of Appeals.”). Litigants “may not evade these

provisions by requesting the District Court to enjoin action that

is the outcome of the agency’s order,” even if the agency order

is allegedly ultra vires. ITT World Communications, 466 U.S.

at 468.

21

As a consequence, once the primary jurisdiction referral is

completed, the Companies will be powerless to challenge the

merits of the Commission’s decision before the district court,

and the district court will be “without authority to review the

merits of the [Commission’s] decision.” Port of Boston Marine

Terminal Ass’n v. Rederiaktiebolaget Transatlantic, 400 U.S.

62, 69 (1970).

Given that, the Companies face a substantial risk that the

district court would take the Commission’s statements at face

value and hold that the common law unjust enrichment claim

is foreclosed. Because the Companies have no other avenue to

challenge that asserted overreach by the Commission, they

have standing to pursue that claim here.

Second, the Commission insists that the Companies’

argument is foreclosed because they failed to file a petition for

reconsideration raising their objection to the Commission

addressing their common law claims. The filing of a petition

for reconsideration is a “condition precedent to judicial review”

whenever a party “relies on questions of fact or law upon which

the Commission * * * has been afforded no opportunity to

pass.” 47 U.S.C. § 405(a). Accordingly, those who wish to

challenge a Commission decision must ensure that the

Commission is afforded “a fair opportunity to review the

arguments” before raising them in court. BDPCS, Inc. v. FCC,

351 F.3d 1177, 1183 (D.C. Cir. 2003).

We do not, however, require that the issue be raised with

“[a]bsolute precision,” and “judicial review is permitted so

long as ‘the issue is necessarily implicated by the argument

made to the Commission.’” EchoStar Satellite LLC v. FCC,

704 F.3d 992, 996 (D.C. Cir. 2013) (quoting Time Warner

Entm’t Co. v. FCC, 144 F.3d 75, 80 (D.C. Cir. 1998)); see also

22

Sprint Nextel Corp. v. FCC, 524 F.3d 253, 257 (D.C. Cir. 2008)

(“The pith of the test is this: ‘the argument made to the

Commission’ must ‘necessarily implicate[]’ the argument

made to us.”) (alteration in original; citation omitted).

Here, the Companies (as well as AT&T) repeatedly argued

to the Commission that it lacked the authority to address the

state-law claims. The Companies pointed out that “the possible

merits of their equitable claims” were “not before the

Commission in the instant proceeding, as AT&T admits in

footnote 87, and so are irrelevant.” Answer and Affirmative

Defenses, supra, ¶ 78. Doubling down, the Companies added

that “the Commission lacks authority to hear [their] claims for

damages against AT&T, as a non-carrier,” and that “[t]o the

extent AT&T has arguments for the SDNY court, it should

make them there, and not in this proceeding.” Id. ¶ 88.

AT&T agreed. See Supplemental Complaint of AT&T

Corp. for Damages ¶ 77 n.87, AT&T v. All American Tel. Co.,

File No. EB-09-MD-010 (FCC filed Oct. 24, 2014) (“[T]he

Commission does not generally have jurisdiction to address the

merits of any particular state law quasi-contract claim[.]”);

Reply Legal Analysis in Support of Supplemental Complaint

at 33, AT&T Corp. v. All American Tel. Co., File No. EB-09-

MD-010 (FCC filed Dec. 22, 2014) (“[T]he Commission

should not decide the merits of any state law claim[.]”); see

also Bartholdi Cable Co. v. FCC, 114 F.3d 274, 280 (D.C. Cir.

1997) (“[Section] 405 does not require that the party seeking

judicial review of an issue be the party that provided the

Commission with opportunity to pass on the issue.”).

Because the Commission was afforded a full and fair

opportunity to consider its treatment of the state-law claims and

was fully apprised of the Companies’ position, Section 405(a)

is no bar to reaching the merits. See, e.g., Sorenson

23

Communications, Inc. v. FCC, 765 F.3d 37, 50 (D.C. Cir. 2014)

(issue is ripe for review when “the Commission had an

‘opportunity to pass’ upon the question of fact or law raised in

the petition” even if no petition for reconsideration was filed)

(citation omitted). 4

2

The Companies are correct that the Commission lacked the

legal authority to discuss the merits of their state-law quantum

meruit claims. Congress has vested the Commission only with

the authority to address allegations of actions taken “in

contravention of” the Communications Act. 47 U.S.C.

§ 208(a). A state common law claim, by definition, does not

arise under or state a violation of the Communications Act, and

thus falls outside the scope of the Commission’s jurisdiction.

In addition, the Companies’ state-law claims seek to

determine the rights of a carrier against a customer: the

Companies want the district court to order AT&T to pay them

for services allegedly rendered. But for more than half a

century, the Commission has held that it lacks jurisdiction to

“determin[e] * * * the carrier’s rights against a subscriber[.]”

Thornell Barnes Co. v. Illinois Bell Tel. Co., 1 F.C.C.2d 1247,

1275 (1965); see also AT&T Corp. v. Bell Atl.-Pa., 14 FCC

4

Prior decisions of this court have held that Section 405(a)

“constitutes ‘an exhaustion requirement, rather than * * * a

jurisdictional prerequisite.’” M2Z Networks, Inc. v. FCC, 558 F.3d

554, 558 (D.C. Cir. 2009) (citation omitted; alteration in original);

see also Southern Indiana Broadcasting, Ltd. v. FCC, 935 F.2d 1340,

1342 (D.C. Cir. 1991) (“[W]e have treated this as an ‘exhaustion’

requirement, rather than a jurisdictional prerequisite, and have

allowed exceptions[.]”). In any event, for the reasons given, the

briefing by both the Companies and AT&T fairly presented the issue

to the Commission.

24

Rcd. 556, 599 n.240 (1998) (the Commission has “no

authority” to conduct “adjudications of carrier’s rights against

their customers”). Indeed, the Commission here dismissed the

Companies’ complaint against AT&T for that very reason. All

American Tel. Co., 26 FCC Rcd. at 726 ¶ 10. And we have

previously affirmed and enforced this limitation on the

Commission’s jurisdiction. See MCI Telecomms. Corp. v.

FCC, 59 F.3d 1407, 1417 (D.C. Cir. 1995) (vacating portion of

a Commission order that “involve[d] a determination of the

carrier’s rights against a [customer], over which this

Commission has no jurisdiction”) (second alteration in

original) (quoting Thornell Barnes Co., 1 F.C.C.2d at 1275

¶ 67).

Accordingly, the Commission’s discussion of the

Companies’ ability to satisfy the “necessary elements for unjust

enrichment,” Damages Order, 30 FCC Rcd. at 8963 ¶ 13, and

its determination that the quantum meruit claims referred to the

Commission were “moot[ed]” by the Commission’s decision

that the Companies “did not provide any service to AT&T,” id.

at 8966 ¶ 21, were improper and ultra vires to the extent that

they addressed the Companies’ state-law claims. The

Companies’ petition for review is granted only with respect to

those aspects of the decision that reached beyond the

Commission’s statutory authority. The merits of the

Companies’ state-law claims must be decided by the district

court in the first instance. 5

***

5

Because the Commission’s order does not reach the question

of whether the Communications Act preempts the Companies’ state-

law claims, that question also remains open for the district court to

address in the first instance.

25

The petition for review is granted in part and denied in

part. The Commission’s award of damages is affirmed, but

insofar as the Commission reached and decided any questions

of state law or the merits of the Companies’ quantum meruit

claims, those parts of the decision are without legal effect and

vacated in relevant part.

So ordered.