Farmers & Merchants Mutual Telephone Co. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 7, 2011 Decided December 30, 2011

No. 10-1093

FARMERS AND MERCHANTS MUTUAL TELEPHONE

COMPANY OF WAYLAND, IOWA,

PETITIONER

v.

FEDERAL COMMUNICATIONS COMMISSION AND

UNITED STATES OF AMERICA,

RESPONDENTS

NORTHERN VALLEY COMMUNICATIONS, LLC, ET AL.,

INTERVENORS

On Petition for Review of Orders of

the Federal Communications Commission

John F. Cooney argued the cause for petitioner. With him

on the briefs were James U. Troup, Tony S. Lee, and Christine

McLaughlin.

Ross A. Buntrock argued the cause for intervenor Northern

Valley Communications, LLC. With him on the briefs was G.

David Carter. Jonathan E. Canis and Stephanie A. Joyce entered

appearances.

2

Joel Marcus, Counsel, Federal Communications

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

brief were Austin C. Schlick, General Counsel, Peter Karanjia,

Deputy General Counsel, and Richard K. Welch, Acting

Associate General Counsel. Robert B. Nicholson and Robert J.

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

Armstrong III, Associate General Counsel, Federal

Communications Commission, entered appearances.

David H. Solomon argued the cause for intervenors Qwest

Communications Company, LLC, et al. With him on the brief

were Craig J. Brown, Russell P. Hanser, Robert B. McKenna,

Charles W. McKee, Michael B. Fingerhut, Scott H. Angstreich,

Gregory G. Rapawy, M. Robert Sutherland, Gary L. Phillips,

Paul K. Mancini, Michael E. Glover, Karen Zacharia, and

Christopher M. Miller. David L. Lawson and James P. Young

entered appearances.

Before: ROGERS, TATEL and KAVANAUGH, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge: In the three challenged orders, the

Federal Communications Commission addressed a “traffic

pumping” (or access stimulation) scheme in which the holder of

the filed tariff entered into contractual arrangements with

conference calling companies and charged the interexchange

carrier the tariff rate for providing switched access service.

Interpreting the tariff to require switched access service to be

provided to an end user, the Commission determined that the

contractual arrangements were inconsistent with the subscriber

relationship required by the tariff and violated 47 U.S.C. §§

201(b) and 203(c). The Commission also determined, in the

alternative, that the tariff holder had exceeded the permissible

rate of return under the tariff and violated 47 U.S.C. § 201(b).

Farmers & Merchants Mutual Telephone Company (“Farmers”),

3

the holder of the tariff, petitions for review on the grounds that

in addition to ignoring jurisdictional requirements, the

Commission misread the tariff and failed to adhere to its

precedent and rules. For the following reasons, we deny the

petition.

I.

In May 2007, Qwest Communications Corporation

(“Qwest”), an interexchange carrier (“IXC”) receiving access

services from Farmers, filed a complaint alleging that Farmers

was collecting “unreasonably high terminating switched access

charges by inflating the amount of traffic delivered to it by

Qwest and other [IXCs] in a manner that rendered Farmers’s

rates wholly unrelated to its costs.” Compl. at 1. Qwest argued

the charges to it were unlawful under sections 201(b) and 203(c)

of the Communications Act of 1934, as amended, and elected to

have the amount of any damages determined in a separate

proceeding. In response, the Commission issued the challenged

orders:

- In Farmers I,1 the Commission ruled that Farmers had

violated section 201(b) by earning an excessive rate of return,

but Qwest could not recover damages because Farmers’ tariff

was “deemed lawful” under 47 U.S.C. § 204(a)(3). In its answer

to the complaint, Farmers stated that the conference calling

companies were subscribers to Farmers’ interstate access service

and were billed the federal subscriber line charge as well as for

local telephone service and rental of floor space in Farmer’s

central office (where the conference bridges were located).

Answer at vii.

1

Qwest Comm’cns Corp. v. Farmers & Merchants Mutual

Tel. Co. (“Farmers I”), 22 FCC Rcd. 17973 (2007), 2007 WL

2872754 (F.C.C.).

4

- In Farmers II,2 the Commission, after granting Qwest’s

request for partial reconsideration and initiating additional

proceedings, found that new evidence supported Qwest’s

assertion that the conference calling companies, in fact, never

took tariffed services from Farmers.3 The Commission found that

because the companies were not end users under the tariff,

“Farmers’ transport of traffic to them did not constitute

‘switched access’ under the tariff” and therefore Farmers’

corresponding charges to Qwest were unlawful under sections

201(b) and 203(c) of the Communications Act. Farmers II, 24

FCC Rcd. at 14813. The Commission also reaffirmed its ruling

on Farmers’ unreasonable rate-of-return. Consequently, Farmers

had violated sections 201(b) and 203(c) and was liable to Qwest

for damages.

- In Farmers III,4 the Commission denied Farmers’ petition

for reconsideration, rejecting challenges to its authority to issue

Farmers II and its determination that the companies were not

“end users” under Farmers’ tariff.

2

Qwest Comm’cns Corp. v. Farmers & Merchants Mutual

Tel. Co. (“Farmers II”), 24 FCC Rcd. 14801 (2009), 2009 WL

4073944 (F.C.C.).

3

The new evidence regarding Farmers’ relationships to the

conference calling companies came to light in a parallel proceeding

before the Iowa Utility Board. Farmers II, 24 FCC Rcd. at 14804.

That evidence indicated that contract amendments and bills for

services had been executed or created at dates much later than would

have been apparent from their face. See id. at 14812.

4

Qwest Comm’cns Corp. v. Farmers & Merchants Mutual

Tel. Co. (“Farmers III”), 25 FCC Rcd. 3422 (2010), 2010 WL

972315.

5

II.

As a threshold matter, Farmers, joined by intervenor

Northern Valley Communications, LLC (“Northern Valley”),

contends that the Commission lacked authority to overturn its

decision in Farmers I because it failed, as 47 U.S.C. § 405(b)

requires, to act within 90 days on Qwest’s petition for partial

reconsideration and, consequently, Farmers I became a final,

appealable order. This contention is based on a misreading of

the statute.

Section 405(b) requires the Commission to “issue an order

granting or denying” a petition for reconsideration within 90

days, 47 U.S.C. § 405(b)(1), and provides that any such order

granting or denying a petition shall be a final, appealable order,

id. § 405(b)(2). By its plain terms, this provision does not speak

to the finality of the original order for which reconsideration is

sought, but rather to the Commission’s need to grant or deny a

petition for reconsideration. See Chevron U.S.A. Inc. v. Nat’l

Res. Def. Council, Inc., 467 U.S. 837, 842–43 (1984).

The Commission granted in part Qwest’s petition for partial

reconsideration on January 29, 2008, within 90 days after Qwest

filed its petition on November 1, 2007. In its order, the

Commission initiated additional proceedings to compel

production of and to consider previously undisclosed evidence.

Qwest’s Second Supplement to Petition for Reconsideration was

submitted as part of the additional proceedings, and was not, the

Commission maintains, a separate petition for reconsideration of

an order, decision, report, or action taken by the Commission.

The Commission’s interpretation of section 405 and its rule, see

47 C.F.R. § 1.106, as allowing it to defer a ruling on the merits

pending completion of the additional proceedings appears

reasonable and entitled to deference. See Chevron, 467 U.S. at

843. But even if the Commission had missed the 90-day

6

deadline, it would not have lost jurisdiction to issue Farmers II

because Congress established no consequence for failing to meet

that deadline.5 See Brock v. Pierce Cnty., 476 U.S. 253, 265–66

(1986); Gottlieb v. Pena, 41 F.3d 730, 733 (D.C. Cir. 1994);

AT&T Corp. v. Beehive Tel. Co., 17 FCC Rcd. 11641, 11652 &

n.80 (2002). Contrary to intervenor Northern Valley’s

contention during oral argument, we find nothing in the

legislative history to support a contrary reading of section 405.

See S. REP. NO. 100-142 (1987).

Farmers’ suggestion that the Commission lacked subject

matter jurisdiction ab initio over Qwest’s complaint “is flatly

wrong.” Resp’t’s Br. at 38. Farmers maintains that if the

Commission was correct that Qwest was not required to pay

Farmers’ access-service tariff rates, then the service Farmers

provided was not a common-carrier service offered in a tariff and

the Commission exceeded its authority by considering Qwest’s

complaint under the Communications Act’s Title II common-

carrier provisions. The Commission had jurisdiction to consider

Qwest’s complaint pursuant to 47 U.S.C. § 208(a), which

provides authority to adjudicate complaints “of anything done or

omitted to be done by any common carrier” in violation of the

Communications Act. Farmers held itself out as a common

carrier providing access service to IXCs such as Qwest and billed

5

A similar analysis disposes of intervenor Northern Valley’s

contention that the Commission lost its authority to act after 90 days

(47 U.S.C. § 405(b)) and five months (47 U.S.C. § 208(b)), and that

Farmers I was therefore a final order. Rule 1.106(n), 47 C.F.R.

§ 1.106(n), which requires compliance with a Commission order

subject to a petition for reconsideration, does not, as Northern Valley

implies, address the Commission’s authority to conduct proceedings

after the 90-day deadline, much less require the Commission to stay

Farmers I inasmuch as it granted partial reconsideration of that order.

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Qwest for that service. Section 203(c)(3) makes unlawful a

common carrier’s provision of service outside of the terms of its

tariff; Qwest’s complaint alleged Farmers violated section 203(c)

and a Commission ruling Farmers did so could not immunize it

from the complaint process.

III.

The merits question is whether the Commission properly

determined that Farmers was not entitled to bill Qwest for access

service under Farmers’ tariff because Farmers had not provided

interstate “switched access service” as that term is defined in

Farmers’ federal access tariff. In matters of tariff interpretation,

the court applies a deferential standard of review and will uphold

the Commission’s interpretation where it is “reasonable [and]

based upon factors within the Commission’s expertise.” Global

NAPs, Inc. v. FCC, 247 F.3d 252, 258 (D.C. Cir. 2001) (internal

citation omitted).

The Commission relied on three key provisions in Farmers’

tariff in concluding that the tariff allowed Farmers to provide

(and bill for) switched access service only when it delivers a call

to an end user, i.e., a person or entity that subscribes to Farmers’

service under the tariff. At the relevant time, Farmers was

operating under the Kiesling Associates LLP FCC Number 1

Tariff (“Kiesling Tariff”), which incorporates provisions of the

National Exchange Carrier Association FCC Tariff Number 5

(“NECA Tariff”), e.g., Kiesling Tariff §§ 2, 6. Under Farmers’

tariff: (1) “switched access” means a service that allows an IXC

“to terminate calls from a customer designated premises to an

end user’s premises.” NECA Tariff § 6.1 (emphasis added). (2)

The term “end user” means “any customer . . . that is not a

carrier.” Id. § 2.6 (emphasis added). (3) “Customer” means an

entity that “subscribes to the services offered under th[e] tariff.”

Id. (emphasis added). The Commission therefore determined

8

that Farmers may provide and bill for switched access service

only when it delivers a call to an entity that “subscribes” to that

service under its tariff. Whether the conference calling

companies subscribed to switched access service under Farmers’

tariff turns on the nature of Farmers’ relationship with the

companies, a subject demonstrably within the Commission’s

expertise.

The Commission found that “in numerous respects,”

Farmers III, 25 FCC Rcd. at 3426, the conference calling

contracts did not establish a subscriber relationship under

Farmers’ tariff. The evidence showed that the conference calling

companies never paid subscriber line charges or made any other

payments to Farmers, and that Farmers never expected to be

paid. See id. The Commission also found, for several reasons,

that Farmers and the conference calling companies did not

structure their relationship in a manner consistent with Farmers’

tariff as evidenced by the contract terms and Farmers’ conduct.

Id. As examples, the Commission cited the exclusivity

provisions in the conference calling contracts, a practice

“antithetical to the notion of tariffed service,” Farmers II, 24

FCC Rcd. at 14807, and the fact that Farmers used different

technology than it used for other customers, id. at 14806, and

each company enjoyed individually negotiated terms and

conditions, id. at 14807. Unlike its practice with other

customers, Farmers did not send regular bills or enter the

companies into its billing system, id. at 14808. Neither did

Farmers pay the federal universal service charge that would have

accrued for service provided to a subscriber, id. at 14813 n.97.

Further, Farmers agreed not to charge the conference calling

companies for services, the subscriber line charge, equipment

installation, or space in Farmers’ central office. Id. at 14806 &

nn.48, 49. And after the Qwest complaint proceedings began,

Farmers created backdated bills and contract amendments while

advising the conference calling companies they still did not have

9

to pay, id. at 14808-10. Based on these findings, which Farmers

does not challenge, the Commission concluded that Farmers

never intended to treat the conference calling companies as

customers of any of Farmers’ tariffed services. Its findings

demonstrate, moreover, that the Commission’s decision in

Farmers II did not hinge upon the single issue of whether the

conference calling companies were required to make payments

to Farmers in order to be considered subscribers of Farmers’

services. Farmers III, 25 FCC Rcd. at 3426.

Farmers’ challenges to the Commission’s interpretation of

the tariff fail to show the Commission was unreasonable or

considered factors outside of its expertise such that deference

would not be appropriate:

1. Farmers maintains that the Commission ignored the plain

terms of the tariff, which require Qwest to pay the tariff rate

regardless of whether the conference calling companies were end

users. It points to several subsections of section 6.1 that do not

refer to end users, see, e.g., NECA Tariff §§ 6.1.3(A), 6.4.1(C),

in contending that general rules of construction require specific

provisions of the tariff to control over the general. The

Commission persuasively responds that the general definition of

section 6.1 is incorporated into the subsequent, more-specific

provisions of section 6.

First and foremost, the tariff itself includes a diagram of

switched access service that illustrates an end user as one of the

sub-elements of that service. See NECA Tariff § 6.1.3.

Additionally, under the rules of construction for the NECA

Tariff, each of the subsections is “subordinate to and dependent

on [the] next higher level” of the tariff. NECA Tariff, Tariff

Users Guide, at 30; see Kiesling Tariff, Tariff Users Guide at 4

(noting incorporation of NECA Tariff language). The

Commission’s reading of the tariff thus was well within its

10

discretion. See Diamond Int’l Corp. v. FCC, 627 F.2d 489, 492

(D.C. Cir. 1980).

Farmers’ other arguments also fail to show deference is not

due to the Commission’s interpretation that switched access

service under the tariff requires service to an end user. Farmers’

reliance on In re Investigation of Access & Divestiture Related

Tariffs (“Tariff Investigation”), 97 F.C.C. 2d 1082, 1229 (1984),

where the Commission expressed discomfort with the

“fragmentary description” of switched access service in section

6.1 of the NECA Tariff, is misplaced; the tariff language has

since been changed to clarify that section 6.1 contains a unitary

definition of switched access service, compare NECA Tariff

§ 6.1, Petr.’s Br. Addendum at A-74 with prior version of § 6.1

quoted in Tariff Investigation, 97 F.C.C. 2d at 1229. Farmers’

reliance on general rules of contract construction is similarly

misplaced; the relevant contract-law principle applies when

general and specific provisions conflict, see Mutual Life Ins. Co.

v. Hill, 193 U.S. 551, 558 (1904), and Farmers fails to show such

conflict exists here.

2. No more successful is Farmers’ challenge to the

Commission’s alternative ruling that even if the service it

provided to Qwest constituted “switched access” under the tariff,

Farmers exceeded the allowable rate of return and thereby

violated 47 U.S.C. § 201(b), Farmers III, 25 FCC Rcd. at

3427–28. Farmers contends that this alternative ground was

erroneous because the Kiesling Tariff had previously been

“deemed lawful” under 47 U.S.C. § 204(a)(3). Two responses

suffice.

First, the Commission identified two independent bases for

section 201(b) liability. It found that Farmers did not provide

Qwest with “switched access” under its tariff, and that its

practice of charging Qwest for such service was therefore unjust

11

and unreasonable under section 201(b). See Farmers III, 25 FCC

Rcd. at 3427–28. The service provided by Farmers to the

conference calling companies was not a tariffed service and so

Farmers’ assessment of switched access charges to Qwest

violated sections 201(b) and 203(c) of the Communications Act.

Id. The Commission identified the rate-of-return violation as an

alternative and independent basis for Farmers’ section 201(b)

liability. Id. As clarified in Farmers III, “[e]ven if the carriage

of traffic from Qwest to the conference calling companies could

be said to constitute switched access under Farmers’ tariff, . . .

the Commission could have reached the same conclusion [as to

liability] by finding that Farmers’ earning an excessive rate of

return violated section 201(b) of the Act.” Id.

Second, the Commission’s alternative basis for section

201(b) liability did not violate any principles regarding

retrospective relief. Farmers’ rates were deemed lawful and not

subject to refund until the Commission determined otherwise,

see Virgin Islands Tel. Corp. v. FCC, 444 F.3d 666, 669 (D.C.

Cir. 2006), as it did in view of new evidence. Nothing in

Farmers III imposes a retrospective refund: rather the

Commission found that the rates could properly serve as a basis

for section 201(b) liability even if they had been properly

charged under the tariff and Qwest thus could qualify for

prospective relief.

3. Farmers contends that even if Qwest’s obligation to pay

access service tariff rates depended on whether the conference

calling companies were end users, the Commission was arbitrary

and capricious and acted contrary to law and principles of due

process by departing from its precedent without explanation.

Farmers points to the Jefferson Telephone cases,6 which it reads

6

AT&T Corp. v. Jefferson Tel. Co. (“Jefferson II”), 16 FCC

Rcd. 16130 (2001); In re Jefferson Tel. Co., Notice of Apparent

12

to stand for the proposition that business arrangements

inconsistent with a tariff are immaterial so long as the conference

calling companies that do business with the tariff holder “enter[]

their names for” the access service covered by the tariff.

Farmers then invokes the filed rate doctrine, which generally

requires that all parties that take service under a tariff pay the

tariff rate, e.g., Ark. La. Gas Co. v. Hall, 453 U.S. 571, 577

(1981). Farmers’ reliance on this precedent is to no avail.

The Commission’s decision did not contravene its holdings

in the Jefferson Telephone cases. As a preliminary due process

matter, Jefferson I is under judicial seal and was made available

to Qwest only upon order of this court of September 2, 2010.

Not only was Qwest deprived of this authority during the

proceedings before the Commission, the Commission was

deprived of the benefit of an adversarial process and was unable

to discuss the Jefferson I opinion in any detail in its decision.

Commission rules prohibit reliance on unpublished orders,

“except against persons who have actual notice of the document

. . . or by such persons against the Commission.” 47 C.F.R.

§ 0.445(e). Qwest did not have notice of Jefferson I until this

appeal. In Jefferson II, which is not under seal, the Commission

“emphasize[d] the narrowness of [its] holding” and limited it to

“the specific facts and arguments presented.” 16 FCC Rcd. at

16137. The issue there was whether a local exchange carrier’s

inducement of conference call traffic was inconsistent with a

common carrier’s duty to carry traffic indifferently, id. at

16133–34, and whether revenue sharing between the carrier and

the conference calling company violated section 202(a)’s

restriction on “undue or unreasonable preference[s],” id. at

16136 n.38. But, although the IXC was ordered to pay the access

service tariff rate, the Commission neither mentioned the filed

Liability for Forfeiture & Order to Show Cause (“Jefferson I”), FCC

Order No. 96-430 (1996).

13

rate doctrine nor indicated that it applied to the dispute. Indeed,

neither of the Jefferson Telephone cases established that

conference calling companies are end users under the NECA

Tariff; tariffed service appears to have been assumed, see id. at

16131–32; Letter Ruling, Nov. 10, 2010, FCC Deputy Chief,

Market Disputes Resolution Div., Enforcement Bureau, at 4

(discussing Jefferson I). Consequently, in the absence of

relevant holdings by the Commission, the Commission properly

applied the principles of tariff interpretation to Farmers’ tariff

and adequately distinguished relevant precedent, an approach

consistent with due process.

Second, Farmers fares no better in invoking the filed rate

doctrine. Because the Commission could properly conclude that

the conference calling companies were not end users under the

tariff, tariffed services are not at issue. Therefore, as explained

in Farmers II, the filed rate doctrine does not apply. The

Commission has long instructed that a service that does not “fall

within the plain meaning” of the tariff is not governed by the

tariff whether or not it is “functionally similar” to a tariffed

service. W. Union Corp. v. S. Bell Tel. & Tel. Co., 5 FCC Rcd.

4853, 4855 (1990); see also 47 U.S.C. § 203(c); New Valley

Corp. v. Pac. Bell, 15 FCC Rcd. 5128, 5132–33 (2000).

Although it did not decide how traffic to the conference calling

companies should be classified, see Farmers III, 25 FCC Rcd. at

3427 n.43, the Commission based its conclusion, that in the

absence of an end user such traffic did not constitute switched

access service under the tariff, on the controlling plain text of

Farmers’ tariff. The service was outside of the tariff and, as

such, the filed rate doctrine could not protect Farmers from

liability to Qwest.

To the extent Farmers contends the Commission acted

contrary to its rules, the Commission observes, as it did in

Farmers II, that “Farmers’ tariff may have defined switched

14

access more narrowly than was permissible under [its] rules.”7

Resp’t’s Br. at 49. In any event, the rules governing what local

exchange carriers must include in their tariffs, see, e.g., 47

C.F.R. §§ 69.4, 69.5, neither apply to the IXCs nor limit the

Commission here. If Farmers’ tariff did not apply to the services

it was providing to Qwest, then Farmers violated such rules, not

the Commission. Farmers’ reliance on 47 U.S.C. § 202(a),

prohibiting discrimination of charges for like services to like

parties, also fails because the services billed to Qwest were for

tariffed services it did not receive. Intervenor Northern Valley

likewise gains no traction on a section 202(a) claim by noting

that Qwest may recover damages in connection with services for

which other IXCs have already paid.

4. Finally, Farmers suggests that in Farmers II the

Commission retroactively applied a new standard for being a

subscriber under the tariff without fair notice or reasoned

analysis; this contention, however, ignores the fact that in

Farmers I the Commission relied on Farmers’ answer to the

complaint stating that the conference calling companies were

subscribers, paying and being billed monthly. “On

reconsideration, the landscape shifted dramatically” because

“[t]he record contained many more facts about the relationship

between Farmers and the conference calling companies.”

Farmers III, 25 FCC Rcd. at 3426. The Commission concluded:

“Farmers withheld critical evidence during the earlier stages of

this proceeding, and it now attempts to bind the Commission to

7

Hence, Farmers’ reliance on the Commission’s description

of what its rules allow in the Report and Order and Further Notice of

Proposed Rulemaking, In re Connect America Fund, FCC Order No.

11-161, at 216, 2011 WL 5844975, at *168 (Nov. 18, 2011), does not

help its cause. Letter of Nov. 29, 2011 from John F. Cooney, Counsel

for Farmers, to Mark J. Langer, Clerk of Court, filed pursuant to FED.

R. APP. P. 28(j).

15

a ruling that was predicated upon the incomplete factual record.

On reconsideration, the Commission is entitled to review new

facts and to change its ruling based on the new facts,” which “is

precisely what happened here . . . .” Id. at 3426–27. Intervenor

Northern Valley’s suggestion that the Commission erred by not

examining the state tariff to consider Farmers’ relationship with

the conference calling companies is not properly before the

court: the Commission was not given an opportunity to pass on

it, 47 U.S.C. § 405(a); Environmentel, LLC v. FCC, 661 F.3d 80,

84 (D.C. Cir. 2011); Bartholdi Cable Co. v. FCC, 114 F.3d 274,

279 (D.C. Cir. 1997); and an intervenor cannot raise issues not

raised in Farmers’ brief, see Ill. Bell Tel. Co. v. FCC, 911 F.2d

776, 786 (D.C. Cir. 1990).

In sum, the Commission, upon considering factors within its

expertise, could reasonably conclude that Farmers’ relationships

with the conference calling companies had been deliberately

structured to fall outside the terms of Farmers’ tariff and

therefore reasonably reject such services as tariffed services.

Deference to the Commission’s determination is thus

appropriate. See Global NAPs, 247 F.3d at 257–58; Diamond

Int’l, 627 F.2d at 492. To the extent Farmers protests what it

characterizes as a “windfall” for Qwest, Oral Argument at 1:34,

whether Farmers can set off, and to what extent, its costs of

providing service against Qwest’s claim for damages is not

before the court. See Farmers III, 25 FCC Rcd. at 3424 & n.19;

Compl. at 27, ¶ 59. Accordingly, we deny the petition.