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April 2007
Volume 10 / Number 4
Regulation Watch
William B. Wilhelm

An “Appealing Case”

VoIP Providers Ask Court to Reconsider Aspects of the FCC’s
Universal Service Order

By William B. Wilhelm, Regulation Watch

In February, the United States Court of Appeals for the District of Columbia heard argument in the appeal of the FCC’s Interim Universal Service Order. The panel hearing oral argument from Petitioners CCIA and Vonage (News - Alert), consisted of Judges Edwards, Garland and Tatel. While it is notoriously difficult to predict how a court will rule based on oral argument, it seemed that the arguments relating to double collection and disparate treatment of traffic studies — both issues explained in detail below — resonated with the Court more than other objections to the Order.

Vonage appealed three separate aspects of the Order: (1) that the 64.9% safe harbor (i.e., the amount of interconnected VoIP traffic that is deemed to be interstate and therefore subject to USF contributions) was arbitrary and capricious; (2) that it was arbitrary for the FCC to require interconnected VoIP providers to obtain pre-approval for their traffic studies while wireless carriers can file their studies and rely on them unless the FCC rejects them; and (3) that it was inconsistent with the Act to require both the carriers that provide the underlying telecommunications services to interconnected VoIP providers and the interconnected VoIP providers to contribute to USF amounting to a double collection applicable only to VoIP providers.

Concerning the safe harbor figure of 64.9%, Vonage argued that the FCC impermissibly compared interconnected VoIP services to long distance service providers rather than traditional local telephone service. This was inconsistent with the FCC’s VoIP E911 Order and CALEA Orders that interconnected VoIP services were substitutes for local phone service and thereby subject to 911 and CALEA regulations. In adopting the safe harbor percentage, Vonage argued that the FCC relied on a study that was not part of the FCC’s record and reached its conclusions using worldwide minutes of use for interconnected VoIP services. Vonage argued that the Court should not rely on the report because it did not distinguish between different types of VoIP services and it did not segregate traffic into interand intrastate components since it was focused on worldwide VoIP minutes of use. Vonage suggested that the 37.1% safe harbor used for wireless services would be more appropriate for interconnected VoIP services.

Judge Tatel asked whether Vonage’s argument rested on whether there was sufficient record evidence for the FCC to determine whether 64.9% was the appropriate safe harbor, because if so, the Court affords substantial deference to the agency. Moreover, neither Judge Tatel nor Judge Garland seemed convinced that wireless services are an appropriate analogue for interconnected VoIP services noting that consumers use wireless in addition to wireline phone service and for convenience. Judge Garland also questioned whether Vonage could have submitted a traffic study prior to the FCC adopting the order demonstrating that their percentage was below the safe harbor identified by the FCC. Vonage responded that at the time the Order was adopted, it appeared that the only safe harbor in play was the wireless safe harbor and that there was not sufficient notice for Vonage to take such a step.

Regarding the disparate treatment of traffic studies submitted by wireless and interconnected VoIP providers, Judge Tatel asked the FCC attorney to begin his oral argument addressing this issue. The FCC argued that it made sense because the wireless carriers have relied on such studies for years and have studies on file. Wireless carriers relied on this system while interconnected VoIP providers were new to the obligation so there was no similar reliance. Moreover, FCC counsel argued that interconnected VoIP providers were new to producing traffic studies implying that they would require FCC review. Finally, FCC counsel argued that the FCC thought there were significant problems with the wireless traffic studies and didn’t want to compound the problem by allowing interconnected VoIP providers to use the same process for calculating revenues subject to USF. Judge Garland wondered if FCC counsel was suggesting that the FCC was indulging the wireless industry but not providers of interconnected VoIP services. Judges Edwards and Garland appeared skeptical that the FCC’s explanations of this disparate treatment offered in Court was actually made in the Order.

Turning to the issue of double collection, FCC counsel argued that the FCC was concerned that if there was not double contribution, there would be a drop in the fund requiring the FCC to increase the contribution percentage attributable to all telecommunications service providers. Judge Garland questioned whether this reason comports with Section 254 of the Act that requires equitable and non-discriminatory contributions and that a better reason might have been that providers of interconnected VoIP services have not contributed until now. Judge Edwards also questioned the reasonableness of the FCC’s position that interconnected VoIP providers should be subject to double collection in a discriminatory manner. FCC counsel then attempted to argue that the non-discrimination provision only applies to telecommunications services and the FCC has not yet classified interconnected VoIP services as telecommunications, but quickly retreated from that position as each Judge took turns examining the seriousness of that position and inquiring whether it was counsel’s argument or that of the agency’s — with Judge Garland noting that this was not even a good post-hoc rationalization of the Order.

CCIA argued that the FCC lacked the statutory authority to subject interconnected VoIP providers to USF contribution obligations. CCIA’s primary argument was that in the absence of classifying interconnected VoIP services as telecommunications or information, the FCC could not subject interconnected VoIP services to USF contribution obligations. The Court seemed skeptical of this argument with both Judges Tatel and Edwards noting that the FCC was acting under its permissive authority to require contribution. CCIA responded that the FCC’s permissive authority to subject services to USF contribution was limited to non-common carriers providing telecommunications services, like private carriers or aggregators. All three Judges questioned CCIA’s reading of the statute.

CCIA also argued that the FCC’s legal principle for subjecting interconnected VoIP services to USF contribution obligations threatened to eviscerate the statutory distinction between information and telecommunications services. Specifically, CCIA framed the FCC’s argument as one where regardless of whether interconnected VoIP services are telecommunications or information, they have a telecommunications component and it is on that component that the FCC argues it can assess USF. Using that same reasoning, CCIA argued that the FCC could require all information services, like instant messaging and dial-up Internet, to not only contribute to USF but also to comply with Title II common carriage regulation. Judge Tatel responded that the FCC was not regulating interconnected VoIP services but requiring them to contribute to USF and had not addressed information services in its Order.

An order is expected in the next several months. For now, VoIP providers will have to wait for the outcome.

William B. Wilhelm is a Partner in the Telecommunications, Media and Technology group of the national law firm of Bingham McCutchen, a law firm with over 900 lawyers and more than 20 different practice areas, including antitrust, corporate, litigation, telecommunications and government affairs. For more information regarding the author you may visit The preceding represents the views of the author only and does not necessarily represent the views of Bingham McCutchen or its clients.


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