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June 2007
Volume 10 / Number 6
Regulation Watch

Eighth Circuit Preempts State
Utility Regulation

Outlook Remains Unclear for Fixed VoIP Regulation and State Universal
Service Contributions

By William B. Wilhelm, Jr., Regulation Watch

In late March 2007, the Eighth Circuit Court of Appeals issued an opinion denying the petitions for review of the FCC's Order that preempted certain state regulations regarding Vonage's VoIP services in Minnesota PUC v. FCC. The Court upheld the order in its entirety. The outcome of this case has serious impacts on the future of state regulation for both "nomadic" and fixed VoIP providers.

The five primary issues raised in the consolidated petitions were whether the Vonage Order was arbitrary and capricious because it: (1) failed to make a threshold determination about whether VoIP services were "information services" or "telecommunications services;" (2) determined it is impractical or impossible to separate the intrastate components of VoIP service from its interstate components; (3) determined state regulation of VoIP service conflicts with federal regulatory policies; (4) preempted emergency 911 telephone service requirements; and (5) whether the Vonage Order arbitrarily preempted "fixed" VoIP services offered by cable television companies, even though the intrastate components of such service can more easily be separated from the interstate components of such services.

In upholding the FCC's preemption decision, the Court first found that it was "sensible" for the FCC to defer its consideration of whether VoIP services are "information" or "telecommunications" services under the Act

Next, the Court considered whether the FCC properly applied the "impossibility exception," which allows the FCC to preempt state regulation of a service if it is not possible to separate interstate from intrastate components, and if federal regulation is necessary to further valid federal regulatory objectives. In upholding the FCC's decision, the Court found it proper that the agency considered the economic burden of identifying the geographic endpoints of VoIP communications in determining whether providers could separate the service into its interstate and intrastate components. Significantly the Court noted that "Service providers are not required to develop a mechanism for distinguishing between interstate and intrastate communications merely to provide state commissions with an intrastate communication they can then regulate." The Court further held that the FCC's VoIP E911 Order does not provide a basis for concluding the Vonage Order is arbitrary and capricious, because the VoIP E911 Order similarly recognizes the practical difficulties of accurately determining the geographic location of VoIP customers when they place a call. The Court , however, took solace in the fact that the FCC recognized the limits of the Order's preemptive effect in the Universal Service Order where the FCC noted that VoIP providers that could track the jurisdictional confines of calls "would no longer qualify for the preemptive effects" of the Vonage Order.

The Court also determined that the FCC's conclusions regarding the conflicts between state regulation and federal policy deserve "weight." Specifically, the Court found that competition and deregulation are valid federal interests the FCC may protect through preemption of state regulation, and the FCC's determination that state regulation of VoIP service would interfere with these federal rules and policies was reasonable.

The Court next rejected Minnesota's argument that the FCC arbitrarily or capriciously preempted Minnesota's 911 requirements, where Minnesota argued that the FCC's subsequent VoIP E911 Order indicates Vonage could have complied with the sate's 911 entry requirement. The Court first rejected this argument because Minnesota did not raise the issue before the FCC and thus was barred from raising it first with the Court. Further, the Court noted that there is no guarantee Minnesota would accept as sufficient for its purposes the different requirements imposed upon VoIP providers under the FCC's VoIP E911 Order, based on the differences in state laws and regulations governing 911 services, agreed with the FCC that national rules for VoIP 911 were needed given the nomadic nature of such services.

Finally, noting that the FCC's Vonage (quote - news - alert) Order states "to the extent other entities, such as cable companies, provide VoIP services, we would preempt state regulation to an extent comparable to what we have done in this Order," the Court determined that the Vonage Order only addresses services having basic characteristics similar to Vonage's, and does not specifically address fixed VoIP service providers. As such, the Court found that the language in the Vonage Order is, at most, a prediction of what the FCC might do if faced with the issue of fixed VoIP service providers, particularly cable based services. Again, the Court took comfort in the language from the FCC's Universal Service Order stating that the Vonage Order's preemptive effects would not be available to providers that can track the geographic endpoints of their customers' calls. The Court concluded that the New York PSC's challenge was therefore not ripe for review until the FCC actually addresses that precise issue.

In sum, the Court found that the FCC reasonably considered the technical and legal aspects concerning the regulation of Vonage's VoIP service, that the Vonage Order was therefore not arbitrary or capricious, and reasonably preempted state VoIP regulation. The Court also found unripe the New York PSC's argument that the Vonage Order is overbroad as applied to "fixed" VoIP services.

Unless appealed, the decision upholds the FCC's clear ruling that Vonage's nomadic VoIP service is not subject to state PUC regulation. Fixed VoIP services, however, are not subject to the FCC's Vonage order and, accordingly, they may become the subject of attempts by State PUCs to regulate such services notwithstanding the alternative preemption arguments that these companies may have.

William B. Wilhelm is a Partner in the law firm of Bingham McCutchen. 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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