Wide Voice, LLC v. Fed. Commc'ns Comm'n

7 F.4th 796

WIDE VOICE, LLC, Petitioner,

v.FEDERAL COMMUNICATIONS COMMISSION; United States of America, Respondents,MCI Communications Services, LLC, Respondent-Intervenor.

No. 20-70042

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 4, 2021 San Francisco, California

Filed July 30, 2021

Lauren J. Coppola (argued) and Robert F. Callahan Jr., Robins Kaplan LLP, Boston, Massachusetts; Glenn Danas, Robins Kaplan LLP, Los Angeles, California; for Petitioner.

William J. Scher (argued), Counsel; Richard K. Welch, Deputy Associate General Counsel; Jacob M. Lewis, Associate General Counsel; Thomas M. Johnson Jr., General Counsel; Federal Communications Commission, Washington, D.C.; Robert B. Nicholson and Robert Wiggers, Attorneys; Michael F. Murray, Deputy Assistant Attorney General; Makan Delrahim, Assistant Attorney General; United States Department of Justice, Washington, D.C.; for Respondent.

Grace W. Knofczynski (argued), Scott H. Angstreich, and Sean Nadel, Kellogg Hansen Todd Figel & Frederick PLLC, Washington, D.C.; Christopher M. Miller and Curtis L. Groves, Verizon, Washington, D.C.; for Respondent-Intervenor.

Philip J. Macres, Klein Law Group PLLC, Washington, D.C., for Amici Curiae Fusion Cloud Services, LLC f/k/a Birch Communications, LLC, and Fusion Communications, LLC f/k/a Cbeyond Communications, LLC.

Before: Johnnie B. Rawlinson and Patrick J. Bumatay, Circuit Judges, and Stephen J. Murphy III,^* District Judge.

RAWLINSON, Circuit Judge:

Competitive local exchange carrier (CLEC), Wide Voice, LLC (Wide Voice), petitions for review of an order from the Federal Communications Commission (FCC) finding that Wide Voice's tariffed rate was void ab initio because it violated the FCC's benchmarking rule by exceeding the established step-down rates. We hold that the FCC did not err in concluding that Wide Voice's tariff violated the benchmarking rule by deviating from the established step-down rates. However, the FCC's determination that the tariff was void ab initio after being "deemed lawful" in accordance with the governing statute was arbitrary and capricious. Therefore, we grant in part and deny in part the petition for review.

I. BACKGROUND

A. Legal Framework

This appeal involves tariffed charges that local exchange carriers (LEC) impose on long-distance carriers for access to services that complete long-distance telephone calls. When customers, known as end users, purchase telephone service, they generally contract with two different entities: a LEC, and a long-distance carrier. "The LEC owns the phone lines that connect directly to end users, and it is through the LEC's lines that users make local calls." Great Lakes Comnet, Inc. v. FCC , 823 F.3d 998, 1000 (D.C. Cir. 2016). In turn, "[t]he long-distance carrier connects end users’ LEC networks to other LEC networks around the country, thus giving end users the ability to make long-distance calls." Id. (citation omitted).

As an example, when a caller wishes to speak with a friend across the country, the call travels from the caller's LEC's lines to the long-distance carrier's lines and then from those lines to the friend's LEC's lines, across which it travels to the friend's phone. Under the traditional intercarrier compensation system, the long-distance carrier would pay access charges to the LEC. See In the Matter of Access Charge Reform , 16 FCC Rcd. 9923, 9926–27 (2001) ( Access Reform Order ) (explaining that customers pay their long-distance carriers for calls and that those carriers then pay access fees to the caller's LEC and the recipient's LEC).

Under § 201(b) of the Communications Act of 1934, rates for interstate communications services must be "just and reasonable." 47 U.S.C. § 201(b). To ensure compliance with this mandate, carriers must generally file a "schedule [of] charges"—commonly referred to as tariffs—with the FCC, listing interstate services and applicable rates. 47 U.S.C. § 203 ; see also CallerID4u, Inc. v. MCI Commc'ns Servs. Inc. , 880 F.3d 1048, 1052–53 (9th Cir. 2018). The FCC may suspend a tariff for a limited time prior to it becoming effective to investigate its lawfulness. 47 U.S.C. § 204(a)(1).

The Telecommunications Act of 1996 (1996 Act) amended § 204(a) by providing that a carrier "may file with the [FCC] a new or revised charge ... on a streamlined basis—[and]—[a]ny such charge ... shall be deemed lawful" if the FCC does not suspend or investigate it within seven days (if the rate decreases) or 15 days (if the rate increases). 47 U.S.C. § 204(a)(3). The 1996 Act also divided local exchange carriers into incumbent LECs (ILECs)¹ and new entrants called competitive LECs (CLECs). See 47 U.S.C. §§ 251, 252 ; see also Fones4All Corp., 550 F.3d at 813.

The FCC initially left CLECs’ access rates unregulated. See Great Lakes Comnet , 823 F.3d at 1001. However, after discovering that CLECs’ rates generally exceeded that of ILECs, the FCC changed course to ensure that CLECs’ access charges were just and reasonable as compared to that of ILECs. See Access Reform Order , 16 FCC Rcd. at 9931. To achieve this goal, the FCC implemented the "benchmarking rule," which prohibited a CLEC from pricing its services "above ... [t]he rate charged for such services by the competing ILEC." 47 CFR § 61.26(b)(1) ; see also Access Reform Order , 16 FCC Rcd. at 9939.

In 2011, the FCC initiated comprehensive reforms of its intercarrier compensation regime and adopted a timeline for transitioning to a "bill-and-keep" framework for telecommunications traffic involving LECs. In the Matter of Level 3 Commc'ns., LLC v. AT&T Inc. , 33 FCC Rcd. 2388, 2389 (2018) ; see also In the Matter of Connect Am. Fund , 26 FCC Rcd. 17663 (2011) ( Transformation Order ). Under a bill-and-keep arrangement, carriers look to their subscribers, as opposed to other carriers, to recover their costs. See Level 3, 33 FCC Rcd. at 2388. In the Transformation Order , the FCC adopted a multi-year plan for transitioning the rates of price cap carriers² to bill-and-keep by July 1, 2018. See id. at 2389.

The FCC promulgated corollary rules providing for price cap carriers to reduce—or "step down"—their "Tandem-Switched Transport Access Service"³ rates in year six of the transition plan, and to further reduce those same charges to zero (i.e., bill-and-keep) in year seven. 47 CFR §§ 51.907(g)(2), (h). In year six (beginning July 1, 2017), the step-down required price cap carriers to "establish, for interstate and intrastate terminating traffic traversing a tandem switch that the terminating carrier or its affiliates owns, Tandem-Switched Transport Access Service rates no greater than $0.0007 per minute." 47 CFR § 51.907(g)(2). Effective July 1, 2018, the year seven step-down required price cap carriers to reduce these rates to zero. See 47 CFR § 51.907(h). In sum, price cap carriers who owned the equipment at the end of a call could no longer charge other carriers to access that equipment. Instead, the price cap carrier was required to recoup its costs from its subscribers. See Level 3 , 33 FCC Rcd. at 2388.

B. Procedural History

Wide Voice is a CLEC, and thus is not a price cap carrier. Wide Voice filed a tariff with the FCC setting forth two separate "terminating Tandem Switched Transport" rates. One rate was referred to as a "Standard" rate and the other was referred to as an "Affil PCL" rate. The Standard rate of up to $0.03993227 per minute, was "benchmarked to the price cap rates which are not subject to the step-down specified in [FCC] rules." The Affil PCL rate incorporated the year six and year seven step-downs as specified in the Transformation Order and in §§ 51.907(g)(2) and (h) of the FCC's rules. However, the step-down Affil PCL rate only applied to terminating traffic that traversed a Wide Voice tandem switch, with the terminating carrier being a Wide Voice-affiliated price cap carrier. However, Wide Voice has never actually charged the step-down Affil PCL rates of $0.0007 per minute (as of July 29, 2017) and $0 per minute (as of August 2, 2018) because Wide Voice has no price cap carrier affiliates. Stated differently, Wide Voice continued to charge other carriers for using Wide Voice's tandem switch even when the terminating carrier was a Wide Voice-affiliate. Wide Voice justified its charges on the basis that the step-down rates only applied if the terminating carrier is also a price cap carrier, which Wide Voice is not.

In 2019, Verizon Business Services (Verizon), a price cap carrier, filed a complaint with the FCC alleging that Wide Voice's tariff was unlawful because it charged rates exceeding the step-down rates set forth in §§ 51.907(g)(2) and (h). Specifically, Verizon sought a "declaration that § 51.907 applie[d] to Wide Voice, as a CLEC, and that Wide Voice's tariff purporting to authorize it to charge rates prohibited by §§ 51.907 and 61.26 [was] void ab initio ." The FCC agreed with Verizon, concluding that Wide Voice's tariffed rate violated the benchmarking rule by exceeding the step-down rates charged by a competing ILEC for the same service, and that the tariff was void ab initio . Wide Voice filed a timely petition for review of the FCC's decision.

II. STANDARD OF REVIEW

An FCC decision may be set aside if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." California v. FCC , 75 F.3d 1350, 1358 (9th Cir. 1996) (citation omitted). Under that standard, we must determine whether the FCC's decision "was a reasonable exercise of its discretion." Id. (citation and internal quotation marks omitted).

III. DISCUSSION

A. The Benchmarking Rule

It is undisputed that Wide Voice is a CLEC subject to the benchmarking rule. The benchmarking rule prohibits CLECs like Wide Voice from charging rates higher than those charged by a competing ILEC for the same service, i.e. , tandem-switched transport service. See 47 CFR § 61.26(b)(1). As the FCC pointed out, "[t]he next logical question is what rate...