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Illinois Public Telcomunication Association v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

June 13, 2014

ILLINOIS PUBLIC TELECOMMUNICATIONS ASSOCIATION, PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS, AT& T, INC. AND VERIZON, INTERVENORS

Argued: April 4, 2014.

Page 1019

On Petitions for Review of an Order of the Federal Communications Commission.

Michael W. Ward argued the cause for petitioners Illinois Public Telecommunications Association and Payphone Association of Ohio, Inc. Keith J. Roland argued the cause for petitioner Independent Payphone Association of New York. With them on the briefs were Albert H. Kramer, Donald J. Evans, and Daniel S. Blynn.

Sarah E. Citrin, Counsel, Federal Communications Commission, argued the cause for respondents. With her on the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Shana M. Wallace, Attorneys, Suzanne M. Tetreault, Deputy General Counsel, Federal Communications Commission, Jacob M. Lewis, Associate General Counsel, and Richard K. Welch, Deputy Associate General Counsel. Joel Marcus, Attorney, Federal Communications Commission, entered an appearance.

Aaron M. Panner argued the cause for intervenors. With him on the brief were Gary L. Phillips, Michael E. Glover, and Christopher M. Miller.

Before: KAVANAUGH and WILKINS, Circuit Judges, and SILBERMAN, Senior Circuit Judge. Opinion for the Court filed by Circuit Judge KAVANAUGH.

OPINION

Page 1020

Kavanaugh, Circuit Judge :

Once upon a time, the only way to call home from a roadside rest stop or neighborhood diner was to use a payphone. Some payphones were owned by independent payphone providers. Other payphones were owned by Bell Operating Companies. The Bell Operating Companies also happened to own the local phone lines. To ensure fair competition in the payphone market, Congress prohibited Bell Operating Companies from exploiting their control over the local phone lines to discriminate against other payphone providers in the upstream payphone market. Specifically, Congress prohibited Bell Operating Companies from subsidizing their own payphones or charging discriminatory rates to competitor payphone providers. See 47 U.S.C. § 276. This case concerns the remedies available for violations of that prohibition -- in particular, whether independent payphone providers who were charged excessive rates by Bell Operating Companies are entitled to refunds or instead are entitled only to prospective relief in the form of lower rates.

We conclude that Congress granted discretion to the Federal Communications Commission to determine whether refunds would be required in those circumstances and that the Commission reasonably exercised that discretion here.

I

Petitioners are trade associations representing independent payphone providers in Illinois, New York, and Ohio. Since the mid-1980s, independent payphone providers have competed with Bell Operating Companies in the consumer payphone market. At first, Bell Operating Companies had a built-in advantage. In addition to operating some payphones, Bell Operating Companies owned the local phone lines that provide service to all payphones. An independent payphone provider was thus " both a competitor and a customer" of the local Bell Operating Company. Davel Communications, Inc. v. Qwest Corp., 460 F.3d 1075, 1081 (9th Cir. 2006). And that Bell Operating Company could exploit its control over the local phone lines by charging lower service rates to its own payphones or higher service rates to independent payphone providers. See New England Public Communications Council, Inc. v. FCC, 334 F.3d 69, 71, 357 U.S.App. D.C. 231 (D.C. Cir. 2003).

To prevent unfair competition in the payphone market, Congress included a payphone services provision in the Telecommunications Act of 1996. See Pub. L. No. 104-104, § 151(a), 110 Stat. 56, 106. That provision, codified as a new Section 276 of the Communications Act of 1934, states that a Bell Operating Company may not " subsidize its payphone service directly or indirectly" or " prefer or discriminate in favor of its payphone service." 47 U.S.C. § 276(a). To implement those statutory proscriptions, Congress directed the FCC to prescribe regulations governing Bell Operating Company rates. See id . § 276(b)(1)(C). And to ensure that state laws would not undermine the statutory proscriptions, Congress provided that " [t]o the extent that any State requirements are inconsistent with the Commission's regulations, the Commission's regulations on

Page 1021

such matters shall preempt such State requirements." Id. § 276(c).[1]

The FCC and the payphone industry have traveled a long and winding road in implementing Section 276. We recount here only those developments relevant to this case.[2]

In 1996, the FCC issued an initial set of orders implementing Section 276. Those orders required Bell Operating Companies to file tariffs demonstrating that the rates they charged to independent payphone providers complied with the requirements of Section 276. The FCC directed Bell Operating Companies to file those tariffs with state regulatory commissions by January 1997. The FCC directed the state regulatory commissions to review the tariffs for compliance with Section 276 based on a pricing standard known as the " new services test." State commissions that were unable to review the tariffs could order Bell Operating Companies in their states to instead file tariffs with the FCC. See Order on Reconsideration, Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, 11 FCC Rcd. 21,233, 21,308 ¶ 163 (1996); Report and Order, Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, 11 FCC Rcd. 20,541, 20,614-15 ¶ ¶ 146, 147 (1996).

In Wisconsin, independent payphone providers challenged the rates charged by Bell Operating Companies as unlawful under Section 276. In 2002, in response to the Wisconsin litigation, the FCC issued additional guidance on the pricing standard that state commissions must apply in determining whether Bell Operating Company rates comply with Section 276. See Order Directing Filings, Wisconsin Public Service Commission, 17 FCC Rcd. 2051, 2065-71 ¶ ¶ 43-65 (2002). The FCC's new guidance led a number of states to conclude that Bell Operating Companies had been charging excessive rates. Bell Operating Companies in those states thus had to (and did) reduce their rates going forward. But the independent payphone providers sought more than just prospective relief. They argued that they were entitled to refunds dating back to 1997. Some state regulatory commissions and courts agreed and granted full refunds. Other states granted partial refunds. Some states granted no refunds. See Declaratory Ruling and Order, Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, 28 FCC Rcd. 2615, 2621 ¶ 11 & n.37 (2013) ( Refund Order ).

Three state proceedings are relevant here. In Illinois, the state commission and state courts declined to order refunds primarily because of the filed-rate doctrine, which prohibits retroactive revisions to rates that a government regulatory body has approved. See Illinois Public Telecommunications Association v. Illinois Commerce Commission, 361 Ill.App.3d 1081, No. 1-04-0225 (Ill.App.Ct. Nov. 23, 2005). In New York, the state commission and state courts have thus far declined to grant refunds

Page 1022

but have left the question open pending resolution of the independent payphone providers' petition in this case. See Indep. Payphone Ass'n of N.Y., Inc. v. PSC, 5 A.D.3d 960, 774 N.Y.S.2d 197 (N.Y.App.Div. 2004). And in Ohio, the state commission awarded partial refunds but the state commission and state courts denied the request for refunds back to 1997 based on the filed-rate doctrine and state procedural grounds. See Payphone Ass'n v. PUC, 109 Ohio St. 3d 453, 2006 Ohio 2988, 849 N.E.2d 4 (Ohio 2006).

Having failed to gain retrospective relief through state regulatory or judicial proceedings, independent payphone providers from Illinois, New York, and Ohio sought a declaratory ruling from the FCC. See 47 C.F.R. § 1.2 (authority to issue declaratory rulings). They asked the Commission to declare that Section 276 created an absolute entitlement to refunds dating back to 1997 and that the state commissions and courts had violated federal law by denying relief. The Commission rejected that position. After considering the text, history, and purpose of Section 276, the Commission concluded that states " may, but are not required to, order refunds" for periods dating back to 1997 in which a Bell Operating Company did not have compliant rates in effect. Refund Order, 28 FCC Rcd. at 2639 ¶ 47.[3]

The independent payphone providers filed petitions for review in this Court. See 28 U.S.C. § 2342(1); 47 U.S.C. § 402(a). We assess the FCC's ruling under the Administrative Procedure Act. We must determine whether the decision was " arbitrary, capricious, an abuse of discretion, ...


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