Qwest Corporation v. WorldCom, Inc. ( 2004 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 03-1489
___________
Qwest Corporation, *
*
Plaintiff - Appellee, *
*
v. *
*
Gregory Scott, Chair, Minnesota *
Public Utilities Commission; *
Edward A. Garvey, Commissioner, *
Minnesota Public Utilities Commission; *
LeRoy Koppendrayer, Commissioner, * Appeal from the United States
Minnesota Public Utilities * District Court for the
Commission; R. Marshall Johnson, * District of Minnesota.
Commissioner, Minnesota Public *
Utilities Commission; Phyllis Reha, *
Commissioner, Minnesota Public *
Utilities Commission; AT&T *
Communications of the Midwest, Inc., *
*
Defendants, *
*
WorldCom, Inc.; Time Warner Telecom *
of Minnesota, LLC, *
*
Defendants - Appellants. *
__________
Submitted: March 8, 2004
Filed: August 23, 2004
___________
Before WOLLMAN, MORRIS SHEPPARD ARNOLD, and COLLOTON, Circuit
Judges.
___________
COLLOTON, Circuit Judge.
WorldCom, Inc. and Time Warner Telecom of Minnesota, LLC (collectively
"WorldCom") appeal the district court's entry of a permanent injunction barring the
Minnesota Public Utilities Commission from requiring appellee Qwest Corporation
to provide WorldCom with reports regarding the provision of certain
telecommunications services. Because we conclude that the Federal Communications
Commission (FCC) has not preempted the authority of the Minnesota Public Utilities
Commission in this area, we reverse.
I.
Qwest Corporation is an incumbent provider of local telephone services in
Minnesota. Long distance providers, such as WorldCom, rely on local telephone
providers, such as Qwest, to connect customers to their long distance networks. One
method of connecting local and long distance networks is through a "special access"
line, which provides a direct connection from a home or business to a long distance
network through a dedicated line, rather than through the switched public telephone
network. Special access services generally are used by entities, such as large
businesses or public institutions, that engage in a high volume of long distance
telephone calling, and also allow for the provision of high-speed Internet connections
to homes and businesses.
Because of alleged discrimination and quality problems in the provision of
special access services by Qwest (formerly US West, referred to herein as Qwest),
AT&T Communications of the Midwest filed a complaint with the Minnesota Public
Utilities Commission ("Minnesota Commission") on August 18, 1999. On August
-2-
15, 2000, over Qwest's objection, the Minnesota Commission asserted jurisdiction
over the regulation of Qwest's performance, and found that an investigation should
be opened to determine whether quality standards should be developed for Qwest.
In the Matter of the Complaint of AT&T Communications of the Midwest, Inc. Against
US West Communications, Inc. Regarding Access Serv., Docket No. P-421/C-99-
1183, at 5, 15 (Minn. P.U.C. Aug. 15, 2000). The Minnesota Commission also
ordered Qwest to conform to "detailed reporting requirements." Id. at 15.
The investigation arising out of the AT&T complaint was consolidated with a
separate proceeding, which examined the quality of Qwest's provision of various
wholesale services to numerous other telecommunications companies, including
WorldCom. Following consolidation, the Minnesota Commission heard WorldCom's
proposed measurement plan for special access services. On March 4, 2002, the
Minnesota Commission issued an order requiring Qwest to provide reports regarding
special access performance data to AT&T and WorldCom, in accordance with
WorldCom's suggested requirements. In the Matter of Qwest Wholesale Serv. Quality
Standards, Docket No. P-421/M-00-849, at 4, 2002 WL 906589 (Minn. P.U.C. March
4, 2002). It did so over Qwest's continued assertion that the Minnesota Commission
lacked jurisdiction to require such reports. Id. Qwest's petition for reconsideration
of this order was denied by the Minnesota Commission. See In the Matter of Qwest
Wholesale Serv. Quality Standards, Docket No. P-421/M-00-849, at 4, 2002 WL
1554523 (Minn. P.U.C. May 29, 2002).
Qwest brought suit in district court, alleging that the Minnesota Commission
lacked jurisdiction to require Qwest to comply with the reporting requirements. The
district court found that the FCC has exclusive jurisdiction over lines that the FCC
classified as "interstate" through a federal regulatory procedure known as
"jurisdictional separations," and that the Minnesota Commission's reporting
requirements were preempted with respect to those lines. The district court therefore
granted Qwest's motion for a permanent injunction as to those special access lines
-3-
which had been classified as interstate, leaving the Minnesota Commission able to
regulate only those lines that had been classified as intrastate through the FCC's
jurisdictional separations process.
A district court's grant of a permanent injunction is reviewed for abuse of
discretion, Forest Park II v. Hadley, 336 F.3d 724, 731 (8th Cir. 2003), but where,
as here, the determinative question is purely legal, our review is more accurately
characterized as de novo. See United States v. Blue Bird, 372 F.3d 989, 991 (8th Cir.
2004).
II.
The Communications Act of 1934 ("the Act"), codified at 47 U.S.C. § 151 et
seq., established "a system of dual state and federal regulation over telephone
service." Louisiana Pub. Serv. Comm'n v. FCC, 476 U.S. 355, 360 (1986)
("Louisiana PSC"). The FCC has authority to regulate interstate wire and radio
communications, 47 U.S.C. § 151, but the Act specifically denies the Commission
jurisdiction to regulate intrastate communication services, and leaves that authority
with the States. 47 U.S.C. § 152(b); cf. Smith v. Illinois Bell Tel. Co., 282 U.S. 133,
148-51 (1930).1 While it may, at first blush, seem a simple matter to divide
communication services between "intrastate" and "interstate" categories, "the realities
of technology and economics belie such a clean parceling of responsibility."
Louisiana PSC, 476 U.S. at 360.
1
The Telecommunications Act of 1996 gave the FCC jurisdiction over some
purely "intrastate" matters, AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 380
(1999), and the FCC has concluded that the 1996 Act also gave states authority to
regulate certain "interstate" matters. In re Implementation of the Local Competition
Provisions in the Telecommunications Act of 1996, First Report & Order, 11 F.C.C.R.
15,499, ¶ 84 (1996), vacated in part on other grounds, Iowa Utils. Bd. v. FCC, 120
F.3d 753 (8th Cir. 1997), rev'd in part, 525 U.S. 366 (1999).
-4-
This clean parceling is not possible, because facilities and equipment used to
provide intrastate telecommunications services often are used for interstate
telecommunications services as well. Such facilities are "conceivably within the
jurisdiction of both state and federal authorities," id., and are described by the FCC
as "jurisdictionally mixed" or "mixed use" facilities. E.g., Southwestern Bell Tel. Co.
v. FCC, 153 F.3d 523, 543 (8th Cir. 1998). The special access lines at issue in this
case are in the mixed use category, because they carry both interstate and intrastate
traffic.
Recognizing that conflicts may emerge because of this dual regulatory system,
the Act "establishes a process designed to resolve what is known as 'jurisdictional
separations' matters, by which process it may be determined what portion of an asset
is employed to produce or deliver interstate as opposed to intrastate service."
Louisiana PSC, 476 U.S. at 375 (citing 47 U.S.C. §§ 221(c), 410(c)). The Supreme
Court explained that "[b]ecause the separations process literally separates costs such
as taxes and operating expenses between interstate and intrastate service, it facilitates
the creation or recognition of distinct spheres of regulation." Id. The FCC has
promulgated regulations entitled "Jurisdictional Separations Procedures." According
to the Commission, the procedures "are designed primarily for the allocation of
property costs, revenues, expenses, taxes and reserves between state and interstate
jurisdictions." 47 C.F.R. § 36.1(b).
In 1989, the FCC revised the jurisdictional separations procedures for "mixed
use special access lines," such as the lines at issue in this case, which carry both
interstate and intrastate traffic. See In the Matter of MTS and WATS Mkt. Structure,
Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Bd.,
4 F.C.C.R. 5660, at ¶ 1, 1989 WL 511212 (1989) ("10% Order"). The FCC explained
that prior to this revision, "the cost of special access lines carrying both state and
interstate traffic [was] generally assigned to the interstate jurisdiction." Id. at ¶ 2.
This allocation was known as the "contamination doctrine;" any interstate traffic was
-5-
deemed to "contaminate" the service, even when the facilities involved were
physically located intrastate. See In the Matter of MTS and WATS Mkt. Structure,
Amendment of Part 36 of the Commission's Rules and Establishment of a Joint Bd.,
4 F.C.C.R. 1352, at ¶ 5 n.14, 1989 WL 511865 (1989) ("10% Recommendation").
The contamination doctrine was criticized because it deprived state regulators of
authority over largely intrastate private line systems that carried only small amounts
of interstate traffic to otherwise intrastate lines. 10% Order, 4 F.C.C.R. 5660, at ¶¶
5-6.
The Commission therefore adopted a bright-line rule known as the "ten percent
rule," under which interstate traffic is deemed de minimis when it amounts to ten
percent or less of the total traffic on a special access line. Under the ten percent rule,
the cost of a mixed use line is directly assigned to the interstate jurisdiction only if
the line carries interstate traffic in a proportion greater than ten percent. Id. at ¶¶ 2,
6-7; see also 47 C.F.R. § 36.154(a)-(b). The FCC concluded that the new rule would
"resolve existing concerns in a manner that reasonably recognizes state and federal
regulatory interests and fosters administrative simplicity and economic efficiency."
10% Order, 4 F.C.C.R. 5660, at ¶ 6 (footnote omitted).
The question presented in this case is whether the order issued by the FCC
through its jurisdictional separations procedure preempts the Minnesota
Commission's authority to regulate the quality of special access services on interstate
lines provided by Qwest and other companies. Does the 10% Order allocate between
federal and state jurisdictions all regulatory authority over special access lines based
on the ten percent traffic threshold, or was the FCC's intent more limited? WorldCom
argues that the ten percent rule is only a cost allocation measure, and does not assign
to the FCC exclusive regulatory authority over lines classified as "interstate" under
the rule. Qwest contends that the district court correctly read the FCC's order more
broadly to preempt all state regulation of lines classified as interstate under the ten
percent rule.
-6-
Federal regulations, like federal statutes, may preempt state law, if the
regulations are intended to have preemptive effect, and the agency is acting within the
scope of authority delegated to it by Congress. Capital Cities Cable, Inc. v. Crisp,
467 U.S. 691, 699 (1984); Fidelity Fed. Sav. & Loan Ass'n v. De la Cuesta, 458 U.S.
141, 153-54 (1982). The FCC has authority to preempt state regulation of
telecommunications where it is not possible to separate the interstate and intrastate
aspects of a communications service, and where the Commission concludes that
federal regulation is necessary to further a valid federal regulatory objective. See,
e.g., Illinois Bell Tel. Co. v. FCC, 883 F.2d 104, 114-15 (D.C. Cir. 1989) ("Illinois
Bell"); North Carolina Utils. Comm'n v. FCC, 552 F.2d 1036 (4th Cir. 1977). There
is no dispute in this case that the FCC has the power to preempt states from
establishing standards and requiring reports relating to special access services. The
fighting issue is whether the FCC actually intended to do so when it promulgated the
10% Order.
Several considerations lead us to conclude that the ten percent rule does not
preempt the Minnesota Commission's reporting requirements in this case. In
discerning the intent of the FCC, we believe it is important to consider the context in
which the FCC issued the 10% Order, namely, the jurisdictional separations process.
As noted, the jurisdictional separations procedures "are designed primarily for the
allocation of property costs, revenues, expenses, taxes, and reserves between state and
interstate jurisdictions." 47 C.F.R. § 36.1(b). "'Jurisdictional separation' is a
procedure that determines what proportion of jointly used plant should be allocated
to the interstate and intrastate jurisdictions for ratemaking purposes." MCI
Telecomm. Corp. v. FCC, 750 F.2d 135, 137 (D.C. Cir. 1984). In 2001, the FCC
similarly explained that:
Jurisdictional separations is the process by which incumbent local
exchange carriers (ILECs) apportion regulated costs between the
intrastate and interstate jurisdictions. Historically, one of the primary
-7-
purposes of the separations process has been to prevent ILECs from
recovering the same costs in both the interstate and intrastate
jurisdictions. Jurisdictional separations is the third step in a four-step
regulatory process that begins with an ILEC's accounting system and
ends with the establishment of rates for the ILEC's interstate and
intrastate regulated services. First, carriers record their costs, including
investments and expenses, into various accounts . . . . Second, carriers
assign the costs in these accounts to regulated and nonregulated
activities . . . . Third, carriers separate the regulated costs between the
intrastate and interstate jurisdictions in accordance with the
Commission's Part 36 separations rules. Finally, carriers apportion the
interstate regulated costs among the interexchange services and rate
elements that form the cost basis for their interstate access tariffs.
In the Matter of Jurisdictional Separations and Referral to the Federal-State Joint
Bd., 16 F.C.C.R. 11382, at 11384-85 ¶ 3, 2001 WL 540481 (2001) (footnotes
omitted) (emphases added). The jurisdictional separations process, therefore, is one
part of a larger regulatory process for rate regulation. As we see it, neither the
jurisdictional separations process, nor the larger regulatory framework in which it
exists, is generally designed to confer exclusive regulatory power.
Consistent with this understanding, the District of Columbia Circuit in Illinois
Bell recognized that the regulatory accounting treatment of a telecommunications
service as interstate or intrastate does not necessarily negate the mixed use character
of the service for purposes of regulating other aspects of that service. 883 F.2d at
114. In that case, which involved the marketing of a mixed-use service, the court
rejected an argument that assignment to the intrastate jurisdiction of certain costs
associated with marketing controlled whether the FCC could preempt state regulatory
authority over the manner in which the services were marketed. Id. at 113-14. The
court viewed the allocation of costs through a jurisdictional separation proceeding
and the regulation of marketing practices by the FCC as independent matters, and we
agree with this analysis.
-8-
The FCC's orders concerning the ten percent rule are consistent with our view
that jurisdictional separations procedures generally are designed to allocate costs and
regulatory authority over ratemaking, rather than plenary regulatory authority over
a telecommunications service. In its order initiating the proceedings, the FCC
explained that it was establishing a pleading cycle to consider "various options for the
separations treatment of all special access lines that carry significant amounts of both
interstate and intrastate traffic." In the Matter of MTS and WATS Mkt. Structure,
Amendment of Part 67 of the Commission's Rules and Establishment of a Joint Bd.,
1 F.C.C.R. 1287, at ¶ 19, 1986 WL 291193 (1986). The Commission's discussion of
the pleading cycle focused on whether and how to continue the "direct assignment of
the costs" of mixed-use special access lines. Id. (emphasis added).
The 10% Order itself is plainly concerned with cost allocation. The Order
begins by noting that "[a]t present, the cost of special access lines carrying both state
and interstate traffic is generally assigned to the interstate jurisdiction," 10% Order,
4 F.C.C.R. 5660, at ¶ 2 (emphasis added), and ultimately "adopt[s] the Joint Board's
recommendations for the separation of investment in mixed use special access lines."
Id. at ¶ 8 (emphasis added). The Joint Board, whose reasoning was adopted by the
Commission, likewise framed its recommendation as a matter of cost allocation. It
began its discussion by noting that a "variety of options might be used to separate
special access costs," 10% Recommendation, 4 F.C.C.R. 1352, at ¶ 22 (emphasis
added), and then expressed its final view in similar terms: "Based on a careful review
of the record in this proceeding, we conclude that direct assignment of special access
costs is superior to an allocation-based approach in terms of administrative simplicity
and economic efficiency." Id. at ¶ 25 (emphasis added). The codification of the 10%
Order likewise refers only to costs, without any mention of other regulatory authority.
See 47 C.F.R. § 36.154(a)-(b).
Qwest argues that the 10% Order sweeps more broadly because the Joint Board
included a statement in its recommendation that "[t]he separations procedures
-9-
perform an important role in defining the separate state and federal regulatory
spheres, and thus have a major effect on both jurisdictions." 10% Recommendation,
4 F.C.C.R. 1352, at ¶ 23. The importance and effect of the separations proceedings
are indubitable, but Qwest's quotation of the Joint Board begs the question of what
"role" is played by the separations proceedings. The Supreme Court also has spoken
of "distinct spheres of regulation" that are recognized by the jurisdictional separations
process, but it has done so in connection with questions of cost allocation and rate
regulation. Louisiana PSC, 476 U.S. at 375 (citing Smith, 282 U.S. 133). As the
Joint Board explained in recommending the ten percent rule, "[t]he fundamental
principles of separations were described by the Supreme Court in [Smith], which
holds that the separation of telephone company plant is necessary to proper rate
regulation." 10% Recommendation, 4 F.C.C.R. 1352, at ¶ 33 (citation omitted)
(emphasis added). The FCC's statement concerning "regulatory spheres" is
susceptible of a broader interpretation if plucked out of context, but we conclude that
when the 10% Order is read as a whole, the Commission's expressed intent to
preempt state regulation does not extend to performance measurements and standards.
Qwest also contends that a notice of proposed rulemaking issued by the FCC
in November 2001 demonstrates that the Minnesota Commission does not have
jurisdiction to enforce the requirements. See In the Matter of Performance
Measurements and Standards for Interstate Special Access Servs., 16 F.C.C.R.
20896, 2001 WL 1461100 (2001) ("Performance Measurements Notice"). The notice
addresses whether the FCC should develop national performance measures and
standards for special access services that would serve a purpose similar to that of the
requirements instituted by the Minnesota Commission. In the Performance
Measurements Notice, the FCC solicited "comment on how, if the Commission were
to adopt special access measures and standards [regarding interstate special access
services], the state commissions might participate in enforcing these requirements."
Id. at 20902 ¶ 11. The FCC observed that some state regulatory agencies have
reached the conclusion that they may not regulate the provisioning of interstate
-10-
special access services, because such services are taken pursuant to a federal tariff,
but also noted that "[t]he states have taken various positions," and the Commission
did not express its own view on whether state regulation was preempted. Id. & n.27.
The FCC has not yet acted on this notice, either to establish federal performance
measures and standards, or to declare that there shall be no such measures and
standards at either the federal or state level.
The FCC's comments in the Performance Measurements Notice are notably
agnostic for an agency that is said to have preempted state performance standards
when it issued the 10% Order. "[B]ecause agencies normally address problems in a
detailed manner and can speak through a variety of means, . . . we can expect that
they will make their intentions clear if they intend for their regulations to be
exclusive." Hillsborough County v. Automated Med. Labs., Inc., 471 U.S. 707, 718
(1985). Reading all of the FCC's pronouncements concerning special access services,
including this most recent notice of rulemaking, we do not discern an intent of the
Commission as yet to preclude all state regulation of these mixed-use services.
Preemption ultimately is a political act in our federal system for which Congress or
the Executive should be accountable. The judiciary is not in a position to make this
policy judgment, and "pre-emption is not to be lightly presumed." Calif. Fed. Sav.
and Loan Ass'n v. Guerra, 479 U.S. 272, 281 (1987). Given the absence of
persuasive evidence of preemptive intent by the FCC, we believe the exercise of
judicial restraint is the better course. The FCC certainly has the wherewithal to
preempt state regulation in this area if it so desires, and the Performance
Measurements Notice provides a readily available vehicle.
III.
Qwest argues that the judgment of the district court can be affirmed on the
alternative ground that the Minnesota Commission's reporting requirements violate
the "filed tariff," or "filed rate," doctrine. The filed tariff doctrine has been defined
-11-
as a "common law rule forbidding a regulated entity, usu[ally] a common carrier, to
charge a rate other than the one on file with the appropriate federal regulatory
authority[.]" Black's Law Dictionary 642 (7th ed. 1999). Qwest argues that the
Minnesota Commission's reporting requirements violate the filed tariff doctrine,
because the requirements alter the services provided under Qwest's federal special
access tariff. The district court ruled that the filed tariff doctrine does not apply in
this case, because the doctrine addresses the relationship between a carrier and its
customers, not the relationship between a carrier and a regulator. We agree with this
conclusion of the district court.
The Supreme Court has stated that the heart of the filed tariff doctrine is an
anti-discrimination policy designed to protect customers, and that this policy "is
violated when similarly situated customers pay different rates for the same services."
AT&T Co. v. Cent. Office Tel. Co., 524 U.S. 214, 223 (1998). Similarly, we have
stated that "[t]he purpose of the filed rate doctrine is to: (1) preserve the regulating
agency's authority to determine the reasonableness of rates; and (2) insure that the
regulated entities charge only those rates that the agency has approved or been made
aware of as the law may require." H.J. Inc. v. Northwestern Bell Tel. Co., 954 F.2d
485, 488 (8th Cir. 1992). We have rejected the argument that the doctrine protects
competitors, noting that the rule is "formulated to ensure uniformity of rates as
between customers." City of Kirkwood v. Union Elec. Co., 671 F.2d 1173, 1179 (8th
Cir. 1982).
Qwest has not cited any authority holding that the filed tariff doctrine applies
to the relationship between a carrier and a regulatory agency. The doctrine is
designed to "ensure rate uniformity by confining the authority to oversee the
reasonableness of rates to a single regulatory agency," id., and we do not see how rate
uniformity is at issue in this case. We agree with the district court's conclusion that
this case turns on the issue of preemption, and the actions of the Minnesota
Commission do not conflict with the filed tariff doctrine.
-12-
* * *
For the foregoing reasons, we reverse the judgment of the district court, and
remand for proceedings consistent with this opinion.
_____________________________
-13-