Great Lakes Comnet, Inc. v. Federal Communications Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 1, 2016 Decided May 24, 2016
No. 15-1064
GREAT LAKES COMNET, INC. AND WESTPHALIA TELEPHONE
COMPANY,
PETITIONERS
v.
FEDERAL COMMUNICATIONS COMMISSION AND UNITED
STATES OF AMERICA,
RESPONDENTS
AT&T SERVICES, INC., ET AL.,
INTERVENORS
On Petition for Review of an Order of
the Federal Communications Commission
Michael G. Oliva argued the cause for petitioners. With
him on the joint briefs was Philip J. Macres.
Russell M. Blau was on the brief for amicus curiae The
National Telecommunications Cooperative Association d/b/a
NTCA-The Rural Broadband Association in support of
petitioners.
Thaila K. Sundaresan, Counsel, Federal Communications
Commission, argued the cause for respondents. With her on
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the brief were William J. Baer, Assistant Attorney General,
U.S. Department of Justice, Robert B. Nicholson and Daniel
E. Haar, Attorneys, Jonathan B. Sallet, General Counsel,
Federal Communications Commission, David Gossett,
Deputy General Counsel, Jacob M. Lewis, Associate General
Counsel, and Richard K. Welch, Deputy Associate General
Counsel. Sarah E. Citrin, Attorney, Federal Communications
Commission, entered an appearance.
Michael J. Hunseder argued the cause for intervenors.
With him on the brief were Paul Zidlicky, Gary L. Phillips,
David L. Lawson, Charles McKee, Christopher M. Miller, and
John E. Benedict.
Before: TATEL, SRINIVASAN, and WILKINS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: Great Lakes Comnet, Inc. petitions
for review of a Federal Communications Commission order
finding that the rates it charged long-distance telephone
carrier AT&T for use of its network exceeded the amount
allowed by Commission regulations. Because the
Commission failed to adequately explain its conclusion that
Great Lakes did not qualify for the Commission’s “rural
exemption,” which would have allowed it to charge the
challenged rates, we remand that issue to the Commission for
further consideration. In all other respects, we deny the
petition for review.
I.
When customers, known as end users, buy telephone
service, they generally contract with two different entities: a
local telephone company, known as a local exchange carrier
3
or 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. The 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. See generally Northern Valley
Communications, LLC v. FCC, 717 F.3d 1017, 1018 (D.C.
Cir. 2013) (describing the roles of local exchange carriers and
long-distance carriers in the telephone market). As an
example, when a mother calls her son on the other side of the
country, the call travels from her LEC’s lines to her long-
distance carrier’s lines and then from those lines to the son’s
LEC’s lines, across which it travels to the son’s phone. The
calling party, here the mother, pays her long-distance carrier
for the call, and the long-distance carrier then pays access fees
to the mother’s LEC and the son’s LEC. See generally In re
Access Charge Reform (“Seventh Report and Order”), 16
FCC Rcd. 9923, 9926–27 ¶ 10 (2001) (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).
Prior to the Telecommunications Act of 1996, a single
LEC provided local exchange service for a given region
pursuant to a monopoly franchise granted by the state. See
AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 371
(1999) (“Until [the Telecommunications Act] . . . [s]tates
typically granted an exclusive franchise in each local service
area to a local exchange carrier . . . .”). These carriers—“Bell
Operating companies and their successors”—are now called
incumbent local exchange carriers or ILECs. Competitive
Telecommunications Ass’n v. FCC, 309 F.3d 8, 10 (D.C. Cir.
2002). Seeking to increase competition, the Act required that
states allow other carriers, known as competitive local
exchange carriers or CLECs, to enter the local exchange
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market. 47 U.S.C. § 253(a) (“No State or local statute or
regulation, or other State or local legal requirement, may
prohibit or have the effect of prohibiting the ability of any
entity to provide any interstate or intrastate
telecommunications service.”). To promote CLEC entry,
Congress required that ILECs make their networks available
to CLECs “on rates, terms, and conditions that are just,
reasonable, and nondiscriminatory.” Id. § 251(c)(3) (“An
[ILEC] shall provide . . . unbundled network elements in a
manner that allows requesting carriers to combine such
elements in order to provide such telecommunications
service.”).
At first, the Federal Communications Commission left
CLEC access rates unregulated. But after discovering that
CLEC rates generally exceeded ILEC rates, the Commission
changed course and subjected CLECs to rate regulation. See
Seventh Report and Order, 16 FCC Rcd. at 9931 ¶¶ 21–22
(explaining that prior to the order “CLECs ha[d] been largely
unregulated in the manner that they set their access rates” but
that the Commission’s review revealed that “CLEC access
rates . . . , on the average, are well above the rates that ILECs
charge for similar service”). Under the Commission’s
regulations, known as benchmark rate regulations, a CLEC’s
tariffed access rates may not exceed the rates of the ILEC that
would otherwise serve the CLEC’s customers. 47 C.F.R.
§ 61.26(b) (“[A] CLEC shall not file a tariff for its interstate
switched exchange access services that prices those services
above . . . [t]he rate charged for such services by the
competing ILEC.”). The regulations do not apply, however, to
“rural CLEC[s],” id. § 61.26(e), which “do[] not serve . . . any
end users located” in urban areas, id. § 61.26(a)(6).
This case concerns what are known as intermediate
carriers, which serve no end users directly but instead provide
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connections between LECs and long-distance carriers. See In
re Access Charge Reform (“Eighth Report and Order”), 19
FCC Rcd. 9108, 9116–17 ¶ 17 (2004) (discussing the role of
intermediate carriers in the long-distance telephone market).
By making connections to the LECs scattered across a region,
intermediate carriers enable long-distance carriers to connect
to a single central location rather than to each individual LEC.
Petitioner Great Lakes Comnet, Inc. operates as an
intermediate carrier in Michigan. Westphalia Telephone
Company, the other petitioner here, serves as its billing agent.
AT&T, a long-distance carrier, relies on Great Lakes’
network to receive certain 8YY calls, the technical term for
toll free calls such as 1-800 calls. The 8YY calls at issue, all
made by wireless callers, are routed from around the country
to a CLEC in Southfield, Michigan, called Local Exchange
Carriers of Michigan, Inc. or LEC-MI. In re AT&T Services
Inc. v. Great Lakes Comnet, Inc., 30 FCC Rcd. 2586, 2590
¶ 14 (2015) (describing the arrangement in which the traffic is
routed from wireless callers around the country to LEC-MI).
Great Lakes transfers the calls from LEC-MI to AT&T, which
in turn directs the calls to the businesses that purchase the
8YY services from AT&T.
This case arose in 2014 when AT&T filed a formal
complaint with the Commission alleging that for several years
Great Lakes had charged it access fees that violated the
benchmark rates. In response, Great Lakes argued that it is not
subject to benchmark rate regulation because it is not a
CLEC. Alternatively, Great Lakes argued that even if it does
qualify as a CLEC, it is a rural CLEC exempt from the
regulations. The Commission disagreed with Great Lakes on
both counts and, after finding that Great Lakes charged
AT&T an access rate nearly seven times higher than the
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benchmark rate, granted AT&T’s complaint in part, leaving
resolution of damages to a later proceeding.
Great Lakes and Westphalia now petition for review.
AT&T, joined by several other long-distance carriers that use
Great Lakes’ network, intervened on the side of the
Commission.
II.
Under the Administrative Procedure Act, we must
“determine whether the Commission’s actions were ‘arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law.’” Verizon v. FCC, 740 F.3d 623, 635
(D.C. Cir. 2014) (quoting 5 U.S.C. § 706(2)(A)). We accept
the Commission’s “findings of fact so long as they are
supported by substantial evidence on the record as a whole,”
Communications Vending Corp. of Arizona v. FCC, 365 F.3d
1064, 1069 (D.C. Cir. 2004), and will defer to the
Commission’s “reading of its own regulations unless that
reading is ‘plainly erroneous or inconsistent with the
regulations,’” Global Crossing Telecommunications, Inc. v.
FCC, 259 F.3d 740, 746 (D.C. Cir. 2001) (alteration omitted)
(quoting Auer v. Robbins, 519 U.S. 452, 461 (1997)). “Where
the Commission’s failure to address or explain an issue leaves
a court unable to understand Commission action, the
appropriate course is to remand the case for further
explanation.” National Cable Television Ass’n v. FCC, 914
F.2d 285, 289 (D.C. Cir. 1990).
The first major dispute in this case concerns whether
Great Lakes, as an intermediate carrier, qualifies as a CLEC,
subject to benchmark rate regulation. See 47 C.F.R.
§ 61.26(b) (“[A] CLEC shall not file a tariff for its interstate
switched exchange access services that prices those services
above [the benchmark rate].”). Commission regulations define
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a CLEC as a “local exchange carrier that provides some or all
of the interstate exchange access services used to send traffic
to or from an end user and does not fall within the definition
of [an ILEC].” Id. § 61.26(a)(1). In this case, the Commission
found that Great Lakes satisfied each part of this definition: it
was “not an ILEC,” and it “provide[d] some of the interstate
exchange access services used to send traffic to or from an
end user” when it “furnishe[d] tandem switched transport
termination, tandem switched transport facility, and tandem
switching.” In re AT&T Services Inc., 30 FCC Rcd. at 2591
¶ 20 (emphasis omitted).
Challenging the Commission’s conclusion, Great Lakes
argues that intermediate carriers fall outside the CLEC
definition because they provide no service directly to end
users. As the Commission pointed out, however, the
regulation requires only that a CLEC provide “some of the
interstate exchange access services used to send traffic to or
from an end user,” not that it connect directly to end users. Id.
The Commission also explained that in its 2004 Eighth Report
and Order it amended its regulations for the precise purpose
of subjecting intermediate carriers to benchmark rate
regulation. Id. at 2592 ¶ 21. In that order, the Commission
added the “some or all” language to the CLEC definition and
issued 47 C.F.R. § 61.26(f), which states that “[i]f a CLEC
provides some portion of the switched exchange access
services used to send traffic to or from an end user not served
by that CLEC, the rate for the access services provided may
not exceed the rate charged by the competing ILEC for the
same access services.” Explaining its rationale for taking
these actions, the Commission expressly stated that it sought
to apply benchmark rate regulation to intermediate carriers:
“Because of the many disputes related to the rates charged by
[CLECs] when they act as intermediate carriers, we conclude
that it is necessary to adopt a new rule to address these
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situations. Specifically, we find that the rate that a [CLEC]
charges for access components when it is not serving the end-
user should be no higher than the rate charged by the
competing [ILEC] for the same functions.” Eighth Report and
Order, 19 FCC Rcd. at 9116 ¶ 17 (emphasis added). Given the
clarity of the regulatory text and history, the Commission’s
conclusion that intermediate carriers like Great Lakes qualify
as CLECs was hardly “plainly erroneous.” Auer, 519 U.S. at
461. Neither of Great Lakes’ two arguments to the contrary
has merit.
First, Great Lakes asserts that the canon against
surplusage requires limiting the CLEC definition so that it
includes only those carriers that serve end users directly. That
canon dictates that when construing a statute courts “give
effect, if possible, to every clause and word.” Duncan v.
Walker, 533 U.S. 167, 174 (2001) (internal quotation marks
omitted). According to Great Lakes, the clause in the CLEC
definition, “the interstate exchange access services used to
send traffic to or from an end user,” 47 C.F.R. § 61.26(a)(1),
creates surplusage unless it is “read to mean that the definition
only covers carriers that transmit traffic directly to or from an
end user,” Pet’rs’ Br. 27, because all interstate exchange
access services are used to send traffic to or from end users.
The canon against surplusage typically applies when
attempting to ascertain the meaning of a statute. Here,
however, we seek to determine the meaning of a regulation, as
to which the agency’s interpretation generally receives
controlling weight. See Auer, 519 U.S. at 461. In any event,
the Supreme Court, has cautioned that the canon “is not an
absolute rule,” Marx v. General Revenue Corp., 133 S. Ct.
1166, 1177 (2013), because “[w]hile it is generally presumed
that statutes do not contain surplusage, instances of
surplusage are not unknown,” Arlington Central School
District Board of Education v. Murphy, 548 U.S. 291, 299 n.1
9
(2006). Here, where the text and history of the regulation
make its meaning clear, the canon against surplusage cannot
dictate a different interpretation. See Loving v. IRS, 742 F.3d
1013, 1019 (D.C. Cir. 2014) (declining to read a statute
contrary to its plain meaning simply to avoid surplusage).
Next, Great Lakes argues that the Commission’s
interpretation conflicts with its 2011 Transformation Order,
which by 2018 will phase in a new framework for carrier
rates. In re Connect America Fund (“Transformation Order”),
26 FCC Rcd. 17,663, 17,934–35 ¶ 801 (2011) (describing the
transition). Once fully implemented, this framework, known
as bill-and-keep, will require carriers to recoup their costs
primarily from end users rather than from other carriers. Id. at
17,676 ¶ 34 (“Under bill-and-keep, carriers look first to their
subscribers to cover the costs of the network . . . .”).
According to Great Lakes, if intermediate carriers qualify as
CLECs, the bill-and-keep framework will eventually require it
to charge a rate of zero for its services. But we need not
explore this argument because the bill-and-keep framework
has no relevance to this case. The issue here is not what Great
Lakes may charge once the transition to bill-and-keep is
complete in 2018, but rather whether Great Lakes was subject
to the Commission’s benchmark rule in the years prior to
AT&T’s 2014 complaint. The Commission reasonably
concluded that it was.
The second major dispute in this case concerns whether
Great Lakes qualifies as a rural CLEC and thus is exempt
from the Commission’s benchmark rate regulations. 47 C.F.R.
§ 61.26(e) (allowing rural CLECs to charge rates above the
benchmark rate). Commission regulations define a rural
CLEC as “a CLEC that does not serve (i.e., terminate traffic
to or originate traffic from) any end users” in an urban area.
Id. § 61.26(a)(6). Great Lakes believes it qualifies for the
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rural CLEC exemption because it serves no urban end users.
In its Order, the Commission ruled otherwise, explaining that
Great Lakes “stipulate[d] that it has transport facilities in
urban areas, including Chicago, Illinois.” In re AT&T
Services Inc., 30 FCC Rcd. at 2595 ¶ 27 n.100. “Moreover,”
the Commission continued, “the 8YY wireless traffic, by its
very nature, originates from locations throughout the country,
including locations that are ‘urban.’” Id.
The Commission’s first reason is plainly erroneous.
Commission regulations exclude a carrier from the exemption
if it “serve[s] . . . any end users” in an urban area, not if it has
“transport facilities” in an urban area. 47 C.F.R. § 61.26(a)(6).
The Commission’s second reason—that 8YY calls originate
in urban locations—may well have merit. But the use of the
word “moreover,” defined by Webster’s as “in addition to
what has been said,” Webster’s Third New International
Dictionary 1470 (1993), leaves us unable to determine
whether the Commission believed this rationale was
independently sufficient, such that it would have relied on it
even if Great Lakes had no urban transport facilities. See MCI
Telecommunications Corp. v. FCC, 917 F.2d 30, 39 (D.C.
Cir. 1990) (remanding to the Commission because the court
could not “tell from the [Commission’s] order whether it
considered [the arguably valid] portion of its explanation . . .
to be independent of the impermissible [portion]”). Confusing
matters further, at oral argument Commission counsel
advanced still another basis for excluding Great Lakes from
the exemption: that intermediate carriers may not qualify for
the rural exemption under any circumstances. This too may
have merit, but we cannot rely on it either because it appears
nowhere in the Commission’s order. Ass’n of Civilian
Technicians v. Federal Labor Relations Authority, 269 F.3d
1112, 1117 (D.C. Cir. 2001) (“‘The courts may not accept
appellate counsel’s post hoc rationalizations for agency
11
action.’” (quoting Burlington Trucks Lines, Inc. v. United
States, 371 U.S. 156, 168 (1962))). Unable to rely on
Commission counsel’s post hoc rationale or to decipher the
Commission’s reasoning in its Order, we follow our long-
established rule that “[w]here the Commission’s failure to
address or explain an issue leaves a court unable to
understand Commission action, the appropriate course is to
remand the case for further explanation.” National Cable
Television Ass’n, 914 F.2d at 289.
Advancing a third challenge to the Order, Great Lakes
alleges that the Commission selected the wrong ILEC for
purposes of determining the applicable benchmark rate. Under
Commission regulations, a CLEC’s tariffed access rates “may
not exceed the rate charged by the competing ILEC.” 47
C.F.R. § 61.26(f); see also id. § 61.26(b). The regulations
define the “competing ILEC” as the ILEC “that would
provide interstate exchange access services, in whole or in
part, to the extent those services were not provided by the
CLEC.” Id. § 61.26(a)(2). The Commission determined that
AT&T Michigan—an affiliate of intervenor AT&T, though
that coincidence has no bearing here—was the relevant
competing ILEC because it was “an [ILEC] operating in and
around Southfield, Michigan,” In re AT&T Services Inc., 30
FCC Rcd. at 2591 ¶ 17, the location where LEC-MI handed
off the 8YY traffic to Great Lakes. Great Lakes insists that the
competing ILEC is instead the ILEC serving the 8YY caller,
meaning that the competing ILEC will differ based on the
location of the caller. Great Lakes misunderstands the
relevant question. We are concerned not with which ILEC
would have carried the traffic from the originating caller but
rather with which ILEC would have carried the traffic from
LEC-MI to AT&T had Great Lakes not inserted itself into the
traffic path. The Commission reasonably concluded that
AT&T Michigan, the ILEC operating in Southfield,
12
Michigan, would have done so, and Great Lakes does not
challenge that conclusion.
We can quickly dispose of Great Lakes’ remaining
challenges. It asserts that the Commission’s Order subjected it
to an unlawful taking when it required Great Lakes to abide
by bill-and-keep. But as explained above, supra p. 9, the
Transformation Order, not the order under review,
implements the bill-and-keep framework, so any challenges to
the validity of that framework are not presently before us.
Great Lakes also contends that because it expected that
benchmark rate regulation would not apply to intermediate
carriers, the Commission erred when it applied the regulations
to it retroactively. Although agencies may not, as Great Lakes
emphasizes, apply their adjudications retroactively where
doing so will upset “reasonable” expectations, Qwest Services
Corp. v. FCC, 509 F.3d 531, 540 (D.C. Cir. 2007), the
company’s expectations were hardly reasonable given the
Commission’s 2004 Eighth Report and Order. As the
Commission points out in its brief, and as we explain above,
supra pp. 7–8, that order “explicitly appl[ies] the benchmark
rule to . . . intermediate carriers, such as Great Lakes, that do
not directly serve end users.” Resp’ts’ Br. 36. Great Lakes
had no response to this point in its reply brief. Finally, Great
Lakes is concerned that the Commission has already passed
judgment on its claim that the applicable statute of limitations
bars some of AT&T’s alleged damages, a claim that Great
Lakes believes should be left to the separate damages phase of
the proceedings. The Commission acknowledges in its brief,
however, that it had no intention of prejudging the statute of
limitations issue, and at oral argument it agreed the issue
remains an “open question,” Oral Arg. Rec. 30:08–09.
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III.
For the foregoing reasons, we remand the rural
exemption issue to the Commission for further consideration
and deny the petition for review in all other respects.
So ordered.