So. Montana Lincoln Telephone V.

05/30/2017
DA 16-0439
IN THE SUPREME COURT OF THE STATE OF MONTANA
2017 MT 123
SOUTHERN MONTANA TELEPHONE CO.,
Petitioner and Appellant,
v.
MONTANA PUBLIC SERVICE COMMISSION,
DEPARTMENT OF PUBLIC SERVICE
REGULATION, an agency of the State of Montana,
Respondent and Appellee.
______________________________________
LINCOLN TELEPHONE CO.,
Petitioner and Appellant,
v.
MONTANA PUBLIC SERVICE COMMISSION,
DEPARTMENT OF PUBLIC SERVICE
REGULATION, an agency of the State of Montana,
Respondent and Appellee.
APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis And Clark, Cause Nos. ADV-2015-315 and
CDV 2015-314
Honorable Kathy Seeley, Mike Menahan, Presiding Judges
COUNSEL OF RECORD:
For Appellant:
Elizabeth A. Brennan, Brennan Law & Mediation, PLLC, Missoula,
Montana
For Appellee:
Justin W. Kraske, Jeremiah Langston, Special Assistant Attorneys General,
Montana Public Service Commission, Helena, Montana
Peter Michael Meloy, Meloy Law Firm, Helena, Montana
For Amicus Curiae:
Jill Gerdrum, Axilon Law Group, PLLC, Missoula, Montana
(Attorney for Montana Telecommunications Association)
Submitted on Briefs: March 22, 2017
Decided: May 30, 2017
Filed:
__________________________________________
Clerk
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Justice Beth Baker delivered the Opinion of the Court.
¶1 The Montana Public Service Commission requires that certain regulated
telecommunications companies publicly disclose the compensation of their executive or
managerial employees earning more than $100,000 per year. Southern Montana Telephone
Company and Lincoln Telephone Company—both regulated by the Commission—filed
motions for protective orders to keep the salary information confidential. The Commission
denied the motions, relying in part on a new “rubric” that it developed by which it declared
it would judge such motions. Southern and Lincoln each appealed to the First Judicial
District Court. In two separate rulings, the District Court affirmed.
¶2 Southern and Lincoln appeal, raising several issues. We reverse on the sole ground
that the Commission’s “rubric” constitutes a de facto rule subject to Montana
Administrative Procedure Act (MAPA) rulemaking requirements.
PROCEDURAL AND FACTUAL BACKGROUND
¶3 Southern and Lincoln are privately-owned Montana telecommunications
companies. They also qualify as “public utilities” and are therefore subject to regulation
by the Commission. Sections 69-1-102, -3-101(1)(f), MCA. The Commission possesses
the authority to regulate privately-owned companies that provide a “regulated
telecommunications service”—like Southern and Lincoln—but it does not regulate “[r]ural
telephone cooperatives.” Sections 69-3-101(1)(f), -901(5), MCA.
¶4 The Commission certifies certain telecommunications public utilities as “eligible
telecommunications carrier[s]” (ETCs) for purposes of the Federal Telecommunications
Act of 1996. See 47 C.F.R. § 54.201(b) (2016); § 69-3-840(2), MCA. That Act’s purpose
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is, in part, to provide “universal” telecommunications services to “low-income consumers
and those in rural, insular, and high cost areas.” 47 U.S.C. § 254(b)(3) (2015). The Act
establishes the “universal service” fund (USF)—a series of federal subsidies made
available to ETCs for the purpose of providing such services. 47 U.S.C. § 254(e). Federal
law provides the requirements for ETC certification. 47 U.S.C. § 214(e). Only a company
that receives certification as an ETC may be eligible to receive USF subsidies. 47 U.S.C.
§ 254(e). The Federal Communications Commission delegates to the Commission the
authority to certify annually ETCs in Montana. 47 C.F.R. § 54.314; § 69-3-840(1), MCA.
The Commission must base its ETC certification on companies’ compliance with federal
statute. Section 69-3-840(2), MCA. The Commission has certified Southern and Lincoln
as ETCs, and each receives federal USF subsidies.
¶5 Pursuant to federal law, the Commission requires all ETCs to apply for
recertification annually. Section 69-3-203, MCA. Although all ETCs must submit certain
documentation to the Commission for recertification, most are unregulated telephone
cooperatives and not public utilities. Only ETCs that are subject to Commission regulation
as public utilities—including Southern and Lincoln—must submit “annual reports.” Mont.
Admin. R. 38.5.2602 (2000). The Commission prescribes the information that ETCs must
include in their annual reports.
¶6 Recently the Commission began requiring that privately-owned ETCs disclose in
their annual reports the names and compensation information for all executives and
managers earning more than $100,000 per year in total compensation. The Commission’s
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purpose in imposing this requirement was to increase transparency by disclosing to the
public how ETCs spend the federal USF subsidies that they receive.
¶7 Southern and Lincoln each filed motions for protective orders with the Commission.
The motions requested that the Commission permit them to not disclose their employees’
compensation information publicly. They agreed to provide the compensation information
to the Commission but argued that employee salaries constituted trade secret information
and that disclosure would violate the employees’ constitutional rights to privacy.
¶8 The Commission denied Southern’s and Lincoln’s motions for protective orders. It
concluded that the compensation information did not constitute a trade secret and that the
employees’ individual rights to privacy in their compensation did not clearly outweigh the
public’s right to know how the companies spent federal subsidies. In reaching the latter
conclusion, the Commission developed and employed a three-part “rubric by which to
judge companies’ motions for protective orders” of employee compensation information.
Under the rubric, the public’s right to know will outweigh the employees’ individual
privacy in their compensation information when: (1) “the employee is a manager or
executive of the telecommunications company”; (2) “the manager or executive has annual
compensation that exceeds $100,000”; and (3) “one-fifth or more of [the company’s] total
Montana revenues originate from sources tied to the company’s designation as an ETC”—
i.e., from the USF subsidies. The Commission held no hearings or rulemaking proceedings
before adopting this rubric, and applied it for the first time in the orders denying Southern’s
and Lincoln’s motions.
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¶9 Both Southern and Lincoln derive at least one-fifth of their total revenue from
federal funds. The Commission thus determined that the compensation information of the
companies’ executive or managerial employees earning more than $100,000 per year in
total compensation would not be “subject to confidentiality.” The Commission
subsequently denied Southern’s and Lincoln’s motions for reconsideration.
¶10 Southern and Lincoln each filed petitions for judicial review in the First Judicial
District Court. They raised several challenges, including an argument that the
Commission’s rubric constituted a “rule” under MAPA and that the Commission had
unlawfully adopted that rule without adhering to MAPA’s rulemaking requirements.
¶11 In separate orders, two different judges affirmed the Commission’s orders. Both
concluded in relevant part that the Commission’s “rubric” did not constitute a “rule” within
the meaning of MAPA. In its order in Southern’s case, the court explained that the
Commission was “not required to initiate rulemaking to determine which factors to apply
when balancing an individual’s right of privacy versus the public’s right to know. An
agency’s factual determination when conducting a legal analysis prescribed by the
Montana Constitution is not a rule.” The court stated further in that order that when the
Commission “identifies and applies factors with which to balance competing constitutional
mandates involving public records, it is not establishing a de facto rule.” Southern and
Lincoln appealed the court’s orders, and their appeals were consolidated.
STANDARDS OF REVIEW
¶12 In an administrative appeal, we apply the same standards of review that the district
court applies. Nw. Corp. v. Mont. Dep’t of Pub. Serv. Regulation, 2016 MT 239, ¶ 25,
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385 Mont. 33, 380 P.3d 787. A court reviews an administrative decision in a contested
case to determine whether the agency’s findings of fact are clearly erroneous and whether
its interpretation of the law is correct. Nw. Corp., ¶ 25.
DISCUSSION
¶13 Southern and Lincoln argue that the Commission’s rubric establishes a “standard”
that “implements” the Commission’s “policy” of making ETC federal funding more
transparent to the public. They therefore contend that it constitutes a de facto rule within
the meaning of MAPA and that the Commission was obligated to comply with MAPA’s
rulemaking procedures before implementing the rubric.
¶14 The Commission counters that the District Court correctly concluded that the rubric
was not a rule under MAPA. It emphasizes that the Commission is obligated to balance
the public’s constitutional right to know against the employees’ constitutional right to
privacy when considering companies’ motions for protective orders. The Commission
argues that its formulation of the rubric was simply a tool for applying this balancing test
on a case-by-case basis and was therefore not subject to rulemaking requirements.
¶15 MAPA defines a “rule” as “each agency regulation, standard, or statement of
general applicability that implements, interprets, or prescribes law or policy.” Section
2-4-102(11)(a), MCA. Before an administrative agency adopts a rule, MAPA mandates
that the agency “comply with the public notice and comment procedures detailed in
§§ 2-4-302 and -305, MCA.” State v. Vainio, 2001 MT 220, ¶ 27, 306 Mont. 439, 35 P.3d
948. These procedures include, among other requirements, that the agency give written
notice of its proposed rule, hold a hearing, afford interested parties the opportunity to
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submit data, views, or arguments, consider comments in those submissions, and issue a
statement explaining its reasons for adopting the rule. Sections 2-4-302, -305, MCA.
¶16 “Unless a rule is adopted in substantial compliance with these procedures, the rule
is not valid.” Vainio, ¶ 27. In Vainio, we reversed the defendant’s conviction for Medicaid
fraud because the conviction was based on his violation of Medicaid policies that the
Department of Public Health and Human Services had not adopted in compliance with
MAPA rulemaking procedures. Vainio, ¶ 71. We reached a similar conclusion in two
earlier cases. In Northwest Airlines v. State Tax Appeal Board, 221 Mont. 441, 720 P.2d
676 (1986), we held invalid a Department of Revenue auditor’s unilateral decision to
include airline carriers’ nonstop “flyover” miles in the agency’s tax apportionment formula
for determining a carrier’s corporate license tax. We concluded that the standard inclusion
of “flyover” miles constituted a rule under MAPA. Nw. Airlines, 221 Mont. at 445,
720 P.2d at 678. In Rosebud County v. Department of Revenue, 257 Mont. 306, 849 P.2d
177 (1993), we held invalid a Department of Revenue decision to alter the default method
for assessing the market value of heavy equipment. The Department sent a letter to all
county assessors directing them to use the new method. Rosebud Cnty., 257 Mont. at 308,
849 P.2d at 178. Although the Department later conducted rulemaking to adopt this new
method as a rule, we held that the rulemaking process was a “sham” because the
Department had denied “the public, the Legislature, and certain affected agencies” their
“right to participate effectively in the governmental process.” Rosebud Cnty., 257 Mont.
at 311, 849 P.2d at 180.
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¶17 The Commission’s rubric establishes a list of three formulaic criteria that it uses “to
judge companies’ motions for protective orders” of executive compensation information
and to determine “whether the right to know of the public outweighs the demand of
individual privacy involving ETC telecommunication company employee compensation.”
This rubric does not call for balancing individual interests on a case-by-case basis; it sets a
standard by which the Commission judges all motions for protective orders for salary
information of regulated ETCs. If the company’s circumstances fit the formula, there is no
further inquiry; all companies that receive at least twenty percent of their revenues from
federal subsidies must disclose the compensation information of executives earning over
$100,000 per year in total compensation, while all companies that do not meet the twenty
percent threshold may keep that information confidential.
¶18 The term “rubric” is defined as “[a]n established rule, custom, or law” or as “[a]n
authoritative rule, esp. for conducting a public worship service.” Black’s Law Dictionary
1529 (Bryan A. Garner ed., 10th ed. 2014) (emphasis added). The Commission’s
description of its formula as a “rubric” is apt: it sets a “standard . . . of general applicability”
that “implements” the Commission’s “policy” of providing for greater public disclosure of
how ETCs spend the federal subsidies they receive. Section 2-4-102(11)(a), MCA. It
therefore constitutes a rule within the meaning of MAPA.
¶19 MAPA categorizes “substantive rules” as either “legislative rules” or “adjective or
interpretive rules.” Section 2-4-102(14), MCA. “Legislative rules” have the force of law
and are invalid unless adopted via rulemaking. Section 2-4-102(14)(a), MCA. “Adjective
or interpretive rules,” in contrast, lack the force of law, § 2-4-102(14)(b), MCA, and may
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be adopted with publication of a statement of the advisory nature of the rule in the
Administrative Rules of Montana. Section 2-4-308, MCA. The Commission failed to
follow either process. It did not conduct rulemaking, so the rubric did not meet the
requirements for a “legislative rule.” Section 2-4-102(14)(a), MCA. The Commission also
failed to adopt the rubric as advisory only “in accordance with” MAPA’s requirements for
adopting an “adjective or interpretive rule.” Sections 2-4-102(14)(b), -308, MCA.
¶20 The Commission developed and announced its rubric in the orders denying
Southern’s and Lincoln’s motions for protective orders. It did not give advance notice to
potentially interested parties of its intent to adopt this rubric or provide such parties an
opportunity to comment on the rubric. The rubric is therefore invalid for failure to comply
with MAPA rulemaking requirements. Vainio, ¶ 27; §§ 2-4-302, -305, MCA. The District
Court incorrectly concluded otherwise.
CONCLUSION
¶21 We reverse the judgments of the District Court in Southern’s and Lincoln’s cases
and instruct the court to vacate the Commission’s orders and to remand for further
proceedings on the companies’ motions for protective orders.
/S/ BETH BAKER
We Concur:
/S/ JAMES JEREMIAH SHEA
/S/ MIKE McGRATH
/S/ DIRK M. SANDEFUR
/S/ MICHAEL E WHEAT
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