United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 6, 2001 Decided November 9, 2001

No. 00-1207

Verizon Telephone Companies, et al.,

Petitioners

v\.

Federal Communications Commission and

United States of America,

Respondents

Sprint Corporation, et al.,

Intervenor

On Petitions for Review of Orders of the

Federal Communications Commission

Aaron M. Panner argued the cause for petitioners and supporting
intervenors. With him on the briefs were Michael K. Kellogg, Michael E.
Glover, John M. Goodman, James D. Ellis, Roger K. Toppins, Jeffry A.
Brueggeman, Jay C. Keithley, and Michael B. Fingerhut.

John E. Ingle, Deputy Associate General Counsel, Federal Communications
Commission, argued the cause for respondents. With him on the briefs
were Daniel M. Armstrong, Associate General Counsel, Laurel R. Bergold
and Lisa E. Boehley, Counsel, John M. Nannes, Acting Assistant Attorney
General, United States Department of Justice, Robert B. Nicholson and
Robert J. Wiggers, Attorneys. Christopher J. Wright, General Counsel,
Federal Communications Commission, and Lisa S. Gelb, Counsel, entered
appearances.

Michael J. Thompson, Albert H. Kramer, Katherine J. Henry, and Andrew J.
Phillips were on the joint brief of intervenors ABTEL Communications,
Inc., et al. Robert F. Aldrich entered an appearance.

Michael E. Glover, John M. Goodman, James D. Ellis, Roger K. Toppins,
Jeffry A. Brueggeman, Michael K. Kellogg, Aaron M. Panner, Jay C.
Keithley, and Michael B. Fingerhut were on the brief of Local Exchange
Carrier intervenors.

Before: Ginsburg, Chief Judge, Edwards and Sentelle, Circuit Judges

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: A group of local phone companies (known as
\"local exchange carriers,\" or \"LECs\") seek review of an order of the
Federal Communications Commission (\"FCC\" or \"Commission\") holding
them liable for violating the unreasonable charge provisions of 47
U.S.C. § 201(b) (1994). The violations occurred when the LECs wrongfully
imposed so-called End User Common Line (\"EUCL\") fees on certain
\"independent payphone providers\" (\"IPPs\"). In an agency adjudication
that addressed complaints challenging the fees, the FCC initially
construed the rules enunciated in an earlier rulemaking, In re MTS and
WATS Market Structure, 97 F.C.C.2d 682 (1983) (\"Access Charge
Reconsideration\") (setting rules by which LECs could recover costs
associated with calls made on payphones), to allow the imposition of the
fees. However, the FCC\'s decision did not survive judicial review. In
C.F. Communications Corp. v. FCC, 128 F.3d 735 (D.C. Cir. 1997), the
court held that the Access Charge Reconsideration did not allow for the
fees. The case was remanded, leading the Commission to reverse itself in
the order now under review. See In re C.F. Communications Corp. v.
Century Tel. of Wisconsin, Inc., 15 F.C.C.R. 8759 (2000) (\"Liability
Order\"). In changing its position following judicial review, the FCC
conclusively determined that the LECs had violated the applicable Access
Charge Reconsideration rules by imposing the EUCL charges; the
Commission decided, however, that the question of what damages should
flow from that violation was best reserved for another day.

In their present petition, the LECs contend, first, that the Liability
Order is final, and thus immediately reviewable by this court. Second,
they argue that the agency may not now sanction them for conduct that
had been expressly approved, and may have even been compelled, by the
Commission itself. The FCC responds that we lack jurisdiction at this
time, because by leaving the issue of damages unresolved, the Liability
Order was rendered non-final. Moreover, the Commission asserts that even
if we do reach the merits, the LECs\' retroactivity argument must fail,
as whatever reliance those carriers placed on ultimately erroneous FCC
pronouncements cannot excuse their violations of governing law - as that
law is properly construed. We conclude that the Liability Order is
final, and that we therefore have jurisdiction to review it. It is true
that the general rule is that an adjudicatory decision resolving only
liability and not damages is not final. In this case, however, the
relevant jurisdiction-conferring statute, 47 U.S.C. § 208(b), provides
that an order \"concluding an investigation \... of the lawfulness of a
charge\" is a final order subject to immediate appeal. We are presented
with just such an order here.

On the merits, we hold that it was appropriate for the FCC to find the
LECs liable for their EUCL charges, even though the Commission initially
construed the Access Charge Reconsideration rules to allow the charges.
We do not believe that the Commission should be prevented from stating
the law correctly merely because it may have misconstrued the applicable
rules in the past. We emphasize, however, that this holding does not
necessarily doom the LECs\' retroactivity arguments. Because the FCC has
not yet fixed the means by which it will calculate damages, the LECs are
not foreclosed from presenting their equitable concerns to the agency
during the next phase of the proceedings. We therefore express no
opinion as to the Commission\'s authority to impose damages on the LECs
for charges that they may have collected in reliance on the agency\'s
initial (and mistaken) interpretations of the Access Charge
Reconsideration rules.

I. Background

Much of the regulatory and procedural background to the present petition
is set out in C.F. Communications. See 128 F.3d at 736-38. We will not
repeat that entire discussion here, but rather will concentrate on the
most salient points. The underlying issue in this case is how local
phone companies are to recover the costs that they incur when
long-distance calls are made on coin-operated telephones. The story
begins in 1983, when the FCC issued general rules establishing a
regulatory mechanism for LECs to be compensated for providing
long-distance carriers (known as \"interexchange carriers\" or \"IXCs\")
access to their local networks. In re MTS and WATS Market Structure,
Third Report and Order, 93 F.C.C.2d 241 (1983) (\"Access Charge
Rulemaking\"), modified on recon., 97 F.C.C.2d 682 (1983), modified on
further recon., 97 F.C.C.2d 834 (1984), aff\'d and remanded in part sub
nom. Nat\'l Ass\'n of Regulatory Util. Comm\'rs v. FCC, 737 F.2d 1095
(D.C. Cir. 1984). For most phones, the Commission decided that these
costs were to be footed by \"end users\" who would be assessed EUCL
charges by the LECs. Pay telephones, however, which tend to have no
predetermined end-user, required a different solution. Accordingly, the
FCC decided to exempt public payphones from EUCL fees altogether,
instead allowing the LECs to recover their costs from the IXCs directly,
in the form of Carrier Common Line (\"CCL\") charges. See Access Charge
Reconsideration at 705. Not all payphones were exempted, however.
Instead, the FCC distinguished between true \"public\" payphones - such
as those in airports and on street corners - and those which it labeled
\"semi-public\" - a category that included coin-operated phones found in
restaurants and gas stations, where \"there is a combination of general
public and specific customer need for the service.\" Id. at 704 & n.40.
Reasoning that this latter class could be linked to identifiable
subscribers, the Commission allowed the LECs to impose flat EUCL charges
on those subscribers, just as they would do for ordinary private phones.
See id. at 706.

At the time when the Access Charge Reconsideration was issued, all of
the nation\'s payphones were owned by the LECs themselves. This
situation was soon undermined when the FCC allowed a group of
\"independent\" providers to enter the payphone market. See Registration
of Coin Operated Telephones, 49 Fed. Reg. 27,763 (July 6, 1984). These
IPPs brought with them a technological advantage: so-called \"smart\"
phones, which connected to ordinary phone lines rather than to the
special coin lines that linked the LEC-owned phones to the central
processors that supervise their calls. The new phones, which were able
to perform this managerial task internally, needed no such specialized
hook-up. However, despite their architectural and cognitive differences,
the two types of phones are found in the same kinds of places and are
basically indistinguishable from the lay user\'s perspective.
Nevertheless, when it came to EUCL charges, the LECs decided to treat
the smart phones rather differently from their less sophisticated
cousins. Acting at first without any guidance from the Commission other
than the original Access Charge Reconsideration, the LECs imposed EUCL
fees on all of the new phones - not merely those located in semi-public
places - and assessed these tolls on the IPPs directly.

Unsurprisingly, the IPPs balked at these charges. Their concerns,
however, were not well received by officials at the FCC. In 1988 and
1989, informal complaints filed by two IPPs generated two letters from
Anita J. Thomas, an analyst in the Enforcement Division of the
Commission\'s Common Carrier Bureau. In both of these letters, Thomas
declared that by imposing EUCL fees on IPPs, the LECs violated neither
their own tariffs nor the agency\'s regulations. See Letter from Anita
J. Thomas to LeRoy A. Manke, Manager, Coon Valley Farmers Telephone Co.
(Apr. 4, 1989), reprinted in Joint Appendix (\"J.A.\") 154; Letter from
Anita J. Thomas to Lance C. Norris, Vice President, American Payphones,
Inc. (Sept. 14, 1988), reprinted in J.A. 152. In May of 1989, another
IPP, C.F. Communications Corp. (\"CFC\"), filed a formal complaint,
alleging that the LECs\' conduct had violated various provisions of the
Communications Act and seeking reparations for the wrongfully collected
EUCL charges. This challenge proved unsuccessful at the agency level, as
both the Common Carrier Bureau and ultimately the Commission itself
sided with the LECs. In re C.F. Communications Corp. v. Century Tel. of
Wisconsin, 8 F.C.C.R. 7334 (Com. Car. Bur. 1993); 10 F.C.C.R. 9775
(1995) (\"EUCL Decisions\"). In rejecting CFC\'s complaint, the FCC
concluded that IPPs were properly considered \"end users\" and thus
could be subjected to EUCL charges. Moreover, the agency held that the
IPPs\' payphones were \"semi-public\" within the meaning of the Access
Charge Reconsideration no matter where they were located or how they
were used.

CFC sought review of the FCC decision in this court and found some
success. In C.F. Communications, the court vacated the EUCL Decisions,
holding both that the classification of IPPs as \"end users\" was an
unreasonable interpretation of the relevant regulation, 47 C.F.R. §
69.2(m), and that the FCC had not adequately justified allowing EUCL
charges to be collected for IPP phones while exempting similarly
situated LEC-owned payphones from such fees. See 128 F.3d at 738-42. In
deciding this second issue, the court pointedly rejected the FCC\'s
theory that a payphone should be denied \"public\" (and thus
EUCL-exempt) status under the Access Charge Reconsideration merely
because it was capable of private use. Rather, the court stated that the
relevant question was how a phone was actually used, that is, the manner
in which it was held out to the public. Id. at 741-42. These holdings
were significant because they undermined the legal basis on which the
LECs had relied to rationalize their disparate treatment of
independently owned \"smart\" payphones. And, without such support, the
LECs\' actions seem to collapse into the kind of unreasonable
discrimination proscribed by the Communications Act. See 47 U.S.C. §
202(a). However, the court in C.F. Communications declined to decide
\"whether the Commission\'s interpretation compelled LECs to
discriminate under Section 202(a), or the precise consequences if it
did,\" leaving those issues for another day. 128 F.3d at 742.

On remand, the FCC chose not to mount a renewed defense of its decision
to allow the LECs to assess end-user fees on the IPPs. Instead, the
Commission decided to hold the LECs liable for devising and implementing
that policy in the first place. In the Liability Order now on review,
the FCC concluded that, in light of the C.F. Communications decision, a
EUCL fee imposed on an independent payphone that is used in the same
manner as a LEC-owned \"public\" payphone is an \"unreasonable charge\"
under 47 U.S.C. § 201(b). See Liability Order at 8766, p 20. The agency
then concluded that an award of damages for such liability was
appropriate. Id. at 8768-69, p p 27-29. At the same time, however, the
agency postponed a final ruling on damages, reasoning that further
briefing and argument were needed in order to fix the proper amount of
the award. Id. at 8771, p p 33-34. The LECs filed the present petition
for review before that phase of the proceedings commenced.

II\. Discussion

This petition presents two central questions, one jurisdictional and one
merits-based. The first is whether the FCC\'s Liability Order is final
and therefore subject to immediate judicial review. We answer this
question in the affirmative. The second is whether it was permissible
for the Commission to hold the LECs liable for imposing charges that had
previously been condoned by the FCC itself. We answer this question in
the affirmative as well. At the same time, however, we note that,
because the agency has not yet conclusively determined how it will
measure damages, the LECs still will be able to raise their concerns
about retroactivity and reliance with the FCC during the next phase of
these proceedings. And, until the Commission reaches a conclusion on
that issue, we are unable to review the propriety and permissible extent
of damages in this case.

A. Finality under 47 U.S.C. § 208(b)

Under 28 U.S.C. § 2342(1) (1994), this court has jurisdiction to
determine the validity of \"all final orders of the Federal
Communications Commission made reviewable by section 402(a) of title
47.\" In turn, 47 U.S.C. § 208(b) states that \"\[a\]ny order concluding
an investigation\" of, inter alia, \"the lawfulness of a charge\"
commenced at the behest of a party complaining about the actions of a
common carrier \"shall be a final order and may be appealed under
section 402(a) of this title.\" The jurisdictional question in this
case, then, is whether the Liability Order \"concluded\" the
investigation that began with CFC\'s original 1989 complaint against the
LECs.

All parties agree that, in the Liability Order, the FCC reached a final
determination that the LECs had imposed unreasonable charges in
collecting EUCL fees from the IPPs, thereby violating 47 U.S.C. §
201(b). See Liability Order at 8773, p p 40-41. This decision is
undoubtedly final, in the sense that there is no indication that the
agency will revisit it in future proceedings. Indeed, neither the
Commission\'s brief nor agency counsel\'s argument on appeal claimed
that the finding of liability is subject to further review by the FCC
sans a court order requiring it. Nonetheless, the Commission contends
that its decision to bifurcate the damages phase of its investigation
from the liability phase stripped the entire Liability Order of its
finality. In other words, according to the FCC, an investigation under §
208 of a single complaint that seeks a determination of liability and an
award of damages is not over until the Commission has resolved both
aspects of the complaint. See Br. for Respondents at 27.

As a general proposition, an FCC order is final if it \"(1) represents a
terminal, complete resolution of the case before the agency, and (2)
determines rights or obligations, or has some legal consequence.\"
Capital Network Sys., Inc. v. FCC, 3 F.3d 1526, 1530 (D.C. Cir. 1993)
(internal quotations and citations omitted). Here, we are sure that the
Liability Order, even without a concomitant determination of damages,
has \"some legal consequence\" for the LECs. The actions of the FCC bear
this out. Agency officials have relied on the Liability Order at least
twice in unrelated cases to deny requests made by SBC Communications,
one of the named LECs, to have sanctions against it mitigated. See In re
SBC Communications, Inc., 16 F.C.C.R. 10963, 10968, p 15 & n.38 (Enf.
Bur. rel. May 24, 2001); In re SBC Communications, Inc., 16 F.C.C.R.
5535, 5543, p 19 & n.53 (Enf. Bur. rel. Mar. 15, 2001). If the Liability
Order now furnishes the basis for agency judgments in subsequent cases,
the FCC is hard pressed to deny that the finding of legal liability is
sufficient to satisfy the second prong of the finality test. Cf.
Consolidation Coal Co. v. Fed. Mine Safety & Health Review Comm\'n, 824
F.2d 1071, 1078 (D.C. Cir. 1987) (holding that an agency designation
that \"became a part of \[the regulated party\'s\] permanent record,
thereby exposing \[it\] to more severe sanctions for later violations\"
supplied \"the \'modicum of injury\' necessary to support
jurisdiction\") (quoting Meredith Corp. v. FCC, 809 F.2d 863, 868 (D.C.
Cir. 1987)).

The FCC is, however, quite correct to point out that, under a
well-established principle of finality, when a tribunal elects to
resolve the issue of liability in a particular action while reserving
its determination of damages on that liability, that decision generally
is not considered \"final\" for purposes of judicial review. See
Franklin v. District of Columbia, 163 F.3d 625, 628 (D.C. Cir. 1998)
(\"In damage and injunction actions, a final judgment in a plaintiff\'s
favor declares not only liability but also the consequences of
liability\--what, if anything, the defendants must do as a result.\");
see also Liberty Mut. Ins. Co. v. Wetzel, 424 U.S. 737, 744 (1976)
(holding that a summary judgment order imposing liability is not
considered final under 28 U.S.C. § 1291 where \"assessment of damages or
awarding of other relief remains to be resolved\"). This basic
understanding of finality is the norm not only in civil litigation, but
also in the administrative context, at least where the relevant statute
does not embrace a non-traditional view of finality. See, e.g.,
Rivera-Rosario v. United States Dept. of Agric., 151 F.3d 34, 37 (1st
Cir. 1998) (\"A final decision in an adjudicatory proceeding is one that
resolves not only the claim but, if liability is found, also the relief
to be afforded.\"); Washington Metro. Area Transit Auth. v. Dir., Office
of Workers\' Comp. Programs, 824 F.2d 94 (D.C. Cir. 1987); accord AAA
Eng\'g & Drafting, Inc. v. Widnall, 129 F.3d 602, 603 (Fed. Cir. 1997)
(holding that an order of the Armed Service Board of Contract Appeals
was not final because it resolved only \"entitlement\" (liability) while
reserving decision as to \"quantum\" (damages)).

In this case, however, this norm of finality has been supplanted by
statute. Congress added subsection (b) to 47 U.S.C. § 208 in 1988. See
Pub. L. No. 100-594, § 8(c), 102 Stat. 3021 (1988). This amendment
converted what had been § 208 - which allowed a broad group of entities
to bring complaints to the FCC challenging the actions of common
carriers, thus triggering investigations by the Commission of the
\"matters complained of\" - into what is now subsection (a). In turn,
the new provision, subsection (b), established time limits pursuant to
which certain investigations cognizable under subsection (a) had to be
concluded, and decreed that dispositions in those investigations would
be subject to immediate judicial scrutiny. Thus, when the FCC conducts
an investigation into the \"lawfulness\" of a (1) charge, (2)
classification, (3) regulation, or (4) practice, \"any order
concluding\" such an investigation is deemed to be a final order under §
208(b). This case falls squarely within the meaning of this expediting
amendment.

Our conclusion is compelled by the statutory text. The crucial word in §
208(b) is \"lawfulness,\" which must be read to mean what it says,
namely that which is \"allowed or permitted by law.\" Webster\'s Third
New International Dictionary 1279 (1993); cf. Holland v. Williams
Mountain Coal Co., 256 F.3d 819, 826 (D.C. Cir. 2001) (Sentelle, J.,
concurring) (\"While it is fashionable in some legal circles to deride
\'hyper-technical reliance upon statutory provisions,\' this Court does
not - and should not - move in them.\") (citing Palm Beach County
Canvassing Bd. v. Harris, 772 So.2d 1220, 1227 (Fla. 2000), vacated, 531
U.S. 70 (2000)). As such, interpreted literally (as we think is proper),
§ 208(b) applies to final determinations of liability of the sort that
the FCC has delivered here.

This conclusion is further buttressed by the fact that § 208(b) does not
mention damages. By contrast, damages are specifically covered in three
other sections of the chapter: § 206 makes common carriers who do
anything \"declared to be unlawful\" liable for damages; § 207 allows
any party harmed by the actions of a common carrier to file a complaint
with the FCC seeking damages; and § 209 authorizes the Commission to
\"make an order directing the carrier to pay to the complainant the sum
to which he is entitled\" if it determines that damages are appropriate.
Given that § 208(b) was designed to render only a limited category of
FCC decisions final, the failure of that provision to mention damages,
set against the explicit reference to damages in these other provisions,
militates in favor of applying § 208(b) as it is written.

It is also noteworthy that § 201(b) declares all \"charges, practices,
classifications, and regulations\" that are \"unjust or unreasonable\"
to be \"unlawful.\" The categories listed in § 201(b) are coterminous
with those cognizable under § 208(b), further suggesting that, as to
this class of investigations, a determination of lawfulness is separate
and distinct from a determination of what damages (if any) should flow
from a violation of the law. For, even if the FCC ultimately decides
that the LECs need not pay any damages for their EUCL charges, it would
not follow from such a decision that they had done nothing unlawful. One
can violate the law without being made to pay for it. Accordingly, when
the FCC conclusively resolved that the EUCL charges were unreasonable
within the meaning of § 201(b) and the Access Charge Reconsideration,
see Liability Order at 8766, p 20, it simultaneously and necessarily
concluded its investigation into the \"lawfulness\" of those charges, as
it left nothing more to be said on the question of whether the LECs had
run afoul of the statute\'s proscriptions.

To the argument that the original \"investigation\" has not been
concluded because CFC\'s original complaint sought damages, and the
agency\'s failure to determine damages means that it has not resolved
all of the \"matters complained of\" under § 208(a), our answer is
simple. The class of investigations contemplated by § 208(b), and
subject both to that subsection\'s time limitations and finality rules,
is narrower than the class of investigations contemplated by § 208(a).
Indeed, the FCC has conceded as much. See Br. for Respondents at 32.
This difference in coverage is stark, and plain on the face of the
statute. Under § 208(a), investigations can be launched regarding
\"anything done or omitted to be done by any common carrier subject to
this chapter in contravention of the provisions thereof.\" By contrast,
§ 208(b) governs only the four types of investigations enumerated above.
Its text refers not to investigations \"of the matters complained of,\"
but rather to investigations \"of the lawfulness of a charge,
classification, regulation, or practice.\"

Taken together, then, the language of § 208(b), which speaks only of
lawfulness, and the structure of the common carrier chapter, which
contemplates separate determinations of lawfulness and damages, compel
the conclusion that when the FCC enters an order dealing solely with the
lawfulness of a charge, that order is final under § 208(b)(3) even if it
fails to resolve a complainant\'s properly presented claim for damages.
Our holding in no way limits how the Commission may elect to investigate
complaints under § 208. No FCC order is subject to review under §
208(b)(3) unless it actually terminates an investigation of the
lawfulness of a common carrier\'s activities. Thus, had the agency not
bifurcated the proceedings in this case, but instead reserved final
judgment on the LECs\' liability until it was in a position to consider
damages simultaneously, this court would have been compelled to wait as
well. But, having elected to bifurcate, and thus to render a conclusive
finding that the LECs acted unlawfully, the FCC subjected its decision
to immediate review. Accordingly, we proceed to the merits of the LECs\'
petition.

B. The LECs\' Liability for Imposing EUCL Charges

The LECs argue that the Liability Order was arbitrary and capricious for
two related reasons. First, they contend that the Supreme Court\'s
decision in Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Railway
Co., 284 U.S. 370 (1932), precludes a finding of liability where a
common carrier imposes charges pursuant to and in reliance on the
Commission\'s official mandate. Second, they assert that the FCC\'s
change in position amounted to a \"new\" rule, and, therefore, the
agency was foreclosed from applying it retroactively. We reject both
claims. In doing so, we emphasize that our analysis here is limited to
the question of whether it was permissible for the FCC to hold the LECs
liable for violating the Communications Act. We do not decide the
question of whether the FCC may award damages for the LECs\' charges
that have been found to be unlawful.

1\. The Arizona Grocery Rule

In Arizona Grocery, the Supreme Court held that the Interstate Commerce
Commission could not order a common carrier to pay reparations for
charging a rate that the agency had explicitly approved at the time it
was collected, but subsequently determined to have been unreasonable. In
that case, the ICC had, in a proceeding described by the Court as
\"quasi-legislative,\" 284 U.S. at 388-89, ordered railroads shipping
sugar from California to Phoenix, Arizona to charge no rate exceeding
96.5 cents per 100 pounds. In response, the carriers adopted a rate of
86.5 cents, which they later reduced to 84 cents; these rates were then
challenged before the Commission. In that proceeding, which the Court
described as \"quasi-judicial,\" id. at 389, the agency determined that
this rate was unreasonable to the extent that it exceeded 71 to 73 cents
and awarded the sugar shippers reparations from the carriers for the
difference. The Supreme Court ultimately held that this damages award
was improper:

Where the Commission has, upon complaint and after hearing, declared
what is the maximum reasonable rate to be charged by a carrier, it may
not at a later time, and upon the same or additional evidence as to the
fact situation existing when its previous order was promulgated, by
declaring its own finding as to reasonableness erroneous, subject a
carrier which conformed thereto to the payment of reparation measured by
what the Commission now holds it should have decided in the earlier
proceeding to be a reasonable rate.

Id. at 390.

Despite the superficial appeal of this passage, the rule enunciated
therein is of no help to the LECs in this case. First, Arizona Grocery
deals only with the power of the ICC to award reparations to shippers
for unreasonable rates that they had paid to carriers. See id. at 381
(\"This case turns upon the power of the Interstate Commerce Commission
to award reparations with respect to shipments which moved under rates
approved or prescribed by it.\"). Arizona Grocery has been and should be
understood in the terms in which it was decided, as a proscription
against the retroactive revision of established rates through ex post
reparations. See, e.g., Alabama Power Co. v. ICC, 852 F.2d 1361, 1373
(D.C. Cir. 1988) (suggesting that Arizona Grocery stands for the
proposition that requiring railroads \"to pay refunds, based on a
determination that the earlier Commission-approved rates were
impermissible, runs counter to the well-established prohibition against
retroactive ratemaking\"); AT&T v. FCC, 836 F.2d 1386, 1394-95 (D.C.
Cir. 1988) (Starr, J., concurring) (citing Arizona Grocery for the
\"basic rule of ratemaking\" that \"when the Commission determines that
existing rates are excessive, it cannot order a refund of past payments
under the revoked rate\"); cf. Sea Robin Pipeline Co. v. FERC, 795 F.2d
182, 189 n.7 (D.C. Cir. 1986) (\"FERC may not order a retroactive refund
based on a post hoc determination of the illegality of a filed rate\'s
prescription.\").

As such, neither Arizona Grocery nor the rule it announced are concerned
with a situation such as the one presented here, in which we must decide
not whether the FCC may force the LECs to repay that which they took
through EUCL charges, but rather whether the Commission may make a
retroactive determination that those charges were unlawful at the time
that they were imposed. Indeed, the rule against retroactive ratemaking
is premised on the implicit understanding that an established rate is
not made illegal if it is later found to be impermissible or
unreasonable. See, e.g., Arizona Grocery, 284 U.S. 370, 389 (1932) (the
ICC \"could repeal the order as it affected future action, and
substitute a new rule of conduct as often as occasion might require, but
this was obviously the limit of its power, as of that of the legislature
itself\"); Town of Norwood, Mass. v. FERC, 53 F.3d 377, 381 (D.C. Cir.
1995) (\"The retroactive ratemaking doctrine prohibits the Commission
from authorizing or requiring a utility to adjust current rates to make
up for past errors in projections. If a utility includes an estimate of
certain costs in its rates and subsequently finds out that the estimate
was too low, it cannot adjust future rates to recoup past losses.\");
Sea Robin, 795 F.2d at 189 n.7 (\"Sea Robin had a right to rely on the
legality of the filed rate once the Commission allowed it to become
effective.\"). The subsequent determination rejecting the earlier rate
prescription is similar to a congressional action revising an earlier
statutory enactment - the later action may suggest that the original
legislative act was ill-advised, but this will not justify reparations
for persons who were disadvantaged by the original legislative
enactment. This case does not involve the sort of ratemaking
contemplated by Arizona Grocery, so the same assumptions do not apply
here.

Second, in light of the implicit assumptions underlying the rule against
retroactive revision of established rates through ex post reparations,
it is not surprising that the Court in Arizona Grocery observed that the
ICC had prescribed a legal rate in its \"quasi-legislative capacity.\"
284 U.S. at 388. The Court recognized that ratemaking - \"fixing rates
or rate limits for the future\" - is a legislative function, and held
that once the Commission had exercised such a power it could only undo
the results prospectively. Id. at 388-89. In other words, Arizona
Grocery, by its own terms, does not apply where an adjudicating agency
alters, even with retroactive effect, a policy established in a previous
quasi-judicial action. Nor has it ever been so applied. The lines
between these categories of activity are not always clear - indeed, in
Arizona Grocery itself the quasi-legislative rates were established in
an adjudicatory proceeding, see id. at 388. Nevertheless, the Court in
Arizona Grocery made clear that there is an important distinction
between rules resulting from quasi-adjudication and rules resulting from
quasi-legislation. We are therefore bound to follow the Court\'s mandate
and apply this distinction.

With these principles in mind, we are constrained to conclude that the
FCC\'s actions in this case are not governed by the rule established in
Arizona Grocery. The Access Charge Reconsideration, a rulemaking
designed to establish how the LECs were to recover end-user costs in the
future, was undoubtedly legislative in character. But this rulemaking
was not \"revised\" by the Liability Order that the LECs now challenge.
Rather, the Liability Order merely corrected the EUCL Decisions, agency
adjudications that had erroneously interpreted the original Access
Charge Reconsideration by holding that particular instances of
challenged conduct on the part of the LECs did not violate the
regulations arising from that rulemaking. In those decisions, the FCC
did not purport to substitute a new legislative rule for an old one.
Moreover, when the court in C.F. Communications vacated the judgment in
the EUCL Decisions, it did so on the grounds that the FCC had
misconstrued the Access Charge Reconsideration rulemaking. See 128 F.3d
at 741-42. Our opinion in that case did not, however, suggest that the
underlying rulemaking was in any way infirm. And on remand, the FCC
issued the Liability Order to rectify the errors found pursuant to the
judicial review of the EUCL Decisions.

Therefore, the FCC\'s actions in issuing the orders in the EUCL
Decisions and the Liability Order were not analogous to the situation in
Arizona Grocery. In Arizona Grocery, the ICC purported to retroactively
revise an established rate (that was the product of a
\"quasi-legislative\" action); in this case, by contrast, the FCC
purported to interpret and apply legislative regulations in succeeding
adjudications.

There is no doubt that the EUCL Decisions were intended to have
prospective application, in the sense that these adjudicatory actions
purported to interpret the Access Charge Reconsideration rulemaking,
which remained in force all along. But this fact does not advance the
LECs\' argument. It is well understood that judicial interpretations of
legislative enactments have consequences for parties in the future; yet,
this does not render the statutory construction a legislative activity.
See Japan Whaling Ass\'n v. Am. Cetacean Soc., 478 U.S. 221, 230 (1986)
(\"\[u\]nder the Constitution, one of the Judiciary\'s characteristic
roles is to interpret statutes \...\"); Northwest Airlines, Inc. v.
Transport Workers Union of Am., 451 U.S. 77, 95 & n.34 (1981)
(emphasizing that \"the federal lawmaking power is vested in the
legislative, not the judicial, branch of government,\" but that once the
legislature speaks, \"the task of the federal courts is to interpret and
apply statutory law\"). So too with adjudication by administrative
agencies. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 216-17
(1988) (Scalia, J., concurring) (\"Adjudication \... has future as well
as past legal consequences, since the principles announced in an
adjudication cannot be departed from in future adjudications without
reason.\"); Goodman v. FCC, 182 F.3d 987, 994 (D.C. Cir. 1999)
(\"\[T\]he nature of adjudication is that similarly situated non-parties
may be affected by the policy or precedent applied, or even merely
announced in dicta, to those before the tribunal.\"). To suggest, as the
LECs do here, that the EUCL Decisions were somehow \"legislative\"
merely because they interpreted a rulemaking or because they had some
future impact would entirely collapse the distinction between rulemaking
and adjudication, and thus the very distinction on which Arizona Grocery
rests. As such, we hold that when the FCC departed from the EUCL
Decisions in a subsequent adjudication, it was not constrained by
Arizona Grocery\'s blanket prohibition on retroactive repeals of
quasi-legislative ratemaking.

2\. The Retroactivity Doctrine

This is not to say that agency adjudications that modify or repeal rules
established in earlier adjudications may always and without limitation
be given retroactive effect. To the contrary, there is a robust
doctrinal mechanism for alleviating the hardships that may befall
regulated parties who rely on \"quasi-judicial\" determinations that are
altered by subsequent agency action. Over fifty years ago, in SEC v.
Chenery Corp., 332 U.S. 194, 203 (1947), the Supreme Court cautioned
that the ill effects of retroactivity \"must be balanced against the
mischief of producing a result which is contrary to a statutory design
or to legal and equitable principles.\"

In the ensuing years, in considering whether to give retroactive
application to a new rule, the courts have held that

\[t\]he governing principle is that when there is a \"substitution of
new law for old law that was reasonably clear,\" the new rule may
justifiably be given prospectively-only effect in order to \"protect the
settled expectations of those who had relied on the preexisting rule.\"
Williams Natural Gas Co. v. FERC, 3 F.3d 1544, 1554 (D.C. Cir. 1993). By
contrast, retroactive effect is appropriate for \"new applications of
\[existing\] law, clarifications, and additions.\" Id.

Pub. Serv. Co. of Colo. v. FERC, 91 F.3d 1478, 1488 (D.C. Cir. 1996)
(\"PSCC\"). See also Aliceville Hydro Assocs. v. FERC, 800 F.2d 1147,
1152 (D.C. Cir. 1986) (discussing the distinction between \"new
applications of law\" and \"substitutions of new law for old law\"). In
a case in which there is a \"substitution of new law for old law that
was reasonably clear,\" a decision to deny retroactive effect is
uncontroversial. Epilepsy Found. of N. Ohio v. NLRB, No. 00-1332, slip
op. at 12-13 (D.C. Cir. Nov. 2, 2001). In cases in which there are \"new
applications of existing law, clarifications, and additions,\" the
courts start with a presumption in favor of retroactivity. See, e.g.,
Health Ins. Ass\'n of Am. v. Shalala, 23 F.3d 412, 424 (D.C. Cir. 1994).
However, retroactivity will be denied \"when to apply the new rule to
past conduct or to prior events would work a \'manifest injustice.\' \"
Clark-Cowlitz Joint Operating Agency v. FERC, 826 F.2d 1074, 1081 (D.C.
Cir. 1987) (en banc) (quoting Thorpe v. Housing Auth. of the City of
Durham, 393 U.S. 268, 282 (1969)); see also Consol. Freightways v. NLRB,
892 F.2d 1052, 1058 (D.C. Cir. 1989).

This court has not been entirely consistent in enunciating a standard to
determine when to deny retroactive effect in cases involving \"new
applications of existing law, clarifications, and additions\" resulting
from adjudicatory actions. In Clark-Cowlitz, the en banc court adopted a
non-exhaustive five-factor balancing test, see 826 F.2d at 1081-86
(citing Retail, Wholesale & Dep\'t Store Union v. NLRB, 466 F.2d 380,
390 (D.C. Cir. 1972). In a subsequent case, however, we substituted a
similar three-factor test. See Dist. Lodge 64 v. NLRB, 949 F.2d 441,
447-49 (D.C. Cir. 1991) (citing Chevron Oil Co. v. Huson, 404 U.S. 97,
106-07 (1971)). And in other cases, the court has jettisoned
multi-pronged balancing approaches altogether. See Cassell v. FCC, 154
F.3d 478, 486 (D.C. Cir. 1998) (declining to \"plow laboriously\"
through the Clark-Cowlitz factors, which \"boil down to a question of
concerns grounded in notions of equity and fairness\"); PSCC, 91 F.3d at
1490 (concluding that \"the apparent lack of detrimental reliance \...
is the crucial point supporting retroactivity\").

In the present case, the LECs argue that the Liability Order should not
be given retroactive effect, because it would be grossly unfair to
punish them for imposing EUCL charges that were approved, and perhaps
even required, by the authoritative pronouncements of the Commission
itself. Before addressing these concerns, we note that even if we were
to accept the LECs\' argument in full, there would still remain a period
of approximately four years - from the IPPs\' entry into the payphone
market in 1984 until the first Thomas letter in 1988 - during which no
claim of reliance can possibly be maintained. During this period, the
LECs imposed EUCL fees on the IPPs wholly on their own initiative, i.e.,
without specific guidance from the FCC, and thus entirely at their own
risk.

That said, we conclude that the FCC\'s decision to hold the LECs liable
for EUCL charges levied even after the Commission had spoken on the
issue was not an abuse of discretion or otherwise impermissible. In
reaching this determination, we rely primarily on two factors. The first
is the fact that the FCC\'s policy regarding the propriety of imposing
end-user fees on IPPs was never authoritatively articulated outside of
the same complaint proceeding in which it was eventually reversed.
Indeed, the two EUCL Decisions, on which the LECs\' reliance argument
primarily rests, were part of a single chain of decisions triggered by
CFC\'s original complaint, a chain whose natural progression led to this
court, where the Commission\'s holdings were vacated. Thus, the agency
orders on which the LECs claim to have relied not only had never been
judicially confirmed, but were under unceasing challenge before
progressively higher legal authorities. Our cases indicate that under
such circumstances reliance is typically not reasonable, a conclusion
that significantly decreases concerns about retroactive application of
the rule eventually announced. See Clark-Cowlitz, 826 F.2d at 1083 n.7
(\"\[A\] holding of nonretroactivity \... cannot be premised on a
single, recent agency decision \... that is still in the throes of
litigation when it is overruled.\").

Indeed, our holding in PSCC is directly on point here. In that case, a
group of natural gas producers increased the prices that they charged
their pipeline customers in order to recover an ad valorem tax imposed
by the state of Kansas; the legal theory behind this increase was that
this tax was a severance tax under § 110 of the Natural Gas Policy Act.
These price hikes were challenged before FERC, which sided with the
producers, holding that the Kansas tax came within the meaning of § 110.
Reviewing this decision, this court found that FERC\'s statutory
interpretation was unreasonable and reversed. On remand, the Commission
retreated from its earlier analysis and found that the tax did not
qualify as a severance tax, and therefore that the producers had
over-charged the pipelines. We upheld the retroactive application of
this decision, in the process rejecting the claims of reliance advanced
by the producers, claims that uncannily echo those made by the LECs in
the present case. 91 F.3d at 1488-91. The court held that as soon as the
pipelines had petitioned the Commission for a ruling that the
producers\' preferred interpretation of § 110 was incorrect, the
producers were put on notice that the recoverability of the tax was \"in
dispute.\" Once this challenge had been lodged, it was then unreasonable
for the producers to rely on that interpretation, even though it was
explicitly endorsed by the agency before ultimately being reversed by
this court. Id. at 1490. Thus, we concluded that it was appropriate for
FERC to hold the producers liable for that which they had taken when the
law was uncertain but the Commission was on their side. Just so here.
Because the object of the LECs\' reliance was neither settled (but
rather was perpetually enmeshed in litigation) nor \"well-established,\"
see Clark-Cowlitz, 826 F.2d at 1083 (\"\[T\]he Commission\'s ruling in
that solitary proceeding can scarcely be viewed as \'well-established.\'
\"), we are skeptical that retroactive liability against the LECs would
actually impose a manifest injustice. In light of the ongoing legal
challenges to the EUCL Decisions, whatever reliance the LECs placed on
those rulings was something short of reasonable for purposes of the
retroactivity analysis.

The second factor pointing toward retroactive liability is that the
agency pronouncements on which the LECs relied were subsequently held by
this court to be mistaken as a matter of law. As such, the FCC\'s
Liability Order was largely an exercise in error correction. We have
previously held that administrative agencies have greater discretion to
impose their rulings retroactively when they do so in response to
judicial review, that is, when the purpose of retroactive application is
to rectify legal mistakes identified by a federal court. See Exxon Co.,
USA v. FERC, 182 F.3d 30, 49-50 (D.C. Cir. 1999); cf. Pub. Utils.
Comm\'n of the State of Cal. v. FERC, 988 F.2d 154, 161-63 (D.C. Cir.
1993) (noting that the normal rule against retroactive ratemaking may be
relaxed where the original order was challenged and determined by this
court to be unlawful). Indeed, there can be little dispute that had the
FCC originally (whether in 1993 or 1995) held in favor of the IPPs, the
Commission at that point would have been well within its rights to have
held the LECs liable for violating the unreasonable charge provisions of
47 U.S.C. § 201(b). As such, the LECs\' argument that the FCC may not
reach the same conclusion now reduces to the assertion that the agency
may not retroactively correct its own legal mistakes, even when those
missteps have been highlighted by the federal judiciary. But this is not
the law. See United Gas Improvement Co. v. Callery Props., Inc., 382
U.S. 223, 229 (1965) (\"An agency, like a court, can undo what is
wrongfully done by virtue of its order.\"); Natural Gas Clearinghouse v.
FERC, 965 F.2d 1066, 1073 (D.C. Cir. 1992) (reading Callery to embody
the \"general principle of agency authority to implement judicial
reversals\").

In sum, then, the IPPs should not be denied now what they asked for in
their original complaint - a determination that the LECs violated the
law - merely because the FCC bungled their case the first time around.
To do so would make a mockery of the error-correcting function of
appellate review. It would be to say that the LECs must prevail now
because they (wrongfully) prevailed below. We are unwilling to tie the
Commission\'s hands in this way. Cf. Exxon USA, 182 F.3d at 49 (\"There
is also a strong equitable presumption in favor of retroactivity that
would make the parties whole.\"). As such, we conclude that the
Liability Order represented a permissible exercise of the FCC\'s
discretion and therefore deny the LECs\' petition for review.

Having upheld the imposition of retroactive liability, we decline to
address whether a similar finding regarding damages would be equally
permissible. As described above, the FCC has not yet entered a final
order with respect to damages. Both the amount that the LECs will
ultimately have to pay, and the time period that those payments will
cover, remain for determination. As such, the LECs\' contention that
equitable restitution, and not legal damages, is the sole remedy
available to the IPPs, see Atlantic Coast Line R.R. Co. v. Florida, 295
U.S. 301 (1935); Moss v. Civil Aeronautics Bd., 521 F.2d 298, 314 (D.C.
Cir. 1975), is plainly not ripe for adjudication at this time. See
Abbott Labs. v. Gardner, 387 U.S. 136, 149-50 (1967). Only after the
Commission both commits itself to a method for calculating the proper
amount of the award, and concretely applies that method to the LECs,
will this court be in a position to evaluate the arguments regarding
damages. See Eagle-Pitcher Indus., Inc. v. EPA, 759 F.2d 905, 915 (D.C.
Cir. 1985). By bifurcating the proceedings as it did, the FCC left those
decisions for another day.

As we read the Liability Order, the FCC has suggested a possible means
for figuring damages, but has not foreclosed the possibility of
modifying that suggestion during the next phase of the proceedings. See
Liability Order at 8771, p p 33-34. Specifically, the FCC has not
reached a conclusive determination that it will compel the LECs to
return all of the monies that they collected in possible reliance on the
FCC\'s official pronouncements. Nor has it rendered a final judgment
that the LECs are not entitled to some kind of equitable offset in light
of such reliance. We will not pre-judge these issues in advance of the
agency.

III\. Conclusion

For the reasons given above, we hold that the Liability Order is final
despite its failure to reach the issue of damages. Rejecting the LECs\'
arguments that either the Arizona Grocery doctrine or the rule against
retroactivity bars the FCC from imposing liability, we deny the petition
for review and uphold the Commission\'s finding that the LECs violated
the unreasonable charge provisions of the Communications Act. At the
same time, we express no opinion as to whether damages or some other
monetary remedy are appropriate in this case, or whether such a remedy,
if appropriate, may be imposed retroactively.