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     Before the
     Federal Communications Commission
     Washington, D.C. 20554


                                        )
In the Matter of                        )
                                        )
Petition of MCI for Declaratory Ruling       )         CCBPol. 97-4
that New Entrants Need Not Obtain            )
Separate License or Right-to-use Agreements  )
Before Purchasing Unbundled Elements         )
                                   )
Implementation of the Local Competition                )         CC Docket No. 96-98
Provisions in the Telecommunications Act               )
of 1996                                 )
                                        )


                  MEMORANDUM OPINION AND ORDER


Adopted:  April 17, 2000                                          Released:  April 27, 2000 

By the Commission:

                              TABLE OF CONTENTS

     I.  INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . .  2

     II.  BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . .  3

     III.  DISCUSSION . . . . . . . . . . . . . . . . . . . . . . .  5
                                                            A.   Jurisdiction. . . . .   5
                                                            B.   Implication of Intellectual Property Rights . . . . . . .  6
                                                            C.   Incumbent LEC Obligations Under Section 251(c)(3) . . . . . .   7
               
     IV.  ORDERING CLAUSE . . . . . . . . . . . . . . . . . . . . . 14




     
     
                        I.  INTRODUCTION

     1.   MCI filed a petition for declaratory ruling relating to intellectual property rights. 
Specifically, it asked the Commission to declare that any requirement that a requesting
telecommunications carrier obtain separate license or right-to-use agreements before it may obtain
access to unbundled network elements violates sections 251 and 253 of the Communications Act
of 1934, as amended (the Act).  MCI also asks the Commission to issue a declaratory ruling that
the Act's nondiscrimination requirement requires an incumbent LEC to provide requesting
telecommunications carriers the same rights to intellectual property that the incumbent LEC
enjoys.  In addition, MCI requests that the Commission hold that intellectual property rights of
third parties are not implicated in the sale of unbundled network elements.     

2.   For the reasons set forth below, we grant MCI's petition to the extent that it
requests that we declare that section 251(c)(3) of the Telecommunications Act of 1996 (1996
Act) requires an incumbent local exchange carrier ("LEC") to use its best efforts to obtain
coextensive intellectual property rights from the vendor on terms and conditions that are equal in
quality to the terms and conditions under which  the incumbent LEC has obtained these rights.   
We deny, however, MCI's petition to the extent that it requests that the Commission hold that
intellectual property rights of third parties are not implicated in the sale of unbundled network
elements.  In reaching this conclusion, we also respond to a primary jurisdiction referral of the
United States District Court for the Western District of Texas ("Texas District Court"). Although
we do not believe that this issue is currently preventing competing carriers from being able to
enter the local exchange and exchange access markets, we seek to ensure that there are no
barriers to entry in the local exchange and exchange access markets.      
 
                               II.  BACKGROUND

     3.   In the 1996 Act, Congress moved to restructure the local telecommunications
market so as to remove legal and economic impediments to market entry that had previously
existed.  A key aspect of this restructuring is to require incumbent LECs to offer to requesting
telecommunications carriers, among other things, access to network elements on an unbundled
basis.  By permitting competing carriers to enter local markets through the acquisition of
unbundled network elements, the 1996 Act sought to increase the opportunities for competitive
entry and reduce the existing competitive advantages of incumbent local exchange carriers. 
Section 3(29) of the Communications Act defines the term "network element" to mean both "a
facility or equipment used in the provision of a telecommunications service" and "features,
functions, and capabilities that are provided by means of such facility or equipment."  Section
251(c)(3) of the Act requires incumbent LECs to provide requesting telecommunications carriers
nondiscriminatory access to network elements on an unbundled basis at any technically feasible
point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory. 

     4.   On January 25, 1999, the United States Supreme Court ("Supreme Court")
released an opinion in AT&T Corp. v. Iowa Utilities Board in which it vacated section 51.319 of
the Commission's rules.  Section 51.319, which was adopted in the Local Competition First
Report and Order, set forth the minimum number of network elements that incumbent LECs must
make available on an unbundled basis to requesting carriers pursuant to section 251(c)(3).  The
Supreme Court found that the Commission, in determining which network elements must be
unbundled pursuant to section 251(c)(3), had not adequately considered the "necessary" and
"impair" standard of section 251(d)(2).  In a Third Report and Order and Fourth Further Notice
of Proposed Rulemaking, we addressed the issues of which particular elements are "proprietary,"
and whether any of these elements must be unbundled in light of the "necessary" and "impair"
standards of section 251(d)(2).  We found that a proprietary network element is "necessary"
within the meaning of section 251(d)(2)(A) if, taking into consideration the availability of
alternative element outside the incumbent's network, lack of access to an element would, as a
practical, economic and operational matter, preclude a requesting carrier from providing the
services it seeks to offer.   We clarify at the outset, that the instant order is limited to our
interpretation of section 251(c)(3) and the obligations that this section imposes on incumbent
LECs with respect to the intellectual property rights associated with network elements that they
are required to unbundle for requesting carriers pursuant to section 251(d)(2).  
     
     5.   In its petition, MCI asserts that certain incumbent LECs have insisted that carriers
requesting access to unbundled network elements ("competing carriers" or "requesting carriers")
obtain licenses or right-to-use agreements associated with every network element to which the
carrier requests access.  According to MCI, at the time it filed its petition in 1997, at least one
incumbent LEC, Southwestern Bell Telephone Company ("SWBT"), has inserted this requirement
in its Statements of Generally Available Terms, and has included this as an issue in the arbitration
and negotiation process.  MCI further states that the Texas Public Utility Commission ("Texas
Commission") has adopted a requirement that SWBT provide a list of all known and necessary
license or right-to-use agreements applicable to an unbundled network element requested by a
competing carrier, and a requirement that the competing carrier obtain any license or right-to-use
agreement associated with a network element purchased from SWBT.  Pursuant to this
provision, SWBT, in response to a request by AT&T, identified 78 different contracts with
approximately 42 different vendors.
     
                             III.  DISCUSSION
     
A.   Jurisdiction

     6.   As an initial matter, we reject the argument, made by certain commenters, that we
lack jurisdiction in the present matter because we have no jurisdiction over state decisions
regarding statements of generally available terms and conditions or arbitration decisions.  The
Supreme Court held that "the FCC has rulemaking authority to carry out the 'provisions of [the
Communications Act],' which include  251 and 252, added by the Telecommunications Act of
1996"  Our holding below requires us only to interpret section 251(c)(3) and section 251(c)(1) 
pursuant to our general rulemaking authority.  Moreover, as noted above, the Texas District
Court has referred primary jurisdiction to this Commission to resolve this matter.
               
B.   Implication of Intellectual Property Rights
     
     7.   We deny MCI's petition to the extent it requests that we declare generally that
intellectual property rights are never implicated in the purchase of unbundled network elements. 
Determining whether intellectual property rights are implicated in the purchase of a particular
unbundled network element must be determined on an individual case basis and depends upon a
number of factors including: the scope of the use restrictions placed on the intellectual property by
the vendor upon sale of equipment or licensing of software; the nature of the access and use
contemplated by the requesting carrier when it purchases access to the element; the nature of the
intellectual property included in the network element; and the applicable intellectual property or
contract law.  We, therefore, agree with commenters that contend that physical control of
network elements is irrelevant to the question of whether intellectual property rights are
implicated.  Moreover, we agree with those commenters asserting that nothing in the 1996 Act
permits us to nullify patent or other intellectual property rights.  Because the determination of
whether intellectual property rights are implicated can vary greatly depending upon the individual
contract terms negotiated by the vendor and incumbent LEC, we decline to make the
comprehensive declaration requested by MCI.  

     8.   At the same time, however, we expect that, in nearly all cases, requesting carriers
will be able to access unbundled network elements without the need for additional licenses.  For
example, many parties, including large equipment vendors such as Lucent and Nortel state that,
generally, no additional licenses or fees should be required when a competing carrier obtains
access to unbundled network elements under current contracts for a use that is within the scope of
the original license.  Even BellSouth acknowledges that the "magnitude of occurrence of the
need for direct licenses is much more nominal" than other commenters suggest.  Similarly, Sprint
observes that, where these intellectual property rights are implicated, the issue will be the scope of
the rights granted in the original software license.  Some commenters opine that this situation
may explain why certain incumbent LECs have not raised the issue of third party intellectual
property rights.  We are optimistic, therefore, that incumbent LECs will not raise the issue of
intellectual property as a barrier to entry.  In the unlikely event that this should become an issue,
however, we seek to clarify incumbent LECs' obligations under section 251(c)(3) to provide
nondiscriminatory access to network elements.    

C.   Incumbent LEC Obligations Under Section 251(c)(3)

     9.   We conclude that the "nondiscriminatory access" obligation in section 251(c)(3)
requires incumbent LECs to use their best efforts to provide all features and functionalities of
each unbundled network element they provide, including any associated intellectual property
rights that are necessary for the requesting carrier to use the network element in the same manner
as the incumbent LEC.  In particular, incumbent LECs must exercise their best efforts to obtain
co-extensive rights for competing carriers purchasing unbundled network elements.  We further
find that the nondiscriminatory access obligation requires incumbent LECs to allocate any costs
associated with acquiring the necessary intellectual property rights among all requesting carriers,
including themselves.  We do not mandate a particular method of satisfying these obligations.  In
fact, we believe that, through negotiation, third party vendors, incumbent LECs and requesting
carriers can best determine how to ensure that an incumbent LEC lawfully provides access to
unbundled network elements to requesting carriers without infringing upon the rights of third
party vendors. As noted above, in most cases, the incumbent LEC's contract with a vendor
already permits it to provide access to competing carriers, but in others, it may be necessary to
negotiate for additional licenses.
  
     10.  We reach this conclusion in view of the fact that incumbent LECs control the
choice of third party vendors, the scope of contracts with those vendors, and, along with the
vendors, are well-situated to interpret ambiguous portions of those contracts.  Given this, they are
in the best position to determine whether existing contracts permit requesting carriers to use
unbundled elements without modifying the contract to permit an extension of the right to use the
intellectual property, to renegotiate the existing contracts if an extension is required, and to
negotiate future contracts to ensure that competing carriers' use of intellectual property present in
an element is contemplated.  If incumbent LECs were not required to obtain the right for
requesting carriers to use the network elements, they would likely have an incentive to interpret
their licenses with these providers as narrowly as possible to make it more difficult for competing
carriers to obtain access to the elements.  Confidentiality agreements precluding the disclosure of
the terms of these contracts exacerbate the incentives of incumbents to interpret contractual
provisions to exclude use by requesting carriers.  Requesting carriers, without access to the actual
contracts, would be unable to determine which additional rights need to be obtained.  Moreover,
the record suggests that, because incumbent LECs have pre-existing relationships with the
vendors, they typically have more bargaining power with these parties. 

     11.       We further conclude that incumbent LECs must recover the reasonable cost
associated with renegotiating and extending rights to use intellectual property rights among all
requesting carriers, including themselves.  We thus disagree with commenters that suggest that
costs should be recovered entirely from the competing carriers under cost causation principles. 
Section 251(c)(3) imposes an obligation on incumbent LECs to provide access to unbundled
network elements on terms and conditions that are "just, reasonable, and nondiscriminatory." 
Moreover, section 252(d)(1)(A) requires that rates for unbundled network elements be based on
the cost of providing the network element.  These sections reflect Congress' intent to ensure that
competing carriers are able to share in the economies of scale and economies of scope of the
incumbent.  As the Commission stated in the Local Competition First Report and Order,
incumbent LECs' rates for network elements must recover costs in a manner that reflects the way
they are incurred, and therefore, prices should be based on costs similar to those incurred by the
incumbents.  Moreover, the Commission stated that, "[t]he costs of shared facilities . . . should
be recovered in a manner that efficiently apportions costs among users."  We find that the cost
of co-extensive intellectual property rights is analogous to the shared use of network elements,
and thus, must be shared by the incumbent and competitors, ensuring that all parties bear the same
proportionate and reasonable costs associated with unbundled network elements.  We note that
the price of an unbundled network element already includes the cost of the license for the
incumbent to use it.  Accordingly, charging the entire cost of any license extension to requesting
carriers, without the incumbent sharing in that cost, results in an overcharge to the requesting
carriers.

     12.  This holding best satisfies the "nondiscriminatory access" requirement of section
251(c)(3).  Specifically, we find that this holding reflects Congress' intent in drafting the 1996
Act, and is consistent with the text, structure, history, and purpose of that legislation.  The
Commission has previously determined that the 1996 Act's goal of promoting local competition
would not be achieved if the quality of the access to unbundled elements provided by incumbent
LECs to new entrants were lower than what the incumbent LECs provide to themselves.  Thus,
the Commission determined that the phrase "nondiscriminatory access" means at least two things: 
"first, the quality of an unbundled network element that an incumbent LEC provides, as well as
the access provided to that element, must be equal between all carriers requesting access to that
element; second, where technically feasible, the access and unbundled network element provided
by an incumbent LEC must be at least equal-in-quality to that which the incumbent LEC provides
to itself."    Moreover we note that this holding is consistent with a recent decision of the United
States Court of Appeals for the Fourth Circuit wherein the court held that section 251(c)(3)
imposes an obligation on incumbent LECs to use their best efforts to renegotiate modifications to
intellectual property licenses to provide nondiscriminatory access to network elements on the
same terms and conditions that an incumbent LEC enjoys.   

     13.  Several commenters have questioned the soundness of a policy that would penalize
incumbent LECs for an unregulated vendor's refusal to extend an existing contract to a competing
carrier.  Although we expect that incumbent LECs will obtain any necessary intellectual property
rights for competing carriers in keeping with their statutory obligation under section 251(c)(3),
we do not in this order specify the means by which they must do so.  Rather, we expect that
incumbent LECs will exercise their best efforts to obtain, at the lowest reasonable cost, licensing
for requesting carriers on the terms that it has obtained for itself to ensure that competing carriers
obtain nondiscriminatory access to unbundled network elements.  We are highly skeptical that
incumbent LECs will not succeed in meeting their nondiscrimination obligations pursuant to
section 251(c)(3) through the use of their best efforts.  
     
     14.  We find that, by including the necessary intellectual property license associated
with an unbundled network element, an incumbent LEC can fulfill the requirement of section
251(c)(3) of allowing a requesting carrier to provide telecommunications services.  To conclude
otherwise would be inconsistent with the intent of Congress to dismantle significant economic and
legal barriers to competition.  Specifically, requiring a competing carrier to negotiate intellectual
property licenses individually with multiple vendors with whom they may have no other business
relationship could potentially pose a significant economic barrier to competition.  For example,
competing carriers could incur tremendous transaction costs and delays in attempting to obtain
licenses as preconditions of entry.  Such a requirement would disproportionately threaten smaller
carriers whose participation in the local exchange market Congress sought to encourage.

     15.  We recognize, as Ameritech maintains, that incumbent LECs cannot unilaterally
extend third-party intellectual property rights to competing carriers.  Furthermore, we agree
with Ameritech and other commenters that we do not have jurisdiction to alter the intellectual
property rights of third-party vendors.  Our decision does not infringe upon the rights of these
third parties.  Rather, it requires incumbent LECs to use their best efforts to ensure that their
intellectual property rights are lawfully extended to competing carriers.  We are not convinced by
claims that section 251(c)(3)'s "nondiscriminatory access" requirement applies only to incumbent
LECs' property and not to property that they do not own, such as intellectual property.  We find
no basis in the statute for this distinction, and we are concerned that reading such a distinction
into our rules would be difficult, if not impossible, to administer as incumbents could engage in
lease-back arrangements designed solely to evade the obligations imposed by the Act.

     16.  Moreover, we are not persuaded that incumbent LECs' lack of knowledge about a
requesting carrier's intended use of the unbundled element justifies requiring new entrants
themselves to obtain intellectual property rights from third-party vendors.  Section 251(c)(3)
requires only that the intellectual property rights provided to a requesting carrier will entitle that
carrier to use the element for the same uses as the incumbent LEC.  To the extent the requesting
carrier intends to use the element in a different manner (e.g., in combination with some other
element not contemplated by the incumbent LEC's particular license), the requesting carrier is
solely responsible for obtaining this right from the vendor.

     17.  Nevertheless, we recognize that, in order to limit its use to that contemplated by
the contract, a competing carrier will need to know the extent to which the incumbent LEC is
entitled to use a particular element.  At a minimum, we believe that incumbent LECs should detail
the name of specific third-party vendors, the subject intellectual property, and the relevant
contracts which govern the providing incumbent LEC's use of that intellectual property.  Failure
of an incumbent LEC to satisfy these minimal requirements could constitute a violation of section
251(c)(3) as well as section 251(c)(1), which requires incumbent LECs to negotiate in good faith. 
We also recognize that many of these contracts are subject to non-disclosure provisions. 
Although the extension of rights to competing carriers will necessitate that competing carriers
review these contracts to determine which uses are contemplated, we leave to the parties to
negotiate a reasonable means of conveying this information in a manner that does not violate the
terms of the confidentiality agreement.  For example, the vendor and the incumbent LEC will
have to determine which provisions in the contract are entitled to confidentiality.  Because there
are certain terms, such as the cost of the intellectual property, that a competing carrier will have
no need to examine, we expect that a redacted version of the contract could be made available to
competing carriers in order to assist them in ascertaining the permissible uses of the elements at
issue.   

     18.  We reiterate that throughout the process of evaluating the intellectual property
rights of third parties, incumbent LECs are under a rigorious and continuing obligation to
negotiate in good faith with requesting carriers seeking access to unbundled network elements
pursuant to section 251(c)(1).  For example, an incumbent LEC's obligation to negotiate in good
faith is violated if the incumbent LECs uses confidentiality provisions in vendor contracts in an
anticompetitive manner or otherwise frustrates the ability of a requesting carrier to obtain co-
extensive rights to use unbundled network elements.   Incumbent LEC confidentiality provisions
that impair the ability of a requesting carrier to obtain nondiscriminatory access to unbundled
network elements could constitute a violation of the requirements of section 251(c)(1) and (c)(3). 
We intend to ensure that the renegotiation process, where necessary, does not unreasonably delay
a requesting carrier's access to unbundled network elements.

     19.  We emphasize that in this Order we are not extending our rules to regulate third-
party vendors.  We recognize that intellectual property rights are among the most valuable assets
these companies own.  We agree with commenters that Congress did not intend to open the
local telecommunications market by trampling the intellectual property rights of third parties, and
nothing in section 251(c)(3) requires a third party to grant a compulsory, royalty-free license to its
intellectual property.  As the Texas Commission noted, the challenge posed by this issue is to
interpret the statute in a manner that promotes competition in local telecommunications markets,
while at the same time preserves the rights of third parties.  We have thus endeavored to ensure
that our action preserves vendors' rights in their intellectual property.  Protecting a vendor's
rights to its intellectual property is vital to the encouragement of innovation that can advance
telecommunications services to all consumers.  We are confident that the goal of promoting local
competition can be achieved while simultaneously protecting a vendor's rights to its intellectual
property.      

     20.  Although our holding requires incumbent LECs to use their best efforts to ensure
that a competing carrier purchasing unbundled network elements is able to obtain co-extensive
intellectual property rights, third party vendors are nevertheless entitled to privity of contract with
a requesting carrier.  Because we do not regulate these parties, we conclude that we may not
limit their ability to require such an arrangement.   We do not expect, however, that in those
instances where an intellectual property holder seeks to establish privity with a requesting carrier,
this will erect a significant barrier to providing the services a requesting carrier seek to offer.  We
expect that privity could be established with straightforward amendments to incumbent LEC
license agreements and requesting carrier intellectual property licenses.
     21.  We disagree with GTE's contention that our holding is inconsistent with the
Commission's treatment of proprietary network information in the Local Competition Second
Report and Order.   We agree with AT&T that this interpretation "distorts the Commission's
reasoning and thus obscures the fundamental distinction between the situation here and the issues
[the Local Competition Second Report] order resolved."  In that proceeding, the Commission
found that in interpreting the section 251(c)(5) network disclosure requirement, there may be
instances in which incumbent LECs are permitted to refer requesting carriers to negotiate with
third parties for the release of any necessary proprietary information associated with the
incumbent LEC's network disclosure obligations.  That is not the situation at hand here.  In the
instant proceeding we are clarifying incumbent LECs' obligations under section 251(c)(3) to
provide "nondiscriminatory access" to unbundled network elements.  Given this standard, we find
it is reasonable to require incumbent LECs to use their best efforts to obtain coextensive
intellectual property rights from the vendor on terms and conditions that are equal in quality to the
terms and conditions under which the incumbent LEC has obtained these rights.  Moreover,
GTE's selective discussion omits the Commission's statement two paragraphs later which clarified
that "incumbent LECs are required [under section 251(c)(5)] to provide adequate access to even
proprietary information if a competing service provider needs that information to . . . maintain
interconnection and interoperation."   

                                     












                      IV.  ORDERING CLAUSE

     22.  Accordingly, IT IS ORDERED pursuant to sections 1, 3,4, 251(c)(1), 251(c)(3)
and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C.  151, 153, 154,
251(c)(1), 251(c)(3), 303(r), 47 C.F.R.  1.2 that the Petition for Declaratory ruling filed by MCI
IS GRANTED IN PART and IS DENIED IN PART to the extent indicated herein.


                         FEDERAL COMMUNICATIONS COMMISSION

     
          
                         Magalie Roman Salas
                         Secretary


                                 APPENDIX

                   MCI's Petition for Declaratory Ruling
                            CC Docket No. 96-98
                            List of Commenters

1.   Ad Hoc Coalition of Telecommunications Manufacturing Companies 
2.   AT&T Corp.
3.   Ameritech
4.   Bell Atlantic and NYNEX
5.   Bell Communications Research (Bellcore)
6.   BellSouth Corporation
7.   Competitive Telecommunications Association
8.   GTE Service Corporation
9.   LCI International Telecom. Corp.
10.  Lucent Technologies
11.  SBC Communications Inc.
12.  Northern Telecom. Inc.
13.  Public Utility Commission of Texas
14.  Sprint
15.  Telecommunications Resellers Association