*Pages 1--15 from  Microsoft Word - 973.doc*
 Federal  Communications  Commission  FCC  00-  139 
 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 
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 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).  1  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.  2  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.  3 


 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.  4 
 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").  5  Although 


 1  Petition  of  MCI  for  Declaratory  Ruling,  CC  Docket  No.  96-  98,  CCB  Pol.  97-  4  (filed  Mar.  11, 
 1997)  ("  Petition").  On  March  14,  1997,  the  Common  Carrier  Bureau  issued  a  Public  Notice  requesting  interested 
 parties  to  file  comments  concerning  MCI's  Petition.  See  Public  Notice,  Common  Carrier  Bureau,  DA  97-  557  (rel. 
 Mar  14,  1997).  A  list  of  commenters  appears  in  the  Appendix  to  this  Order.  In  an  ex  parte  dated  March  4,  1999, 
 MCI  withdrew  the  section  253  preemption  portion  of  its  petition.  See  Letter  from  Keith  L.  Seat,  Senior  Counsel 
 for  Competitive  Strategies,  Federal  Law  and  Public  Policy,  MCI  to  Michelle  M.  Carey,  FCC  (Mar.  4,  1999). 


 2  Petition  at  2. 
 3  Id.  at  7. 
 4  Telecommunications  Act  of  1996,  Pub.  L.  No.  104-  104,  110  Stat.  56,  codified  at  47  U.  S.  C.   
 151  et  seq.  The  1996  Act  amended  the  Communications  Act  of  1934. 
 5  On  August  17,  1998,  the  Texas  District  Court  issued  an  order  referring  the  intellectual  property 


 dispute  to  this  Commission.  AT&  T  sought  review  before  the  Texas  District  Court  seeking  judicial  review  of  an 
 interconnection  agreement  that  was  arbitrated  and  approved  by  the  Texas  Commission  The  court  found  that  "the 
 relationship  of  [section]  251(  c)(  3)  to  the  intellectual  property  rights  of  third  parties  who  have  licensed  their 
 intellectual  property  to  incumbent  LECs  for  use  in  the  LECs'  physical  facilities  is  precisely  the  type  of  issue  within 
 the  FCC's  special  competence."  See  AT&  T  v.  Southwestern  Bell  Telephone  Company,  No.  A-  97-  CA-  029-  SS,  slip. 
 op.  at  6  (W.  D.  Tex.  filed  Aug.  17,  1998)  ("  Texas  Court  Referral"). 
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 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."  6  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.  7  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).  8  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).  9  We  found  that  a  proprietary  network  element  is  necessary 


 6  The  Supreme  Court  has  affirmed  our  application  of  the  term  "network  element"  to  include  such 
 "features,  functions,  and  capabilities"  as  operator  services  and  directory  assistance,  operational  support  systems 
 ("  OSS"),  and  vertical  switching  functions  such  as  caller  I.  D.,  call  forwarding,  and  call  waiting.  See  AT&  T  Corp.  v. 
 Iowa  Utilities  Board,  119  S.  Ct.  721,  733-  734  (1999)  ("  Iowa  Utilities  Board"). 


 7  Iowa  Utilities  Board,  119  S.  Ct.  721  (1999). 


 8  Iowa  Utilities  Board,  119  S.  Ct.  at  733-  36. 
 9  Implementation  of  the  Local  Competition  Provisions  of  the  Telecommunications  Act  of  1996,  CC 
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 within  the  meaning  of  section  251(  d)(  2)(  A)  if,  taking  into  consideration  the  availability  of 
 alternative  element  outside  the  incumbents  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.  10  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).  11 


 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.  12  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 


 Docket  No.  96-  98,  Third  Report  and  Order  and  Fourth  Further  Notice  of  Proposed  Rulemaking,  FCC  99-  238  (rel. 
 Nov.  5,  1999)  (UNE  Remand). 


 10  In  the  UNE  Remand,  we  adopted  a  definition  of  proprietary  network  elements  that  track  the 


 intellectual  property  categories  of  patent,  copyright  and  trade  secret  law.  See  UNE  Remand  at  para.  34. 
 11  In  the  instant  Order  we  determine  that  section  251  imposes  certain  obligations  on  incumbent 


 LECs  in  connection  with  the  intellectual  property  rights  of  third  parties.  Concurrently  today,  by  an  Order  on 
 Reconsideration  in  CC  Docket  No.  96-  237,  we  determine  that  different  obligations  affecting  third  party  intellectual 
 property  rights  are  imposed  on  incumbent  LECs  by  section  259.  See  Order  on  Reconsideration,  CC  Docket  No.  96-237, 
 FCC  No.  00-  140,  (rel.  April  27,  2000)(  Infrastructure  Sharing  Reconsideration  Order).  This  dissimilar 
 treatment  is  mandated  by  the  different  requirements  and  operational  contexts  of  the  two  statutory  provisions. 
 Section  251  governs  interconnection  and  unbundled  access  requests,  including  requests  made  by  carriers 
 competing  with  the  incumbent  LEC.  Pursuant  to  section  251(  c),  incumbent  LECs  must  provide  interconnection 
 and  unbundled  access,  inter  alia,  on  a  non-  discriminatory  basis.  See  47  U.  S.  C.    251(  c)(  2)(  D);  (c)(  3).  Construing 
 this  non-  discrimination  requirement,  we  find  that  incumbent  LECs  must  exercise  best  efforts  to  obtain  co-extensive 
 rights  on  behalf  of  competing  LECs  obtaining  unbundled  access  pursuant  to  section  251  where  such 
 access  implicates  third  party  intellectual  property  rights.  We  do  not  adopt  the  same  best  efforts  standard  in 
 section  259  cases  because  section  259  applies  only  where  non-  competing  carriers  share  access  to  an  incumbent 
 LECs  public  switched  network  infrastructure,  technology,  information,  and  telecommunications  facilities  and 
 functions.  47  U.  S.  C.    259(  a).  As  the  Commission  recognized  in  the  Infrastructure  Sharing  Order,  incumbent 
 LECs  in  section  259  cases  have  less  incentive  to  deny  non-  competing  carriers  the  full  benefit  of  infrastructure 
 sharing  agreements  than  they  would  competing  carrier  interconnection  requests  made  pursuant  to  section  251.  See 
 Infrastructure  Sharing  Order,  12  FCC  Rcd  at  5528,  5530-  31,    116.  Also  in  contrast  to  section  251,  section  259 
 contains  no  explicit  non-  discrimination  requirement.  Given  these  differences,  we  see  no  compelling  reason  to 
 impose  upon  incumbent  LECs  in  section  259  sharing  cases  the  same  best  efforts  requirement  that  we  find  is 
 necessary  in  the  very  different  context  of  section  251.  We  note  also  that  pursuant  to  section  251,  incumbent  LECs 
 are  under  a  continuing  and  rigorous  obligation  to  negotiate  in  good  faith. 


 12  MCI  Petition  at  3. 
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 in  its  Statements  of  Generally  Available  Terms,  and  has  included  this  as  an  issue  in  the  arbitration 
 and  negotiation  process.  13  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.  14  Pursuant  to  this 
 provision,  SWBT,  in  response  to  a  request  by  AT&  T,  identified  78  different  contracts  with 
 approximately  42  different  vendors.  15 


 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.  16  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"  17  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.  18 
 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 


 13  Id.  at  4. 
 14  Id. 
 15  Id.  at  5. 
 16  See  Bell  Atlantic  Comments  at  1;  BellSouth  Comments  at  2-  3;  GTE  Comments  at  1-  3;  Texas 
 Commission  Comments  at  1-  2. 
 17  Iowa  Utilities  Board,  119  S.  Ct.  at  729. 


 18  MCI  Petition  at  6. 
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 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.  19  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.  20  Moreover,  we  agree  with  those  commenters  asserting  that  nothing  in  the  1996  Act 
 permits  us  to  nullify  patent  or  other  intellectual  property  rights.  21  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.  22 


 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.  23  Even  BellSouth  acknowledges  that  the  "magnitude  of  occurrence  of  the 
 need  for  direct  licenses  is  much  more  nominal"  than  other  commenters  suggest.  24  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.  25  Some  commenters  opine  that  this  situation 
 may  explain  why  certain  incumbent  LECs  have  not  raised  the  issue  of  third  party  intellectual 
 property  rights.  26  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. 


 19  See  Lucent  Comments  at  3;  Lucent  Reply  Comments  at  2;  see  also  TIA  Reply  Comments  at  2. 


 20  See  BellSouth  at  4-  5;  BellCore  at  2-  3;  SWBT  Comments  at  9-  10. 
 21  BellCore  Comments  at  3;  SWBT  Comments  at  16. 
 22  Likewise,  we  reject  LCI's  suggestion  that  we  declare  that  intellectual  property  rights  are  not 
 implicated  unless  an  incumbent  LEC  proves  by  clear  and  convincing  evidence  that  they  are  implicated.  See  LCI 
 Comments  at  1. 


 23  Lucent  Comments  at  2,  5-  6;  Nortel  Comments  at  6-  7. 


 24  BellSouth  Reply  Comments  at  8. 
 25  See  Sprint  Comments  at  4-  5. 
 26  See  MCI  Petition  at  7;  AT&  T  Comments  at  2,6,  18-  26;  Competitive  Telecommunications 
 Association  ("  CompTel")  Comments  at  4. 
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 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.  27  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  LECs  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.  28  Moreover, 
 the  record  suggests  that,  because  incumbent  LECs  have  pre-  existing  relationships  with  the 


 27  The  costs  allocated  to  intellectual  property  rights  will  be  considered  with  all  the  other  costs  that 
 go  into  determining  the  unbundled  network  price. 
 28  MCI  notes  that  even  SWBT  recognizes  that  "determining  whether  there  is  potential  infringement 


 requires  a  close  examination  of  the  particular  patents  at  issue  and  the  nature  of  the  use."  MCI  Reply  Comments  at 
 8  (citing  SWBT  Comments  at  5). 
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 vendors,  they  typically  have  more  bargaining  power  with  these  parties.  29 
 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.  30  We  thus  disagree  with  commenters  that  suggest  that 
 costs  should  be  recovered  entirely  from  the  competing  carriers  under  cost  causation  principles.  31 
 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.  32  Moreover,  the  Commission  stated  that,  "[  t]  he  costs  of  shared  facilities  .  .  .  should 
 be  recovered  in  a  manner  that  efficiently  apportions  costs  among  users."  33  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.  34  We  note  that 
 the  price  of  an  unbundled  network  element  already  includes  the  cost  of  the  license  for  the 


 29  See,  e.  g.,  TRA  Comments  at  9;  AT&  T  Comments  at  1-  3,  13.  But  see  Ad  Hoc  Comments  at  4; 
 BellSouth  Comments  at  6;  SWBT  Comments  at  28. 
 30  The  Supreme  Court  has  affirmed  our  jurisdiction  to  design  pricing  methodology  to  carry  out  the 


 provisions  of  the  1996  Act.  See  Iowa  Utilities  Board,  119  S.  Ct.  721,  733  (1999). 
 31  See  Ad  Hoc  Comments  at  4;  Bell  Atlantic  Comments  at  4;  GTE  Reply  Comments  at  5-  6;  US 


 West  Reply  Comments  at  15. 
 32  Local  Competition  First  Report  and  Order  at  para.  743. 


 33  Local  Competition  First  Report  and  Order  at  para.  755. 
 34  See  AT&  T  Comments  at  12.  But  c.  f.  Implementation  of  Infrastructure  Sharing  Provisions  of  the 
 Telecommunications  Act  of  1996,  Report  and  Order,  FCC  97-  36,  12  FCC  Rcd  5470  (1997)  (addressing  terms  for 
 use  of  shared  network  infrastructure  pursuant  to  section  259  of  the  Act),  recon.  pending.  Qualifying  carriers  that 
 request  sharing  pursuant  to  section  259  may  not,  pursuant  to  section  259(  b)(  6),  use  an  incumbent  LEC's  facilities 
 to  compete  in  the  incumbent  LEC's  telephone  exchange  area.  The  Commission,  therefore,  concluded  that 
 incumbents  in  section  259  sharing  cases  lack  incentives  to  deny  otherwise  valid  sharing  requests  pursuant  to  the 
 terms  of  section  259.  Based  on  these  unique  circumstances,  the  Commission  allowed  the  parties  to  section  259 
 sharing  arrangements  to  negotiate  the  terms  for  such  sharing  arrangements  without  mandating,  for  example, 
 pricing  guidelines  or  specific  requirements  controlling  how  requesting  carriers  would  share  in  the  economies  of 
 scale  and  scope  of  the  incumbent.  Id.  at    95,  116.  Such  an  approach  is  unique  to  section  259  cases. 
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 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.  35  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."  36  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.  37 


 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.  38  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.  39  Rather,  we  expect  that 


 35  The  language  of  the  statute  indicates  that  Congress  recognized  that  incumbent  LECs  enjoy  such 
 overwhelming  economies  of  scale  and  scope  due  to  their  historic  monopolies  that,  to  ensure  competition, 
 competitors  must  be  permitted  to  share  the  benefits  of  these  economies.  See  Local  Competition  First  Report  and 
 Order  at  para.  11,  316;  MCI  Petition  at  8;  AT&  T  Comments  at  13. 


 36  See  Local  Competition  First  Report  and  Order  at  para.  312. 


 37  See  AT&  T  v.  Bell  Atlantic,  Nos.  98-  2131,  98-  2147,  98-  2196  (decided  December  15,  1999)  (1999 
 WL  1186253  (4  th  Cir.  Va.)). 
 38  See,  e.  g.,  Sprint  Comments  at  10;  Bell  Atlantic  Comments  at  4-  5;  GTE  Comments  at  8. 


 39  The  Fourth  Circuit  reached  the  same  conclusion  when  it  held  that  we  recognize  that 
 negotiations  might  not  be  successful  in  every  instance.  If  negotiations  fail,  we  do  not  interpret    251(  c)(  3)  to 
 impose  an  absolute  duty  to  provide  identical  licensing  terms  in  the  case  of  existing  agreements.  [citations  omitted]. 
 Still,  there  must  be  a  duty  to  negotiate.  Otherwise,  the  Acts  goal    competition  in  local  telephone  markets   
 would  be  ignored.  See  AT&  T  v.  Bell  Atlantic,  at  *6. 
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 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.  40  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.  41  Furthermore,  we  agree  with 
 Ameritech  and  other  commenters  that  we  do  not  have  jurisdiction  to  alter  the  intellectual  property 
 rights  of  third-  party  vendors.  42  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.  43  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 


 40  See  MCI  Petition  at  8;  AT&  T  Comments  at  9;  CompTel  Comments  at  2-  3; 
 41  See  Ameritech  Comments  at  3-  6. 
 42  See  Ameritech  Comments  at  4-  5;  BellSouth  Comments  at  2-  3;  SWBT  Comments  at  27. 
 43  See  Ad  Hoc  Coalition  Comments  at  3;  BellSouth  Reply  Comments  at  6. 
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 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.  44 


 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.  45  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  LECs  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 


 44  See  Lucent  Comments  at  6  ("  Clearly  in  situations  where  a  CLEC's  use  ...  is  beyond  the  scope  of 
 the  original  license  or  causes  the  originally  intended  license  restrictions  to  be  violated,  an  expanded  or  separate 
 license  would  be  required");  see  also  Lucent  Reply  Comments  at  10;  Nortel  Comments  at  6;  SWBT  Comments  at 
 11. 


 45  TRA  Comments  at  6;  AT&  T  Reply  Comments  at  9-  12.  We  note  that  at  least  one  vendor, 


 Lucent,  indicates  that  it  stands  ready  to  work  with  incumbent  LECs  to  identify,  pursuant  to  reasonable  non-disclosure 
 terms,  the  portions  of  agreements  which  may  be  necessary  for  competing  carriers  to  assess  their  extent  of 
 intellectual  property  rights.  Lucent  Comments  at  13. 
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 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  carriers  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.  46  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.  47  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.  48  We  have  thus  endeavored  to  ensure 
 that  our  action  preserves  vendors'  rights  in  their  intellectual  property.  49  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.  50  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. 


 46  Lucent  Comments  at  1. 
 47  See  Texas  Commission  Comments  at  3;  BellCore  Comments  at  2. 
 48  Texas  Commission  Comments  at  3. 
 49  Northern  Telecom  ("  Nortel")  Comments  at  2;  Telecommunications  Industry  Association  ("  TIA") 
 Reply  Comments  at  2;  Lucent  Comments  at  2. 
 50  Several  commenters  contend  that  third  party  vendors  must  be  able  to  require  privity  of  contract 


 with  individual  carriers.  See  BellCore  Comments  at  3;  SWBT  Comments  at  26;  but  see  Nortel  at  8-  9  ("  Nortel 
 takes  no  position  regarding  whether  the  Commission  should  mandate  that  the  agreements  be  established  directly 
 between  the  vendor  and  the  requesting  telecommunications  carrier  or  between  the  requesting  carrier  and  the 
 [incumbent  LEC]  in  accordance  with  the  rights  granted  by  the  vendor  to  the  [incumbent  LEC]"). 
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 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.  51  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."  52  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.  53  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."  54 


 51  See  GTE  Comments  at  7;  citing  Second  Report  and  Order  and  Memorandum  Opinion  and 
 Order,  Implementation  of  the  Local  Competition  Provisions  of  the  Telecommunications  Act  of  1996,  CC  Docket 
 No.  96-  98  (rel.  Aug.  8,  1996)  ("  Local  Competition  Second  Report  and  Order"). 


 52  AT&  T  Reply  Comments  at  13. 


 53  Local  Competition  Second  Report  and  Order  at  para.  257. 
 54  Id.  at  para.  259. 
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 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 
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 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 
15