Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca7-14-03807/USCOURTS-ca7-14-03807-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 14-3807

SPRINTCOM, INC.,et al.,

Plaintiffs-Appellants,

v.

COMMISSIONERS OF THE ILLINOIS COMMERCE COMMISSION, and

 ILLINOIS BELL TELEPHONE CO.,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 13 C 6565 — Edmond E. Chang, Judge.

____________________

ARGUED MAY 19, 2015 — DECIDED JUNE 23, 2015

____________________

Before POSNER, EASTERBROOK, and MANION, Circuit Judges.

POSNER, Circuit Judge. The Telecommunications Act of 

1996, 47 U.S.C. §§ 151 et seq., sought (so far as relates to this 

case) to encourage competition in local telephone service. 

110 Stat. 56, preamble. Companies that had once been the 

local subsidiaries of AT&T, such as Illinois Bell, but that had 

become independent when AT&T was broken up in 1984 (or 

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2 No. 14-3807

successors to those companies) were believed, despite the 

competition of MCI and GT&T in many parts of the country,

to have near monopolies of local telephone service because 

of the heavy costs that a competitor would have to incur to 

duplicate the cables, switches, and other transmission infrastructure owned and operated by each Bell company (officially called a “Regional Bell Operating Company”). Indeed, 

before 1996 the dominant local carriers (almost all Bell companies) earned more than 99 percent of the telecommunications revenue generated in local telecommunications markets. Federal Communications Commission, Industry Analysis Division, Common Carrier Bureau, “Local Competition” 

12 (1998), https://transition.fcc.gov/Bureaus/Common_Car

rier/Reports/FCC-State_Link/IAD/lcomp98.pdf (visited June 

17, 2015).

If the existing infrastructure could handle the entire local 

demand for telephone service, a new entrant, needing to create its own infrastructure, might be unable to charge prices 

that would recover the costs of that infrastructure. The monopolist would have recovered its infrastructure costs and 

could therefore charge a remunerative price lower than any 

new entrant, since the new entrant would have to charge a 

price that covered not only its marginal costs but also its 

fixed costs, that is, the costs of building an infrastructure 

competitive with the monopolist’s (though there would be 

instances in which an established monopolist had to incur 

substantial costs to update and repair its infrastructure while 

new entrants could build out their networks at lower cost 

because costs tend to fall as technology advances). Alternatively, the monopolist could either refuse to connect its network to that of the new entrant or agree to do so only on exorbitant terms; that would prevent the entrant’s customers 

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No. 14-3807 3

from reaching the monopolist’s large customer base and

would thus severely limit the entrant’s ability to attract customers. See Implementation of the Local Competition Provisions 

in the Telecommunications Act of 1996, First Report & Order, 

11 FCC Rcd. 15499, 15508–09 (1996). It is no surprise, therefore, that studies evaluating the effectiveness of the 1996 Act 

in promoting local competition have yielded at best mixed 

results. See, e.g., Donald L. Alexander & Robert M. Feinberg, 

“Entry in Local Telecommunication Markets,” 25 Review of 

Industrial Organization 107 (2004); Jaison R. Abel, “Entry into 

Regulated Monopoly Markets: The Development of a Competitive Fringe in the Local Telephone Industry,” 45 Journal 

of Law & Economics 289 (2002).

A telephone company that before the breakup of AT&T 

was the monopolist in a local market is called an “incumbent 

local exchange carrier” and is usually a Bell company once 

owned by AT&T but since the breakup independent. Such a

carrier, like Illinois Bell (which does business under the 

name “AT&T” but which we’ll call “Illinois Bell” to distinguish it from its former parent), provides telephone service 

in a local area; a carrier that provides long-distance service is 

called an interexchange carrier, because it carries calls between local exchange areas.

These local exchange carriers might have remained monopolists of local telephone service had not the 1996 Telecommunications Act required them to interconnect with

new entrants (indeed with any “requesting telecommunications carrier”) by giving them access to the cables and 

switches and other equipment that bring telephone service

to buildings in the company’s market area (the “exchange 

area” in telecom jargon). 47 U.S.C. § 251(c)(2). (Some interCase: 14-3807 Document: 31 Filed: 06/23/2015 Pages: 14
4 No. 14-3807

connection obligations predated the 1996 Act, however. See

United States v. American Telephone & Telegraph Co., 552 F. 

Supp. 131 (D.D.C. 1982).) So, were Sprint a new entrant in 

Chicago and wanted its subscribers to be able to call at competitive rates people who were subscribers to Illinois Bell rather than to Sprint, it could require Illinois Bell to allow it to 

connect its modest infrastructure of cables and so on to Illinois Bell’s infrastructure. A Sprint caller would dial a Bell 

customer and the call would travel to the latter through the 

interconnected transmission systems of the two carriers.

To make the interconnection requirement as inexpensive 

for new entrants as possible, the FCC further forbade local 

exchange carriers to charge not just rates that exceeded a 

“just and reasonable” price for interconnection—a common 

regulatory formula—but also rates that exceeded “TELRIC” 

rates (we’ll spare the reader the uninformative words behind 

the acronym). 47 C.F.R. §§ 51.501, 51.503. Such a rate, generated by a complicated regulatory formula, see 47 C.F.R. 

§ 51.505; Verizon Communications, Inc. v. FCC, 535 U.S. 467, 

495–96 (2002), that we can ignore, is only slightly above the 

monopolist’s marginal cost (the cost that the last call made 

adds to the company’s total costs, as distinct from average 

cost, which might be substantially higher). Indeed TELRIC 

rates sometimes are below even the carrier’s marginal cost

because they are required to be based on the most advanced 

telecommunications technology, which the local monopolist 

may not be using. In Verizon Communications, Inc. v. FCC, supra, 535 U.S. at 489, the Supreme Court described TELRIC 

rates as being just above the confiscatory level.

Advances in telecommunications technology since 1996 

have greatly reduced the dependence on the Bell incumbents 

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No. 14-3807 5

of what were then conceived to be new entrants into local 

telephone markets but are now—Sprint certainly—

established competitors. But they continue to use Bell transmission facilities where they can, because TELRIC rates are 

such a bargain.

This case concerns Sprint’s desire to expand its access to 

Illinois Bell’s infrastructure at TELRIC rates even when 

Sprint customers make calls to, or receive calls from, persons 

outside the region (Illinois) in which Illinois Bell operates. 

Sprint invokes “the duty to provide, for the facilities and 

equipment of any requesting telecommunications carrier, 

interconnection with the local exchange carrier’s network for 

the transmission and routing of telephone exchange service 

and exchange access.” 47 U.S.C. § 251(c)(2)(A). This could be 

read to mean just that at Sprint’s request Illinois Bell must

allow Sprint to connect its lines to Illinois Bell’s lines, enabling a Sprint subscriber to phone any user of Illinois Bell’s 

network, with Sprint being charged only the TELRIC rate for 

connecting its network to the Bell company’s network in order to enable the call. But suppose that Illinois Bell’s lines 

connect not just to its subscribers and to carriers such as 

Sprint that use Bell’s lines to reach Bell subscribers, but also 

to an interexchange carrier. If a Sprint subscriber places a 

long-distance call, Sprint can route the call through Illinois 

Bell en route to the interexchange carrier, and it claims that 

Illinois Bell can charge only the TELRIC rate for making this 

connection. (It does not argue that the rate Illinois Bell does 

charge, though higher than the TELRIC rate, is not just and 

reasonable.) It asked Illinois Bell to make an interconnection 

agreement with it that would so provide. Illinois Bell refused, citing a regulation by the Federal Communications 

Commission that defines interconnection as “the linking of 

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two networks for the mutual exchange of traffic,” 47 C.F.R. 

§ 51.5 (emphasis added), implying that interconnection is 

limited to communications between Sprint customers and 

Illinois Bell customers.

That was only one of the requests that Sprint made to Illinois Bell. There was a second, of limited significance, as 

we’ll see; and a third. Illinois Bell refused all three. (Sprint 

made other requests as well, but they are not before us.) It

asked the Illinois Commerce Commission to arbitrate its 

disputes with the Bell company; arbitration of such disputes 

by the telecommunications agency of the state in which the 

Bell company that is a party to the dispute operates is the 

prescribed method of resolving such disputes. See 47 U.S.C. 

§ 252(b)(1). The Commission rejected Sprint’s claims, and the 

district court in which Sprint sought judicial review of the 

Commission’s decision affirmed that decision, precipitating 

this appeal to us. The appellants are various Sprint affiliates, 

unnecessary to discuss separately, and the appellees are the 

Commissioners (sued in their official capacity, meaning that 

the real defendant-appellee is the Commission itself) and Illinois Bell.

Before we consider the appeal we need to remark the 

aridity of the parties’ briefs. They focus on the meaning of 

various regulatory terms abstracted from the regulated activities themselves; as a result we are given no sense of the 

actual stakes in the parties’ disputes. We are not told what 

the TELRIC rates for interconnection with Illinois Bell are, 

how much they differ from the maximum “just and reasonable” rates that Illinois Bell claims to be entitled to charge 

(and is currently charging), what the effects on competition, 

entry, service quality, and telecommunications costs to subCase: 14-3807 Document: 31 Filed: 06/23/2015 Pages: 14
No. 14-3807 7

scribers would be were we to grant the relief sought by 

Sprint, or how much it would cost Sprint to connect its subscribers to long-distance carriers by leasing capacity on lines 

owned by companies other than Illinois Bell, or to build its 

own connections to the long-distance carriers. Neither side 

has tried to motivate us to decide the case in its favor by explaining how the decision that it advocates would further 

the goals of federal regulation of the contemporary telecommunications industry. The factual vacuum in which we 

are asked to decide Sprint’s appeal works to the particular 

disadvantage of that company by confining it to arguing semantics rather than economic realities, thus leaving us to 

wonder whether Sprint is seeking anything from us other 

than windfalls at the expense of Illinois Bell.

Against this rather blank background we turn to Sprint’s 

first argument, which we need to describe with somewhat 

greater precision. Sprint is conceded to be entitled to pay only TELRIC rates for using Illinois Bell’s infrastructure to 

route a call to a subscriber to the Bell company’s telephone 

service. It may also be entitled to use the Bell company’s infrastructure at TELRIC rates when a Sprint customer calls a 

customer of any local exchange carrier, which need not be 

Illinois Bell, in Illinois Bell’s exchange area (as held in Southern New England Telephone Co. v. Comcast Phone of Connecticut, 

Inc., 718 F.3d 53 (2d Cir. 2013))—though this we needn’t decide. That area, by the way, is all of Illinois, despite Illinois 

Bell’s being designated a “local exchange carrier.” Its alternative designation as a “Regional Bell Operating Company” 

is more descriptive, since its area of operations is an entire 

state, and one doesn’t think of an entire state (with the possible exception of Rhode Island) as a “local area.”

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8 No. 14-3807

If a Sprint customer in Chicago calls an Illinois Bell customer in Carbondale, which though many miles south of 

Chicago is still in Illinois and therefore in Illinois Bell’s “local 

exchange area,” and the call goes at least part of the way 

over Illinois Bell lines, Illinois Bell can charge Sprint only the 

TELRIC rate for connecting the caller to Illinois Bell’s network (the connection facilities are called “entrance facilities”). This enables Sprint to compete with Illinois Bell 

throughout the latter’s service area by use of that company’s

facilities at very low cost. That was what the 1996 Act 

sought: making the Bell companies’ facilities available at a 

very low cost to companies seeking to become viable competitors of the Bell company in that company’s “local” (really regional) exchange area (i.e., market), which in this case, 

to repeat, is the State of Illinois.

What Sprint now seeks is the right to use Illinois Bell’s

facilities at TELRIC rates to connect Sprint’s subscribers to

persons in other parts of the country by linking Sprint facilities via Illinois Bell facilities to the facilities of an interexchange carrier, which, recall, transmits calls from one local 

exchange area (such as Illinois) to another (such as Alabama). If a Sprint customer wants to call someone in Alabama, the call may go part way over Illinois Bell lines; but 

when it leaves Illinois it must go over the lines of an interexchange carrier to reach the intended recipient of the call in

Alabama.

Sprint claims the right to pay only the TELRIC rate for 

the Illinois Bell portion of the transmission just instanced. 

But such a right, besides being in tension with the FCC’s interpretation of “interconnection” as a mutual exchange of 

traffic between entrant and established carrier—in our exCase: 14-3807 Document: 31 Filed: 06/23/2015 Pages: 14
No. 14-3807 9

ample the Alabama resident is not an Illinois Bell customer—would not comport with the concern that motivated the 

imposition of a very low ceiling (TELRIC) on the pricing of 

certain calls using Bell company facilities. That concern, as 

we noted earlier, was a belief that the Bell companies had 

monopoly power, and was alleviated by allowing a non-Bell 

company such as Sprint to use the facilities of a Bell company to compete with that company. Granted, a Sprint customer in Illinois might call a subscriber to a phone company in 

Alabama (which might be one of Alabama’s two regional 

Bell operating companies, comparable to Illinois Bell, or one 

of the ten other phone companies in that state), and if as 

Sprint argues it’s entitled to use Illinois Bell’s facilities to 

lower the cost of reaching the Alabaman, that would be very 

nice for Sprint. But there is nothing to suggest that the 1996 

Act, having given Sprint low-cost access at Illinois Bell’s expense to Illinois Bell’s subscribers, meant to force Illinois Bell 

to share its entire network with its competitors at TELRIC 

rates.

One effect of such a requirement would be to sap Illinois 

Bell’s motivation to improve its network. As explained in 

U.S. Telecom Association v. FCC, 290 F.3d 415, 424 (D.C. Cir. 

2002), “a regulated price below true cost will reduce or eliminate the incentive for an [incumbent local exchange carrier]

to invest in innovation (because it will have to share the rewards with [the new entrants]), and also for a [new entrant]

to innovate (because it can get the element cheaper as a 

UNE)”—an “unbundled network element,” which is to say a 

part of an incumbent local exchange carrier’s network that 

another carrier is entitled to demand access to at TELRIC 

prices. (More on unbundling below.) See also Jerry Hausman 

& J. Gregory Sidak, “A Consumer-Welfare Approach to the 

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Mandatory Unbundling of Telecommunications Networks,” 

109 Yale Law Journal 417 (1999). Many prices that seem to 

equate to cost have this effect. Some innovations pan out; 

others do not; and if parties who have not shared the risks 

are able to come in as equal partners on the successes and 

avoid having to pay for the losses, the incentive to invest is 

impaired.

This is where Sprint’s unexplained failure to provide us 

with data bites its case the hardest. We are given no evidence on which to base a judgment that by having to pay 

just and reasonable rates rather than TELRIC rates in order 

to be allowed to use Illinois Bell facilities as part of a transmission from Illinois to a person in another state (and therefore outside Illinois Bell’s local—actually regional—

exchange area), Sprint will be meaningfully hindered in its 

ability to compete with Illinois Bell to attract Illinois customers. We are told nothing about the concentration of the Illinois telephone market or the feasibility of Sprint’s linking its 

network to interexchange carriers directly or through companies other than Illinois Bell—options which would obviate

the need for it to rely on Illinois Bell’s network.

Sprint might seek succor under another section of the 

1996 Act: 47 U.S.C. § 251(c)(3) requires incumbent local exchange carriers to provide to any requesting telecommunications company unbundled access to specific facilities, as opposed to the incumbent local exchange carrier’s entire network, at TELRIC rates. See also 47 U.S.C. § 252(d)(1)(A)(i); 47 

C.F.R. § 51.503. But there’s a hitch: the FCC is tasked by 47 

U.S.C. § 251(d)(2) with determining which network elements 

shall be subject to 47 U.S.C. § 251(c)(3). Section 251(d)(2) 

states that in making that determination “the Commission 

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No. 14-3807 11

shall consider, at a minimum, whether—(A) access to such 

network elements as are proprietary in nature is necessary; 

and (B) the failure to provide access to such network elements would impair the ability of the telecommunications 

carrier seeking access to provide the services that it seeks to 

offer.” This has been interpreted to allow the Commission to

“withhold unbundling orders, even in the face of some impairment, where such unbundling would pose excessive impediments to infrastructure investment.” U.S. Telecom Association v. FCC, supra, 359 F.3d at 580. If Sprint thinks it can 

prove that the prices that Illinois Bell is charging it to connect to long-distance carriers, using Illinois Bell facilities, is 

too high, it can try to convince the Commission, which so far 

has been unsympathetic to such claims. The Commission has 

decided to “impose[] [Section 251(c)(3)] unbundling obligations only in those situations where we find that carriers 

genuinely are impaired without access to particular network 

elements and where unbundling does not frustrate sustainable, facilities-based competition. ... We now conduct an impairment analysis with respect to entrance facilities and find 

that the economic characteristics of entrance facilities ... 

support a national finding of non-impairment.” In the Matter 

of Unbundled Access to Network Elements: Review of the Section 

251 Unbundling Obligations of Incumbent Local Exchange Carriers, Order on Remand, 20 FCC Rcd. 2533, 2535, 2610 (2005); 

see also Talk America, Inc. v. Michigan Bell Telephone Co., 131 

S. Ct. 2254, 2258–59 (2011). Sprint has not shown that it faces 

“genuine impairment” if denied access at TELRIC rates to 

Illinois Bell facilities.

The second argument that Sprint presses on us is that as

long as some of its traffic carried by Illinois Bell qualifies for

TELRIC pricing (that is, traffic from Sprint customers to subCase: 14-3807 Document: 31 Filed: 06/23/2015 Pages: 14
12 No. 14-3807

scribers to Illinois Bell or other local exchange carriers in the 

same exchange area as Sprint—i.e., Illinois), Sprint can piggyback nonqualifying traffic on that qualifying traffic, thereby, it argues, making the nonqualifying traffic qualifying. In 

support Sprint unguardedly cites a regulation which states 

that “a carrier that requests interconnection [with a local exchange carrier such as Illinois Bell] solely for the purpose of 

originating or terminating its interexchange traffic [to the 

customers of such a carrier] ... is not entitled to” interconnection at TELRIC rates, 47 C.F.R. § 51.305(b) (emphasis added), 

unless it demonstrates that such free riding is necessary to 

enable it to compete. Sprint, which has not so demonstrated,

interprets the provision to mean that the converse must be 

true—that as long as it’s not using the interconnection solely

for interexchange traffic it’s entitled to TELRIC rates for all 

traffic. There’s no basis for that interpretation.

Sprint’s last claim concerns the rate that the Federal 

Communications Commission allows Illinois Bell to charge it 

when a Sprint subscriber telephones an Illinois Bell subscriber, thereby using Illinois Bell facilities for a part of the 

transmission of the call. The allowed rate varies. For some 

calls Illinois Bell is allowed to charge the originating carrier 

(here Sprint) an “access” fee, which is higher than the normal rate. Exactly how much higher we don’t know; but in 

2008 the average access charge was 0.8 cents per minute, 

Federal Communications Commission, “Telecommunications Industry Revenues 2008,” tab. 10 (Sept. 2010)—more 

than 100 times the rate Illinois Bell charges to complete nonaccess calls. Illinois Bell claims the right to charge the access 

fee whenever the call is between geographic regions (“major 

trading areas” in FCC-speak), while Sprint claims that the

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No. 14-3807 13

access charge is permitted only when the originating carrier

charges its subscriber an additional fee for placing the call.

In 1996, when the Telecommunications Act was passed, 

the industry practice was to charge a higher rate for longdistance calls—and calls between different geographic regions are long-distance calls. Nowadays, especially in the 

wireless market, which is the market in which Sprint operates, ”postage stamp” pricing—pricing independent of distance—is common. Sprint has adopted postage-stamp pricing and argues that therefore none of the calls it places to Illinois Bell subscribers is subject to an access charge. (One 

might call Sprint’s pricing system “super postage stamp.” 

The price of the stamp is insensitive to distance but not to 

the weight of the letter, while Sprint’s uniform price is constant no matter how many calls its subscriber makes.)

Why Illinois Bell’s charge to Sprint for the leg of the call 

that it handles should depend on what Sprint charges its 

subscriber admittedly is obscure; but equally obscure is why 

Illinois Bell should charge more depending on where the call 

originates. If a Sprint customer in New York calls someone 

in Chicago, which is on the eastern border of Illinois, Illinois 

Bell will be handling only a minute part of the transmission, 

hardly justifying a higher charge than if the call had originated hundreds of miles to the south but in the same major 

trading area so that no access fee could be charged. It is no 

more costly for Illinois Bell to terminate a call that originated 

one mile away than one that originated 1000 miles away. See 

Jonathan Nuechterlein & Philip Weiser, Digital Crossroads: 

Telecommunications Law and Policy in the Internet Age 249 (2d 

ed. 2013).

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14 No. 14-3807

But forced to choose, we side with Illinois Bell. Sprint’s 

approach creates an incentive for phone companies to engage in postage-stamp pricing so that they would never 

have to pay access charges when placing calls from their

subscribers to subscribers of other companies. Illinois Bell’s 

approach, though equally arbitrary, has at least the virtue of 

not affecting how telephone companies decide to price their 

services.

The judgment of the district court, denying Sprint’s petition to set aside the ruling of the Illinois Commerce Commission, is

AFFIRMED.

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