United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 05-3698

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Connect Communications

Corporation,

Appellant,

v.

Southwestern Bell Telephone, L.P.,

formerly known as Southwestern

Bell Telephone Company;

Arkansas Public Service

Commission; Sandra L.

Hochstetter, in her official capacity

as Chairman of the Arkansas Public

Service Commission; Daryl E.

Bassett, in his official capacity as

Commissioner of the Arkansas

Public Service Commission; Randy

Bynum, in his official capacity as

Commissioner of the Arkansas

Public Service Commission,

Appellees.

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Appeal from the United States

District Court for the

Eastern District of Arkansas.

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Submitted: May 17, 2006

 Filed: October 27, 2006

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Before BYE, HANSEN, and BENTON, Circuit Judges. 

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1

The Honorable J. Leon Holmes, Chief Judge, United States District Court for

the Eastern District of Arkansas.

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HANSEN, Circuit Judge.

This case involves telephone calls placed from Southwestern Bell Telephone

Company (SWBT) telephone customers to the individual customer's internet service

provider (ISP), where the ISP is a telephone customer of a different telephone

company, Connect Communications Corporation (Connect). All the involved

telephone customers are located within the same local exchange area. After the

Arkansas Public Service Commission (APSC) approved an Interconnection

Agreement between Connect and SWBT, the parties disputed whether these ISPbound calls were local calls, which would subject them to reciprocal compensation

under the Interconnection Agreement, or whether the calls were non-local. After years

of litigation and several decisions at various administrative and judicial levels, the

APSC determined that the ISP-bound calls were not local calls under the

Interconnection Agreement. The district court1

 found that determination not to be

arbitrary or capricious and upheld the APSC's decision. Connect appeals, and we

affirm. 

I. Background

This litigation began in 1998, shortly after SWBT and Connect had entered into

an Interconnection Agreement on June 23, 1997. SWBT, as an incumbent local

exchange carrier (ILEC), had a duty to negotiate and enter into an interconnection

agreement with Connect, a competitive local exchange carrier (CLEC), under the

Telecommunications Act of 1996 (the Act). See 47 U.S.C. § 251(c)(1), (2). Rather

than negotiate an interconnection agreement of its own with SWBT, Connect chose

to adopt the interconnection agreement previously negotiated by SWBT with Brooks

Fiber Communications of Arkansas, Inc. (Brooks Fiber) in August 1996, a procedure
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allowed under the Act. See 47 U.S.C. § 252(I); 47 C.F.R. § 51.809. The APSC

approved the SWBT-Connect Interconnection Agreement on October 24, 1997, and

neither party sought review of the Interconnection Agreement in federal district court

pursuant to 47 U.S.C. § 252(e)(6). 

The Interconnection Agreement divides the telecommunications traffic between

the two telephone companies into four categories: local traffic, through-put traffic,

intraLATA interexchange traffic, and interLATA interexchange traffic. (Appellant's

Add. at 48.) The Interconnection Agreement classifies "[c]alls originated by one

Party's end users and terminated to the other Party's end users . . . as local traffic . . .

if the call originates and terminates in the same SWBT exchange area" (id.) and

provides for reciprocal compensation for the termination of local traffic (id. at 49).

Although the Interconnection Agreement does not define "terminate," it does define

"terminating traffic" as "a voice-grade switched telecommunications service which is

delivered to an end-user(s) as a result of another end user's attempt to establish

communications between the parties." (Id. at 57.) 

At the time that SWBT and Connect were entering into the Interconnection

Agreement, the FCC had not determined whether traffic transmitted to ISPs was

subject to reciprocal compensation as local traffic under the Act or not. In an FCC

Order issued on May 16, 1997, the FCC noted that since an earlier ruling in 1983,

ISPs had not been required to pay interstate access charges and were allowed to

purchase services from ILECs under the same intrastate tariffs available to end users.

See In the Matter of Access Charge Reform Price Cap Performance Review for Local

Exchange Carriers Transport Rate Structure and Pricing End User Common Line

Charges, 12 F.C.C.R. 15982, 16132-33 (FCC May 16, 1997) (hereinafter 1997 FCC

Order). The FCC concluded in the 1997 FCC Order "that the existing pricing

structure for ISPs should remain in place." Id. at 16133. Thus, for tariff purposes,

calls placed to ISPs were treated as local calls. At that time, there was debate in the

industry about whether ISPs acted more like end users, such that a call to an ISP is
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terminated at the ISP's server, or more like interexchange carriers, providing a

connection to the Internet. See id. at 16275 (discussing AOL's and PacTel's opposing

arguments).

In 1999, the FCC determined that ISP-bound traffic was "largely interstate," but

that this conclusion "does not in itself determine whether reciprocal compensation is

due in any particular instance." See In the Matter of Implementation of the Local

Competition Provisions in the Telecommunications Act of 1996, 14 F.C.C.R. 3689,

3690 (FCC Feb. 26, 1999) (ISP Declaratory Ruling). The FCC recognized that prior

to this time, it had consistently treated enhanced service provider (ESP) traffic as local

for purposes of interstate access charges despite its interstate character, and that

parties may have agreed, or state commissions may have mandated, that reciprocal

compensation applied to ISP-bound traffic. Thus, the FCC "conclude[d] that parties

should be bound by their existing interconnection agreements, as interpreted by state

commissions." Id. The FCC noted that in interpreting prior interconnection

agreements, state commissions should consider all of the relevant facts, including the

parties' negotiations in light of the FCC's "longstanding policy of treating this traffic

as local, and the conduct of the parties pursuant to those agreements." Id. at 3704.

The D.C. Circuit vacated portions of the FCC's ISP Declaratory Ruling,

concluding that the FCC did not adequately explain its reliance on an "end to end"

jurisdictional analysis to support its conclusion that ISP-bound traffic was not local

and thus not subject to reciprocal compensation. See Bell Atlantic Tel. Cos. v. FCC,

206 F.3d 1, 6-7 (D.C. Cir. 2000). On remand from the D.C. Circuit, the FCC again

concluded that ISP-bound calls were not subject to reciprocal compensation, though

under a different rationale. This time, the FCC concluded that Congress excluded

traffic listed in 47 U.S.C. § 251(g) from telecommunications traffic subject to

reciprocal compensation. One of the items included in § 251(g) is "information

access," which the FCC determined included ISP-bound traffic. See In the Matter of

Implementation of the Local Competition Provisions in the Telecommunications Act
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of 1996, 16 F.C.C.R. 9151, 9153 (FCC Apr. 27, 2001) (Remand Order). Again, the

FCC reiterated that its order applied prospectively only to renegotiated or expiring

interconnection agreements; "[i]t does not alter existing contractual obligations." Id.

at 9189. 

Once again, on appeal the D.C. Circuit remanded the case back to the FCC. See

WorldCom, Inc. v. FCC, 288 F.3d 429, 430 (D.C. Cir. 2002). The court found the

FCC's reliance on § 251(g) misplaced, as that section was merely a transitional device

to preserve the status quo until the FCC could adopt rules to implement the Act. Id.

The court did not vacate the FCC order, however, noting that there could be other

legal bases to support the FCC's rule; it "simply remand[ed] the case to the [FCC] for

further proceedings." Id. at 434. 

Turning back to the case at hand, SWBT informed Connect in March 1998 that

it would not compensate Connect for suspected ISP-bound traffic as a local call under

the Interconnection Agreement's reciprocal compensation arrangement. On June 5,

1998, Connect filed a complaint with the APSC seeking a declaration that the ISPbound traffic was subject to the reciprocal compensation provisions for local traffic

under the Interconnection Agreement. The APSC issued its order on December 31,

1998, and, relying heavily on FCC decisions and the district court’s analysis in Sw.

Bell Tel. Co. v. Pub. Util. Comm’n of Tex., No. MO 98 CA043 (W.D. Tex. June 16,

1998), aff'd, 208 F.3d 475 (5th Cir. 2000), determined that a call from a SWBT

customer to an ISP served by Connect within the same local calling area is a local call

subject to reciprocal compensation. (J.A. at 90, 95-96, APSC Order #6.) The APSC

also noted that twenty-three state commissions had found similar ISP-bound traffic

to be local. (Id. at 90.) SWBT challenged that decision by filing suit in federal

district court, naming Connect and the APSC as defendants and seeking injunctive

relief to prohibit enforcement of the APSC Order #6. The district court determined

that it lacked jurisdiction to review a state commission’s order interpreting and

enforcing an interconnection agreement because the Telecommunications Act grants
2

This decision was issued by the district court prior to the D.C. Circuit's

WorldCom opinion holding that § 251 was a transitional provision and did not control

the issue.

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federal district courts jurisdiction only to determine whether interconnection

agreements meet the requirements of federal law. Sw. Bell Tel. Co. v. Connect

Commc'ns Corp., 72 F. Supp. 2d 1043, (E.D. Ark. 1999) (SWBT I). On appeal, a

panel of this court reversed the district court, holding that the claim raised substantial

federal law questions. Sw. Bell Tel. Co. v. Connect Commc'ns Corp., 225 F.3d 942,

948 (8th Cir. 2000) (SWBT II). The panel did not reach the merits of the federal law

claim, but remanded to the district court to address these issues. Id. at 949. 

On remand, the district court discussed the FCC orders that had been issued

since the case at bar was originally before the district court, namely the FCC's 1999

ISP Declaratory Order and the FCC's 2001 Remand Order. These were contrary to

the FCC’s earlier position, which treated ISP traffic as local for tariff purposes, and

which was the most current FCC pronouncement at the time that the APSC first issued

its determination that the ISP traffic at issue here was subject to reciprocal

compensation. The district court noted that the FCC has now taken the position that

ISP traffic is "information access" within the meaning of 47 U.S.C. § 251(g), and that

Congress intended to exclude traffic listed in § 251(g) from the reciprocal

compensation requirements of § 251(b)(5).2

 The district court noted, however, that

the FCC Remand Order allowed the payment of reciprocal compensation for ISPbound traffic to the extent provided for in an existing interconnection agreement.

Finding that the APSC based its prior ruling on federal regulations and FCC rulings,

which turned out to be incorrect according to the latest FCC rulings, but that the

APSC failed to interpret the Interconnection Agreement pursuant to state contract law,

the district court remanded the case to the APSC "for reconsideration in light of the

FCC Remand Order and the statements made herein." (J.A. at 113.). 
3

Following the APSC's first order, SWBT began paying reciprocal

compensation to Connect for ISP-bound traffic. SWBT filed a separate claim alleging

that Connect was creating fictitious local call activity by using a Lucent Max device

to provide broadband internet service to its customers. The APSC issued Order #11,

in which it ordered Connect to make an accounting of the reciprocal compensation

that Connect received from SWBT based on calls made using the Lucent Max device,

reasoning that whether the calls created fraudulent fictitious local call activity, as

alleged by SWBT, or were legitimate ISP-bound traffic, they would not be subject to

reciprocal compensation based on Order #10. In Order #12, the APSC denied

Connect's motion to reconsider Order #11, noting that it would need to revisit the

issue only if it was ultimately determined that the ISP-bound traffic was indeed

subject to reciprocal compensation. The district court construed its judgment as

disposing of the entire case. Because we affirm the district court's decision upholding

the APSC's conclusion that the ISP-bound traffic is not subject to reciprocal

compensation, we need not address Orders #11 or #12. 

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On remand from the district court, the APSC issued Order #10, in which it

considered the existing record and determined that the Interconnection Agreement was

ambiguous as to whether the parties intended for ISP-bound calls to be subject to

reciprocal compensation. Applying Arkansas contract law and looking for the intent

of the parties, the APSC determined that SWBT clearly did not intend to subject ISPbound traffic to reciprocal compensation when it entered into the Interconnection

Agreement; that the record lacked any evidence of Connect's intent one way or the

other regarding this specific traffic when it entered into the Interconnection

Agreement; and that ISP-bound traffic was generally accepted in the industry as being

"jurisdictionally interstate." The APSC then considered the FCC Remand Order, as

it was directed to do by the district court, which, according to the APSC, "clearly

designates ISP-bound traffic as interstate." (Appellant's Add. at 29.) Based on all of

these considerations, the APSC determined that the Interconnection Agreement did

not require payment of reciprocal compensation for ISP-bound traffic.3

This time, Connect challenged the agency decision by bringing a complaint in

federal district court, seeking a declaratory ruling that the APSC Order #10 misapplied
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federal law, violated the district court mandate, violated Arkansas law, and was

arbitrary and capricious. Ruling from the bench, the district court found a latent

ambiguity in the Interconnection Agreement and determined that the APSC did not

act arbitrarily or capriciously in finding an ambiguity in the agreement. The district

court then determined, based on the original record before the APSC, that the APSC's

determination that the parties did not intend to subject ISP-bound traffic to reciprocal

compensation was likewise not arbitrary or capricious. The court entered judgment

in favor of SWBT on September 2, 2005. 

Connect appeals, arguing that the Interconnection Agreement is not ambiguous,

and even if it is, the ambiguity should be resolved in its favor. 

II. Standard of Review

The district court had jurisdiction over Connect's complaint seeking declaratory

relief against the APSC's decision as a misapplication of federal law pursuant to 28

U.S.C. § 1331. See Verizon Md. Inc. v. Pub. Serv. Comm'n of Md., 535 U.S. 635,

643-44 (2002). It also had supplemental jurisdiction to review the agency's state law

determinations. 28 U.S.C. § 1367(a); Qwest Corp. v. Minn. Pub. Utils. Comm'n, 427

F.3d 1061, 1064 (8th Cir. 2005) (Qwest v. MPUC) (exercising supplemental

jurisdiction over a claim that the MPUC acted beyond its statutory authority); Sw. Bell

Tel. Co. v. Brooks Fiber Commc'ns of Okla., Inc., 235 F.3d 493, 498 (10th Cir. 2000)

(exercising supplemental jurisdiction over state law claims in action seeking review

of Oklahoma Corporation Commission's interpretation of interconnection agreement)

(hereinafter Brooks Fiber). We review the district court's grant of summary judgment

de novo, applying the same standard used by the district court. Bockelman v. MCI

Worldcom, Inc., 403 F.3d 528, 531 (8th Cir. 2005).

We review the APSC's decision for compliance with federal law de novo. See

Qwest v. MPUC, 427 F.3d at 1064. Although federal law plays a large role in this
4

Even this conclusion is far from clear. The district court found the ambiguity

to be latent, meaning that the ambiguity "arises from undisclosed facts or uncertainties

of the written instrument." Jet Asphalt & Rock Co., Inc. v. Angelo Iafrate Constr.,

LLC, 431 F.3d 613, 617 (8th Cir. 2005) (applying Arkansas law) (internal marks

omitted). With respect, we conclude that the Supreme Court of Arkansas has not been

entirely consistent in its characterization of latent ambiguities as a legal or factual

determination. Compare Countryside Cas. Co. v. Grant, 601 S.W.2d 875, 877 (Ark.

1980) ("[W]e view the trial court's finding of latent ambiguity . . . as primarily [a]

question[] of fact, [and] we shall not reverse the trial court unless its judgment is

clearly erroneous."), with C. & A. Constr. Co., Inc. v. Benning Constr. Co., 509

S.W.2d 302, 303 (Ark. 1974) ("[A] latent ambiguity arises from undisclosed facts or

uncertainties of the written instrument. However, the initial determination of the

existence of an ambiguity rests with the court." (internal citations omitted)); see also

Nichols v. Farmers Ins. Co., 128 S.W.3d 1, 4 (Ark. Ct. App. 2003) ("[W]here the . .

. ambiguity may be resolved by reviewing the language of the contract itself, it is the

trial court's duty to make such a determination as a matter of law. . . . [W]here the

parties go beyond the contract and submit disputed extrinsic evidence . . ., this is a

question of fact for the jury." (internal citations omitted)). The APSC did not clarify

whether it found the ambiguity to be patent or latent, though it appears from its

reasoning that it found it to be a latent ambiguity. 

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dispute, the ultimate issue in this case--interpretation of the Interconnection

Agreement--is a state law issue. See Sw. Bell Tel. Co. v. Pub. Util. Comm'n of Tex.,

208 F.3d 475, 485 (5th Cir. 2000) ("[T]he agreements themselves and state law

principles govern the questions of interpretation of the contracts and enforcement of

their provisions."). Although the parties agree that we review the APSC's factual

findings related to any state law issues under an arbitrary and capricious standard, see

id., they dispute the level of deference owed to the APSC's application of state law.

The APSC determined that the Interconnection Agreement was ambiguous, which

generally is a legal conclusion under Arkansas law. See Hisaw v. State Farm Mut.

Auto. Ins. Co., 122 S.W.3d 1, 8 (Ark. 2003).4 Connect urges a de novo review of that

determination, while SWBT argues for an arbitrary and capricious review.
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In our prior panel opinion in this case, we noted that "[w]ith regard to purely

state law issues, the state commissions may have the final say." SWBT II, 225 F.3d

at 948 (citing P.R. Tel. Co. v. Telecomms. Regulatory Bd., 189 F.3d 1, 13-15 (1st Cir.

1999) (holding that § 252(e)(6) does not confer jurisdiction on federal courts to review

state agency action for compliance with state law)). Since that time, several circuits

have addressed the issue and have determined that federal courts can review state

commission determinations of state law, giving deference to the state agency's

expertise in making state law determinations. See Global NAPs, Inc. v. Verizon New

Eng., Inc., 454 F.3d 91, 96 (2d Cir. 2006) ("[W]e review the Board's decisions as

congruent with state law under the arbitrary-and-capricious standard."); Sw. Bell Tel.

Co., 208 F.3d at 482 (reviewing the state agency's "state law determinations . . . under

the more deferential arbitrary-and-capricious standard"); Mich. Bell Tel. Co. v. MFS

Intelenet of Mich., Inc., 339 F.3d 428, 433 (6th Cir. 2003) (noting "the inherent logic

of . . . allowing state agencies wider deference in state law determinations"); US West

Commc'ns v. MFS Intelenet, Inc., 193 F.3d 1112, 1117 (9th Cir. 1999) ("[We]

consider[] all other issues under an arbitrary and capricious standard"), cert. denied,

530 U.S. 1284 (2000); Brooks Fiber, 235 F.3d at 498 (reviewing all state law

determinations made by a state agency under arbitrary and capricious standard).

In this circuit, we recently held that "in recognition of the state commission's

superior technical expertise, we review its factual determinations under the arbitrary

and capricious standard." Qwest Corp. v. Koppendrayer, 436 F.3d 859, 863 (8th Cir.

2006). We were not called upon, and therefore did not decide, what level of deference

was owed to the state commission's determinations of state law. Connect relies on our

statement in Qwest v. MPUC that "whether an agency acts within its statutory

authority is a question of law [we review] de novo," 427 F.3d at 1064, to urge us to

apply de novo review to APSC's application of Arkansas law.

We believe that the de novo standard applied in Qwest v. MPUC does not

compel a similar review of the APSC's review of the state law issues in this case. In
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Qwest v. MPUC, we were reviewing the agency's actions for consistency with its

authority to act under state law. It would not have made sense to give deference to the

agency's legal conclusions when the legal conclusions being challenged involved the

agency's own authority under state law even to act. 

Nevertheless, we need not wade through this standard of review quagmire, for

regardless of the standard applied, we believe that the Interconnection Agreement

contains a latent ambiguity as discussed more fully below, and we proceed to

determine whether the APSC acted arbitrarily or capriciously in settling the

ambiguity. See Starpower Commc'ns, LLC v. FCC, 334 F.3d 1150, 1155 (D.C. Cir.

2003) (declining to settle a dispute over the proper standard of review "because the

contracts are so far from clearly unambiguous that we would resolve this issue in the

same manner regardless whether we owe the Commission any deference"). 

III. Is the Interconnection Agreement Ambiguous?

"[A] latent ambiguity arises when the contract on its face appears clear and

unambiguous, but collateral facts exist that make the contract's meaning uncertain."

Norman v. Norman, 970 S.W.2d 270, 274 (Ark. 1998); see also Coble v. Sexton, 27

S.W.3d 759, 761 (Ark. Ct. App. 2000) ("[A] latent ambiguity arises from undisclosed

facts or uncertainties of the written instrument."); Richard A. Lord, 11 Williston on

Contracts, § 33:40 (4th ed. 1999) (A latent ambiguity is one which "appear[s] only as

the result of extrinsic or collateral evidence showing that a word, thought to have but

one meaning, actually has two or more meanings."). For example, a contract may

include a clear description of the property to which it pertains, but extrinsic evidence

reveals that the description applies to more than one estate. See Norman, 970 S.W.2d

at 274; see also Abbott v. Abbott, 90 S.W.3d 10, 15-16 (Ark. Ct. App. 2002) (finding

a latent ambiguity in a divorce decree that referred to "retirement" when husband's

employer had three types of retirement plans, and it was unclear to which plan the

decree referred); Barry v. Barry, 78 F.3d 375, 382 (8th Cir. 1996) (finding a latent
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ambiguity in the meaning of the term "sale" in the context of selling shares of stock

back to a corporation where the parties disputed whether a sale required an actual

transfer of control, and both parties' interpretations were plausible).

In this case, the Interconnection Agreement is clear on its face that local traffic

is subject to reciprocal compensation. An ambiguity arises, however, when the parties

try to define local traffic to either include or exclude ISP-bound traffic. Similar to the

interconnection agreements at issue in Starpower, "[t]he ambiguity in the [ConnectSWBT] agreement[] arises from the hybrid nature of a call to an ISP and the failure

of the parties expressly to state whether ISP-bound traffic should be treated as local

or non-local." Starpower Commc'ns, 334 F.3d at 1155. The Interconnection

Agreement does not address ISP-bound traffic at all. It defines "local traffic" as traffic

originating and terminating within the same SWBT exchange area. Connect claims

that ISP-bound traffic clearly falls within this definition of local traffic because the

call terminates at the ISP provider's location within SWBT's exchange area. SWBT

counters that the calls do not "terminate" at the ISP provider's location at all, but

continue on to the internet websites ultimately accessed by the calling party's

computer. This dispute is not resolved by the Interconnection Agreement, which does

not define the term "terminating." Although the Interconnection Agreement does

define "terminating traffic" as "a voice-grade switched communications service which

is delivered to an end-user(s) as a result of another end user's attempt to establish

communications between the parties" (Appellant's Add. at 57), that definition likewise

does not address the issues raised by ISP-bound calls. The parties legitimately dispute

whether the end user initiating the call is attempting to establish communications with

the ISP-provider, which is within the local exchange area, or with the world wide web,

which clearly is not. 

Although the terms "local traffic" and "terminating traffic" are defined in the

Agreement, once extrinsic evidence of the nature of ISP-bound calls is considered, it

becomes unclear whether ISP-bound traffic "terminates" within the local calling area
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as contemplated by the Interconnection Agreement. Given the dispute within the

industry at the time and both parties' plausible interpretations of where traffic

terminates in an ISP-bound call, we conclude that the Interconnection Agreement

contains a latent ambiguity that must be resolved by extrinsic evidence.

IV. Is the APSC's Decision Arbitrary and Capricious?

 

Having determined that the Interconnection Agreement contains a latent

ambiguity, we must determine then whether the APSC acted arbitrarily or capriciously

in finding that the parties' intent was to treat the ISP-bound traffic as non-local and

thus not subject to reciprocal compensation. See Qwest v. MPUC, 427 F.3d at 1064

(reviewing state agency fact determinations under arbitrary and capricious standard).

This "scope of review 'is narrow and a court is not to substitute its judgment for that

of the agency.'" In re: Core Commc'ns, Inc., 455 F.3d 267, 277 (D.C. Cir. 2006)

(quoting Cellular Telecomms. & Internet Ass'n v. FCC, 330 F.3d 502, 507 (D.C. Cir.

2003), which applied the arbitrary and capricious standard to the FCC's order denying

a petition for forbearance). "The [state] agency must, however, 'examine the relevant

data and articulate a satisfactory explanation for its action including a rational

connection between the facts found and the choice made.'" Id. (quoting Motor

Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). 

Under Arkansas law, "the polestar of contractual construction is to determine

and enforce the intent of the parties . . . at the time the contract was made." Taylor v.

Hinkle, No. 04-471, 2004 WL 2904681, at *7 (Ark. Dec. 16, 2004) (internal citations

omitted); see also Moss v. Allstate Ins. Co., 776 S.W.2d 831, 834 (Ark. Ct. App.

1989). "[C]ourts may consider and accord considerable weight to the construction of

an ambiguous [contract] by the parties themselves, evidenced by subsequent

statements, acts, and conduct." Bishop v. City of Fayetteville, 97 S.W.3d 913, 919

(Ark. Ct. App. 2003); see also Taylor, 2004 WL 2904681 at *8 (considering

subsequent conduct of parties in ascertaining parties' intent in entering into a contract).
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The APSC also had "an obligation to interpret the Agreement within the bounds of

existing federal law." Brooks Fiber, 235 F.3d at 499. "[T]he present

telecommunications landscape makes clear that existing interconnection agreements

'requiring payment of reciprocal compensation for calls to ISPs do not conflict with

§§ 251 and 252 of the Act or with the FCC's regulations or rulings.'" Mich. Bell Tel.

Co., 339 F.3d at 436 (quoting Sw. Bell Tel. Co., 208 F.3d at 483). 

The APSC determined that the parties did not intend to treat ISP-bound traffic

as local traffic based on evidence of SWBT's intentions and actions around the time

of the contract and the lack of any evidence about Connect's intent, since it merely

adopted another parties' agreement and offered no evidence of its intent at the time it

adopted the Interconnection Agreement. The APSC also relied on the fact that "ISPbound traffic was generally accepted in the industry as being jurisdictionally

interstate." (Appellant's Add. at 28-29.) Since 1983, the FCC has recognized that

ISP-bound traffic is under its jurisdiction as interstate traffic, but exempted the traffic

from access charges generally applicable to interstate traffic. Both sides use these

FCC findings to support their positions: SWBT says the traffic is clearly interstate or

the FCC would not have had jurisdiction to exempt it from access charges, while

Connect argues that because it is treated as local traffic for purposes of access charges,

it should be treated as local traffic for purposes of reciprocal compensation. 

It is clear from the record that during the time that Connect and SWBT

negotiated and entered into the Interconnection Agreement at issue here, there was

significant debate in the industry about whether or not ISP-bound traffic was to be

treated as local traffic for purposes of reciprocal compensation. In June 1997, SWBT

sent letters to CLECs with which it had interconnection agreements, explaining its

position that the access charge exemption issued by the FCC did not change the

jurisdictional nature of ISP-bound traffic as interstate traffic, and that SWBT did not

believe that ISP-bound traffic was subject to reciprocal compensation under local

interconnection agreements. (See J.A. at 449-50 (copy of June 9, 1997, letter to Time
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Warner Communications).) During the same time frame, the Association for Local

Telecommunications sought an expedited letter clarification from the Common Carrier

Bureau to the effect that the FCC's Local Competition Order did not "alter[] the

[FCC's] long standing rule that calls to an Information Service Provider ("ISP") made

from within a local calling area must be treated as local calls by any and all LECs

involved in carrying those calls." (Id. at 610-13 (copy of June 20, 1997, Request for

Expedited Letter Clarification).) 

Considering the parties' actions following implementation of the

Interconnection Agreement, the evidence reveals that SWBT never paid reciprocal

compensation to Connect for ISP-bound traffic under the Interconnection Agreement,

even prior to the time SWBT notified Connect of its position regarding the traffic,

until it was ordered to do so by the APSC in Order #6. (Id. at 197, testimony of Paul

L. Cooper.) L. Bruce Sparling, who negotiated interconnection agreements for

SWBT, including the Interconnection Agreement with Connect, testified that at the

time that SWBT entered into the Interconnection Agreement with Connect, SWBT did

not intend reciprocal compensation to apply to the traffic now at issue. (Id. at 324,

Rebuttal Testimony of L. Bruce Sparling.) Mr. Sparling also testified that SWBT

would not have agreed to pay reciprocal compensation for ISP-bound traffic at the

time of negotiations even if Connect had requested it because SWBT considered

internet traffic to be jurisdictionally interstate, and SWBT was already losing the

access charge revenue pursuant to the FCC's exemption. (Id. at 326.) Connect offered

no evidence about its intentions at the time it entered into the Interconnection

Agreement. Its evidence revolved around the issue of whether ISP-bound traffic in

fact terminated at the ISP's server within the local area. 

If this were all there was to the APSC's resolution of the ambiguity in the

agreement, we would easily uphold its decision as not arbitrary or capricious. Given

the evidence about the intent of the parties, their subsequent actions, and the ongoing

debate within the industry at the time the Interconnection Agreement was adopted, we
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cannot say that the APSC's decision that the parties did not intend to apply reciprocal

compensation to ISP-bound traffic was arbitrary or capricious. The APSC did more

than consider the events surrounding adoption of the Interconnection Agreement,

however. It also considered (and understandably so given the district court's remand

order) the FCC's Remand Order, which, according to the APSC, "clearly designates

ISP-bound traffic as interstate." (Appellant's Add. at 29.) The FCC Remand Order

was issued in 2001, long after the parties entered into the Interconnection Agreement.

Because we are focused on the parties' intentions at the time of contracting in 1997,

"the ISP Remand Order result should have no bearing on the present dispute that

predates that ruling." Mich. Bell Tel. Co., 339 F.3d at 435. 

While the district court's reliance on the irrelevant ISP Remand Order gives us

pause, it does not render the APSC's decision arbitrary and capricious in this case. At

most, it reinforces the ongoing debate within the industry about the nature of these

calls. In the ISP Remand Order, the FCC continued to reinforce, as it had in earlier

rulings, that parties should be bound by their existing interconnection agreements as

interpreted by state commissions. Although its rationale in the ISP Remand Order

was different under the Act than previous orders, it had already concluded in 1997 that

ISP-bound traffic was jurisdictionally interstate. Given the evidence favoring SWBT's

position at the time of contracting, and the lack of evidence of Connect's intent, the

APSC's consideration of the subsequent FCC order did not make its determination

arbitrary and capricious. 

Finally, we recognize that the Oklahoma Corporation Commission (OCC)

determined that the Brooks Fiber Interconnection Agreement that was adopted by

Connect required SWBT to pay reciprocal compensation to Brooks Fiber for ISPbound traffic, and that the Tenth Circuit upheld that decision under an arbitrary and

capricious review. See Brooks Fiber, 235 F.3d at 498, 501. The fact that the Tenth

Circuit upheld the OCC's ruling that the identical agreement between SWBT and

Brooks Fiber requires reciprocal compensation does not make the APSC's contrary
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decision in this case arbitrary or capricious. See Global NAPs, Inc. v. Mass. Dep't of

Telecomms. & Energy, 427 F.3d 34, 48 (1st Cir. 2005) (recognizing that state

commissions are not bound by decisions reached by other state commissions, even in

construing similar or identical terms). The interpretation of interconnection

agreements rightly belongs to the state commissions, and we will not overturn one in

favor of another without the showing of an arbitrary or capricious decision. Reasoned

decisions reaching opposite conclusions do not ipso facto prove that either is arbitrary

or capricious.

V. Conclusion

The APSC's decision is not arbitrary and capricious, and the district court's

judgment is affirmed.

BYE, Circuit Judge, dissenting.

Because the Arkansas Public Service Commission (APSC) did not determine

the existence of a latent ambiguity in the Interconnection Agreement at issue, I do not

believe its decision is entitled to any deference under an arbitrary-and-capricious

standard of review. Further, I cannot detect a latent ambiguity in the Interconnection

Agreement, and therefore do not believe the APSC's decision can stand even under the

more deferential arbitrary-and-capricious standard. For those reasons, I would reverse

the district court's judgment, and respectfully dissent.

The Court states: "The APSC did not clarify whether it found the ambiguity to

be patent or latent, though it appears from its reasoning that it found it to be a latent

ambiguity." Ante at 9 n.4. I cannot draw the same conclusion as to the APSC's

reasoning. Rather, it seems clear the notion of a latent ambiguity was only interjected

into this case by the district court as an after-the-fact attempt to justify the APSC's
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flawed and conclusory reasoning finding an ambiguity in the Interconnection

Agreement.

The following is the sum and substance of the APSC's reasoning to support its

determination the Interconnection Agreement was ambiguous: 

Although both Connect and SWBT argue that there is no ambiguity in

their Interconnection Agreement, the parties interpret the contract to

reach diametrically opposed results. This fact, coupled with a

comparison of the Interconnection Agreement at issue in this docket and

the contracts reviewed in Starpower v. FCC, [334 F.3d 1150 (D.C. Cir.

2003),] together with the D.C. Circuit's holding that the contracts in that

case were clearly ambiguous, support the conclusion that the ConnectSWBT Interconnection Agreement at issue is ambiguous.

Appellant's Add. at 23-24.

Thus, the APSC gave two "reasons" for its decision. The first was the

agreement must be ambiguous simply because "the parties interpret the contract to

reach diametrically opposed results." This reasoning is obviously arbitrary and

capricious. Such a rule would mean ambiguity turns on the parties' arguments rather

than a contract's terms, thereby rendering every disputed contract ambiguous. This

makes no sense.

Second, the APSC relied upon the D.C. Circuit's interpretation of an

interconnection agreement in Starpower Commc'ns, LLC v. FCC, 334 F.3d 1150

(D.C. Cir. 2003). A mere cursory examination of Starpower reveals the arbitrary and

capricious nature of the APSC's reasoning. In Starpower, the FCC issued an order

indicating interconnection agreements between Starpower and Verizon Virginia, Inc.,

were unambiguous, and thus Verizon did not have to pay Starpower for ISP-bound

traffic as local traffic under the agreement. Focusing on the agreement's use of the
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phrase "end-to-end," the D.C. Circuit disagreed, concluding the parties' agreements

were

models of ambiguity with respect to reciprocal compensation for ISPbound traffic. Certain terms, such as "local traffic" and "terminate,"

could readily support an interpretation that would require Verizon and

Starpower to compensate each other for ISP-bound traffic. At the same

time, the term "end-to-end" in § 5.7.5 of the 1998 Agreement and in §§

4.1 and 4.2 of the 1999 agreement implies that the Commission's

jurisdictional end-to-end analysis controls, so that reciprocal

compensation is not due. Thus, the agreements are susceptible to two

meanings, and the Commission erred in holding the agreements

unambiguously exclude ISP-bound traffic.

Starpower, 334 F.3d at 1157.

The D.C. Circuit focused exclusively upon the agreement's use of the term

"end-to-end" as the language which created an ambiguity. Starpower has absolutely

no bearing on the interconnection agreement at issue in this case, because nowhere

does this agreement use the term "end-to-end," or anywhere else incorporate the FCC's

jurisdictional end-to-end analysis for determining the interstate or local nature of a

given call.

Because both "reasons" given by the APSC for finding an ambiguity in the

agreement are fundamentally flawed, I see no reason to pay its decision any deference

whatsoever.

Reviewing the APSC's decision de novo, as I believe we should, see Qwest

Corp. v. Minn. Pub. Utils. Comm'n, 427 F.3d 1061, 1064 (8th Cir. 2005) (reviewing

de novo whether a state agency acts within its authority in implementing the

Telecommunications Act of 1996); see also Western World Ins. Co. v. Branch, 965

S.W.2d 760, 761 (Ark. 1998) (indicating the question whether a contract is ambiguous
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is a question of law), I can find no ambiguity in the interconnection agreement

between Southwestern Bell (SWB) and Connect Communications.

Under Arkansas law, the language contained in the contract is the best evidence

of the parties' intention. First Nat'l Bank v. Griffin, 832 S.W.2d 816, 818-19 (Ark.

1992). "When contracting parties express their intention in a written instrument in

clear and unambiguous language, it is the court's duty to construe the writing in

accordance with the plain meaning of the language employed." Surratt v. Surratt, 148

S.W.3d 761, 768 (Ark. Ct. App. 2004). 

Under the plain and unambiguous language of the agreement, calls placed from

SWB's customers to internet service providers (ISPs) within the same SWB exchange

were defined as local calls for which SWB agreed to pay Connect reciprocal

compensation. The contract language defines traffic as terminating when it is

"delivered." See Add. at 57 (defining "Terminating Traffic" as a "telecommunications

service which is delivered to an end user(s) as a result of another end user's attempt

to establish communication between the parties."). It is undisputed the calls at issue

were delivered, and therefore terminated, to Connect end users (ISPs) at a

geographical location within the same local exchange area. SWB clearly agreed to

compensate Connect for such calls. See Add. at 49 ("SWBT agrees to compensate

CONNECT for the termination of SWBT Local Traffic originated by SWBT end users

in the SWBT exchanges described in Appendix DCO and terminating to CONNECT

end users.").

"A latent ambiguity arises [only] when the contract on its face appears clear and

unambiguous, but collateral facts exist that make the contract's meaning uncertain."

Oliver v. Oliver, 19 S.W.3d 630, 633 (Ark. Ct. App. 2000). Here, SWB contends the

"hybrid" nature of calls placed to ISPs renders the agreement's meaning uncertain –

that is, although ISP-bound calls may "terminate" at an ISP's geographical location
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within the same local exchange area, they may proceed from there to a website

anywhere on the Internet.

I disagree the "hybrid" nature of ISP-bound calls is a collateral fact which

renders uncertain the meaning of any of the terms in this particular agreement. The

parties specifically chose to define the termination of local calls with reference to

where they were "delivered," which undisputedly occurred at a specific geographical

location irrespective of whether subsequent to "delivery" the calls continued on into

cyberspace via the internet. The parties further unambiguously agreed that when

phone calls were "delivered" within the same local exchange area where they were

placed, such calls were local in nature and therefore subject to reciprocal

compensation.

The only "collateral" event which occurred here (which appears to be the real

reason SWB suddenly refused to pay Connect for ISP-bound calls) was the FCC's

subsequent ruling that calls placed to ISP providers were interstate in nature. See In

re Implementation of the Local Competition Provisions in the Telecomms. Act of

1996, Intercarrier Comp. for ISP-Bound Traffic, 14 F.C.C.R. 3689, 1999 WL 98037

(Feb. 26, 1999) (Reciprocal Compensation Order). The FCC's order was prospective

in nature, however, as several courts have since noted. See Global NAPS, Inc. v.

FCC, 291 F.3d 832, 834 (D.C. Cir. 2002) ("However, the FCC's Reciprocal

Compensation Order left open the possibility that state regulators . . . could continue

to treat ISP-bound traffic as local traffic, if interconnection agreements between

carriers so provided, whether explicitly or implicitly."); S. New England Tel. Co. v.

Conn. Dep't of Pub. Util. Co., 285 F. Supp. 2d 252, 259 (D. Conn. 2003) ("While

classifying the majority of ISP-bound traffic as interstate, the FCC left open the

possibility that state regulators could continue to treat ISP-bound traffic as local

traffic, if interconnection agreements between carriers so provided, whether explicitly

or implicitly. The FCC further acknowledged in its 1999 Ruling that it had

historically directed state commissions to treat such calls as 'local.'") (internal citations
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and quotations omitted); see also Sw. Bell Tel. Co. v. Brooks Fiber Commc'ns of

Okla., Inc., 235 F.3d 493 (10th Cir. 2000) (interpreting the very agreement at issue

here and upholding the Oklahoma Corporation Commission's determination that calls

placed to ISPs within the same exchange area were local traffic subject to reciprocal

compensation under the agreement). 

Thus, even though ISP-bound calls have now been identified as interstate in

nature, it is clear parties could choose by contract to identify such calls as local ones

subject to reciprocal compensation. That is exactly what occurred here. The fact

SWB now realizes it made a bad business judgment, which led to a written contract

entered into in good faith by both parties to it, does not now justify its refusal to pay

Connect pursuant to the unambiguous terms of the agreement in controversy.

For the reasons stated, I respectfully dissent.

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