In the

United States Court of Appeals

For the Seventh Circuit

____________

No. 03-1976

INDIANA BELL TELEPHONE COMPANY, INC.,

Plaintiff-Appellee,

v.

INDIANA UTILITY REGULATORY COMMISSION,

WILLIAM D. MCCARTY, DAVID E. ZIEGNER, in their

capacity as Commissioners of the Indiana Utility

Regulatory Commission and not as individuals,

Defendants-Appellants,

and

AT&T COMMUNICATIONS, INC. and WORLDCOM, INC.,

Intervening Defendants-Appellants,

and

INDIANA OFFICE OF UTILITY CONSUMER COUNSELOR,

Intervening Appellant.

____________

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 02 C 1772—Larry J. McKinney, Chief Judge.

____________

ARGUED OCTOBER 23, 2003—DECIDED FEBRUARY 26, 2004

____________
2 No. 03-1976

Before MANION, KANNE, and EVANS, Circuit Judges.

EVANS, Circuit Judge. Through the Telecommunications

Act of 1996, Congress has had notable success in meeting

its goal of fostering competition in the telecommunications

industry. But that success has not come without furrowing

more than a few brows as lawyers and judges puzzle over

the Act’s unusual—and unequal—blending of federal and

state authority. So it is not surprising to have before us

again a preemption issue, this time revolving around the

application of a local telephone service provider to enter the

long-distance market. The issue is whether, during the

long-distance application process, a state regulatory commission has the power to enter an order designed to ensure

the applicant will continue to meet its obligations in the

local service market.

In the Act, Congress entered what was primarily a state

system of regulation of local telephone service and created

a comprehensive federal scheme of telecommunications

regulation administered by the Federal Communications

Commission (FCC). While the state utility commissions

were given a role in carrying out the Act, Congress “unquestionably” took “regulation of local telecommunications

competition away from the State” on all “matters addressed

by the 1996 Act”; it required that the participation of the

state commissions in the new federal regime be guided by

federal-agency regulations. AT&T Corp. v. Iowa Utils. Bd.,

525 U.S. 366, 378 n.6 (1999). And we recently learned for

certain that federal courts can review what the state

regulatory agencies do. Verizon Md., Inc. v. Pub. Serv.

Comm’n, 535 U.S. 635 (2002). It is not surprising that

questions regarding the degree to which the Act preempts

state regulation have inevitably grown out of such a

scheme.

The issue before us arises as a result of the request of

Indiana Bell Telephone Company, Inc. (now SBC Indiana)
No. 03-1976 3

to be allowed to enter the long-distance market. SBC is

what is known as an “incumbent local exchange carrier,” as

defined in 47 U.S.C. § 251(h); it is also a “Bell operating company,” (BOC) as defined in 47 U.S.C. § 153(4)

and used in section 271 of the Act, 47 U.S.C. § 271. It is one

of the Baby Bells—the descendants of the old monopolist

American Telephone & Telegraph Company (AT&T).

The defendant is a state agency—the Indiana Utility

Regulatory Commission (IURC). The intervener defendants

are other competing “local exchange carriers,” as defined in

47 U.S.C. § 153(44), including AT&T. As we have previously

pointed out, “[o]ne of history’s ironies is that AT&T itself,

reduced to a long-distance carrier . . . has become one of the

principal new entrants into local phone service.” AT&T

Communications of IL v. Illinois Bell Tel. Co., 349 F.3d 402,

404 (7th Cir. 2003). At the same time, the Baby

Bells—incumbent local exchange carriers, or Bell operating

companies—are attempting to enter the long-distance

market.

The Act sets out procedures by which companies enter

both the local and long-distance markets. Sections 251 and

252 set out procedures to facilitate entry into local service

markets. Section 271 sets forth the process a Bell operating

company must go through in applying to the FCC for

authority to provide long-distance service.

The Baby Bells have telephone lines and other infrastructure in place. In order to facilitate the entry of competing carriers into the market for local service, the Act

requires that incumbent carriers provide “interconnection”

and other wholesale services to the competing carriers

on a nondiscriminatory basis. Sections 251 and 252 of the

Act lay out a process for reaching “interconnection agreements” by which competing carriers can gain interconnection with the incumbent carrier’s networks, facilities,

and services. The state commissions have a role in helping

to negotiate and arbitrate interconnection agreements if
4 No. 03-1976

private negotiations fail to produce a complete agreement

within a specific period of time. Section 252(a),(b). Before

any interconnection agreement may be implemented, the

state commission must approve it. Section 252(e)(1).

Going in the other direction, section 271 sets out the factors the FCC evaluates in deciding whether to grant the

application of an incumbent local exchange carrier to enter

the long-distance market. Part of the process is directed

at ensuring that the applicant is facilitating competition

in the market for local services before it is allowed to

enter the long-distance market. To that end, under section

271(d)(2)(B), the FCC consults with the state commission to

verify that the BOC has (1) one or more state-approved

interconnection agreements with a competitor, pursuant

to sections 251 and 252, or a Statement of Generally

Available Terms and Conditions (SGAT) under which it will

offer local service, and (2) that the interconnection agreements or the SGAT satisfies the 14-point competitive

checklist set out in section 271(c)(2)(B). The state commission makes a recommendation, which is merely advisory, as

to whether the BOC has satisfied the requirements. The Act

reserves to the FCC the authority to decide whether to

grant a section 271 application. See MCI Telecomms. Corp.

v. Illinois Bell Tel. Co., 222 F.3d 323 (7th Cir. 2000).

In this case, SBC initiated a proceeding before the IURC

to have the agency evaluate its compliance with section 271

so that the IURC could then consult with the FCC on SBC’s

proposed application to provide long-distance service. In

evaluating SBC’s compliance with section 271, IURC set up

a collaborative process to allow for the participation of other

interested parties, namely, competing local exchange

carriers. Several of the competing carriers presented the

IURC with proposed “performance assurance” or “remedy”

plans to ensure SBC’s performance toward the competing

carriers and to provide for enforcement of the plan through

liquidated damages payable to the competing carriers and
No. 03-1976 5

assessments payable to the state of Indiana. But no agreement on such a plan was reached.

“Performance assurance” plans are not creatures of

the Act. However, the FCC has said that the “existence of

a satisfactory performance monitoring and enforcement

mechanism is probative evidence that the BOC will continue to meet its section 271 obligations after a grant of [longdistance] authority.” In re Joint Application by BellSouth

Corp. et al. for Provision of In-Region, InterLATA Servs. in

Ga. And La., 17 F.C.C.R. 9018, ¶ 291 (May 15, 2002). It is

easy to see why SBC might want to present a plan to the

FCC to bolster its application. And, in fact, SBC presented

a plan of its own in seeking the IURC’s favorable recommendation to the FCC. It was a plan SBC had negotiated

with Time-Warner Telcom of Indiana as an amendment

to its interconnection agreement with that company. It

would be a performance assurance plan that, if the IURC

approved, would be available to all other competing local

exchange carriers pursuant to section 252(I).

It was not approved, however, and instead the IURC entered an order adopting a remedy plan of its own. It

asserted that Indiana state law gave it the authority to

adopt the plan and to issue orders regarding the quality of

service SBC provided. The IURC said that SBC was “subject

to the jurisdiction and oversight” of the IURC and is

obligated under Indiana law to “furnish adequate service

and facilities.” The order it entered was a “stand-alone”

document, which the IURC said was available to new entrants into the local service market, “independent of the

Sections 251/252 interconnection agreement process.”

With this state of affairs, SBC moved to federal court with

a complaint, alleging that the IURC order conflicted with

and was preempted by sections 251, 252, and 271 of the Act

and that the order exceed the IURC’s authority under

Indiana law. SBC filed a motion for a preliminary injunc-
6 No. 03-1976

tion, which by agreement was consolidated with a final

hearing on the merits of the preemption claims. The parties

filed cross-motions for summary judgment, and the district

court granted SBC’s request for injunctive relief. The IURC

and a number of intervener-competing local exchange

carriers now appeal that decision.

As a preliminary matter, we note that at first glance it

may seem disingenuous for SBC to submit its own performance assurance plan and, when that plan fails to gain

approval, to say the IURC has no authority to issue its own

plan, a plan to which SBC did not agree. A closer look,

however, reveals the logic in SBC’s position. The company

was seeking approval of its application to provide longdistance service. A performance assurance plan of its own

making would be its promise to meet its obligations as to

local service if its application to provide long-distance service were granted. If its plan were inadequate, SBC would

presumably bear the consequences in the form of the rejection of its application. To have a plan imposed from the

outside takes the application process out of SBC’s hands

and imposes on it unnegotiated obligations in its provision

of local service.

We come, then, to the issue: is the IURC order preempted

by the Act? Congressional intent “ ‘is the ultimate touchstone’ of pre-emption analysis.” Cipollone v. Liggett Group,

Inc., 505 U.S. 504, 516 (1992) (quoting Malone v. White

Motor Corp., 435 U.S. 497, 504 (1978)). Congress’s intent

may be explicit or it may be implicit in the statute’s structure and purpose. Gade v. National Solid Wastes Mgmt.

Ass’n, 505 U.S. 88 (1992). The Telecommunications Act, as

we have said, specifically reserves some power to the states.

The issue is how much. What the IURC has done is preempted if Congress has occupied the field so thoroughly “as

to make reasonable the inference that Congress left no room

for the States to supplement it.” Cipollone, 505 U.S. at 516.

It is also preempted where what the state has done is an
No. 03-1976 7

obstacle to the execution of Congress’s purpose or frustrates

that purpose by interfering with the methods Congress

selected to achieve a federal goal even when the state goal

is identical to the federal goal:

In determining whether state law stands as an obstacle

to the full implementation of federal law, it is not

enough to say that the ultimate goal of both federal and

state law is the same. A state law also is pre-empted if

it interferes with the methods by which the federal

statute was designed to reach the goal.

Gade, 505 U.S. at 103 (citations omitted); see also Crosby v.

National Foreign Trade Council, 530 U.S. 363 (2000).

It is uncontroverted that in the Act, Congress transferred

broad authority from state regulators to federal regulators,

even while it left corners in which the states had a role.

This role is illustrated by section 271, under which, as we

have been discussing, the state commission evaluates an

application and makes a recommendation to the FCC. But

what the IURC has done is to parlay its limited role in

issuing a recommendation under section 271, involving

long-distance service, into an opportunity to issue an order,

ostensibly under state law, dictating conditions on the

provision of local service. The problem is that the procedure

for entry into the local-service market is spelled out in some

detail in sections 251 and 252. The IURC order bumps up

against those procedures and thus interferes with the

method the Act sets out for the application process for longdistance service in section 271 and, more dramatically, with

the process for interconnection agreements for local service

under sections 251 and 252.

In Wisconsin Bell, Inc. v. Bie, 340 F.3d 441 (7th Cir.

2003), we recently considered a similar foray by the Wisconsin Public Service Commission into the sections 251-252

process. The commission ordered Wisconsin Bell to file

tariffs setting out the price and other terms on which
8 No. 03-1976

competitors would be allowed to interconnect with Wisconsin Bell’s local telephone network. We found that the

requirement was preempted. In fact, we said:

The tariff procedure short-circuits negotiations, making

hash of the statutory requirement that forbids requests

for arbitration until 135 days after the local phone

company is asked to negotiate an interconnection

agreement. 47 U.S.C. § 253(b)(1).

At 445. We recognized that by providing an alternative

means of obtaining interconnection, the tariff promoted the

“procompetitive policy of the federal act.” Nevertheless, we

found that to “identify the policy underlying a statute and

then run with it is a dangerous method of interpretation . . . .” Id.

Although the IURC and the interveners argue that Bie

does not apply here, we are hard-pressed to see why not.

Perhaps they are, too, for their alternative argument is that

we should overrule Bie. We decline the opportunity, not just

because the case is a recent statement from us, but because

we think it is rightly decided. The situation currently before

us is similar and requires the same result, which we would

reach with or without the helpful guidance of Bie. What the

IURC has done is to make an end run around the Act. By

issuing its freestanding order, the IURC set up baselines for

interconnection agreements. The order interferes with the

procedures set out in the Act, which require that the

agreements be negotiated between private parties, and only

when that fails are they subject to mediation by state

agencies. We find that the order of the IURC is preempted

by sections 251 and 252 of the Act. The judgment of the

district court is therefore AFFIRMED.
No. 03-1976 9

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—2-26-04