FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

AT&T COMMUNICATIONS OF 

CALIFORNIA, INC.; TELEPORT

COMMUNICATIONS GROUP OF SAN

FRANCISCO; TELEPORT

COMMUNICATIONS GROUP OF LOS

ANGELES; TELEPORT

COMMUNICATIONS GROUP OF SAN

DIEGO, No. 08-17030

Plaintiffs-Appellants, D.C. No.  v. 3:06-cv-07271-JSW

PAC-WEST TELECOMM, INC.; OPINION

MICHAEL R. PEEVEY; GEOFFREY E.

BROWN; DIAN M. GRUENEICH; JOHN

BOHN; RACHELLE CHONG,

Commissioners of the California

Public Utility Commission in their

official capacity,

Defendants-Appellees. 

Appeal from the United States District Court

for the Northern District of California

Jeffrey S. White, District Judge, Presiding

Argued and Submitted

October 6, 2010—San Francisco, California

Filed June 21, 2011

8363
Before: Stephen Reinhardt and Marsha S. Berzon, Circuit

Judges, and Louis H. Pollak, Senior District Judge.*

Opinion by Judge Berzon

*The Honorable Louis H. Pollak, Senior District Judge for the U.S. District Court for Eastern Pennsylvania, Philadelphia, sitting by designation.

8364 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
COUNSEL

Randolph W. Deutsch, Max Fischer, and Mark E. Haddad of

Sidley Austin LLP, Los Angeles, California, for plaintiffsappellants AT&T Communications of California, Inc., Teleport Communications Group of San Francisco, Teleport Communications Group of Los Angeles, and Teleport

Communications Group of San Diego.

Robert Allen Brundage of Bingham McCutchen LLP, San

Francisco, California; Tamar Finn of Bingham McCutchen

LLP, Washington, DC; and William Carroll Harrelson and

James Michael Tobin of Tobin Law Group, LLC, Tiburon,

California, for defendant-appellee Pac-West Telecomm, Inc.

Christopher Paul Witteman of the California Public Utilities

Commission, San Francisco, California, for defendantsappellees Michael R. Peevey, Geoffrey E. Brown, Dian M.

Grueneich, John Bohn, and Rachelle Chong, Commissioners

8366 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
of the California Public Utility Commission in their official

capacities.

Laurel Rodnon Bergold and Richard K. Welch of the Federal

Communications Commission, Washington, DC, for the Federal Communications Commission as amicus curiae. 

OPINION

BERZON, Circuit Judge:

When a customer of telephone company A places a local

call to a customer of telephone company B, the two companies cooperate to complete the call. Traditionally, the telephone company of the individual receiving the call (company

B) would bill the originating phone company (company A) for

completing, or “terminating,” the call, on a per-minute basis.

When the phone call went in the opposite direction—from a

company B customer to a company A customer—the billing,

too, would be reversed. Underlying this “reciprocal compensation” arrangement was the empirically-based assumption

that, over time, the telephone traffic going in each direction

would even out. 

In the late 1990s, however, a technological development

undermined that assumption: the explosive growth of dial-up

internet access. Unlike calls exchanged between friends and

family members, your internet service provider (ISP)1 never

calls you back; all the telephone traffic originates from your

phone line and terminates at the ISP’s. Following passage of

the Telecommunications Act of 1996, telephone companies

1

In light of the oppressive number of acronyms used herein, and for the

reader’s convenience, we have included a glossary of terms in an appendix

at the end of this opinion. Please note, however, that the definitions provided are meant only to apply to the terms as they are used in this opinion,

and that they may have alternate or additional meanings in other contexts.

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8367
were allowed for the first time to compete with each other for

local telephone customers. Some of these companies—called

“competitive local exchange carriers” (CLECs), as distinct

from the state-regulated monopolies that prevailed before

1996, which are now known as the “incumbent local

exchange carriers” (ILECs)—realized that, in light of the

reciprocal compensation regime, on the one hand, and the

massively unidirectional traffic flows to ISPs, on the other,

they could make a great deal of easy money by putting the

two together. And so many of them did, targeting as their customers ISPs providing dial-up internet access. Each time their

ISP customers received a phone call, the CLECs would bill

the originating phone company (which tended, at least at first,

to be an ILEC) for having terminated its call. But because the

ISPs rarely made any outgoing phone calls, the CLECs could

receive a great deal of compensation without ever having to

put the “reciprocal” in “reciprocal compensation.” 

In 2001, the Federal Communications Commission (FCC)

addressed this game of regulatory arbitrage in the not-sosuccinctly-named In the Matter of Implementation of the

Local Competition Provisions in the Telecommunications Act

of 1996, Intercarrier Compensation for ISP-Bound Traffic, 16

F.C.C.R. 9151 [hereinafter, “ISP Remand Order”], which

imposed a new compensation regime for ISP-bound traffic. In

this case, we are asked to decide the proper scope of this alternative compensation regime.

Plaintiff-appellant AT&T (which is a CLEC in California)

maintains that the ISP Remand Order applies when the carrier

originating the call and the carrier terminating the call are

both CLECs. Defendants-appellees Pac-West (also a CLEC)

and the California Public Utilities Commission (CPUC)

[together, “Appellees”] contend that the ISP Remand Order’s

compensation regime applies only to traffic between a CLEC

and an ILEC. The CPUC agreed with Pac-West’s limited

reading of the reach of the compensation regime, finding it

inapplicable to the ISP-bound traffic originating with AT&T

8368 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
and terminated by Pac-West, and so it assessed against AT&T

charges consistent with Pac-West’s state-filed tariff. AT&T

then sued Pac-West and the CPUC in federal district court,

alleging that the ISP Remand Order preempted Appellees’

attempts to assess AT&T charges for ISP-bound traffic based

on state-filed tariffs. The district court granted summary judgment to Appellees, agreeing with their argument that the ISP

Remand Order does not apply to CLEC-to-CLEC traffic.

We agree with AT&T, and with the analysis contained in

an amicus brief filed upon our request by the FCC, that the

ISP Remand Order’s compensation regime applies to ISPbound traffic exchanged between two CLECs. We therefore

reverse.

REGULATORY BACKGROUND

Until passage of the Telecommunications Act of 1996

(TCA), Pub. L. No. 104-104, 110 Stat. 56 (codified, as

amended, in scattered sections of 47 U.S.C.), local exchange

carriers (LECs)—those carriers responsible for telephone traffic within geographically-delineated regions known as Local

Access and Transport Areas (LATAs), as distinct from longdistance (or “interexchange”) traffic—operated as

government-regulated monopolies. See Global NAPs Cal. v.

Pub. Utils. Comm’n of Cal., 624 F.3d 1225, 1228-29 (9th Cir.

2010); Pac. Bell Tel. Co. v. Cal. Pub. Utils. Comm’n, 621

F.3d 836, 839-40 (9th Cir. 2010); see also Verizon Commcn’s,

Inc. v. FCC, 535 U.S. 467, 475-76 (2002); AT&T Corp. v.

Iowa Utils. Bd., 525 U.S. 366, 371 (1999). With the TCA

Congress opened up the LEC market to new entrants, eliminating their protected monopoly status. See Verizon

Commc’ns, 535 U.S. at 476; Global NAPs Cal., 624 F.3d at

1228. Both AT&T and Pac-West took advantage of the new

statute to compete with the two companies that had previously

enjoyed monopoly LEC status in different parts of California,

Verizon and Pacific-Bell (now SBC California). Thus, for

purposes of the local telephone markets relevant to this case,

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8369
AT&T and Pac-West are CLECs, and Verizon and SBC California are ILECs. 

The TCA imposed special obligations on ILECs to mitigate

their dominant market position. See 47 U.S.C. § 251(c)(2).

But it also imposed on all “carriers”

2

 the duty “to interconnect

directly or indirectly with the facilities and equipment of other

telecommunications carriers.” Id. § 251(a)(1). “Interconnection allows customers of one LEC to call the customers of

another, with the calling party’s LEC (the ‘originating’ carrier) transporting the call to the connection point, where the

called party’s LEC (the ‘terminating’ carrier) takes over and

transports the call to its end point.” Global NAPs Cal., 624

F.3d at 1228 (quoting Verizon Cal. v. Peevey, 462 F.3d 1142,

1146 (9th Cir. 2006)).

Interconnection, however, is not costless. The TCA therefore obligates LECs “to establish reciprocal compensation

arrangements for the transport and termination of telecommunications.”3

 47 U.S.C. § 251(b)(5); see also Global NAPs Cal.,

2With certain exceptions not relevant here, the TCA defines “carrier” as

“any person engaged as a common carrier for hire, in interstate or foreign

communication by wire or radio or in interstate or foreign radio transmission of energy.” 47 U.S.C. § 153(11). 

3Although all carriers have the duty to interconnect and the duty to

establish reciprocal compensation arrangements, only ILECs have the statutory duty to negotiate an interconnection agreement in good faith, see 47

U.S.C. § 251(c)(1), and only ILECs can be required to arbitrate an interconnection agreement if good-faith negotiations do not result in an agreement, see id. § 252(b). So the TCA leaves something of an enforcement

gap: CLECs have statutory duties to interconnect with other LECs and to

provide reciprocal compensation, but there is no procedure specified for

one CLEC to require another CLEC to enter into an interconnection agreement that would govern the terms of those duties. (It is possible—although

the matter is not before us—that 47 U.S.C. § 208(a), which erects a mechanism for filing complaints with the FCC, could provide a means of

enforcing the general TCA duty to interconnect and to establish reciprocal

compensation arrangements. See Western Radio Servs. Co. v. Qwest

Corp., 530 F.3d 1186, 1205 (9th Cir. 2008); see generally N. County

Commc’ns Corp. v. Cal. Catalog & Tech., 594 F.3d 1149, 1158-61 (9th

Cir. 2010).) 

8370 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
624 F.3d at 1228. “Under a reciprocal compensation arrangement, the originating LEC must compensate the terminating

LEC for delivering its customer’s call to the end point.”

Peevey, 462 F.3d at 1146; see also 47 C.F.R. § 51.701(e).

Shortly after the passage of the TCA, the FCC clarified that

“reciprocal compensation obligations . . . apply only to traffic

that originates and terminates within a local area.” In the Matter of Implementation of the Local Competition Provisions in

the Telecommunications Act of 1996, Interconnection

Between Local Exchange Carriers and Commercial Mobile

Radio Service Providers, 11 F.C.C.R. 15499, 16013 ¶ 1034

(1996) [hereinafter, “Local Competition Order”].

Traditionally—that is, before the widespread adoption of

dial-up internet connectivity—reciprocal compensation

arrangements required the originating LEC to pay the terminating LEC for each minute of each call (i.e., each “minute of

use,” or “mou”). See, e.g., ISP Remand Order, 16 F.C.C.R. at

9162 ¶ 19 (discussing “the traditional assumptions of per minute pricing”). The logic behind this system was that, over

time, the number of calls going each way would be essentially

the same, and no LEC would pay more than its fair share of

the costs associated with terminating other LECs’ traffic. See

id. at 9162 ¶ 20, 9183 ¶ 69.

With the advent of dial-up internet access, however, this

arrangement led to a classic example of regulatory arbitrage.4

4

“Regulatory arbitrage” is a pejorative term referring to the practice of

operating a business to take maximum advantage of the prevailing regulatory environment (as opposed to delivering the maximum amount of value

to the business’s customers), usually at the expense of consumers, competitors, or taxpayers, as the case may be. See, e.g., Global NAPs, Inc. v.

Verizon New Eng., Inc., 454 F.3d 91, 95 (2d Cir. 2006); ISP Remand

Order, 16 F.C.C.R. 9162 ¶ 21; see generally Rob Frieden, Regulatory

Arbitrage Strategies and & Tactics in Telecommunications, 5 N.C. J.L. &

TECH. 227 (2004). 

In this context, the FCC explained, the prevailing intercarrier compensation regime encouraged the “inefficient entry of LECs intent on serving

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8371
Certain CLECs (including Pac-West) took advantage of the

traditional reciprocal compensation scheme to target as its

customers a species of company that received a high number

of telephone calls but originated very few—namely, ISPs

offering dial-up internet access. See ISP Remand Order, 16

F.C.C.R. at 9153 ¶ 2; 9161 ¶ 21; 9183-84 ¶¶ 69-70. Not only

do ISPs rarely, if ever, make outgoing calls, but calls to ISPs

are much longer than average telephone calls. See id. at 9153

¶ 2; 9162 ¶ 19 & 21; 9183 ¶ 69. Thus, CLECs predominantly

serving ISP customers could collect huge sums in “reciprocal”

compensation without ever having actually to reciprocate. 

In response to the widespread practice of doing just that,

the FCC promulgated an order in 1999 addressing the problem of ISP-bound phone calls. See In the Matter of Implementation of the Local Competition Provision in the

Telecommunications Act of 1996, Intercarrier Compensation

for ISP-Bound Traffic, 14 F.C.C.R. 3689 (1999) [hereinafter,

“Declaratory Ruling”]. Applying an “end-to-end” analysis,

whereby the geographic location of the telecommunications

transmission’s beginning and end points are compared, the

FCC took the position that phone calls to an ISP do not actually terminate at the ISP’s computers, but instead continue on

to the servers (typically located across state lines or even in

foreign countries) hosting the particular websites visited by

the ISP’s customers. See id. at 3697 ¶ 12. 

For present purposes, the Declaratory Ruling’s end-to-end

ISPs exclusively and not offering viable local telephone competition, as

Congress had intended to facilitate with the [TCA].” ISP Remand Order,

16 F.C.C.R. at 9162 ¶ 21. Indeed, the reciprocal compensation regime permitted LECs to offer ISPs “below cost retail rates subsidized by intercarrier compensation,” id. at 9182 ¶ 68, and, in some instances, even made

it “possible for LECs serving ISPs to afford to pay [the ISPs] to use [the

LECs’] services.” Id. at 9162 ¶ 21. In short, the reciprocal compensation

regime for ISP-bound traffic “disconnect[ed] costs from end-user market

decisions. . . . [,] disort[ing] competition by subsidizing one type of service at the expense of others.” Id. at 9155 ¶ 5. 

8372 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
analysis had two primary consequences. First, the FCC held

that ISP-bound traffic is jurisdictionally interstate, see id. at

3701-02 ¶ 18; and second, the FCC concluded that because

ISP-bound traffic was not “local,” the statutory reciprocal

compensation obligation did not apply to it. See id. at 3706

¶ 26 n.87. There were no federal regulations or rulings governing intercarrier compensation for ISP-bound traffic at the

time. The FCC filled the gap by directing that “parties should

be bound by their existing interconnection agreements.” Id. at

3690 ¶ 1. Recognizing that some LECs had not yet entered

into interconnection agreements, the FCC specified that state

public utility commissions could “determine in their arbitration proceedings at this point whether reciprocal compensation should be paid for [ISP-bound] traffic.” Id. at 3704-05 ¶ 25.5

The Declaratory Ruling was subsequently challenged in a

petition to the U.S. Circuit Court of Appeals for the District

of Columbia, resulting in a decision vacating it as insufficiently legally justified and remanding to the FCC for further

proceedings. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1, 3

(D.C. Cir. 2000).

On remand, the FCC issued a new ruling reaching the same

conclusion—that ISP-bound traffic is not subject to reciprocal

compensation—but, in light of the D.C. Circuit’s legal ruling,

on new grounds. See ISP Remand Order, 16 F.C.C.R. at 9151.

The FCC held that all local telecommunications traffic was

subject to the § 251(b)(5) reciprocal compensation obligation

unless it fell into one of the three exceptions contained in 47

U.S.C. § 251(g), for “exchange access, information access,

and exchange services.”

6

 The FCC then ruled that “Congress,

5As discussed in note 3, supra, only ILECs can be required to arbitrate

an interconnection agreement. The Declaratory Ruling does not directly

consider the possibility that both the originating and terminating LEC

could be CLECs, likely because, so soon after passage of the TCA, ILECs

still dominated the marketplace. 

6

“On or after the date of enactment of the [TCA], each local exchange

carrier . . . shall provide exchange access, information access, and

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8373
through section 251(g), expressly limited the reach of section

251(b)(5) to exclude ISP-bound traffic.” 16 F.C.C.R. at 9154

¶ 3; see also id. at 9168 ¶ 37 (“ISP-bound traffic falls within

at least one of the three enumerated categories in subsection

(g).”).

In addition to setting forth a new legal basis for excluding

ISP-bound traffic from the statutory reciprocal compensation

obligation, the FCC acknowledged the degree to which ISPrelated regulatory arbitrage had distorted the market for telecommunications services. Accordingly, and as an exercise of

the FCC’s power under 47 U.S.C. § 201(b),7 the ISP Remand

Order set forth “interim” rules for how LECs would be compensated for ISP-bound traffic. These interim rules, central to

this appeal, had four components: 

(1) Rate caps. Rather than implementing “a ‘flash cut’ to

a new compensation regime that would upset the legitimate

business expectations of carriers and their customers,” the

FCC imposed declining rate caps, starting at $.0015 per mou

and stabilizing, 36 months after the ISP Remand Order

issued, at $.0007 per mou. 16 F.C.C.R. at 9186-87 ¶¶ 77-78.

The rate caps had several limitations. First, they had “no

effect to the extent that states have ordered LECs to exchange

exchange services for such access to interexchange carriers and information service providers in accordance with the same equal access and nondiscriminatory interconnection restrictions and obligations (including

receipt of compensation) that apply to such carrier on the date immediately preceding the date of enactment of the [TCA] under any court order,

consent decree, or regulation, order, or policy of the [FCC], until such

restrictions and obligations are explicitly superseded by regulations prescribed by the [FCC] after such date of enactment.” 47 U.S.C. § 251(g).

7

“All charges, practices, classifications, and regulations for and in connection with such communication service, shall be just and reasonable,

and any such charge, practice, classification, or regulation that is unjust or

unreasonable is declared to be unlawful . . . . The Commission may prescribe such rules and regulations as may be necessary in the public interest

to carry out the provisions of this chapter.” 47 U.S.C. § 201(b). 

8374 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
ISP-bound traffic either at rates below the caps we adopt here

or on a bill and keep basis[8] (or otherwise have not required

payment of compensation for this traffic).” Id. at 9188 ¶ 80.

Insofar as particular interconnection agreements provided for

compensation at higher rates, those higher rates were to apply

only until “carriers renegotiate expired or expiring interconnection agreements.” Id. at 9189 ¶ 82; see also id. (stating that

the new rate caps “d[id] not alter existing contractual obligations, except to the extent that parties are entitled to invoke

contractual change-of-law provisions”). 

The FCC “d[id] not preempt any state commission decision

regarding compensation for ISP-bound traffic for the period

prior to the effective date of the interim regime we adopt

here,” but stated that “[b]ecause we now exercise our authority under section 201 to determine the appropriate intercarrier

compensation for ISP-bound traffic . . . state commissions

will no longer have authority to address this issue.” Id. If the

rate caps did not adequately compensate LECs for their

expenses, the ISP Remand Order explained, the LECs should

look to their own customers for additional compensation. Id.

at 9189 ¶ 83. Finally, as it is difficult for some carriers to

identify particular traffic as ISP-bound, the FCC adopted a

rebuttable presumption that traffic between two carriers that

exceeds a 3:1 ratio of terminating traffic to originating traffic

is ISP-bound traffic subject to the new compensation regime.

Id. at 9187-88 ¶ 79. 

8

“Bill and keep,” the FCC explained: 

refers to an arrangement in which neither of two interconnecting

networks charges the other for terminating traffic that originates

on the other network. Instead, each network recovers from its

own end-users the cost of both originating traffic that it delivers

to the other network and terminating traffic that it receives from

the other network. 

ISP Remand Order, 16 F.C.C.R. at 9153 ¶ 2 n.6 (citations omitted); see

also 47 C.F.R. § 51.713(a). 

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8375
(2) Growth cap. Next, the ISP Remand Order imposed a

“growth cap” on total ISP-bound minutes for which a LEC

could receive reciprocal compensation. Id. at 9187 ¶ 78. In

2001, a LEC could receive compensation for ISP-bound minutes equal to 110% of what the LEC received (on an annualized basis) for the first quarter of 2001; in 2002, it could

receive 110% of what it received in 2001; and in 2003

onwards, it could receive compensation for the same amount

of ISP-bound traffic that it received in 2002. Id.

(3) New markets rule. Third, the FCC implemented the socalled “new markets” rule, which provided that “where carriers are not exchanging traffic pursuant to interconnection

agreements prior to adoption of [the ISP Remand Order], . . . .

carriers shall exchange ISP-bound traffic on a bill-and-keep

basis.” Id. at 9189 ¶ 81. Again, in a “bill and keep” compensation regime, each carrier bills its own customers for its costs

and keeps those payments as its compensation, with no compensation exchanged between the originating and terminating

LECs. See id. at 9153 ¶ 2 n.6.

(4) Mirroring rule. Last, the ISP Remand Order imposed a

special rule on ILECs only: the “mirroring” rule. Id. at 9194

¶ 89. The FCC thought that it would be “unwise as a policy

matter, and patently unfair” to permit ILECs to benefit from

the reduced rates the ISP Remand Order instituted for ISPbound traffic (for which ILECs were, by and large, net payors) while simultaneously allowing ILECs to recover the

higher rates applicable to other forms of traffic (for which

ILECs were typically net payees). Id. Accordingly, it mandated that “[t]he rate caps for ISP-bound traffic that we adopt

here apply, therefore, only if an incumbent LEC offers to

exchange all traffic subject to section 251(b)(5) at the same

rate.” Id.

As the ISP Remand Order emphasized, this new compensation regime was to be an interim measure. On the same day

the ISP Remand Order issued, the FCC published a notice of

8376 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
proposed rulemaking, setting forth for consideration a wholesale revision of the intercarrier compensation regime. See

Developing a Unified Intercarrier Compensation Regime, CC

Docket No. 01-92, Notice of Proposed Rulemaking, 16

F.C.C.R. 9610 (2001). 

Like its predecessor, the ISP Remand Order was challenged via a petition to the D.C. Circuit. Once more, that Circuit found the FCC’s legal justification for the new rules

lacking, rejecting the FCC’s reliance on § 251(g). See WorldCom, Inc. v. FCC, 288 F.3d 429, 433 (D.C. Cir. 2002). But

in light of the fact that “[m]any of the petitioners themselves

favor bill-and-keep, and there is plainly a non-trivial likelihood that the Commission has authority to elect such a system,” the D.C. Circuit refused to vacate the ISP Remand

Order, choosing instead to remand the case to give the FCC

the opportunity to provide an alternative legal justification for

its interim rules. Id. at 434. 

Thus, all four components of the ISP Remand Order

remained in effect from the date of its issuance (April 27,

2001) until October 8, 2004, when the FCC granted in part a

petition of a CLEC, Core Communications, to forebear from

enforcing the ISP Remand Order. See Petition of Core Communications, Inc. for Forbearance Under 47 U.S.C. § 160(c)

From Application of the ISP Remand Order, 19 F.C.C.R.

20179 (2004) [hereinafter, “Core Order”]. Specifically, the

FCC granted the petition with regards to the growth caps and

new markets rule. 

With regard to the growth caps, the FCC found that they

were no longer in the public interest, particularly in light of

the growth of broadband internet access and the corresponding decline in usage of dial-up internet services. See id. at

20186 ¶ 20; see also id. at 20187-88 ¶ 24 & 20189 ¶ 26. The

FCC explained that its decision to forebear from enforcing the

new markets rule was due to a decrease in its concern over

opportunities for arbitrage, primarily because of the wideAT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8377
spread replacement of dial-up internet access with faster

broadband services. In light of that development, the FCC

explained, enforcing the new markets rule no longer outweighed the public interest in a uniform compensation

regime. See id. at 20186-87 ¶ 21; see also id. at 20187-88 ¶ 24

& 20189 ¶ 26. But the FCC declined to forebear from enforcing the rate caps and mirroring rule, finding that the petitioner

had failed to justify their discontinuation. See id. 20186-88

¶¶ 19-20, 23 & 25. 

Core Communications then petitioned the D.C. Circuit,

challenging the partial denial of its petition for forbearance,

and an ILEC petitioned to challenge the FCC’s partial grant

of Core’s petition. The D.C. Circuit upheld the Core Order in

its entirety. In re Core Commc’ns, Inc., 455 F.3d 267, 270

(D.C. Cir. 2006). The rate caps and mirroring rule remain in

effect today, but the FCC has not re-implemented the growth

cap or new markets rule. 

Meanwhile, the FCC was dilatory in responding to the D.C.

Circuit’s 2002 remand in WorldCom. Therefore, on July 8,

2008, the D.C. Circuit granted a writ of mandamus, ordering

the FCC to provide a valid legal justification for its interim

ISP compensation regime “in the form of a final, appealable

order” no later than November 5, 2008. In re Core Commc’ns,

Inc., 531 F.3d 849, 861-62 (D.C. Cir. 2008). The FCC

responded with an order entitled In the Matter of Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, Developing a Unified Intercarrier

Compensation Regime, Intercarrier Compensation for ISP—

Bound Traffic, 24 F.C.C.R. 6475 (2008) [hereinafter, “ISP

Mandate Order”]. The ISP Mandate Order asserted yet

another legal basis for its interim ISP compensation regime:

the FCC’s general rulemaking authority under 47 U.S.C.

§§ 201(b) and 251(j).9See id. at 6478 ¶ 6. This time the D.C.

9

See note 7, supra; see also 47 U.S.C. § 251(i) (“Savings provision.

Nothing in this section shall be construed to limit or otherwise affect the

Commission’s authority under section 201.”). 

8378 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
Circuit accepted the FCC’s legal justification as reasonable,

see Core Commc’ns, Inc. v. FCC, 592 F.3d 139, 143-44 (D.C.

Cir. 2010), and rejected the argument that the interim rules

were arbitrary and capricious, see id. at 145. 

The net result of these lengthy set of proceedings, as relevant to this case, is as follows: The “new markets” rule, which

required LECs not exchanging traffic pursuant to an interconnection agreement prior to the issuance of the ISP Remand

Order on April 27, 2001 to compensate each other on a “bill

and keep” basis, remained in effect until October 8, 2004,

when the Core Order was issued. The “mirroring” rule and

the rate caps (including its 3:1 rebuttable presumption regarding ISP-bound traffic) have remained in effect continuously

since the ISP Remand Order was issued. From April 29, 2004

onwards, the intercarrier rate for ISP-bound traffic has been

capped at $.0007/mou. 

FACTUAL AND PROCEDURAL HISTORY

Pac-West has been operating in California as a CLEC since

1996 and has had intrastate tariffs on file with the CPUC

since December 1998. These tariffs, which have been

amended several times since first filed, purport to set PacWest’s rates for, inter alia, terminating local traffic originating with another LEC; they apply only in the absence of an

interconnection agreement.

AT&T and Pac-West do not have (and have never had) an

interconnection agreement with each other. Therefore, at all

times relevant to this appeal, they have been exchanging traffic indirectly, with the traffic routed primarily through one of

California’s two ILECs, Verizon and SBC California, with

whom both AT&T and Pac-West have interconnection agreements. The ILECs thus served as conduits for traffic going

between Pac-West and AT&T. Pac-West’s agreements with

the ILECs provided that neither party would bill the other for

this “transit traffic,” and that for all transit traffic Pac-West

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8379
terminated, Pac-West would bill the LEC originating the traffic. Nonetheless, and for reasons unknown to us, for a few

years, Pac-West billed the ILECs rather than AT&T for transit

traffic AT&T originated. 

Starting in July 2001, SBC California refused to pay PacWest for this transit traffic, and Verizon did the same beginning in September 2002. Pac-West then began billing AT&T

for the traffic AT&T originated, but AT&T refused to pay.

The parties had no direct discussions about the issue until late

2003, when Pac-West sent AT&T a “formal request for negotiation of an interconnection agreement between our companies as provided for in Sections 251(a)(1) and specifically

251(b)(5) of the [TCA].” AT&T responded in February 2004

by stating that it “has no interest in entering into such an

agreement”; that, as a CLEC, it had no obligation to negotiate

an interconnection agreement10; and that under the “new markets” rule, the two carriers should continue to exchange all of

their traffic (including that which was ISP-bound) on a “bill

and keep” basis. The parties had additional communications

but could not reach an accord. 

Pac-West filed a complaint with the CPUC on October 20,

2004, alleging that AT&T owed it more than $3.5 million in

reciprocal compensation for the AT&T-originated traffic PacWest had terminated since August 2001, billed at Pac-West’s

state tariff rates. For the sole purpose of deciding the legal

issues, Pac-West stipulated that all AT&T-originated traffic it

terminated was ISP-bound; once the legal issues were

resolved, however, Pac-West reserved its right to demonstrate

later that at least some of the traffic was not bound to ISPs.11

Similarly, both parties stipulated to the amount of traffic at

10Cf. note 3, supra. 

11The record evidence establishes that Pac-West terminated more than

115 times as much traffic from AT&T as AT&T terminated from PacWest. 

8380 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
issue and the amount of compensation Pac-West would be

due ($7.115 million) if its state-filed tariff applied.

The CPUC issued its order on June 29, 2006, holding that

the “new markets” rule did not apply where, as here, two

CLECs are exchanging traffic indirectly and without an interconnection agreement. See Pac-West Telecomm v. AT&T

Commc’ns of Cal., Dec. No. 06-06-055, 2006 WL 1910202,

at *11 (Cal. Pub. Util. June 29, 2006). The CPUC ruled that

the “new markets” rule cannot be applied absent a “mirroring” offer, because to do so would permit AT&T to receive

compensation in situations in which it is a net payee, but

avoid paying anything when, as in the AT&T—Pac-West

relationship, AT&T is a net payor. Because the “mirroring”

rule only applies to ILECs, which AT&T is not (in California), the CPUC held that AT&T could not benefit from the

“new markets” rule. See id. at *10. Relying on a 2005 FCC

order, T-Mobile,

12 the CPUC held that in the absence of governing federal law, Pac-West’s state-filed tariff was the appropriate place to look for the applicable rate, and awarded PacWest $7.115 million in compensation, but no interest. See id.

at *13-17.

Thereafter, AT&T sought rehearing by the CPUC, arguing

for the first time that the CPUC lacked jurisdiction to hear a

dispute regarding interstate traffic outside of an arbitration

proceeding pursuant to 47 U.S.C. § 252. See Pacific Bell v.

Pac-West Telecomm, Inc., 325 F.3d 1114, 1126-27 (9th Cir.

2003) (discussing the state public utilities commissions’ powers under § 252 “to arbitrat[e], approv[e], and enforc[e] interconnection agreements”). The CPUC denied AT&T’s

rehearing request. See Pac-West Telecomm v. AT&T

Commc’ns of Cal., Dec. No. 07-03-016, 2007 WL 725667, at

*1 (Cal. Pub. Util. Mar. 1, 2007).

12In re Developing a Unified Intercarrier Compensation Regime; TMobile Petition for Declaratory Ruling Regarding Incumbent LEC Wireless Termination Tariffs, Declaratory Ruling and Report and Order, 20

F.C.C.R. 4855 (2005) [“T-Mobile”]. 

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8381
In the meanwhile, AT&T filed this suit in the U.S. District

Court for the Northern District of California,13 requesting: (1)

a declaration that the CPUC’s order was preempted by the

TCA; (2) an order enjoining the CPUC from enforcing it; and

(3) an order requiring Pac-West to return the approximately

$10 million AT&T had paid it in accordance with the CPUC’s

decision.14 Following cross-motions for summary judgment,

the district court granted summary judgment to Pac-West and

the CPUC, upholding the CPUC’s decision in all respects. See

AT&T Commc’ns v. Pac-West Telecomm, No. C 06-07271,

2008 WL 3539669, at *1 (N.D. Cal. Aug. 12, 2008). With

regard to the applicability of ISP Remand Order’s ISP compensation regime to “the manner in which two CLECs may be

compensated for the exchange ISP-bound traffic,” the district

court held that “this issue was not before the FCC when it

crafted the ISP Remand Order,” and so the ISP Remand

Order did not preempt the CPUC’s decision. Id. at *3 (citation omitted). AT&T timely appealed. 

After oral argument on this appeal, we invited the FCC to

13“Under 28 U.S.C. § 1331, a district court has jurisdiction to review a

decision by the CPUC to ensure compliance with federal law.” Global

NAPs Cal., 624 F.3d at 1231 n.3 (citing Verizon Md. Inc. v. Pub. Serv.

Comm’n of Md., 535 U.S. 635, 642 (2002)); see also Pacific Bell, 325

F.3d at 1124 (“In Verizon Maryland, the Supreme Court held that 28

U.S.C. § 1331 provides a basis for jurisdiction over an ILEC’s claim that

a state regulatory commission’s order requiring reciprocal compensation

for ISP-bound calls is preempted by federal law.” (citation omitted)).

Because we have jurisdiction, we do not consider whether there is a cause

of action on which AT&T is entitled to go forward, as that question is not

jurisdictional and has not been raised. See Western Radio Servs. Co., 530

F.3d at 1193. 

14Since April 13, 2007, and pursuant to Rule 67(a) of the Federal Rules

of Civil Procedure, AT&T has deposited the monies it would be obliged

to pay Pac-West under the CPUC’s decision with the district court. Following its grant of summary judgment to Pac-West and the CPUC, the district court stayed the execution of its judgment, and AT&T has continued

to deposit the sums purportedly owed Pac-West during the pendency of

this appeal. 

8382 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
submit its views regarding the scope of the ISP Remand

Order. The FCC accepted the invitation and submitted an

amicus brief on February 11, 2011, to which the parties

responded several weeks later.

DISCUSSION

We review the district court’s grant of summary judgment

de novo. See Pacific Bell, 325 F.3d at 1123 n.8. In so doing,

“we review de novo whether the CPUC’s orders are consistent

with the [TCA] and the implementing regulations, and we

review all other issues under an arbitrary and capricious standard.” Id.

[1] We begin with a few well-settled principles. First, there

is no question that, for jurisdictional purposes, ISP-bound

traffic is interstate in nature. See Pacific Bell, 325 F.3d at

1126. ISP-bound traffic is therefore subject to the FCC’s

congressionally-delegated jurisdiction. See Core Commc’ns,

592 F.3d at 143-44. Within this ambit, the FCC’s actions can

preempt state regulation to the contrary. See Barrientos v.

1801-1825 Morton LLC, 583 F.3d 1197, 1208 (9th Cir. 2009)

(citing City of N.Y. v. FCC, 486 U.S. 57, 63-64 (1988)); see

also Wyeth v. Levine, 129 S. Ct. 1187, 1201 (2009).

But, as the district court noted, “[a] matter may be subject

to FCC jurisdiction without the FCC having exercised that

jurisdiction and preempted state regulation.” 2008 WL

3539669, at *7 (quoting Global NAPs, Inc. v. Verizon New

Eng., Inc., 444 F.3d 59, 71 (1st Cir. 2006) (hereinafter

“Global NAPs I”)). Determining whether the FCC has chosen

to displace state law turns on the scope of its intent in exercising its jurisdiction. See Barrientos, 583 F.3d at 1208. 

In issuing the ISP Remand Order, the FCC clearly understood that it was displacing at least some state laws. See ISP

Remand Order, 16 F.C.C.R. at 9189 ¶ 82 (“Because we now

exercise our authority under section 201 to determine the

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8383
appropriate intercarrier compensation for ISP-bound traffic,

however, state commissions will no longer have authority to

address this issue.”). Nonetheless, it is also well settled that,

with the ISP Remand Order and related pronouncements, the

FCC has not exercised its jurisdiction over all manifestations

of ISP-bound traffic. For example, this Court held in Peevey

that the CPUC correctly interpreted the ISP Remand Order as

not applying to interexchange (that is, non-local) ISP-bound

traffic. See 462 F.3d at 1159. Other courts have reached the

same conclusion. See Global NAPs I, 444 F.3d at 72; Global

NAPs, Inc. v. Verizon New Eng., Inc., 603 F.3d 71, 81-82 (1st

Cir. 2010) (“Global NAPs III”) (same, even after ISP Mandate Order); cf. Global NAPs, Inc. v. Verizon New Eng., Inc.,

454 F.3d 91, 98 (2d Cir. 2006) (“Global Naps II”) (holding

that the FCC did not intend “to preempt the state commissions’ authority to define local calling areas for the purposes

of intercarrier compensation”).

[2] In sum, it is well settled that the ISP Remand Order has

preemptive effect with regard to the ISP-related issues it

encompasses. The operative question in this case, then, is

whether the ISP Remand Order evidences the FCC’s intent to

exercise its jurisdiction over local ISP-bound traffic

exchanged between two CLECs.

I.

[3] We begin with the FCC’s language choice in that order.

To facilitate our inquiry, we reproduce the paragraph of the

ISP Remand Order setting forth the “new markets” rule in its

entirety:

[A] different rule applies in the case where carriers

are not exchanging traffic pursuant to interconnection agreements prior to adoption of this Order

(where, for example, a new carrier enters the market

or an existing carrier expands into a market it previously had not served). In such a case, as of the effec8384 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
tive date of this Order, carriers shall exchange ISPbound traffic on a bill-and-keep basis during this

interim period. We adopt this rule for several reasons. First, our goal here is to address and curtail a

pressing problem that has created opportunities for

regulatory arbitrage and distorted the operation of

competitive markets. In so doing, we seek to confine

these market problems to the maximum extent while

seeking an appropriate long-term resolution in the

proceeding initiated by the companion [Notice of

Proposed Rulemaking]. Allowing carriers in the

interim to expand into new markets using the very

intercarrier compensation mechanisms that have led

to the existing problems would exacerbate the market problems we seek to ameliorate. For this reason,

we believe that a standstill on any expansion of the

old compensation regime into new markets is the

more appropriate interim answer. Second, unlike

those carriers that are presently serving ISP customers under existing interconnection agreements, carriers entering new markets to serve ISPs have not

acted in reliance on reciprocal compensation revenues and thus have no need of a transition during

which to make adjustments to their prior business

plans.

ISP Remand Order, 16 F.C.C.R. at 9188-89 ¶ 81 (emphases

added, footnote omitted). Use of the broad terms “carrier” and

“intercarrier compensation,” the former of which is a

statutorily-defined term encompassing both CLECs and

ILECs,15 suggests an intent to apply the “new markets” rule

to all intercarrier relationships, not solely to ILEC-CLEC

arrangements. 

[4] Moreover, the FCC at other junctures in the ISP

Remand Order referred specifically to ILECs and CLECs,

15See note 2, supra. 

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8385
further indicating that the terms “carrier” and “LECs,”

16 used

throughout the order, applied generally to all “carriers,”

except as otherwise stated. For example, in the paragraph

describing the “mirroring” rule—which, everyone agrees,

applies only to ILECs—the ISP Remand Order referred specifically to ILECs seven times; not once did it use the generic

term “LEC” or refer to CLECs. See ISP Remand Order, 16

F.C.C.R. at 9193 ¶ 89. Ordinarily, we presume that the use of

“different words in connection with the same subject” signifies that the drafter intended to convey different meanings by

its disparate word choice.17 Arizona Health Care Cost Containment Sys. v. McClellan, 508 F.3d 1243, 1250 (9th Cir.

2007); see also Warre v. Comm’r of the SSA, 439 F.3d 1001,

1005 (9th Cir. 2006).

Nonetheless, the CPUC and the district court held that other

portions of the ISP Remand Order indicate an intent to apply

the entire interim compensation regime only to ILEC-CLEC

combinations. For example, just after describing the “new

16“Local exchange carrier,” like “carrier,” is a statutorily-defined term.

See 47 U.S.C. § 153(32) (“The term ‘local exchange carrier’ means any

person that is engaged in the provision of telephone exchange service or

exchange access.”). 

17This canon of interpretation is most commonly associated with statutes and regulations. See McClellan, 508 F.3d at 1250; Boeing Co. v.

United States, 258 F.3d 958, 967 (9th Cir. 2001) (“[T]enets of statutory

construction apply with equal force to the interpretation of regulations.”

(citation omitted)). The ISP Remand Order is neither a statute nor a regulation. But issues of form aside, just as in interpreting a judicial opinion,

see Michigan v. Mosley, 423 U.S. 96, 109-10 (1975) (White, J., concurring), or a contract, see Montana v. Wyoming, ___ S. Ct. ___, 2011 WL

1631038, at *14 (2011) (Scalia, J., dissenting); Litton Fin. Printing Div.

v. NLRB, 501 U.S. 190, 205 (1991); Panaview Door & Window Co. v.

Reynolds Metals Co., 255 F.2d 920, 925 (9th Cir. 1958), applying the

canon in this context simply makes sense. The precision with which the

FCC used the terms “ILECs,” “CLECs,” and “carriers” throughout the ISP

Remand Order demonstrates that it “act[ed] intentionally and purposely”

when it used the disparate terms. See Atl. Cleaners & Dyers, Inc. v. United

States, 286 U.S. 427, 433 (1932). 

8386 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
markets” rule, the ISP Remand Order stated that “[t]he

interim compensation regime we establish here applies as carriers renegotiate expired or expiring interconnection agreements. It does not alter existing contractual obligations . . . .”

ISP Remand Order, 16 F.C.C.R. at 9189 ¶ 82. The district

court reasoned that because “only ILECs have a duty to negotiate interconnection agreements, . . . . [t]hat fact suggests that

the FCC was focused on the relationship between ILECs and

CLECs when it crafted the ISP Remand Order.” 2008 WL

3539669, at *9.

The CPUC and the district court found further evidence

that the FCC was concerned only with CLECs taking advantage of ILECs in the description of the “mirroring” rule. In

setting forth that rule, the ISP Remand Order explained: 

It would be unwise as a policy matter, and patently

unfair, to allow incumbent LECs to benefit from

reduced intercarrier compensation rates for ISPbound traffic, with respect to which they are net payors, while permitting them to exchange traffic at

state reciprocal compensation rates, which are much

higher than the caps we adopt here, when the traffic

imbalance is reversed. Because we are concerned

about the superior bargaining power of incumbent

LECs, we will not allow them to “pick and choose”

intercarrier compensation regimes, depending on the

nature of the traffic exchanged with another carrier.

The rate caps for ISP-bound traffic that we adopt

here apply, therefore, only if an incumbent LEC

offers to exchange all traffic subject to section

251(b)(5) at the same rate. Thus, if the applicable

rate cap is $ .0010/mou, the ILEC must offer to

exchange section 251(b)(5) traffic at that same rate.

Similarly, if an ILEC wishes to continue to exchange

ISP-bound traffic on a bill and keep basis in a state

that has ordered bill and keep, it must offer to

exchange all section 251(b)(5) traffic on a bill and

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8387
keep basis. For those incumbent LECs that choose

not to offer to exchange section 251(b)(5) traffic

subject to the same rate caps we adopt for ISP-bound

traffic, we order them to exchange ISP-bound traffic

at the state-approved or state-arbitrated reciprocal

compensation rates reflected in their contracts. This

“mirroring” rule ensures that incumbent LECs will

pay the same rates for ISP-bound traffic that they

receive for section 251(b)(5) traffic.

ISP Remand Order, 16 F.C.C.R. at 9193 ¶ 89 (footnotes omitted). As previously mentioned, the “mirroring” rule reflects

the FCC’s concern for the possibility of a different kind of

arbitrage created by the new rules: that ILECs, responsible for

terminating the majority of non-ISP-bound local traffic,

would be able to avoid paying anything to CLECs for ISPbound traffic (or paying the capped rate for ISP-bound traffic

if the ILEC and CLEC had an agreement) while still receiving

uncapped compensation for all other types of traffic. 

The district court reasoned that “[i]f the FCC was concerned about the possibility of regulatory arbitrage between

two CLECs, it is reasonable to assume that it would have

required the mirroring rule to apply to all LECs.” 2008 WL

3539669, at *10. The CPUC reasoned similarly in its decision

—that if the “new markets” rule could be applied in the

absence of a mirroring offer, then CLECs could exploit this

new opportunity for arbitrage by “ ‘pick[ing] and choos[ing]’

intercarrier compensation regimes” depending on the type of

traffic being exchanged, the very concern that led the FCC to

adopt the “mirroring” rule and apply it to ILECs. See 2006

WL 1910202, at *11. This potential loophole, created only if

the “new markets” rule applies absent a mirroring offer, led

both the CPUC and the district court to hold that the FCC

must have meant to apply the entire interim compensation

regime for ISP-bound traffic solely to ILEC-CLEC relationships.

8388 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
[5] Although the ISP Remand Order could be clearer, we

are convinced that the CPUC and the district court erred in

holding that it does not apply to ISP-bound traffic exchanged

between two CLECs. At base, the rules implemented by the

ISP Remand Order addressed a particular problem: the opportunity for regulatory arbitrage created by application of the

prevailing reciprocal compensation scheme to local ISPbound traffic. As discussed, ISP-bound traffic is uniquely unidirectional, and for that reason, incompatible with a compensation regime that assumes relative traffic parity. The defining

feature of the problem the FCC sought to remedy is thus the

type of traffic being exchanged—ISP-bound traffic. It is true

that, at the time the ISP Remand Order was issued, the arbitrage problem was manifesting in a particular LEC-to-LEC

relationship: new CLECs, free to pick and choose particular

types of customers that would generate lots of unidirectional

traffic (ISPs), were taking advantage of the then-prevailing

reciprocal compensation regime at the expense of ILECs,

who, prior to the passage of the Act and the entry of CLECs,

served all customers within a particular area, and therefore

maintained those customers unless and until they were lured

away by CLECs. See ISP Remand Order, 16 F.C.C.R. at 9162

¶ 21. But the dominance of that CLEC-ILEC arrangement

was, as this case demonstrates, both transient and in no way

essential to the market distortions the FCC was trying to remedy.

[6] Both the 1999 Declaratory Ruling and the 2001 ISP

Remand Order reflect that the FCC was well aware that the

market distortion problem was not limited to ILEC-CLEC

arrangements, and so addressed the problem of ISP-bound

traffic generally, regardless of the precise type of LEC-toLEC relationship in which it was manifested. The Declaratory Ruling, which first held that ISP-bound traffic was jurisdictionally interstate, but chose not to impose a federal rule

regarding how that traffic ought to be compensated, described

the question that had arisen as “whether a local exchange carrier (LEC) is entitled to receive reciprocal compensation for

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8389
traffic that it delivers to an information service provider, particularly an Internet service provider (ISP).” 14 F.C.C.R. at

3689 ¶ 1. The FCC noted: “This question sometimes has been

posed more narrowly, i.e., whether an incumbent LEC must

pay reciprocal compensation to a competitive LEC (CLEC)

that delivers incumbent LEC-originated traffic to ISPs,” but

stated that “[b]ecause the pertinent provision of the 1996

[TCA] pertains to all LECs, we examine this issue in the

broader context.” Id. at 3689-90 n.1 (citing 47 U.S.C.

§ 251(b)(5)).

[7] Similarly, in the ISP Remand Order, the FCC presented

the question it was answering as “whether reciprocal compensation obligations apply to the delivery of calls from one

LEC’s end-user customer to an ISP in the same local calling

area that is served by a competing LEC.” 16 F.C.C.R. at 9159

¶ 13. As with “carrier,” “local exchange carrier” is a

statutorily-defined term that encompasses both CLECs and

ILECs. See note 16, supra. In concluding that ISP-bound traffic was not subject to § 251(b)(5)’s reciprocal compensation

requirement, moreover, the ISP Remand Order repeatedly

indicates that it is the nature of the traffic, not the particular

intercarrier relationship, that prompted the FCC to institute

the interim rules.18 See, e.g., 16 F.C.C.R. at 9162 ¶ 19 (“The

Commission has struggled with how to treat Internet traffic

for regulatory purposes.”); id. at 9162 ¶ 20 (“The issue of

intercarrier compensation for Internet-bound traffic with

which we are presently wrestling is a manifestation of this

growing challenge.”); id. at 9163 ¶ 23 (“ISP-bound traffic is

not subject to the reciprocal compensation requirement in section 251(b).”); id. at 9165 ¶ 30 (“Congress intended to exempt

18As previously indicated, the D.C. Circuit in WorldCom, 288 F.3d at

434, rejected much of the ISP Remand Order’s legal justification for the

FCC’s interim compensation regime, which was based on 47 U.S.C.

§ 251(g), although it did not vacate the interim rules. Nonetheless, the

FCC’s reasoning remains essential to understanding the scope of the ISP

Remand Order, which was not changed by WorldCom. 

8390 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
certain enumerated categories of service from section

251(b)(5) when the service was provided to interexchange

carriers or information service providers. The exemption

focuses not only on the nature of the service, but on to whom

the service is provided. “); id. at 9167 ¶ 34 (“Congress

intended to exclude the traffic listed in subsection (g) from the

reciprocal compensation requirements of subsection (b)(5).”);

id. ¶ 35 (“[W]e conclude that ISP-bound traffic is not subject

to the reciprocal compensation provisions of section

251(b)(5).”); id. at 9168 ¶ 37 (“Congress excluded all such

[ISP-bound] access traffic from the purview of section

251(b)(5).”); id. at 9172 ¶ 44 (“We conclude that this definition of ‘information access’ [in § 251(g)] was meant to

include all access traffic that was routed by a LEC ‘to or

from’ providers of information services, of which ISPs are a

subset.”); id. at 9175 ¶ 52 (“Having found that ISP-bound

traffic is excluded from section 251(b)(5) by section 251(g),

we find that the Commission has the authority pursuant to

section 201 to establish rules governing intercarrier compensation for such traffic.”); see also ISP Mandate Order, 24

F.C.C.R. at 6476 ¶ 1 (“[W]e conclude that we have authority

to impose ISP-bound traffic rules.”).

[8] Although not presented with the precise issue before

us, other courts have similarly described the ISP Remand

Order as applying to ISP-bound traffic exchanged between

two LECs, not distinguishing traffic originating with ILECs

or terminating with CLECs. See Peevey, 462 F.3d at 1147

(“In the ISP Remand Order, the FCC held that § 251(g)

carves out a category of telecommunications traffic not subject to the reciprocal compensation requirement of

§ 251(b)(5), and that ISP-bound traffic is within this category.

. . . This was done to eliminate the regulatory arbitrage opportunity available to CLECs.” (citations omitted)); Core

Commc’ns, 592 F.3d at 141 (“At least as early as 1999 the

[FCC] was concerned that the regulatory procedures under

which the sending LEC compensated the recipient LEC were

leading to the imposition of excessive rates, and that these

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8391
rates in turn were distorting the markets for internet and telephone services.”); In re Core Commc’ns, 455 F.3d at 273

(“The Commission adopted ‘rate caps,’ which established a

gradually declining maximum rate that a carrier (typically, a

CLEC) could charge another carrier (typically, an ILEC) for

delivering a call to an ISP. Although the rate caps limited how

much carriers could recover from other carriers, the carriers

remained free to recover ‘[a]ny additional costs . . . from endusers,’ that is, from their own customers.” (quoting the ISP

Remand Order, 16 F.C.C.R. at 9156 ¶ 4 (emphases added,

some citations omitted, alterations in original)); Global NAPs

II, 454 F.3d at 99 (“The ultimate conclusion of the [ISP]

Remand Order was that ISP-bound traffic within a single calling area is not subject to reciprocal compensation.”); WorldCom, 288 F.3d at 430 (explaining that, in the ISP Remand

Order, the FCC “held that under § 251(g) of the [TCA] it was

authorized to ‘carve out’ from § 251(b)(5) calls made to

[ISPs] located within the caller’s local calling area”).

In sum, in adopting an interim compensation regime for

ISP-bound traffic, the FCC was primarily concerned with

arbitrage opportunities created by traffic of a particular

nature; we therefore measure the scope of the FCC’s intent

with regard to the reach of the ISP Remand Order on the same

basis. It is true that the FCC was also concerned with how its

new rules would play out in a regulatory environment in

which ILECs dominated the marketplace. For that reason, the

FCC adopted the “mirroring” rule, ensuring that the ILECs

would not unduly benefit from their dominant market position. But this concern for new arbitrage opportunities that

ILECs were uniquely positioned to exploit was a corollary to

the FCC’s overriding concern for the arbitrage opportunities

created by ISP traffic generally. And as this case demonstrates, arbitrage related to ISP-bound traffic in no way

depends on the participation of an ILEC. The ISP Remand

Order reflects this reality, imposing its rules on all LECs,

with the exception of the “mirroring” rule, which the FCC

singled out as applicable only to ILECs. 

8392 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
The only verbiage in the various FCC orders concerning

ISP-bound traffic that supports Appellees’ view is one paragraph of the 2004 Core Order discussing the “new markets”

rule, which states:

[T]he Commission concluded that different interim

intercarrier compensation rules should apply if two

carriers were not exchanging traffic pursuant to an

interconnection agreement prior to the adoption of

the ISP Remand Order. In this situation, if an incumbent LEC has opted into the federal rate caps for

ISP-bound traffic, the two carriers must exchange

this traffic on a bill-and-keep basis during the

interim period (the “new markets” rule). This rule

applies, for example, when a new carrier enters a

market or an existing carrier expands into a market

it previously had not served. The Commission implemented this rule in order to confine the opportunities

for regulatory arbitrage to the maximum extent while

seeking an appropriate long-term resolution for the

problems associated with the existing intercarrier

compensation regime. 

Core Order, 19 F.C.C.R. at 20182 ¶ 9 (emphasis added). The

district court reasoned that this paragraph indicates that the

FCC “did not intend the New Markets Rule to apply broadly

to any carriers that were not exchanging traffic pursuant to an

interconnection agreement. Rather, it intended the New Markets Rule to apply when a CLEC requested interconnection

from an ILEC, after the effective date of the ISP Remand

Order.” 2008 WL 3539669, at *9. 

The district court misread ¶ 9 of the Core Order by construing it without attending to its context. Coming, as it does,

just after a discussion of the “mirroring” rule, which applies

only to ILECs, see 19 F.C.C.R. at 20181-82 ¶ 8, it is almost

surely not intended as an exhaustive treatment of the “new

markets” rule. Instead, the paragraph explains how the rule

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8393
would apply to an ILEC that has “opted into the federal rate

caps for ISP-bound traffic.” Id. at 20182 ¶ 9. Given the FCC’s

concern for ILEC arbitrage opportunities created by the new

rules, ¶ 9 is best understood as a reiteration that an ILEC cannot simultaneously benefit from the “new markets” rule when

a new CLEC enters a market, and ignore the rate caps in its

dealings with other CLECs with whom the ILEC had previously been exchanging traffic. Cf. id. at 20186 ¶ 19 (“Nor

does [Petitioner] address the Commission’s concern that,

without the mirroring rule, incumbent LECs would too easily

be able to take advantage of the discrepancy between reduced

rates for ISP-bound traffic and higher rates for section

251(b)(5) voice traffic. The mirroring rule was adopted to preclude incumbent LECs from paying reduced intercarrier compensation rates for ISP-bound traffic, which they send to

competitive LECs, while collecting higher state reciprocal

compensation rates for traffic that they receive.”). 

Other parts of the Core Order indicate, once more, that the

FCC’s primary focus was on the type of traffic creating arbitrage opportunities, without distinguishing (beyond the “mirroring” rule) between types of carriers. See, e.g., id. at 20181

¶ 5 (explaining that in the ISP Remand Order, “[t]he Commission found that the availability of reciprocal compensation for

this type of traffic [ISP-bound] undermined the operation of

competitive markets because competitive LECs were able to

recover a disproportionate share of their costs from other carriers, thereby distorting the price signals sent to their ISP customers.”) (emphases added). Given this context and the

remainder of the Core Order, as well as the general references

to “carriers” and “LECs” throughout the other pertinent

orders, ¶ 9 of the Core Order simply cannot bear the weight

the CPUC and the district court placed upon it. 

The district court also pointed to the FCC’s 2001 Notice of

Proposed Rulemaking (NPRM), issued the same day as the

ISP Remand Order, as evidence that the FCC did not intend

8394 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
to apply the interim compensation regime to CLEC-CLEC

relationships. The district court explained: 

[I]n the NPRM, the FCC stated that it did not “expect

to extend compensation rules to other interconnection arrangements that are not currently subject to

rate regulation and that do not exhibit symptoms of

market failure.” NPRM, 16 F.C.C.R. at 9612 ¶ 2

(emphasis added). The FCC explained this statement

by noting that, “we do not contemplate a need to

adopt new rules governing CLEC-to-CLEC . . .

arrangements.” Id. at 9675 n.2. From this statement,

one can infer that FCC did not believe that CLEC-toCLEC relationships exhibited the types of market

failure underlying its concerns about regulatory arbitrage. This provides further support for the Court’s

conclusion that the FCC was not focused on compensation arrangements between two CLECs when it

crafted the ISP Remand Order.

2008 WL 3539669, at *10. 

This reasoning, however, can easily be flipped over. It is

equally plausible—likely more so—to interpret the NPRM’s

statement as an acknowledgment that the FCC did not foresee

the situation presented here: a CLEC taking advantage of the

secondary arbitrage opportunity created by the interim rules

themselves—that is, benefitting from the “new markets” rule

while not being required to make a “mirroring” offer. Of

course, CLEC-to-CLEC relationships “d[id] not exhibit symptoms of market failure” at the time; the market failure presented in this case is only possible because of the interim

compensation rules themselves, which were issued the same

day as the NPRM. We therefore take the NPRM footnote at

face value: the FCC “d[id] not contemplate a need to adopt

new rules governing CLEC-to-CLEC . . . arrangements.” 16

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8395
F.C.C.R. at 9675 n.2 (emphasis added)—that is, rules other

than those already adopted in the ISP Remand Order.

19

[9] In conclusion, the district court and the CPUC erred in

holding that the ISP Remand Order’s interim compensation

regime did not apply to the ISP-bound traffic exchanged

between AT&T and Pac-West. Because we hold that the ISP

Remand Order does apply to the ISP-bound traffic at issue

here, the CPUC’s decision to rely on Pac-West’s state-filed

tariffs to set the rate in question is preempted. See Barrientos,

583 F.3d at 1208.

II.

Strongly bolstering our conclusion are the views of the

FCC itself. Following oral argument, the FCC was invited to

submit a brief as amicus curiae addressing “whether the

interim compensation regime established by [the ISP Remand

Order] . . . govern[s] the compensation due one [CLEC] for

the termination of presumptively ISP-bound traffic originating

with another CLEC, where the traffic is indirectly exchanged

and the two CLECs do not have an interconnection agreement.” The FCC accepted the invitation and answered in the

affirmative, explaining that “the regulatory language, the

FCC’s description of the scope of its compensation regime,

and the regulatory purpose demonstrate that the new markets

rule (until forborne from on October 18, 2004) and the rate

caps . . . apply to CLEC-to-CLEC ISP-bound traffic.” Brief

for the FCC as Amicus Curiae at 15. 

With regard to the language of the ISP Remand Order, the

FCC points out, as we have, that the order “made it clear that

[the] compensation regime applies ‘when carriers collaborate

to deliver calls to ISPs.’ ” Id. at 18 (quoting ISP Remand

Order, 16 F.C.C.R. at 9181 ¶ 66 (emphasis in original)).

19A “new rule” that perhaps the FCC should have considered, but did

not, is applying a “mirroring” offer requirement to CLECs. 

8396 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
“[H]ad it intended its compensation rules to apply only to

ILEC-to-CLEC ISP-bound traffic,” the FCC explains, the ISP

Remand Order “would not have used repeatedly the inclusive

terms ‘carriers’ and ‘LECs.’ ” Id. at 19. 

The FCC also explains, as we also have done, that the “opportunities for regulatory arbitrage . . . occur under a reciprocal compensation system regardless of the identity of the

originating carrier as an ILEC or a CLEC.” Id. at 21. “Interpreting the compensation rules to apply only to ILEC-toCLEC ISP-bound traffic,” moreover, 

would create a loophole in the FCC’s regulatory

regime for CLEC-originated ISP-bound calls. As to

that traffic, it would thwart full achievement of the

regulatory purpose by leaving unabated the very regulatory arbitrage opportunities and economic distortions that the FCC sought to alleviate by the

adoption of its intercarrier compensation rules.

Id.

Although we do not defer to “an agency’s conclusion that

state law is pre-empted,” Wyeth, 129 S. Ct. at 1201, we do

defer to the FCC’s interpretation of the compensation regime

that it created, barring some “reason to suspect that the interpretation does not reflect the agency’s fair and considered

judgment on the matter in question.” Chase Bank USA, N.A.

v. McCoy, 131 S. Ct. 871, 881 (2011) (quoting Auer v. Robbins, 519 U.S. 452, 462 (1997)); see also Talk Am., Inc. v.

Mich. Bell Tel. Co., ___ S. Ct. ___, 2011 WL 2224429, at *6

(2011) (“In the absence of any unambiguous statute or regulation, we turn to the FCC’s interpretation of its regulations in

its amicus brief.”). No such reason exists here, particularly

given that the FCC’s reasoning mirrors our own and that the

FCC is best positioned to describe the reach of its own orders.

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8397
CONCLUSION

[10] In conclusion, we hold that the ISP Remand Order

governs the traffic exchanged between AT&T and Pac-West

and therefore reverse the district court’s grant of summary

judgment to the CPUC and Pac-West. 

REVERSED.20

20In light of our holding, we do not reach AT&T’s alternative argument

that the CPUC lacked jurisdiction to adjudicate the dispute in this case.

This case is not an appeal of the CPUC’s order. It is, rather, an affirmative

challenge to it brought under the Supremacy Clause and 28 U.S.C. § 1331.

See note 13, supra. Once we determine that the CPUC’s order is invalid—

as we have done—the question whether it could have issued a different

order is not before us. 

8398 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
APPENDIX: GLOSSARY OF TERMS

Bill-and-keep: An intercarrier compensation arrangement

whereby a carrier “bills” its own customers

and “keeps” the revenue—i.e., where neither interconnecting carrier charges the

other for the termination of telecommunications traffic that originates on the other

carrier’s network. See 47 C.F.R.

§ 51.713(a).

carrier: With some exceptions not relevant to this

case, “any person engaged as a common

carrier for hire, in interstate or foreign

communication by wire or radio or in interstate or foreign radio transmission of energy.” 47 U.S.C. § 153(11).

CLEC: Competitive local exchange carrier; a LEC

that entered a particular market following

passage of the TCA. 

CPUC: California Public Utilities Commission.

FCC: Federal Communications Commission.

ISP: Internet service provider; a company that

provides internet access to individuals;

most relevant to this case are those that

provide dial-up internet access.

LEC: Local exchange carrier; generally responsible for “local” (non-toll) telecommunications traffic within a telephone exchange;

can be one of two types: an ILEC or a

CLEC. See 47 U.S.C. § 153(32) (defining

“[l]ocal exchange carrier”); id. § 153(54)

(defining “[t]elephone exchange service”).

AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8399
ILEC: Incumbent local exchange carrier; in general, refers to those LECs that enjoyed

monopoly status prior to the TCA. See 47

U.S.C. § 251(h).

mou: Minutes of use; how telecommunications

traffic is counted for billing purposes.

reciprocal 

compensation: An arrangement between two carriers

whereby “each of the two carriers receives

compensation from the other carrier for the

transport and termination on each carrier’s

network facilities of telecommunications

traffic that originates on the network facilities of the other carrier.” 47 C.F.R.

§ 51.701(e).

TCA: Telecommunications Act of 1996, Pub. L.

No. 104-104, 110 Stat. 56 (codified as

amended in scattered sections of 47

U.S.C.).

8400 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM