Opinion ID: 185527
Heading Depth: 2
Heading Rank: 2

Heading: The LECs' Liability for Imposing EUCL Charges

Text: 21 The LECs argue that the Liability Order was arbitrary and capricious for two related reasons. First, they contend that the Supreme Court's decision in Arizona Grocery Co. v. Atchison, Topeka & Santa Fe Railway Co., 284 U.S. 370 (1932), precludes a finding of liability where a common carrier imposes charges pursuant to and in reliance on the Commission's official mandate. Second, they assert that the FCC's change in position amounted to a new rule, and, therefore, the agency was foreclosed from applying it retroactively. We reject both claims. In doing so, we emphasize that our analysis here is limited to the question of whether it was permissible for the FCC to hold the LECs liable for violating the Communications Act. We do not decide the question of whether the FCC may award damages for the LECs' charges that have been found to be unlawful. 22 1. The Arizona Grocery Rule In Arizona Grocery, the Supreme Court held that the Interstate Commerce Commission could not order a common carrier to pay reparations for charging a rate that the agency had explicitly approved at the time it was collected, but subsequently determined to have been unreasonable. In that case, the ICC had, in a proceeding described by the Court as quasi-legislative, 284 U.S. at 388-89, ordered railroads shipping sugar from California to Phoenix, Arizona to charge no rate exceeding 96.5 cents per 100 pounds. In response, the carriers adopted a rate of 86.5 cents, which they later reduced to 84 cents; these rates were then challenged before the Commission. In that proceeding, which the Court described as quasi-judicial, id. at 389, the agency determined that this rate was unreasonable to the extent that it exceeded 71 to 73 cents and awarded the sugar shippers reparations from the carriers for the difference. The Supreme Court ultimately held that this damages award was improper: 23 Where the Commission has, upon complaint and after hearing, declared what is the maximum reasonable rate to be charged by a carrier, it may not at a later time, and upon the same or additional evidence as to the fact situation existing when its previous order was promulgated, by declaring its own finding as to reasonableness erroneous, subject a carrier which conformed thereto to the payment of reparation measuredby what the Commission now holds it should have decided in the earlier proceeding to be a reasonable rate. Id. at 390. 24 Despite the superficial appeal of this passage, the rule enunciated therein is of no help to the LECs in this case. First, Arizona Grocery deals only with the power of the ICC to award reparations to shippers for unreasonable rates that they had paid to carriers. See id. at 381 (This case turns upon the power of the Interstate Commerce Commission to award reparations with respect to shipments which moved under rates approved or prescribed by it.). Arizona Grocery has been and should be understood in the terms in which it was decided, as a proscription against the retroactive revision of established rates through ex post reparations. See, e.g., Alabama Power Co. v. ICC, 852 F.2d 1361, 1373 (D.C. Cir. 1988) (suggesting that Arizona Grocery stands for the proposition that requiring railroads to pay refunds, based on a determination that the earlier Commissionapproved rates were impermissible, runs counter to the wellestablished prohibition against retroactive ratemaking); AT&T v. FCC, 836 F.2d 1386, 1394-95 (D.C. Cir. 1988) (Starr, J., concurring) (citing Arizona Grocery for the basic rule of ratemaking that when the Commission determines that existing rates are excessive, it cannot order a refund of past payments under the revoked rate); cf. Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 189 n.7 (D.C. Cir. 1986) (FERC may not order a retroactive refund based on a post hoc determination of the illegality of a filed rate's prescription.). 25 As such, neither Arizona Grocery nor the rule it announced are concerned with a situation such as the one presented here, in which we must decide not whether the FCC may force the LECs to repay that which they took through EUCL charges, but rather whether the Commission may make a retroactive determination that those charges were unlawful at the time that they were imposed. Indeed, the rule against retroactive ratemaking is premised on the implicit understanding that an established rate is not made illegal if it is later found to be impermissible or unreasonable. See, e.g., Arizona Grocery, 284 U.S. 370, 389 (1932) (the ICC could repeal the order as it affected future action, and substitute a new rule of conduct as often as occasion might require, but this was obviously the limit of its power, as of that of the legislature itself); Town of Norwood, Mass. v. FERC, 53 F.3d 377, 381 (D.C. Cir. 1995) (The retroactive ratemaking doctrine prohibits the Commission from authorizing or requiring a utility to adjust current rates to make up for past errors in projections. If a utility includes an estimate of certain costs in its rates and subsequently finds out that the estimate was too low, it cannot adjust future rates to recoup past losses.); Sea Robin, 795 F.2d at 189 n.7 (Sea Robin had a right to rely on the legality of the filed rate once the Commission allowed it to become effective.). The subsequent determination rejecting the earlier rate prescription is similar to a congressional action revising an earlier statutory enactment the later action may suggest that the original legislative act was ill-advised, but this will not justify reparations for persons who were disadvantaged by the original legislative enactment. This case does not involve the sort of ratemaking contemplated by Arizona Grocery, so the same assumptions do not apply here. 26 Second, in light of the implicit assumptions underlying the rule against retroactive revision of established rates through ex post reparations, it is not surprising that the Court in Arizona Grocery observed that the ICC had prescribed a legal rate in its quasi-legislative capacity. 284 U.S. at 388. The Court recognized that ratemaking fixing rates or rate limits for the future is a legislative function, and held that once the Commission had exercised such a power it could only undo the results prospectively. Id. at 388-89. In other words, Arizona Grocery, by its own terms, does not apply where an adjudicating agency alters, even with retroactive effect, a policy established in a previous quasi-judicial action. Nor has it ever been so applied. The lines between these categories of activity are not always clear indeed, in Arizona Grocery itself the quasi-legislative rates were established in an adjudicatory proceeding, see id. at 388. Nevertheless, the Court in Arizona Grocery made clear that there is an important distinction between rules resulting from quasi-adjudication and rules resulting from quasi-legislation. We are therefore bound to follow the Court's mandate and apply this distinction. 27 With these principles in mind, we are constrained to conclude that the FCC's actions in this case are not governed by the rule established in Arizona Grocery. The Access Charge Reconsideration, a rulemaking designed to establish how the LECs were to recover end-user costs in the future, was undoubtedly legislative in character. But this rulemaking was not revised by the Liability Order that the LECs now challenge. Rather, the Liability Order merely corrected the EUCL Decisions, agency adjudications that had erroneously interpreted the original Access Charge Reconsideration by holding that particular instances of challenged conduct on the part of the LECs did not violate the regulations arising from that rulemaking. In those decisions, the FCC did not purport to substitute a new legislative rule for an old one. Moreover, when the court in C.F. Communications vacated the judgment in the EUCL Decisions, it did so on the grounds that the FCC had misconstrued the Access Charge Reconsideration rulemaking. See 128 F.3d at 741-42. Our opinion in that case did not, however, suggest that the underlying rulemaking was in any way infirm. And on remand, the FCC issued the Liability Order to rectify the errors found pursuant to the judicial review of the EUCL Decisions. 28 Therefore, the FCC's actions in issuing the orders in the EUCL Decisions and the Liability Order were not analogous to the situation in Arizona Grocery. In Arizona Grocery, the ICC purported to retroactively revise an established rate (that was the product of a quasi-legislative action); in this case, by contrast, the FCC purported to interpret and apply legislative regulations in succeeding adjudications. 29 There is no doubt that the EUCL Decisions were intended to have prospective application, in the sense that these adjudicatory actions purported to interpret the Access Charge Reconsideration rulemaking, which remained in force all along. But this fact does not advance the LECs' argument. It is well understood that judicial interpretations of legislative enactments have consequences for parties in the future; yet, this does not render the statutory construction a legislative activity. See Japan Whaling Ass'n v. Am. Cetacean Soc., 478 U.S. 221, 230 (1986) ([u]nder the Constitution, one of the Judiciary's characteristic roles is to interpret statutes ...); Northwest Airlines, Inc. v. Transport Workers Union of Am., 451 U.S. 77, 95 & n.34 (1981) (emphasizing that the federal lawmaking power is vested in the legislative, not the judicial, branch of government, but that once the legislature speaks, the task of the federal courts is to interpret and apply statutory law). So too with adjudication by administrative agencies. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 216-17 (1988) (Scalia, J., concurring) (Adjudication ... has future as well as past legal consequences, since the principles announced in an adjudication cannot be departed from in future adjudications without reason.); Goodman v. FCC, 182 F.3d 987, 994 (D.C. Cir. 1999) ([T]he nature of adjudication is that similarly situated non-parties may be affected by the policy or precedent applied, or even merely announced in dicta, to those before the tribunal.). To suggest, as the LECs do here, that the EUCL Decisions were somehow legislative merely because they interpreted a rulemaking or because they had some future impact would entirely collapse the distinction between rulemaking and adjudication, and thus the very distinction on which Arizona Grocery rests. As such, we hold that when the FCC departed from the EUCL Decisions in a subsequent adjudication, it was not constrained by Arizona Grocery's blanket prohibition on retroactive repeals of quasi-legislative ratemaking. 30 2. The Retroactivity Doctrine This is not to say that agency adjudications that modify or repeal rules established in earlier adjudications may always and without limitation be given retroactive effect. To the contrary, there is a robust doctrinal mechanism for alleviating the hardships that may befall regulated parties who rely on quasi-judicial determinations that are altered by subsequent agency action. Over fifty years ago, in SEC v. Chenery Corp., 332 U.S. 194, 203 (1947), the Supreme Court cautioned that the ill effects of retroactivity must be balanced against the mischief of producing a result which is contrary to a statutory design or to legal and equitable principles. 31 In the ensuing years, in considering whether to give retroactive application to a new rule, the courts have held that [t]he governing principle is that when there is a substitution of new law for old law that was reasonably clear, the new rule may justifiably be given prospectively-only effect in order to protect the settled expectations of those who had relied on the preexisting rule. Williams Natural Gas Co. v. FERC, 3 F.3d 1544, 1554 (D.C. Cir. 1993). By contrast, retroactive effect is appropriate for new applications of [existing] law, clarifications, and additions. Id. 32 Pub. Serv. Co. of Colo. v. FERC, 91 F.3d 1478, 1488 (D.C. Cir. 1996) (PSCC). See also Aliceville Hydro Assocs. v. FERC, 800 F.2d 1147, 1152 (D.C. Cir. 1986) (discussing the distinction between new applications of law and substitutions of new law for old law). In a case in which there is a substitution of new law for old law that was reasonably clear, a decision to deny retroactive effect is uncontroversial. Epilepsy Found. of N. Ohio v. NLRB, No. 00-1332, slip op. at 12-13 (D.C. Cir. Nov. 2, 2001). In cases in which there are new applications of existing law, clarifications, and additions, the courts start with a presumption in favor of retroactivity. See, e.g., Health Ins. Ass'n of Am. v. Shalala, 23 F.3d 412, 424 (D.C. Cir. 1994). However, retroactivity will be denied when to apply the new rule to past conduct or to prior events would work a 'manifest injustice.'  ClarkCowlitz Joint Operating Agency v. FERC, 826 F.2d 1074, 1081 (D.C. Cir. 1987) (en banc) (quoting Thorpe v. Housing Auth. of the City of Durham, 393 U.S. 268, 282 (1969)); see also Consol. Freightways v. NLRB, 892 F.2d 1052, 1058 (D.C. Cir. 1989). 33 This court has not been entirely consistent in enunciating a standard to determine when to deny retroactive effect in cases involving new applications of existing law, clarifications, and additions resulting from adjudicatory actions. In Clark-Cowlitz, the en banc court adopted a non-exhaustive five-factor balancing test, see 826 F.2d at 1081-86 (citing Retail, Wholesale & Dep't Store Union v. NLRB, 466 F.2d 380, 390 (D.C. Cir. 1972). In a subsequent case, however, we substituted a similar three-factor test. See Dist. Lodge 64 v. NLRB, 949 F.2d 441, 447-49 (D.C. Cir. 1991) (citing Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07 (1971)). And in other cases, the court has jettisoned multi-pronged balancing approaches altogether. See Cassell v. FCC, 154 F.3d 478, 486 (D.C. Cir. 1998) (declining to plow laboriously through the Clark-Cowlitz factors, which boil down to a question of concerns grounded in notions of equity and fairness); PSCC, 91 F.3d at 1490 (concluding that the apparent lack of detrimental reliance ... is the crucial point supporting retroactivity). 34 In the present case, the LECs argue that the Liability Order should not be given retroactive effect, because it would be grossly unfair to punish them for imposing EUCL charges that were approved, and perhaps even required, by the authoritative pronouncements of the Commission itself. Before addressing these concerns, we note that even if we were to accept the LECs' argument in full, there would still remain a period of approximately four years from the IPPs' entry into the payphone market in 1984 until the first Thomas letter in 1988 during which no claim of reliance can possibly be maintained. During this period, the LECs imposed EUCL fees on the IPPs wholly on their own initiative, i.e., without specific guidance from the FCC, and thus entirely at their own risk. 35 That said, we conclude that the FCC's decision to hold the LECs liable for EUCL charges levied even after the Commission had spoken on the issue was not an abuse of discretion or otherwise impermissible. In reaching this determination, we rely primarily on two factors. The first is the fact that the FCC's policy regarding the propriety of imposing end-user fees on IPPs was never authoritatively articulated outside of the same complaint proceeding in which it was eventually reversed. Indeed, the two EUCL Decisions, on which the LECs' reliance argument primarily rests, were part of a single chain of decisions triggered by CFC's original complaint, a chain whose natural progression led to this court, where the Commission's holdings were vacated. Thus, the agency orders on which the LECs claim to have relied not only had never been judicially confirmed, but were under unceasing challenge before progressively higher legal authorities. Our cases indicate that under such circumstances reliance is typically not reasonable, a conclusion that significantly decreases concerns about retroactive application of the rule eventually announced. See Clark-Cowlitz, 826 F.2d at 1083 n.7 ([A] holding of nonretroactivity ... cannot be premised on a single, recent agency decision ... that is still in the throes of litigation when it is overruled.). 36 Indeed, our holding in PSCC is directly on point here. In that case, a group of natural gas producers increased the prices that they charged their pipeline customers in order to recover an ad valorem tax imposed by the state of Kansas; the legal theory behind this increase was that this tax was a severance tax under 110 of the Natural Gas Policy Act. These price hikes were challenged before FERC, which sided with the producers, holding that the Kansas tax came within the meaning of 110. Reviewing this decision, this court found that FERC's statutory interpretation was unreasonable and reversed. On remand, the Commission retreated from its earlier analysis and found that the tax did not qualify as a severance tax, and therefore that the producers had overcharged the pipelines. We upheld the retroactive application of this decision, in the process rejecting the claims of reliance advanced by the producers, claims that uncannily echo those made by the LECs in the present case. 91 F.3d at 1488-91. The court held that as soon as the pipelines had petitioned the Commission for a ruling that the producers' preferred interpretation of 110 was incorrect, the producers were put on notice that the recoverability of the tax was in dispute. Once this challenge had been lodged, it was then unreasonable for the producers to rely on that interpretation, even though it was explicitly endorsed by the agency before ultimately being reversed by this court. Id. at 1490. Thus, we concluded that it was appropriate for FERC to hold the producers liable for that which they had taken when the law was uncertain but the Commission was on their side. Just so here. Because the object of the LECs' reliance was neither settled (but rather was perpetually enmeshed in litigation) nor well-established, see Clark-Cowlitz, 826 F.2d at 1083 ([T]he Commission's ruling in that solitary proceeding can scarcely be viewed as 'well-established.' ), we are skeptical that retroactive liability against the LECs would actually impose a manifest injustice. In light of the ongoing legal challenges to the EUCL Decisions, whatever reliance the LECs placed on those rulings was something short of reasonable for purposes of the retroactivity analysis. 37 The second factor pointing toward retroactive liability is that the agency pronouncements on which the LECs relied were subsequently held by this court to be mistaken as a matter of law. As such, the FCC's Liability Order was largely an exercise in error correction. We have previously held that administrative agencies have greater discretion to impose their rulings retroactively when they do so in response to judicial review, that is, when the purpose of retroactive application is to rectify legal mistakes identified by a federal court. See Exxon Co., USA v. FERC, 182 F.3d 30, 49-50 (D.C. Cir. 1999); cf. Pub. Utils. Comm'n of the State of Cal. v. FERC, 988 F.2d 154, 161-63 (D.C. Cir. 1993) (noting that the normal rule against retroactive ratemaking may be relaxed where the original order was challenged and determined by this court to be unlawful). Indeed, there can be little dispute that had the FCC originally (whether in 1993 or 1995) held in favor of the IPPs, the Commission at that point would have been well within its rights to have held the LECs liable for violating the unreasonable charge provisions of 47 U.S.C. 201(b). As such, the LECs' argument that the FCC may not reach the same conclusion now reduces to the assertion that the agency may not retroactively correct its own legal mistakes, even when those missteps have been highlighted by the federal judiciary. But this is not the law. See United Gas Improvement Co. v. Callery Props., Inc., 382 U.S. 223, 229 (1965) (An agency, like a court, can undo what is wrongfully done by virtue of its order.); Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073 (D.C. Cir. 1992) (reading Callery to embody the general principle of agency authority to implement judicial reversals). 38 In sum, then, the IPPs should not be denied now what they asked for in their original complaint a determination that the LECs violated the law merely because the FCC bungled their case the first time around. To do so would make a mockery of the error-correcting function of appellate review. It would be to say that the LECs must prevail now because they (wrongfully) prevailed below. We are unwilling to tie the Commission's hands in this way. Cf. Exxon USA, 182 F.3d at 49 (There is also a strong equitable presumption in favor of retroactivity that would make the parties whole.). As such, we conclude that the Liability Order representeda permissible exercise of the FCC's discretion and therefore deny the LECs' petition for review. 39 Having upheld the imposition of retroactive liability, we decline to address whether a similar finding regarding damages would be equally permissible. As described above, the FCC has not yet entered a final order with respect to damages. Both the amount that the LECs will ultimately have to pay, and the time period that those payments will cover, remain for determination. As such, the LECs' contention that equitable restitution, and not legal damages, is the sole remedy available to the IPPs, see Atlantic Coast Line R.R. Co. v. Florida, 295 U.S. 301 (1935); Moss v. Civil Aeronautics Bd., 521 F.2d 298, 314 (D.C. Cir. 1975), is plainly not ripe for adjudication at this time. See Abbott Labs. v. Gardner, 387 U.S. 136, 149-50 (1967). Only after the Commission both commits itself to a method for calculating the proper amount of the award, and concretely applies that method to the LECs, will this court be in a position to evaluate the arguments regarding damages. See EaglePitcher Indus., Inc. v. EPA, 759 F.2d 905, 915 (D.C. Cir. 40 1985). By bifurcating the proceedings as it did, the FCC left those decisions for another day. 41 As we read the Liability Order, the FCC has suggested a possible means for figuring damages, but has not foreclosed the possibility of modifying that suggestion during the next phase of the proceedings. See Liability Order at 8771, p p 33-34. Specifically, the FCC has not reached a conclusive determination that it will compel the LECs to return all of the monies that they collected in possible reliance on the FCC's official pronouncements. Nor has it rendered a final judgment that the LECs are not entitled to some kind of equitable offset in light of such reliance. We will not prejudge these issues in advance of the agency.