Court Opinion

ID: 4702451
Source: CourtListenerOpinion
Date Created: 2021-07-09 15:02:56.542139+00
Date Added: 2024-06-11T08:06:24.966267
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 4, 2021                      Decided July 9, 2021

                        No. 19-1233

       GREAT LAKES COMMUNICATION CORP., ET AL.,
                    PETITIONERS

                             v.

   FEDERAL COMMUNICATIONS COMMISSION AND UNITED
               STATES OF AMERICA,
                  RESPONDENTS

                    AT&T CORP., ET AL.,
                      INTERVENORS

                 Consolidated with 19-1244

             On Petitions for Review of an Order
        of the Federal Communications Commission

     Lauren J. Coppola argued the cause for petitioners. With
her on the joint briefs were G. David Carter, Dwayne D. Sam,
Anthony T. Caso, John C. Eastman, Henry Goldberg, and W.
Kenneth Ferree. Robert Callahan entered an appearance.
                             2

     James M. Carr, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on
the brief were Michael F. Murray, Deputy Assistant Attorney
General, U.S. Department of Justice, Robert B. Nicholson and
Andrew N. Delaney, Attorneys, Thomas M. Johnson, Jr.,
General Counsel, Federal Communications Commission,
Ashley S. Boizelle, Deputy General Counsel, and Richard K.
Welch, Deputy Associate General Counsel. Jacob M. Lewis,
Associate General Counsel, and Matthew J. Dunne, Counsel,
Federal Communications Commission, entered an appearance.

     Timothy J. Simeone, Deepika H. Ravi, Michael J.
Hunseder, James P. Young, Christopher M. Heimann, and
David L. Lawson were on the joint brief of intervenors AT&T
Corp., et al. in support of respondents. C. Frederick Beckner
III, Jonathan E. Nuechterlein, and Christopher J. Wright
entered appearances.

    Before: WILKINS and RAO, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.

    Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.

     SILBERMAN, Senior Circuit Judge: Petitioners challenge
an FCC rule that discourages competitive carriers from
stimulating access fees that long-distance carriers must pay
when routing calls to a local carrier. We deny the petitions
because the Commission has ample statutory authority and its
rule is reasonable.

                              I

     As we previously described, so-called “competitive
carriers” compete with legacy “incumbent carriers,” who are
                               3
descendants of AT&T’s broken-up monopoly. See generally
Comptel v. FCC, 978 F.3d 1325 (D.C. Cir. 2020). Typically,
the latter own the local phone network, while the former lease
or purchase at wholesale the use of the incumbent’s network to
deliver services.

     The smaller of the incumbent carriers—operating largely
in rural areas—are known as rate-of-return carriers because
their prices are set by a regulatory formula based on their costs
plus a profit percentage. Competitive carriers benchmark their
rates to an incumbent operating in the same area, whose rates
have already been approved. See Connect America Fund,
Notice of Proposed Rulemaking, 26 FCC Rcd. 4569 ¶ 36
(2011). Since competitive carriers use the networks of others,
they have greater geographic flexibility. And this flexibility
allows them to act quickly to exploit profitable market
opportunities and engage in regulatory arbitrage.

     In a previous case, we described the competitive carriers’
targeting of a market niche servicing large business and
government entities. Comptel, 978 F.3d at 1331. In this case,
the FCC focuses on the competitive carriers’ pursuit of another
market segment—toll conference centers. They host telephone
conferences where multiple people call in to a meeting.

     Servicing toll conference centers has been a particularly
lucrative business for competitive carriers. Under existing (and
congressionally-sanctioned) regulations, long-distance carriers
must pay an “access fee” to local carriers that deliver calls to
their recipients. The access fee covers the responsibility of
tandem switching and transportation to the local carrier’s end
office. The more people who call into the conference center,
the more profit the carrier generates, because fees exceed the
marginal cost to the carrier. This provides a competitive carrier
an incentive to operate in areas where the incumbents have high
                               4
per-minute interstate access rates, and then to inflate the
amount of traffic on its system.

     Calls to rural areas are more expensive (and profitable) for
technological and regulatory reasons. So competitive carriers
will often route calls through rural areas and encourage toll
conference centers to operate there. Indeed, some carriers
operating in rural areas have had explicit agreements with call
centers to share revenue from access charges—thereby
stimulating conference callers to offer artificially low rates
(even totally free calls).

     As a result of these incentives, some sparsely populated
rural areas receive a disproportionate and overwhelming
number of calls. The Commission credited AT&T’s
observation, for instance, that twice as many calling minutes
were routed in a month to Redfield, South Dakota (population
2,300) and one end office as were routed to Verizon’s facilities
in New York City (population 8,500,000) and 90 end offices.
Similarly, Sprint explained that Iowa, with 1% of the U.S.
population, accounts for 48% of Sprint’s access fee payments.
In addition to higher fees, the Commission notes that access
stimulation may result in overloaded networks, call blocking,
and dropped calls. Updating the Intercarrier Compensation
Regime to Eliminate Access Arbitrage, 34 FCC Rcd. 9035 ¶¶
15, 95, 111 (2019) (“Order”).

     The long-distance carriers complained to the FCC. Under
existing rules they could not charge their customers separately
for such calls; long-distance rates for customers are calculated
as flat rates without regard to the length of call or geographic
distance. See 47 U.S.C. § 254(g); Connect America Fund,
Report and Order, 26 FCC Rcd. 17663 ¶ 663 (“2011 Order”).
The interexchange carriers claimed, therefore, that the costs
                                   5
generated by the few who were making these calls to
conference centers were borne by all customers.

      In a 2011 rule, the FCC agreed with the long-distance
carriers’ complaints. 2011 Order ¶ 675. The FCC designated
carriers who exploited this regulatory loophole as “access
stimulators.” That designation included both competitive
carriers and rate-of-return carriers who (1) had a revenue
sharing agreement with a third-party based on access charges
and (2) had three times as many long-distance calls coming in
(“terminating”) as going out (“originating”). 1 If designated an
access stimulator, regulators would reduce the access fees that
a carrier was permitted to charge. 2011 Order ¶¶ 684–86, 688–
90. 2

     But the 2011 rule was not completely successful. Some
competitive carriers continued to stimulate access fees
notwithstanding     the    sanction.    Others      successfully
circumvented the ban on direct revenue sharing with the
conference call centers by using third parties. See Order ¶ 44;
AT&T Corp. v. FCC, 970 F.3d 344, 351–53 (D.C. Cir. 2020).

     So, in 2018, the Commission revisited the problem. It
issued a Notice of Proposed Rulemaking that, importantly,
inquired “whether, and if so how, to revise the current
definition of access stimulation to more accurately and

        1
         Even if a carrier didn’t meet the 3:1 ratio, it could still be
an access stimulator if it had doubled either its interstate originating
or terminating switched access minutes in a month, year over year.
        2
          Certain carriers challenged the 2011 rule in the Tenth
Circuit, which sided with the Commission. See generally In re FCC
11-161, 753 F.3d 1015 (10th Cir. 2014).
                               6
effectively target harmful access stimulation practices.” 3 The
prospective sanction for a carrier determined to be an access
stimulator was a complete ban on charging access fees.

     The FCC released a draft order in which it stated that it
would add an alternative definition of access stimulation that
would not include the troubling revenue sharing agreement as
an essential element. Instead, competitive—as well as rate-of-
return—carriers that terminated six times the number of long-
distance calls they originate would be access stimulators, even
if there was no revenue sharing agreement.

     After the close of the comment period, AT&T and NTCA
(a trade association including rate-of-return carriers) met with
the FCC and claimed that rate-of-return carriers did not engage
in harmful access stimulation practices, but some would
nevertheless hit the 6:1 ratio. They proposed a higher ratio—
10:1—for rate-of-return carriers. That same day, the FCC
released a notice of its final agenda, thereby, under the
Commission’s rules, preventing further responses.

     The Commission adopted rules largely following those
proposed in the draft order but incorporating the differentiated
definitions proposed by AT&T and NTCA. In addition to the
old definition of access stimulation, the Commission added a
new factor. If a competitive carrier exceeded a 6:1 ratio of
terminating to long-distance calls in any month, it would be
labelled an access stimulator regardless of whether it had any
revenue sharing agreements. Order ¶¶ 43–67. But rate-of-
return carriers without a revenue sharing agreement could

       3
         Notice of Proposed Rulemaking, 33 FCC Rcd. 5466, 5475
¶ 26 (2018) (“NPRM”).
                                  7
avoid access-stimulator status if their ratio did not exceed 10:1
for three consecutive months. 4

     The Commission explained its separate test for rate-of-
return carriers by emphasizing their structural and economic
differences from competitive carriers. Id. ¶¶ 47–55. As we
previously described, the Commission noted that many rate-of-
return carriers are small and rural. They have fixed offices and
infrastructure serving defined communities. By contrast, many
competitive carriers serve only high-volume commercial
customers and can flexibly target those customers. Id. ¶ 49.
And the Commission found that rate-of-return carriers may be
more susceptible to seasonal fluctuations given the economics
of rural communities. These considerations, coupled with the
lack of evidence that rate-of-return carriers were engaging in
harmful access-stimulation practices, led the Commission to
adopt the separate definitions of access stimulation.

     The Order prohibited an access stimulator from collecting
access charges from long-distance carriers. Moreover, it also
imposed responsibility on access stimulators for paying any
access charges imposed by intermediate carriers (carriers
between the long-distance carrier and the access-stimulating
network). Order ¶¶ 17–42. The agency explained this rule
would “properly align financial incentives by making the
access-stimulating [carrier] responsible for paying for the part
of the call path that it dictates.” Order ¶ 17.

        4
           Rate-of-return carriers also had to be of sufficient size to
trigger the 10:1 ratio definition—at least 500,000 minutes of
interstate terminating traffic in an end office, averaged over three
calendar months. Order ¶ 43.
                                8
                               II

     Petitioners (several competitive carriers and companies
that offer conference calls) challenge the rule on three grounds.
First, they contend that it exceeds the Commission’s statutory
authority. Second—and this is the main substantive
argument—the rule is arbitrary and capricious (unreasonable)
for several reasons. Third, there is a separate violation of the
APA; the rule is not a logical outgrowth of the Notice of
Proposed Rulemaking. We take these arguments in turn.

                                A

     The government relies primarily on 47 U.S.C. § 201(b) for
its authority to promulgate the Order. That section provides:

    All charges, practices, classifications, and regulations
    for and in connection with [common carrier]
    communication service, shall be just and
    reasonable, . . . The Commission may prescribe such
    rules and regulations as may be necessary in the
    public interest to carry out the provisions of this
    chapter.

(emphasis added). On its face, Section 201(b) gives the
Commission broad authority to define and prohibit practices or
charges that it determines unreasonable. Fees intentionally
accrued by artificially stimulating and inefficiently routing
calls would appear to fall within that wide authority. To be sure,
under the APA, the Commission’s decisions as to what is
unreasonable must themselves be reasonable. But if the
Commission can legitimately conclude that local carriers’
behavior as an access stimulator is unfair to the long-distance
carriers and their customers—which we discuss in part B—
then the local carriers who engage in access stimulation can
                               9
reasonably be described as engaging in unreasonable practices
under Section 201(b).

    Petitioners respond by claiming that the statutory text in
Section 201(b) is not as broad as it seems because other
provisions cabin the Commission’s authority. It is claimed that
Section 251(b)(5), which obliges carriers to establish
reciprocal arrangements to transport and terminate calls, and
Section 252(d)(2), which links reciprocity with just and
reasonable agreements, are inconsistent with the remedy the
Order applies to an access stimulator.

    47 U.S.C. § 251(b): Each local exchange carrier has
    the following duties: . . . (5) The duty to establish
    reciprocal compensation arrangements for the
    transport and termination of telecommunications.

    47 U.S.C. § 252(d)(2): (A) For the purposes of
    compliance by an incumbent local exchange
    carrier with section 251(b)(5) of this title, a State
    commission shall not consider the terms and
    conditions for reciprocal compensation to be just and
    reasonable unless—(i) such terms and conditions
    provide for the mutual and reciprocal recovery by
    each carrier of costs associated with the transport and
    termination on each carrier’s network facilities . . . .

    (B) This paragraph shall not be construed—(i) to
    preclude arrangements that afford the mutual recovery
    of costs through the offsetting of reciprocal
    obligations, including arrangements that waive
    mutual     recovery    (such      as    bill-and-keep
    arrangements).

(emphases added).
                              10
     Petitioners contend that the reciprocity and mutuality
requirements of 251(b)(5) and 252(d)(2) should inform the
reading of 201(b)’s “just and reasonable” term. But, as the
Commission points out, neither 251(b)(5) or 252(d)(2) applies
directly to the FCC. They are directed to carriers and State
Commissions respectively, and the Commission’s role is
limited to supplying background default rules for States to
apply. See Order ¶ 99 (citing 2011 Order ¶¶ 760–81); see also
47 U.S.C. § 201(b) (granting rulemaking authority).

     There is no dispute between the parties that the linguistic
meaning of “just and reasonable,” standing alone, would give
the Commission broad authority. See Nat’l Ass’n of Regul. Util.
Comm’rs v. ICC, 41 F.3d 721, 726–27 (D.C. Cir. 1994). But,
arguably, the Chevron framework is still in play to determine
whether Sections 251 and 252 affect the meaning of “just and
reasonable” in this context. The government invoked Chevron,
and we think its interpretation is eminently permissible. See
467 U.S. 837 (1984).

     Even assuming the sections did limit the Commission’s
authority under 201(b), Petitioners’ argument has no merit.
They argue the sanction imposed on access stimulators is itself
non-reciprocal and non-mutual because they can no longer
recover access charges for calls they terminate—a
circumstance which doesn’t apply to calls the access stimulator
originates. This seems to us to be a rather labored and
unpersuasive argument. Under Petitioners’ logic, if a local
carrier’s ratio of incoming calls to outgoing were 100:1, the
Commission would be powerless to prevent the access
stimulator from recovering access fees despite being grossly
disproportionate to its costs. And after all, the whole purpose
of the FCC’s rule is to achieve a measure of reciprocity
                                 11
between the originating and terminating calls, and thereby
reciprocity with the interexchange carriers. 5

    In sum, we think Petitioners’ statutory arguments are
unpersuasive.

                                 B

     Petitioners attack the premise of the FCC’s rule. It is
allegedly unreasonable for the FCC to conclude that consumers
were disadvantaged by the stimulation of access charges. 6
Seventy-five million people use toll conferencing annually.
And the revenue long-distance carriers receive from these
subscribers—some $20.7 billion—dwarfs the $60–80 million
in additional charges caused by access stimulators.

     The flaw in the argument is that, as the Commission
explained, it is impossible for the long-distance carriers to
charge those users the marginal cost for these services. Section
254(g) of the Communications Act prevents them from
charging customers directly for these costs. Since the costs are
thus spread to all consumers, access stimulation raises the cost
of calls for everyone. See Order ¶ 20 n.55 (citing 2011 Order
¶ 663).

        5
          This whole question of access stimulation will probably
become moot as the Commission fully transitions to what is called a
bill-and-keep regime, whereby access fees will be largely or entirely
eliminated and each carrier will bill its customers for its cost of
originating and terminating calls. See Order ¶ 11; 47 U.S.C. § 251(g)
(providing the Commission authority to establish transitory rules).
        6
          See 5 U.S.C. § 706(2)(A); FCC v. Prometheus Radio
Project, 141 S. Ct. 1150, 1158 (2021) (requiring agency action be
“reasonable and reasonably explained”).
                               12
     Still, Petitioners challenge the notion that even though the
costs for long-distance carriers had been reduced by the 2011
rule—and reduced further by the 2019 rule—these cost savings
would flow to consumers. They have, according to Petitioners,
fattened the purses of the long-distance carriers’ stockholders,
not callers. To support this theory, Petitioners sought discovery
into whether the 2011 rule had actually benefitted consumers.
They contend that the Commission’s refusal to pursue evidence
to establish their premise was erroneous and, substantively, the
premise itself was unreasonable.

     We disagree. The Commission was well within its broad
discretion to “decide when enough data is enough.” United
States v. FCC, 652 F.2d 72, 90–91 (D.C. Cir. 1980) (en banc).
And it could reasonably rely on common sense and predictive
judgments within its expertise “even if not explicitly backed by
information in the record.” Phoenix Herpetological Soc’y, Inc.
v. U.S. Fish & Wildlife Serv., 998 F.3d 999, 1006 (D.C. Cir.
2021); see also FCC v. Fox Television Stations, Inc., 556 U.S.
502, 521 (2009).

     In any event, the requested evidentiary exploration would
have been a snare and a delusion. It is well established the
interexchange market is quite competitive, as the Commission
explains. Order ¶ 32. In a competitive market, a reduction in
producer costs can reasonably be expected to translate into
lower consumer prices. Moreover, as the Commission further
explained, even if some portion of the cost savings improved
the returns of shareholders, that would benefit the public in the
long run by encouraging further investment in long-distance
networks.

     Petitioners further contend that even large and expensive
charges should be tolerated provided that the long-distance
carriers are able to make a profit. This argument is based on a
                                  13
rather disappointing understanding of economics. The relevant
point is that artificial network stimulation harms consumers by
distorting the market.

                              *    *    *

     Next we deal with Petitioners’ claim that it was unfair, and
thus unreasonable, to treat the rate-of-return carriers more
leniently than the competitive carriers. It will be recalled that
the rate-of-return carriers are not deemed access stimulators
unless they have incoming calls which exceed a ratio of 10:1
vis-à-vis outgoing calls, but competitive carriers are subject to
a 6:1 ratio. 7

     The Commission “bears the burden ‘to provide some
reasonable justification for any adverse treatment relative to
similarly situated competitors.’” Baltimore Gas & Elec. Co. v.
FERC, 954 F.3d 279, 283–84 (D.C. Cir. 2020) (quoting ANR
Storage Co. v. FERC, 904 F.3d 1020, 1025 (D.C. Cir. 2018)).
We think the Commission satisfied this burden and reasonably
distinguished the two kinds of carriers. The rate-of-return
carriers lack the same ability to pursue conference call centers
as customers and game the access charge regime. They have a
relatively defined geographic footprint that prevents the
aggressive selling practices and rate arbitrage that competitive
carriers can employ.

        7
           Petitioners also claim the 6:1 ratio is arbitrary. In a sense
that is true, just as would be true of a 60 miles-per-hour speed limit.
But it is within the zone of reasonableness given the Commission’s
goal to set a ratio that would encompass carriers engaged in access
stimulating practices without relying on a revenue sharing
agreement. See Vonage Holdings Corp. v. FCC, 489 F.3d 1232,
1242–43 (D.C. Cir. 2007).
                                 14
     To be sure, some competitive carriers have gravitated to
state-of-the-art network facilities, affixing them more firmly to
a geographic area and allowing them to pursue both business
and residential customers. But as a class, it is still true that most
competitive carriers are much more flexible than rate-of-return
carriers. Therefore, the FCC’s differential treatment of the two
types of carriers was reasonable.

     Indeed, the Commission saw no evidence that rate-of-
return carriers had sought to stimulate their access charges or
engage in rate arbitrage. Yet the increasing use of the internet
and cell phones to initiate long-distance calls could cause rate-
of-return carriers’ ratio of incoming-to-outgoing calls to rise
above 6:1. So the 10:1 limitation imposed on them by the
Commission’s Order was a reasonable prophylactic limitation.

                            *    *    *

    Petitioners argue that the Commission’s subsequent
enforcement of the rule and grant of waivers demonstrates the
Order’s arbitrariness, and, specifically, evidence the
Commission’s targeting of certain competitive carriers. The
FCC responds that such arguments are improperly before this
Court. We side with the Commission.

     Ordinarily we review only the order or rule before us, not
subsequent events. Comptel, 978 F.3d at 1334. However,
Petitioners call our attention to an exception, Amoco Oil Co. v.
EPA, 501 F.2d 722 (D.C. Cir. 1974). The peculiar
circumstances of that case led us to consider post-rulemaking
events for the limited purpose of assessing “the truth or falsity
of agency predictions.” Id. at 729 n.10. We considered post-
rulemaking congressional testimony that bore directly on the
plausibility of agency predictions that were essential to the
rule—and predictions the agency reaffirmed subsequent to the
rule. Id. at 729 n.10, 731.
                                 15
     As we later emphasized, “[t]he exception made in Amoco
Oil was quite narrow.” Defs. of Wildlife v. Gutierrez, 532 F.3d
913, 920 (D.C. Cir. 2008). It does not apply here, and we
certainly do not wish to extend it. If Petitioners want to
challenge the Commission’s enforcement practices it will have
to do so in a separate proceeding. 8

                                 C

     There remains Petitioners’ argument that the final rules’
differential treatment of rate-of-return carriers and competitive
carriers—even if reasonable—was not foreshadowed by the
NPRM; it was not a “logical outgrowth” of the Notice. See U.S.
Telecom Ass’n v. FCC, 825 F.3d 674, 700 (D.C. Cir. 2016) (A
notice “satisfies the logical outgrowth test if it expressly ask[s]
for comments on a particular issue or otherwise ma[kes] clear
that the agency [is] contemplating a particular change.”
(internal quotation omitted)); 5 U.S.C. § 553(b)(3) (“The notice
shall include . . . (3) either the terms or substance of the
proposed rule or a description of the subjects and issues
involved.”).

    This is a troubling argument, perhaps because the
Commission accepted the last-minute proposal from AT&T
and NTCA—too late for adverse comment. Even though we
have concluded that the FCC’s adoption of the proposal was

        8
          Petitioners also raise a rather weak argument that the Order
creates a Network Edge inconsistently with past policy. See Fox
Television Stations, 556 U.S. at 515. A Network Edge is the
boundary in a bill-and-keep system where the financial responsibility
shifts between carriers. Petitioners’ argument is not worth discussing
because, as reasonably construed by the Commission, the Order does
not set a Network Edge, as it does not yet institute a bill-and-keep
regime. See Order ¶ 101.
                                 16
reasonable, can it fairly be said that the differential treatment
was a logical outgrowth of the notice?

     The FCC’s position is clearly yes because the NPRM
explicitly asked whether the Commission should “modify the
ratios or triggers”—plural—in the definition of access
stimulation (recall it is 3:1 under the 2011 rule). NPRM ¶ 26.
That statement warned commenters that the prior 3:1 ratio
could be modified. Granted, it did not explicitly suggest
differential treatment. But since the Commission concluded
that rate-of-return carriers were not at all access stimulators—
a conclusion that Petitioners do not challenge—it would have
been foreseeable that rate-of-return carriers would have been
excluded altogether from any modification of the 2011 rule.
Because even such an extreme differential treatment was
foreseeable, the Order’s more limited differential ratios were a
logical outgrowth of the notice. 9

                             *    *    *

     In sum, Petitioners have not shown that the Commission
failed to provide adequate notice or otherwise acted
unreasonably in its promulgation of the Order. Thus, we deny
the petitions for review. 10

     So ordered.

        9
          Petitioners also claim that the remedy to be imposed on
access stimulators in the final rule differs from the remedy suggested
in the NPRM. We think that is obviously of no significance. See
NPRM ¶¶ 8–9; 13–23; Order ¶¶ 40–41.

         Petitioners have made a number of other and subsidiary
        10

arguments which we have considered and reject without written
opinion.