Court Opinion

ID: 145415
Source: CourtListenerOpinion
Date Created: 2010-05-03 19:28:00+00
Date Added: 2024-06-11T17:23:55.578865
License: Public Domain

Case: 09-11099   Document: 00511098016   Page: 1   Date Filed: 05/03/2010

          IN THE UNITED STATES COURT OF APPEALS
                   FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                   Fifth Circuit

                                                FILED
                                                                 May 3, 2010

                                 No. 09-11099                    Lyle W. Cayce
                               consolidated with                      Clerk
                                 No. 09-11188

BUDGET PREPAY, INC.; GLOBAL CONNECTION INC. OF AMERICA;
NEXUS COMMUNICATIONS, INC.; TERRACOM, INC.; MEXTEL
CORPORATION, LLC, doing business as Lifftel,

                                          Plaintiffs — Appellees
v.

AT&T CORPORATION, formerly known as SBC Communications, Inc./AT&T
Inc.; ILLINOIS BELL TELEPHONE COMPANY, doing business as SBC
Illinois; INDIANA BELL TELEPHONE COMPANY, INC., doing business as
SBC Indiana; MICHIGAN BELL TELEPHONE COMPANY, doing business
as SBC Michigan; SOUTHWESTERN BELL TELEPHONE L.P., doing
business as SBC Arkansas, doing business as SBC Kansas, doing business as
SBC Missouri, doing business as SBC Oklahoma, doing business as SBC
Texas; WISCONSIN BELL, INC., doing business as SBC Wisconsin; SBC
OPERATIONS, INC.; BELL SOUTH TELECOMMUNICATIONS, INC.;
UNKNOWN ENTITIES 1-10; AT&T, INC., also known as SBC
Communications, Inc.; AT&T OPERATIONS, INC., formerly known as SBC
Operations, Inc.; AT&T SOUTHEAST, INC., formerly known as BellSouth
Telecommunications, Inc.,

                                          Defendants — Appellants

                 Appeals from the United States District Court
                      for the Northern District of Texas

Before SMITH, CLEMENT, and OWEN, Circuit Judges.
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EDITH BROWN CLEMENT, Circuit Judge:
        Appellees filed suit in federal district court, alleging that Appellants
initiated a scheme of predatory pricing for wholesale telecommunications
services in violation of the Telecommunications Act of 1996, federal antitrust
law, and Texas law. Appellees sought a temporary restraining order and a
preliminary injunction enjoining implementation of the scheme, as well as a
declaratory judgment that the scheme was unlawful. Appellants argued that
Appellees had failed to exhaust their administrative remedies and failed to show
irreparable harm. The district court granted the temporary restraining order
and extended it twice. It later granted a preliminary injunction and denied
Appellees’ motion to dismiss for lack of subject matter jurisdiction, for lack of
personal jurisdiction, and for failure to state a claim upon which relief could be
granted. We hold that Appellees’ claim does not arise from a question of federal
law. Accordingly, we vacate the preliminary injunction and remand to the
district court for further proceedings consistent with this opinion.
                            FACTS AND PROCEEDINGS
A.      Background of the Telecommunications Act
        Before turning to the facts of this case, the court finds it useful to review
the    provisions     and   structure   of       the   Telecommunications      Act.   The
Telecommunications Act of 1996 (“the Act”) was enacted “to promote competition
and reduce regulation in order to secure lower prices and higher quality services
for American telecommunications consumers and encourage the rapid
deployment of new telecommunications technologies.” Telecommunications Act
of 1996, Preamble, Pub. L. No. 104-404, 110 Stat. 56 (1996). The Act creates “a
procompetitive, de-regulatory national policy framework designed to accelerate
rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition.” H.R. R EP. N O . 104-458, at 113

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(1996) (Conf. Rep.), as reprinted in 1996 U.S.C.C.A.N. 10. To achieve these goals,
the Act divides various responsibilities between states and the federal
government, “enlist[ing] the aid of state public utility commissions to ensure
that local competition was implemented fairly and with due regard to the local
conditions and the particular historical circumstances of local regulation under
the prior regime.” Global Naps, Inc. v. Mass. Dep’t of Telecomms. & Energy, 427
F.3d 34, 46 (1st Cir. 2005) (quoting P ETER W. H UBER ET AL., F EDERAL
T ELECOMMUNICATIONS L AW § 3.3.4, at 227 (2d ed. 1999)) (internal quotation
marks omitted). The “intended effect” of such a regime was to “leav[e] state
commissions free, where warranted, to reflect the policy choices made by their
states.” Id.
      The heart of the Act’s deregulatory scheme is a system of “interconnection
agreements,” or ICAs, which are negotiated under the auspices of state utility
commissions. Under an ICA, a legacy monopoly carrier such as appellant AT&T,
also known as an incumbent local exchange carrier (“ILEC”), agrees to sell
telecommunications services to a new competitor such as appellee Budget
Prepay, also known as a competitive local exchange carrier (“CLEC”). The
process begins when an ILEC receives a “request for interconnection” from
another telecommunications company. 47 U.S.C. § 252(a)(1). The Act then
requires the ILEC to “negotiate in good faith . . . the particular terms and
conditions of agreements to fulfill” its duty to sell telecommunications services
to the CLEC. Id. § 251(c)(1). If the parties are unable to agree on all terms,
either party may petition the relevant state commission to arbitrate “open
issues.” Id. § 252(b)(1). A requesting CLEC may also choose to adopt all of the
terms and conditions of an existing state commission-approved ICA that the
ILEC has with another CLEC. Id. § 252(i). As a final procedural safeguard, all
ICAs must be submitted to the state commission for approval. Id. § 252(e)(1).

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        Under the Act, an ILEC has a general duty to resell to an interconnected
CLEC, at a wholesale rate, any service it offers to retail consumers. Id. §§
251(c)(4)(A), 251 (c)(4)(B). It also cannot “impose unreasonable or discriminatory
conditions or limitations on” such resale. Id. § 251(b)(1). Pursuant to subsections
(b) and (c) of § 251, the FCC has promulgated regulations providing that an
ILEC     “shall offer    to   any   requesting   telecommunications       carrier   any
telecommunications service that the incumbent LEC offers on a retail basis to
subscribers that are not telecommunications carriers for resale at wholesale
rates.” 47 C.F.R. § 51.605. The FCC regulations permit state commissions to
make two exceptions to this resale requirement. First, any service that is limited
to a certain class of subscribers—e.g., a service offered only to commercial
customers—need not be resold to a CLEC that plans to offer that service to a
different class of subscribers. Id. § 51.613(a)(i). Second, an ILEC must pass along
the promotional rate of services to the CLEC unless the promotion is short-term,
defined as lasting less than ninety days. Id. § 51.613(a)(ii). With respect to these
two exceptions, an ILEC “may impose a restriction [on resale] only if it proves
to    the   state     commission    that   the   restriction     is   reasonable    and
nondiscriminatory.” Id.       § 51.613(b). However, the parties are specifically
permitted by the Act to negotiate an ICA “without regard to the standards set
forth in subsections (b) and (c) of section 251”—that is, to negotiate around the
substantive requirements of the resale and interconnection provisions in the Act.
47 U.S.C. § 252(a)(i); see also Law Offices of Curtis V. Trinko, L.L.P. v. Bell Atl.
Corp., 305 F.3d 89, 103 (2d Cir. 2002), rev’d on other grounds sub nom. Verizon
Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004)
(“[I]nterconnection agreements do not necessarily reiterate the duties
enumerated in section 251. Instead, the ILEC and requesting carrier have the
option of contracting around the obligations set forth in subsections (b) and (c)
of section 251.”).

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        “In any case in which a State commission makes a determination
[regarding an ICA], any party aggrieved by such determination may bring an
action in an appropriate Federal district court to determine whether the
agreement or statement meets the requirements of” the Act. 47 U.S.C. §
252(e)(6). In Southwestern Bell Telephone Co. v. Public Utility Commission of
Texas, we interpreted this provision broadly, holding that state commissions had
power both to approve ICAs and to interpret and enforce their clauses. 208 F.3d
475, 480 (5th Cir. 2000). District courts review the orders of a state commission
to determine whether an ICA comports with federal law and can review the state
commission’s interpretation and enforcement of the ICA. Id. at 482. In such an
appellate posture, a district court reviews de novo a state commission’s
determination of whether an ICA comports with the requirements of the Act,
and reviews “all other issues” determined by the state commission under an
arbitrary and capricious standard. Id.
B.      The Parties’ Dispute and Proceedings in the District Court
        Budget Prepay and the other Appellees (collectively, “Budget Prepay”) are
small telecommunications companies. These CLECs purchase wholesale
telecommunications services from the Appellants (AT&T Corp. and various
subsidiaries or successors-in-interest to it, collectively “AT&T”), who are the
ILECs in eighteen different states. The CLECs then resell those services to
consumers. Each Appellee has an ICA with the relevant ILEC, though it is
unclear how many separate ICAs were negotiated and how many were adopted.
        During the relevant time period, AT&T offered a “Win-back Cash Back”
promotion to retail customers in several states, including those served by
Appellees, that waived connection fees and gave a $50 rebate to any customer
who switched from another landline or wireless provider to AT&T. AT&T’s
practice was to offer all such promotions to Budget Prepay, applying a wholesale
discount pursuant to the Act.

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      However, in July 2009, AT&T notified Budget Prepay that as of September
1, 2009, it would no longer pass along the full $50 promotional rebate to CLECs.
Rather, AT&T planned to apply a complicated pricing model to determine the
“economic value” of the Win-back Cash Back promotion. This model takes into
account the fact that many customers do not claim the rebate. Additionally, the
model distributes the value of the promotion over the time that the average
customer stays with AT&T after receiving the promotion. After applying the
wholesale discount rate set by the relevant state commissions, this model sets
the “economic value” of the promotion passed on to Budget Prepay as low as
$3.74 in some states.
      Budget Prepay filed suit in the Northern District of Texas. It brought a
declaratory judgment action as well as federal antitrust claims and various state
law claims under the Texas Deceptive Trade Practices Act. Budget Prepay
sought a temporary restraining order and preliminary injunction enjoining
AT&T from implementing the economic value pricing model or pursuing
collection actions against it. The relevant portion of the Amended Complaint
seeking a declaratory judgment reads:
       Plaintiffs request that the Court issue a declaratory judgment
       construing AT&T’s July 1, 2009, proposed modifications to its
       practice of making promotion payments to qualifying CLECs and
       the underlying contracts and law and issue a ruling to the effect
       that AT&T is required to extend to plaintiffs the full amount of the
       promotions, and that plaintiffs are not required to pay more to
       AT&T for service than the effective retail rate (that is, tariff price
       less promotion offers) less the applicable wholesale discount.

On October 13, 2009, after providing notice to the parties, taking evidence, and
hearing argument, the district court granted a temporary restraining order. The
order enjoined implementation of the pricing model and any collection actions
AT&T might file against Budget Prepay. The order also required the posting of
a $5,000 bond and expired after 10 days. On October 27, 2009, the district court

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clarified the temporary restraining order to the effect that AT&T was not
enjoined from seeking a determination from state commissions that the model
was consistent with federal law. The district court also extended the temporary
restraining order to November 6, 2009. On November 5, 2009, it was further
extended to November 13, 2009. AT&T appealed the order on November 9, 2009,
which appeal is captioned Case Number 09-11099.
        Meanwhile, AT&T filed a motion to dismiss the case for lack of subject
matter jurisdiction. AT&T also filed motions to dismiss certain defendants on
personal jurisdiction grounds, as well as a motion to dismiss AT&T, Inc. for
insufficient service of process and failure to state a claim. The district court
denied these motions on November 30, 2009, and also granted the preliminary
injunction that Budget Prepay sought. AT&T filed a notice of appeal as to these
claims on December 8, 2009, which appeal is captioned Case Number 09-11188.
We consolidated and expedited the appeals on December 22, 2009.
                                       DISCUSSION
A.      Jurisdiction and Standard of Review
        Advancing slightly different arguments each time, AT&T argued before
the district court and on appeal that the interpretation and enforcement of an
ICA does not present a federal question such that the district court had
jurisdiction pursuant to 28 U.S.C. 1331.1 AT&T contends that once the parties
enter into an ICA, the terms of that ICA supplant the provisions of the Act and
that interpreting and enforcing the ICA is a matter of state law within the
original jurisdiction of state commissions, subject to federal court review. Budget

        1
         “The district courts shall have original jurisdiction of all civil actions arising under
the Constitution, laws, or treaties of the United States.” 28 U.S.C. § 1331. There was no claim
that the district court had diversity jurisdiction and it is apparent from the face of the
complaint that the parties are not diverse. Budget Prepay brought a federal antitrust claim
in its complaint, but the district court dismissed that claim without prejudice and it has not
been repleaded or otherwise revived. All remaining claims are state law claims.

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Prepay responds that the court has jurisdiction pursuant to the Declaratory
Judgment Act because its claim arises from the federal regulations promulgated
by the FCC pursuant to the Act, and not from any contractual dispute. It also
asserts that the ICAs at issue invoke and incorporate federal law, including 47
U.S.C. §§ 251(c)(4)(A) & (B) and 47 C.F.R. §§ 51.605 & 51.613, and that
construing the ICAs therefore requires the court to construe federal law.
        As always, we must first consider whether we have jurisdiction. We have
appellate jurisdiction under 28 U.S.C. § 1291.2 The more complicated question
is whether this case presents a federal question such that we have jurisdiction
pursuant to 28 U.S.C. § 1331. We review a ruling on a F ED. R. C IV. P. 12(b)(1)
motion to dismiss for lack of subject matter jurisdiction de novo. See Ramming
v. United States, 281 F.3d 158, 161 (5th Cir. 2001). The party asserting
jurisdiction bears the burden of proof. Id.
B.      Is This a State or Federal Claim?
        A declaratory judgment claim is not jurisdiction-conferring; there must be
an independent basis for federal jurisdiction. See TTEA v. Ysleta del Sur Pueblo,
181 F.3d 676, 681 (5th Cir. 1999). In determining whether a case arises under
federal law, we look to whether the “plaintiff’s well-pleaded complaint raises
issues of federal law.” City of Chicago v. Int’l College of Surgeons, 522 U.S. 156,
163 (1997) (quoting Metro. Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987) (internal
quotation marks omitted)).
        Reviewing the face of the amended complaint, it is apparent that Budget
Prepay’s claim does not arise under federal law. The declaratory judgment claim
simply requests that the district court “constru[e] . . . the underlying contracts

        2
         The district court denied the motion to dismiss in the same order in which it granted
the preliminary injunction. The motion to dismiss is therefore properly before this court on
appeal. Casas v. Am. Airlines, Inc., 304 F.3d 517, 520 n.3 (5th Cir. 2002) (citing In re Seabulk
Offshore, Ltd., 158 F.3d 897, 899 n.2 (5th Cir. 1998); In re Lease Oil Antitrust Litig. (No. II),
200 F.3d 317, 319-20 (5th Cir. 2000)).

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and law,” and does not identify any specific federal statute or regulation from
which the declaratory judgment claim arises. Furthermore, we held in
Southwestern Bell that interpretation of the terms of an ICA, even if the ICA
terms are intertwined with federal law, is a claim governed by and arising under
state law. In that case, a CLEC brought a complaint before the Texas utility
commission alleging that Southwestern Bell, the ILEC, had breached the parties’
ICA by refusing to compensate the CLEC for local calls made by Southwestern
Bell’s customers to the CLEC’s internet service provider customers. 208 F.3d at
477-78, 482-83. The Act requires interconnected carriers to negotiate a means
of compensating each other for “local traffic”; that is, when one carrier’s
customer makes a local call to another carrier’s customer. See 47 U.S.C §
251(b)(5); 47 C.F.R. § 51.701(e). The ILEC and CLEC had negotiated a fixed rate
of reciprocal compensation for each minute of local traffic that utilized the other
carrier’s network. Sw. Bell, 208 F.3d at 477. The question before the state
commission, and ultimately before the district court and this court, was whether
calls to an ISP were “local traffic” that brought the ICA’s per-minute reciprocal
compensation requirement into play. Id. at 479.
      After concluding that state commissions had the power to hear cases
involving the enforcement and interpretation of ICAs, see id. at 481-82, we
rejected Southwestern Bell’s argument that “the proper understanding of these
contracts turns on whether Internet communications are ‘local’ under federal law
and that the definition of ‘local traffic’ in section 251(b)(5) of the Act should
govern the contract,” id. at 484. Rather, we noted that the details of negotiating
a reasonable rate of reciprocal compensation were left to the parties and to state
commissions. Id. at 484-85. It is “the agreements themselves and state law
principles [that] govern the questions of interpretation of the contracts and
enforcement of their provisions.” Id. at 485. We therefore “decline[d]
Southwestern Bell’s invitation to determine the contractual issues as a facet of

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federal law.” Id. Applying Texas contract law, the court then upheld the state
commission’s interpretation of the relevant contractual provisions regarding
“local traffic.” Id. at 485-87; accord Sw. Bell Tel. L.P. v. Pub. Util. Comm’n of
Tex., 467 F.3d 418, 422 (5th Cir. 2006) (“The interconnection agreement and
state law principles govern the interpretation and enforcement of agreement
provisions.”); Curtis V. Trinko, LLP, 305 F.3d at 104-05 (holding that, after an
ICA is signed, the relationship between the parties is governed by that
agreement and there is no claim under § 251).
      The fact that the ICA at issue here invokes and incorporates federal law
is not to the contrary. As noted above, the Act imposes general duties on ILECs
and then fills in the details of enforcement and interpretation with regulations
promulgated by the FCC. But the parties are free to negotiate around these
statutory and regulatory rules. See 47 U.S.C. § 252(a). The invocation of federal
law in an ICA does not turn a contract dispute into a federal question case;
rather, it accepts the relevant statutory language or regulation as a binding
contract provision in lieu of a privately negotiated provision. In this ICA, the
parties have agreed to adopt the specific FCC regulations concerning resale as
binding provisions, and the district court was asked to determine whether
AT&T’s pricing model was an unreasonable limitation on resale, which the ICA
prohibits. The fact that this ICA provision was drawn from 47 U.S.C. §
251(c)(4)(A) and not specifically negotiated does not raise a federal question. It
raises an issue of state law contract interpretation.
      In denying the motion to dismiss, the district court relied on language
from Verizon Maryland, Inc. v. Public Service Commission of Maryland to the
effect that “the district court has jurisdiction if the right of the petitioners to
recover under their complaint will be sustained if the Constitution and laws of
the United States are given one construction and will be defeated if they are
given another.” 535 U.S. 635, 643 (2002) (quotation omitted). In that case, an

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ILEC sued the state commission over the commission’s interpretation of an FCC
ruling. Id. at 640. The Court held that the district court had federal question
jurisdiction over that suit. Id. at 642. Verizon Maryland does not control this
case, because the claim in that case did not arise, as it does here, from an ICA.3
Even though many of the substantive issues may overlap, a suit for enforcement
of an ICA arises from and is governed by a body of law (i.e., state contract law)
different from that governing a suit challenging a commission’s interpretation
of federal regulations.
C.      Does the State Claim Raise Substantial Issues of Federal Law?
        Sua sponte, we asked the parties to address at oral argument whether this
is a case where federal question jurisdiction is satisfied because a substantial
federal right is an essential element of a state law claim. We think not.
        A complaint creates federal question jurisdiction “when it states a cause
of action created by state law and (1) a federal right is an essential element of
the state claim, (2) interpretation of the federal right is necessary to resolve the
case, and (3) the question of federal law is substantial.” Howery v. Allstate Ins.
Co., 243 F.3d 912, 917 (5th Cir. 2001) (footnote omitted) (citing Franchise Tax
Bd. v. Constr. Laborers Vacation Trust for S. Cal., 463 U.S. 1 (1983)). The
Supreme Court has “sh[ied] away from the expansive view that mere need to
apply federal law in a state-law claim will suffice to open the ‘arising under’
door.” Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 313
(2005). Rather, the Court has cautioned that the federal right at issue must be
“a substantial one, indicating a serious federal interest in claiming the
advantages thought to be inherent in a federal forum.” Id. (citing Merrell Dow
Pharm. Inc. v. Thompson, 478 U.S. 804, 814 & n. 12 (1986); Franchise Tax Bd.,
463 U.S. at 28). The Court has also cautioned us to assess the potential for

        3
         It should also be noted that in Verizon Maryland, the state commission heard the case
in the first instance—precisely the outcome proposed here.

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disruption of the state-federal balance struck by 28 U.S.C. § 1331 in determining
whether federal claims enmeshed in state law claims satisfy “arising under”
jurisdiction. Grable & Sons, 545 U.S. at 313-14; Merrell Dow, 478 U.S. at 810.
Such cases “require sensitive judgments about congressional intent, judicial
power, and the federal system.” Id. at 810.
       In Merrell Dow, the Court noted that Congress’s failure to provide a
private cause of action for violation of a federal statute suggested that the
federal right at issue was not substantial. Id. at 814. The Court later clarified
that the lack of a private cause of action was “relevant to, but not dispositive of,”
the question of whether the right was substantial enough to satisfy the exercise
of federal jurisdiction. Grable & Sons, 545 U.S. at 318. Despite this caveat, the
cited passage from Merrell Dow seems to us applicable to this case. Parties could
contract around the resale obligations of § 251 and still comply with the Act.
Given this fact, these obligations cannot be described as “substantial” rights
under federal law.
      Additionally, permitting the exercise of federal question jurisdiction in this
instance has the potential to disrupt the carefully crafted federal-state balance
envisioned in the Act, which erects a scheme of “cooperative federalism.” See
Core Commc’ns, Inc. v. Verizon Pa., Inc., 493 F.3d 333, 335 (3d Cir. 2007) (citing
P.R. Tel. Co. v. Telecomms. Regulatory Bd., 189 F.3d 1, 8 (1st Cir. 1999)). Budget
Prepay argued before the district court that unless the injunction issued, “what
you are going to have is a series of 18 state [commissions] looking at [the model],
followed by 18 federal appeals.” Appellees argued that given the potential for
inconsistent results, litigating these issues in the state commissions didn’t
“make as much sense as coming to one court to get the same result.” Yet such
differing results—so long as none is inconsistent with the purpose of the
Act—are part and parcel of cooperative federalism. The approach divides
responsibility for complex regulatory schemes between states and the federal

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government, with the federal government setting general standards and
ensuring overall compliance, while state agencies are given “latitude to proceed
in any number of fashions, provided that they are not inconsistent with the Act
and FCC regulations.” Phillip J. Weiser, Federal Common Law, Cooperative
Federalism, and Enforcement of the Telecom Act, 76 N.Y.U. L. R EV. 1692, 1742-43
(2001); see also id. at 1695-98 (describing cooperative federalism and noting that
the approach is designed “(1) to allow states to tailor federal regulatory
programs to local conditions; (2) to promote competition within a federal
regulatory framework; and (3) to permit experimentation with different
approaches that may assist in determining an optimal regulatory strategy”).
Such a scheme necessarily implies that states may reach differing conclusions
on specific issues relating to the implementation of the Act. See Global Naps,
Inc., 427 F.3d at 46. Far from being a bug, a patchwork of state-by-state
implementation rules is a feature of this system of cooperative federalism. In
implementing such a system, Congress has explicitly rejected the “advantages
thought to be inherent in a federal forum,” such as uniform application of federal
law. Grable & Sons, 545 U.S. at 313. We will not disturb this congressional
judgment.
                                CONCLUSION
      Because we hold that the district court was without subject matter
jurisdiction to entertain the claims under the Telecommunications Act raised by
Budget Prepay, we need not address other claims of error raised by AT&T. The
judgment of the district court as to the motion to dismiss for lack of subject
matter jurisdiction is REVERSED and the preliminary injunction is VACATED.
The case is remanded to the district court for further proceedings consistent with
this opinion.

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