Court Questions FCC Order Applying USF to VoIP Providers

“This could be the difference between remand or reversal,” Judge Merrick Garland told Vonage attorney Christopher Wright, pressing him for an opinion on the legality of part of the order. Garland made the statement after Wright, representing the company appealing the order, had been reluctant to answer a hypothetical question. Though it’s hard to draw conclusions from judges’ questions at oral arguments, a lawyer noted afterward that affirming the FCC “was not one of the options” Garland had mentioned.

The court “is likely to find fault with at least some of the FCC’s decision making in requiring VoIP providers to contribute to the… USF at levels they believe are inflated,” analysts at Stifel Nicolaus said in a report after the argument.

The judges focused on several parts of the order. One was a requirement that VoIP providers that choose to base their USF contributions on traffic studies must get the studies “preapproved” by the FCC; wireless carriers don’t face the same requirement. The studies are used by contributors to determine actual long distance and international revenue as the basis for USF contributions. They're an alternative to contributing based on a “safe harbor” percentage of revenue set by the FCC.

The FCC order had said studies used by the wireless industry without preapproval could raise problems and the practice shouldn’t be extended to a new technology. But it didn’t impose a preapproval requirement on wireless process, said VoIP companies complaining about their being treated differently. Asked by Tatel why the FCC hadn’t dealt with the lack of preapproval for wireless, FCC attorney James Carr said the Commission “thought it would disrupt an ongoing practice.” Said Garland: “So you already knew there were problems with wireless” but decided to let the process continue. “That makes no sense,” added Judge Harry Edwards.

Stifel Nicolaus warned that wireless companies may get caught in the crossfire of the issue of preapproving traffic studies: “Instead of giving VoIP providers relief from the requirement, the FCC, if the order is remanded, might require the wireless carriers to start making such submissions.”

Judges also asked why the FCC hadn’t eliminated a situation that VoIP providers say resulted in their contributing twice to the USF. VoIP providers say they pay some USF contributions through fees charged by wholesale carriers and, as a result of the FCC order, also pay directly into the fund. VoIP providers objected that the FCC continued the dual payments for 2 quarters rather than stop them immediately. Garland said he didn’t see a reason for this other than “we need money so let’s take it from them.” Carr said the FCC wanted to make sure the USF contribution factor didn’t rise artificially by immediately easing the double payment. The double payment “seems in conflict with Section 254(b) [of the Telecom Act] ‘equitable and nondiscriminatory’ language,” said Garland. Carr said that “for this short time it seemed reasonable for the Commission to require wholesale carriers to continue to pay.”

The judges didn’t ask as many questions about how the FCC set the 64.5% safe harbor, one of Wright’s main points, and Judge David Tatel indicated the court may show the FCC deference on that. Wright argued that the safe harbor percentage shouldn’t have been based on long distance providers’ traffic patterns, because VoIP providers offer both long distance and local service -- and VoIP is marketed more as a substitute for local service. Tatel asked whether Wright would make the same argument “if the record was clear” that 75% of VoIP providers revenue was from long distance service. No, said Wright. “So the question is did the Commission have sufficient evidence to pick the safe harbor,” said Tatel. Yes, said Wright. “Our standard of review on [such questions] is extremely deferential” to regulatory agencies, Tatel told him. “We wouldn’t rule out the chance of a Vonage victory on these arguments but it seems to have tougher road to hoe,” said Stifel Nicolaus.

Glenn Manishin, attorney for the Computer & Communications Industry Assn., said the VoIP order was the “most sweeping expansion of FCC authority since the Telecom Act of 1996.” The order “contradicts the act and is inconsistent with precedent,” said Manishin, who argued that the order violated the “basic distinction between information and telecom services.” The Telecom Act “forecloses the imposition of universal service on information services,” and VoIP has been categorized as an information service, he said. Asked by Tatel whether an information service can also provide telecom service, Manishin called the categories “mutually exclusive.”

The court got involved in similar debates about the difference between telecom service and telecom providers and the meaning of “provide” vs. “offer.” Garland asked Manishin why VoIP and wireline calls should be treated differently, since there’s no difference in how voices sound on the 2 services. The difference is in the “format” used, not the “content” of the calls, Manishin said. VoIP calls transmit information using Internet Protocol, he told Garland. FCC attorney James Carr said that “it’s mandatory by statute” for telecom services to participate in universal service, but the agency decided it didn’t need to deal with the complex definitional question in this order. “It didn’t think it needed to deal with that to reach” a decision, Carr said.