Tomorrow’s Argument in Global Crossing v. Metrophones

The following argument preview was written by Tobias Zimmerman, an attorney at Akin Gump who handles a variety of Telecom-related litigation. Tobias was co-counsel to the defendant in a case presenting the same question before the D.C. Circuit.

In the second of three arguments tomorrow, No. 05-705, Global Crossing Telecommunications v. Metrophones Telecommunications, the Court will consider whether a violation of rules and regulations promulgated by the FCC amounts to an “unjust and unreasonable” practice under 47 U.S.C. 201, thereby constituting a violation of the Communications Act of 1934. If the regulatory breach is found to be a violation of the Act itself, the party injured by that violation has a federal cause of action for damages under 47 U.S.C. 206 & 207. The FCC has previously stated that the conduct at issue does amount to an “unjust and unreasonable” practice. Accordingly, a collateral issue is how much deference should the courts give to an agency’s ruling that directly impacts the jurisdiction of the federal courts. While the first part of the question is specific to the Communications Act and FCC regulation, the deference question will probably lead the Court to further develop the standard set forth in Chevron U.S.A., Inc. v. NRDC, which requires that the federal courts give deference to an agency’s determinations within its regulatory field.

Jeffrey Fisher of Seattle’s Davis Wright Tremaine will argue on behalf of petitioner Global Crossing, while Roy Englert of Robbins Russell will argue on behalf of respondent Metrophones. Assistant to the Solicitor General James Feldman will argue on behalf of the United States as an amicus curiae in support of respondent.

This case, which is one of a slew of related litigation from across the country, concerns the nearly extinct market for public payphones (proving once again that technology moves faster than the law). Until the 1980s, the only owners/operators of public pay telephones were the local exchange carriers (LECs) (i.e., the “Baby Bells”). Due to technology advancements in the 1980s, and also the seismic changes resulting from the break up of the Bell monopoly, it became feasible for independent companies like respondent Metrophones to own and operate payphones. These companies are referred to as payphone service providers (PSPs).

PSPs earn revenue from the coins deposited in their phones and from commissions paid by the long-distance company that they contract to serve the phone. (In the acronym-rich world of telecommunications, long-distance companies are referred to as interexchange carriers (IXCs)). This means that the PSP receives no payment when a caller places a coinless call (using, for example, a calling card or a 1-800 access number) that does not go through the default long-distance company. Such coinless calls are referred to as “dial-around” calls. PSPs attempted to preserve their revenue by blocking dial-around calls, requiring the use of the favored IXC – often at rates unfavorable to the consumer. This practice sparked widespread complaints, ultimately prompting Congress to enact the Telephone Operator Consumer Services Improvement Act of 1990, which prohibits such dial-around call blocking. Recognizing the PSPs’ concern, however, Congress also directed the FCC to explore ways in which the PSPs might be compensated for revenue lost on dial-around calls. The FCC did so by instituting a flat-rate per-phone subsidy, paid by the IXCs based on their share of the market. Under the subsidy, PSPs were paid based on the number of phones they operated, regardless of whether those phones actually generated a substantial number of long-distance calls.

In the Telecommunications Act of 1996, Congress ordered that such subsidies be abolished and directed the FCC to come up with a “compensation plan [under which] all payphone service providers are fairly compensated” for all completed calls made from their phones. 47 U.S.C. 276(b)(1)(A) & (B). However, Congress did not specify who should be responsible for compensating the PSPs. This omission is critical because the PSPs do not actually have any contractual relationship with the IXCs – they buy their phone service from the LECs, which are the only entities with records about what calls are placed from the PSPs’ phones, and to which IXC carriers those calls are switched. An IXC can thus only compensate a payphone owner for a specific call if the LEC informs the IXC that the call originated from that payphone — a process that requires the LEC to implement software (called FLEX-ANI) at the local switch that connects the payphone.

Despite these technological issues, the FCC nevertheless decided that the IXCs should be responsible for compensating the PSPs. The regulations encouraged the PSPs and IXCs to contract with one another to work out the details, but the FCC established a default per-call rate that would operate in the absence of an agreement. Although the D.C. Circuit largely upheld this rulemaking in 1997 (in a case called Illinois Public Telecommunications. Ass’n v. FCC), the per-call rate set by the FCC was struck down. The FCC then established a new rate, which the D.C. Circuit upheld in 2000 (in American Public Communications Council v. FCC) over a challenge by the PSPs. In rejecting the PSPs’ request that bad debt be factored into the rate, the D.C. Circuit pointed out that failure to pay the required compensation “is a violation of FCC rules for which the carrier is subject to damages.”

The confusion over the default rate, and various technical difficulties, led to numerous lawsuits against the IXCs, who — the PSPs claimed — were underpaying. For their part, the IXCs claimed that the change in rates had actually caused them to overpay. These suits proliferated across the country; at one point, there were five separate suits pending in the U.S. District Court for the District of Columbia alone. With billions of dollars at stake, neither side was prepared to make any concessions.

The PSPs initially brought suit directly under 47 U.S.C. 276, the statute that directed the FCC to come up with a compensation plan. However, in 2003, the Ninth Circuit held in Greene v. Sprint Communications Co. that Section 276 does not create a private right of action. The district court in Global Crossing thus dismissed the complaint filed in 2001 by Metrophones (a PSP), but granted Metrophones leave to amend. In its amended complaint, Metrophones alleged a cause of action under Sections 206 and 207 of the Communications Act, which — respectively — make a common carrier (including IXCs) liable for injuries caused by any conduct declared “unlawful” under the Act and grant an express private right of action to recover damages for such injuries. Metrophones, as well as other PSPs across the country, argued that failure to pay the mandated compensation amounted to an “unjust and unreasonable” practice. Under Section 201(b) of the Act, any “practice . . . that is unjust or unreasonable is declared to be unlawful.” Thus, if failure to pay is “unjust and unreasonable” within the meaning of Section 201, it is “unlawful” under the Act, and the carriers are liable for damages, which the PSPs can seek through private action in the federal courts. The district court denied Global Crossing’s motion to dismiss the amended complaint, from which an interlocutory appeal was granted.

Also in 2003, after the Greene decision, the FCC promulgated a new order (“the 2003 Payphone Order”) covering payphone compensation, in which it ruled that an IXC’s “failure to pay . . . constitutes both a violation of section 276 and an unjust and unreasonable practice in violation of section 201(b).” Deferring to this order, the Ninth Circuit upheld the district court’s refusal to dismiss Metrophones’ amended complaint.

The Ninth Circuit’s decision was directly contrary to the conclusion reached by a divided panel of the D.C. Circuit in 2005, in APCC Services, Inc. v. Sprint Communications Co. In that case, the D.C. Circuit held that a violation of FCC regulations could not constitute a violation of the Act. According to the D.C. Circuit, the Act — specifically, Section 276 — requires only that the FCC come up with a compensation plan; it does not actually require that any particular person actually pay that compensation. Thus, the IXCs’ responsibility to pay arises not out of the Act, but from the FCC regulations promulgated as a result of the Act. However, the majority opinion in the D.C. Circuit seems to ignore the 2003 Payphone Order, focusing instead on an earlier order in which the FCC did not address how PSPs might enforce the regulated compensation order. The D.C. Circuit went so far as to say that it was “reluctant to put words in the Commission’s mouth — here, the words ‘unjust and unreasonable.'” Yet, those were exactly the words used by the FCC in the 2003 Payphone Order, as the United States pointed out in appearing as an amicus on behalf of the PSPs in both the D.C. Circuit and Global Crossing. Dissenting from this portion of the opinion, Chief Judge Ginsburg pointed out the majority’s failure to mention the 2003 Payphone Order and would have held that the Commission’s determination that a failure to pay is “unjust and unreasonable” was entitled to Chevron deference.

In resolving this circuit split, the Court will have to decide whether implementing regulations are part of a legislative act for purposes of determining whether a violation of that act has occurred. The Court will also have to address itself to the question of how much deference to grant the FCC’s determination that failure to pay is “unjust and unreasonable” when the only practical effect of that determination is to create a private cause of action in federal court.