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All American Telephone Co., Inc. v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

August 11, 2017

All American Telephone Company, Inc., et al., Petitioners
Federal Communications Commission and United States of America, Respondents AT&T Corp., Intervenor

          Argued March 31, 2017

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

          Jonathan E. Canis argued the cause and filed the briefs for petitioners.

          C. Grey Pash, Jr., Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Robert B. Nicholson and Jonathan H. Lasken, Attorneys, U.S. Department of Justice, Jonathan B. Sallet, General Counsel at the time the brief was filed, Federal Communications Commission, David M. Gossett, Deputy General Counsel, and Richard K. Welch, Deputy Associate General Counsel. Jacob M. Lewis, Associate General Counsel and Lisa S. Gelb, Attorney, Federal Communications Commission, entered appearances.

          James F. Bendernagel Jr. and Michael J. Hunseder were on the brief for intervenor in support of respondents.

          Before: Tatel, Griffith, and Millett, Circuit Judges.


          Millett, Circuit Judge.

         The Federal Communications Commission held that Petitioners All American Telephone Co., e-Pinnacle Communications Inc., and Chasecom improperly engaged in a scheme designed to collect millions of dollars in unwarranted long-distance access charges from AT&T. All American and the other petitioning companies do not challenge that liability determination. They challenge only the Commission's award of damages to AT&T and statements in the Commission's decision that refer to the merits of the companies' state-law claims against AT&T, which are pending in a separate action in the Southern District of New York. We uphold the Commission's award of damages, but vacate those aspects of the Commission's order that tread on the merits of the companies' state-law claims.



         The Federal Communications Commission regulates common-carrier providers of wired telephone services, including the fees that they charge to customers. See 47 U.S.C. § 201. One of the fees that the Commission regulates is for "exchange access services" rendered for long-distance telephone calls. See 47 C.F.R. § 61.26. Those fees are often referred to as "access charges." They work like this: When a person places a long-distance call, a local exchange carrier operating in the caller's geographic area will route the call to an "interstate exchange carrier, " also known as an "interexchange carrier." That interexchange carrier, in turn, will connect the call to the recipient's local exchange carrier. When the recipient's local exchange carrier completes the call to the recipient, the interexchange carrier must pay an access charge to the local carrier for the connection service. See Northern Valley Communications, LLC v. FCC, 717 F.3d 1017, 1018 (D.C. Cir. 2013).

         When it comes to determining the amount of that access charge, however, not all local carriers are the same under federal communications law. As part of an effort to encourage competition, federal law divides local carriers into "incumbent local exchange carriers" and "competitive local exchange carriers." See United States Telecom Ass'n v. FCC, 359 F.3d 554, 561 (D.C. Cir. 2004) (noting Congress's intent "to foster a competitive market in telecommunications"). Incumbent carriers are those that, on or prior to February 8, 1996, provided service to a particular area or were part of an exchange carrier association. 47 U.S.C. § 251(h). Competitive carriers are all other local carriers, including new carriers that entered the market after that time period and compete with the incumbent carriers within a specific geographic region. See 47 C.F.R. § 51.903(a).

         Incumbent carriers cannot impose access charges unless they file a valid tariff with the Commission. See 47 U.S.C. § 203(a). Competitive carriers, by contrast, can impose access charges at or below a Commission-determined rate by filing their own tariff, or they can impose access charges through a contract they individually negotiate with the interexchange carrier. See 47 C.F.R. § 61.26(b); Hyperion Telecomms., 12 FCC Rcd. 8596, 8613 (1997).


         It has been said that "[t]he darkest hour of any man's life is when he sits down to plan how to get money without earning it."[1] But that does not seem to keep people from trying. Through a scheme known as "traffic pumping" or "access stimulation, " some local exchange carriers sought to artificially inflate the number of local calls they could connect, thereby increasing both the call volume and the rates that they could charge interexchange carriers. More specifically, a local exchange carrier would enter into a contractual relationship with a company that generates a high volume of telephone calls, such as a conference calling provider or a provider of sexually explicit chat lines. The local carrier would house the phone-call-generating partner's equipment on its premises for free and would sometimes even provide the equipment itself at no cost. Not only would the local carrier forgo charging its partner for the phone calls that came in, but in fact the carrier would pay the partner a share of the per-minute long-distance access rates it charged the interexchange carriers. See, e.g., Qwest Communications Corp. v. Free Conferencing Corp., 837 F.3d 889, 893-894 (8th Cir. 2016); Northern Valley, 717 F.3d at 1018.

         Those traffic-pumping arrangements were a "win-win" for the local carrier and its phone-call-generating partner. Northern Valley, 717 F.3d at 1018. The local carrier received a higher call volume and thus more revenue from access charges, while the partner got free service for its business plus a cut of the local carrier's revenue. On the losing end, however, were the public and the interexchange carriers "who ha[d] to * * * pay significant amounts to" the local exchange carriers in the form of artificially inflated and distorted access charges to complete the long-distance calls. Id. at 1018-1019.

         Starting in 2010, the Commission issued a series of orders concluding that such traffic-pumping schemes were unlawful under Sections 201(b) and 203(c) of the Communications Act, 47 U.S.C. §§ 201(b), 203(c). The Commission ruled in particular that local exchange carriers could not charge interexchange carriers to connect long-distance calls to a non-paying end user. See, e.g., Qwest Communications Co. v. Sancom, Inc., 28 FCC Rcd. 1982 (2013); Qwest Communications Co. v. Northern Valley Communications, LLC, 26 FCC Rcd. 8332 (2011), aff'd, Northern Valley, 717 F.3d at 1017; AT&T Corp. v. YMax Communications Corp., 26 FCC Rcd. 5743 (2011); Qwest Communications Corp. v. Farmers & Merchants Mut. Tel. Co., 24 FCC Rcd. 14801 (2009), aff'd, Farmers & Merchants Mut. Tel. Co. v. FCC, 668 F.3d 714 (D.C. Cir. 2011).

         We have twice upheld that interpretation of the Communications Act by the Commission. See Northern Valley, 717 F.3d at 1019; Farmers, 668 F.3d at 724. Accordingly, it is now "well-settled that a [local exchange carrier] cannot bill an [interstate exchange carrier] under its tariff for calls 'terminated' at a conference call bridge when the conference calling company does not pay a fee for th[ose] services." Qwest Communications, 837 F.3d at 894.


         Petitioners All American Telephone Co., e-Pinnacle Communications, Inc., and Chasecom (collectively, "the Companies") have held themselves out as competitive local exchange carriers authorized to operate in Utah and Nevada. Standing behind them were Beehive Telephone Company, Inc. of Nevada, and Beehive Telephone Company, Inc. of Utah (collectively, "Beehive"), which operated as incumbent local exchange carriers in rural Nevada and Utah, respectively. Joy Enterprises, Inc., is a Nevada corporation that provides conferencing and sexually explicit chat line services. Until the early 2000s, Joy and Beehive were engaged in a classic traffic-pumping scheme: Beehive paid Joy kickbacks in exchange for the inflated traffic that Joy's conference and sexually explicit chat line services generated. Beehive, however, soon became a victim of its own success: As its traffic numbers skyrocketed, its access charge rates, which were determined by a filed tariff, began to plummet.

         Unwilling to let a good scheme end, Beehive worked to create competitive local exchanges-the Companies-that would have greater rate flexibility. Beehive then had the Companies take its place in the arrangement. Beehive assisted the Companies in preparing and filing tariffs, and worked free of charge to obtain the necessary approval for All American to operate in the state of Utah. Beyond the regulatory paperwork, Beehive provided material support to all three Companies by serving as the co-lessee/guarantor for equipment rentals, installing and maintaining the Companies' equipment at Beehive's facilities, assigning them telephone numbers Beehive had obtained, and managing and coordinating the Companies' billings.

         All American began operating in Beehive's territory in Utah in 2004, although it did not apply for a certificate of public convenience from the Utah Public Service Commission until 2006. See In the Matter of the Consideration of the Rescission, Alteration, or Amendment of the Certificate of Authority of All American to Operate as a Competitive Local Exchange Carrier within the State of Utah at 1, No. 08-2469-01 (Utah Pub. Serv. Comm'n April 26, 2010) ("Utah Commission Order"). Shortly after All American obtained its certificate, Beehive and All American entered into an interconnection agreement that allowed All American to use Beehive's equipment for a fee, despite the fact that the Utah state license prohibited All American from operating in Beehive's territory. Id. at 6; see 47 U.S.C. § 252(d)(1) (addressing interconnection agreements).

         The Companies that Beehive helped to create have never marketed their services to the general public or to businesses in Utah or Nevada. From the time it began operating, All American has served only a single client: Joy Enterprises. In addition, All American has never charged Joy Enterprises for its services.

         Similarly, e-Pinnacle and Chasecom have only ever serviced conference-calling companies and have never charged them for their services. Like Joy Enterprises, e-Pinnacle and Chasecom engaged in a traffic-pumping kickback scheme with Beehive prior to becoming independent carriers.

         In exchange for all of its free aid, Beehive was paid through the interconnection agreement with All American and through revenue-sharing schemes with e-Pinnacle and Chasecom. Beehive also directly benefited from the increased traffic generated by All American's arrangement with Joy Enterprises, and by e-Pinnacle's and Chasecom's arrangements with their conference-call providers, because Beehive could directly charge interexchange carriers other types of fees (such as tandem switching and transport fees) associated with the inflated traffic. Petitioners e-Pinnacle and Chasecom ceased operations in 2007. In 2010, the Utah Commission rescinded All American's certificate to operate as a competitive local exchange carrier, concluding that it was "a mere shell company, paying others for technical services, management fees, consulting fees and equipment fees." Utah Commission Order at 18; see also id. at 35.



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