Much like Freddy Kruger, the legal battles between ILECs and CLECs over reciprocal compensation simply refuse to die. The most recent flare-up of this long-running war was last Friday’s ruling by D.C. Circuit Judge Stephen Williams – one of the FCC’s great judicial antagonists – which vacated and remanded the FCC’ rules which allowed the CLEC-partners of over-the-top interconnected VoIP service providers to charge interexchange carriers (IXCs) the full end-office switching rate element for calls delivered to (or received from) VoIP providers. AT&T Corp. v. FCC, No. 15-1059 (Nov. 18, 2016). The Court ruled that the FCC had not adequately explained why the lower charge associated with tandem switching was not the appropriate rate element that CLECs should be charging IXCs.

Important Note: the ruling applies to CLECs serving over-the-top VoIP service providers only. CLECs serving facilities-based providers (i.e., most cable VoIP providers), should not be affected.

Background

The issue before the FCC (and the court) is illustrated by the following diagram, which appeared in the FCC’s November 2011 Transformation Order (¶ 1306):

Click here to view the graph.

The diagram reflects the hierarchical nature of network switching in the traditional TDM (time division multiplex) environment found on the PSTN (public switched telephone network). End users are “connected” via last mile loops to “end-office switches,” where traffic is aggregated and routed to “tandem switches,” which handle ever larger volumes of traffic. For a traditional PSTN call, CLECs charge IXCs for tandem switching, transport from the tandem switch to the end office, and end-office switching. The latter of which is meant to recover some of the costs of establishing the connection with the end user.

These charges, which were largely established when AT&T was broken into separate local and long-distance businesses, became controversial in the context of VoIP calling because CLECs were no longer serving end-users directly (VoIP service providers were), nor were they operating traditional end-office switches connecting local loops to end-users.

The Controversy

While facilities-based VoIP providers could argue that they were providing the functional equivalent of end-office switching because they owned and operated the IP networks to which end-users are connected, over-the-top VoIP providers, and the CLECs with whom they partnered, could not make the same claim. Nonetheless, in its February 2015 VoIP Symmetry Declaratory Ruling, the FCC held that CLECs serving as LEC partners (providing numbering and interconnection) to over-the-top VoIP service providers could charge IXCs for end-office switching.

For support, the FCC relied on the 2011 Transformation Order, which had adopted the general principle that LECs could “charge the relevant intercarrier compensation for functions performed by it and/or by its retail VoIP partner, regardless of whether the functions performed or the technology used correspond precisely to those used under a traditional TDM architecture.” Transformation Order ¶ 970. That focus on function in 2011 led the FCC, in 2015, to find that the functional equivalent of end office switching exists when the CLEC provides the intelligence associated with call set-up, supervision and management (“call control functions”).

The Court Ruling

AT&T challenged the Declaratory Ruling in the D.C. Circuit, arguing, among other things, that the FCC had not adequately explained how CLECs provide the functional equivalent of TDM end office switching when they provide the call control functions in an over-the-top VoIP call, because those same call control functions are associated with tandem switching. Relying on previous FCC rulings, AT&T also argued that the sine qua non of end office switching is the interconnection of loops and trunks and that this function was not performed by CLEC switches in over-the-top VOIP calls. AT&T argued that nothing in the Transformation Order specifically supported the FCC’s ruling to the contrary and that reliance on “functional equivalence” claims was not enough.

The Court agreed, finding that the FCC “has not pointed to anything in the Transformation Order from which a reader would understand that it meant for specific services provided by over-the-top VoIP-LEC providers to qualify as the functional equivalent of end-office switching and not tandem switching.” Slip op. at 13.

What’s Next?

The Court’s mandate remanding the Declaratory Ruling back to the FCC should issue Jan. 10, 2017 (7 days after the deadline for seeking rehearing or en banc review by the entire D.C. Circuit (the deadline for seeking rehearing is Jan. 3, 2017 (45 days following issuance of the order). A further stay could be sought and obtained for a party filing a certiorari petition to the Supreme Court (the 90-day deadline for seeking cert runs from the date of the order or any order resolving a rehearing petition).

While the court’s order is subject to further review (either a petition for rehearing, en banc review, or even further appeal to the Supreme Court), if the matter is ultimately remanded to the FCC, it will return to an agency very different from the one that issued the Declaratory Ruling. For example, Commissioner Pai, who many expect will be named the Acting Chair or perhaps even the permanent Chair in the new administration, dissented from the FCC’s Declaratory Ruling on the grounds that it was improper to make the Declaratory Ruling retroactive and that the FCC should have proceeded by rulemaking.