On June 9, 2011, the United States Supreme Court resolved a split among the federal courts on how much incumbent telephone companies, like AT&T, can charge for competitors to interconnect with the incumbent’s networks. Specifically, in the consolidated cases of Talk America Inc. v. Michigan Bell Telephone Co. and Isiogu v. Michigan Bell Telephone Co., the Supreme Court determined that incumbents must charge competitors cost-based rates to inteconnect with the incumbent’s networks instead of higher market rates.

The specific issue before the Court was whether the federal Telecommunications Act of 1996 (“Act”) requires incumbents to provide “entrance facilities” to competitors at regulated cost-based rates. An entrance facility, in essence, is the cable linking a competitor’s network with the incumbent’s network.

In the Act, Congress sought to facilitate competition in local telephone service, which had historically been dominated by monopolies like AT&T. To do this, Congress created a list of specific requirements for incumbents to, among other things, provide access to and share their networks with competitors at cost-based rates. This list included the obligation for incumbents to provide “interconnection” (i.e., the linking of their networks to competitor networks) and the obligation to allow competitors to lease and use certain incumbent “network elements” (i.e., pieceparts of the incumbent’s networks.

In implementing the Act, the FCC originally established that entrance facilities were to be provided by incumbents to competitors as “network elements,” thus requiring that incumbents to provide these facilities at cost-based rates. However, through a series of court challenges and subsequent FCC rule changes, entrance facilities were removed from the list of required “network elements.” Incumbents viewed this as a window to increase the price of entrance facilities provided to competitors. Competitors, on the other hand, believed that the Act still required cost-based pricing for these facilities because they were a part of the separate obligation under the Act for incumbents to provide “interconnection.”

This disparity led to litigation around the country between incumbents and competitors. These cases resulted in a number of federal appeals courts siding with competitors, finding that entrance facilities fall within the Act’s obligation for incumbent’s to provide “interconnection” and, thus, must be provided at cost-based rates. The lone exception was the federal Sixth Circuit Court of Appeals, which found that entrance facilities did not qualify as “interconnection” under the Act, and thus could be offered by incumbents at higher market rates.

On June 9th, the Supreme Court resolved this split by rejecting the Sixth Circuit’s ruling. The Supreme Court determined that the entrance facility question was not unambiguously resolved by the plain language of the Act. The Court therefore deferred to the FCC determination, provided by the FCC in briefing and argument to the Court, that the Act should be interpreted to require incumbent’s to provide entrance facilities to competitors at cost-based rates as part of the Act’s requirement for incumbent’s to provide interconnection.