Last week, a federal appellate court issued a decision signaling a significant victory for Competitive Local Exchange Carriers (“CLECs”) that rely on Incumbent Local Exchange Carriers (“ILECs”) for transiting services in order to interconnect indirectly with other local carriers. Southern New England Tel. Co. v. Comcast Phone of Connecticut, Inc. et al., Docket No. 11-2332-cv (2d Cir. May 1, 2013).

The United States Court of Appeals for the Second Circuit (the “Court” or “Second Circuit”) held, among other things, that when an ILEC provides transit services between two indirectly interconnecting CLECs, Section 251(c)(2) of the Communications Act of 1934, as amended (the “Act”), applies and the CLEC’s are entitled to transit rates based on Total Element Long-Run Incremental Cost (“TELRIC”). The Court’s opinion affirmed a decision of the U.S. District Court for the District of Connecticut (“District Court”) which, in turn, upheld a Connecticut Department of Public Utility Control (“DPUC”) decision. The Court limited the direct application of its holding to the parties to the contract that was the subject of the suit – AT&T and Pocket Communications – but the implications of the opinion are much broader as ILECs have maintained for years that transit services do not fall within the scope of Section 251(c)(2) and are subject to market, not TELRIC, pricing.

The Second Circuit’s decision represents the second federal appellate decision in little over a month shooting down arguments of AT&T seeking to limit the scope of their interconnection obligations under Section 251. In April, we reported that the United States Court of Appeals for the Sixth Circuit ruled that a State commission may fashion interconnection obligations under Section 251(a) that differ from those applicable under Section 251(c)(2).

The Second Circuit’s opinion addresses the rates and sections of the Act applicable to “transit traffic.” The Second Circuit described the “principal question [as] whether AT&T, an interconnecting carrier, is obligated under § 251(c)(2) to provide this routing of traffic, or transit service, at lower TELRIC rates or whether AT&T is permitted to charge higher negotiated rates” under Section 251(a). The Second Circuit recognized that the provision of transit traffic service by ILECs is essential to most CLECs entering the market. The Court further acknowledged that, if ILECs are allowed to impose higher, negotiated rates rather than TELRIC rates, then the additional costs imposed on the CLECs would put the CLECs at a competitive disadvantage. The Court concluded that allowing an ILEC to impose unregulated rates on indirectly interconnecting CLECs would undermine the very purpose of the Act, namely, to provide CLECs with the tools necessary to compete with the ILECs and to offset the inherent advantages that ILECs have through their infrastructure. The Second Circuit also found that nothing in Section 251(c)(2) limits that provision to the transmission and routing of traffic between a CLEC and the ILEC’s end users. Accordingly, the Court held that ILECs are obligated under Section 251(c)(2) to provide transit traffic service at TELRIC rates and not higher negotiated rates under Section 251(a).

While the Court limited its order to rates charged by the parties to contract in dispute, the application of this decision and its rationale is not limited to those parties. The Act provides the option of negotiated resolutions under § 252(a) and expresses a preference for those negotiated resolutions. The Court agreed with the District Court that the DPUC erred in imposing regulated rates on all of AT&T’s transit service contracts. The Court joined other federal appellate courts facing similar questions by concluding that the DPUC’s order would undermine Section 252(a) and the preference for negotiated outcomes. Thus, while the Court did not issue an order requiring the use of TELRIC rates for transit traffic, it found that TELRIC-based rates are available to CLECs when other rates are not agreed upon – at least they will be in Connecticut, New York and Vermont, the States bound by the Second Circuit.

In reaching its conclusions, the Court addressed two other topics of note. Before reaching the substance of the primary issues – the application of Section 251(c)(2) to, and the rates for, transit traffic – the Court held that the FCC’s consideration but current inaction on the topic of whether Section 251(c)(2) applied to transit service did not pre-empt State commission action on the question of transit traffic rates. Rather, the Court found, in the absence of guidance from the FCC, that Congress gave State commissions the “latitude to exercise their expertise in telecommunications and the needs of the local market” and that the State commission was free to rule on the issue.

The Court also rejected AT&T’s argument that, because the agreement in dispute was fashioned as a commercial agreement and not expressly a Section 252 interconnection agreement, the DPUC did not have the authority to review it. The Second Circuit held that the DPUC had the authority to review the agreement and determine whether the subject matter fell under Section 251, and therefore, was subject to the regulatory framework of Sections 251 and 252 – in other words that it was, in fact, an interconnection agreement. The DPUC made just such a determination by concluding that negotiations for transit service should have been conducted by the carriers pursuant to Section 252.