In a unanimous decision, the Eighth Circuit of the U.S. Court of Appeals upheld in its entirety a Federal Communications Commission (FCC) order preempting state regulation of “nomadic” Voice over Internet Protocol (VoIP) service similar to Vonage’s DigitalVoice service.1 However, the Court declined to rule on whether state regulation of “fixed” VoIP service, commonly provided by cable companies and traditional facilities-based telecommunications providers, is prohibited, holding that this issue was not ripe for judicial review.

 BACKGROUND

The Vonage appeal date back several years and involves multiple parties. On September 11, 2003, the Minnesota Public Utilities Commission (MPUC) ruled that Vonage’s DigitalVoice service was functionally no different than any other telephone service, and that Vonage was subject to regulation by the MPUC.2 In response to the MPUC’s order, Vonage filed a petition with the FCC to preempt the ruling on the grounds that it was providing an information service, and not a telecommunications service, and as such, was not subject to state regulation. Alternatively, Vonage requested that the FCC preempt the state’s ability to regulate its service under the “impossibility exception.” This exception applies when a service would be subject to dual state and federal regulation, but for the impossibility or impracticality to separate the service’s interstate and intrastate components, and the regulation interferes with valid federal rules or policies.

In November 2004, the FCC issued a Memorandum Opinion and Order in response to Vonage’s petition.3 The FCC declined to rule as to whether Vonage’s service was a telecommunications service or information service. However, the FCC preempted regulation of Vonage’s DigitalVoice service under the “impossibility exception,” stating that it was impossible to separate the service into separate interstate and intrastate components solely for purposes of complying with state regulatory schemes. The FCC further ordered that the preemption of state regulation also applies to “other types of IP-enabled services having basic characteristics similar to DigitalVoice” and stated, “to the extent other entities, such as cable companies, provide VoIP services, we would preempt state regulation to an extent comparable to what we have done in this Order.”

In response to the FCC’s statement regarding the potential preemption of cable companies and other fixed VoIP providers, the New York Public Service Commission (NYPSC) filed a separate petition for review of the FCC’s Order. The NYPSC argued that notwithstanding the regulatory classification of Vonage’s DigitalVoice Service, fixed VoIP providers should be subject to state regulation.

As anticipated, multiple parties petitioned Circuit Courts to review the FCC’s Order, including a multitude of state public service commissions. All of these petitions ultimately became consolidated in the Eighth Circuit proceeding and were dealt with by the Court’s ruling.

DISCUSSION

The Petitioners collectively raised the following four issues for review as to why the FCC’s Order was arbitrary and capricious, and should not be upheld. The Court found for the Respondents in each of the four issues.

First, the FCC failed to make the necessary determination as to whether the services were information services or telecommunications services. Second, the FCC inappropriately determined that it was impossible or impractical to separate the service into interstate and intrastate components. Third, the FCC did not set forth adequate reasons why state regulation of VoIP service conflicts with federal rules and policies. Fourth, the FCC improperly preempted 911 telephone service requirements. The NYPSC argued that the FCC arbitrarily preempted regulation of “fixed” VoIP service offered by cable companies, because the intrastate and interstate components of the service are more easily segregated.

1. Information Service vs. Telecommunications Service

The Court ruled that the FCC was not required to rule whether Vonage’s service was a telecommunications service or an information service, as it was not necessary to make that much more difficult determination when a much simpler determination could be made (i.e., that state regulation was impermissible under the “impossibility exception”).

2. Applicability of “Impossibility Exception”

The Court stated that the “impossibility exception” allows the FCC to preempt state regulation of a service when “(1) it is not possible to separate the interstate and intrastate aspects of the service, and (2) federal regulation is necessary to further a valid federal regulatory objective, i.e., state regulation would conflict with federal regulatory policies.” The Court agreed with the FCC’s determinations that a significant investment would be required in order for Vonage to be able to distinguish between interstate and intrastate calls, and that there is no requirement for a service provider “to develop a mechanism for distinguishing between interstate and intrastate communications merely to provide state commissions with an intrastate communication they can then regulate.” Further, the Court stated that determining whether Vonage’s service could be broken into its interstate and intrastate components is a “largely fact-driven inquiry requiring a high level of technical expertise,” and that a high level of deference is accorded to “the informed decision of the agency charged with making those fact findings.”

The Petitioners primarily argued that the FCC’s finding of impossibility in the Vonage Order was inconsistent with its ruling in its VoIP 911 Order. The VoIP 911 Order requires VoIP providers to ensure that its customers have access to 911 dialing capabilities if an emergency arises. The Petitioners argued that this implies that the FCC is requiring the VoIP providers to know the end points of any given call to be able to provide this service, which is inconsistent with the finding of impossibility or impracticality. The Court ruled that the Orders are not inconsistent, because the FCC recognizes the difficulties inherent in identifying the end points of a VoIP transmission for purposes of 911 compliance. In recognizing these difficulties, the FCC allows VoIP providers to provide their customers with a means to register and update the location at which they would utilize the VoIP service, rather than requiring the provider to transmit the specific location of the caller to emergency personnel at the time of the 911 call.

Further, the Court noted that the FCC stated in its Order addressing the Universal Service Fund contribution requirements of VoIP providers, that providers that are able to

track the jurisdictional confines of customer calls would no longer qualify for the preemptive effects of our Vonage Order and would be subject to state regulation. This is because the central rationale justifying preemption set forth in the Vonage Order would no longer be applicable to such an interconnected VoIP provider.

The Court found that the FCC had to make its ruling on the facts as they existed at that time. Therefore, the Court ruled that the FCC’s finding of impossibility was not arbitrary or capricious. However the Court did note that “[i]f, in the future, advances in technology undermine the central rationale of the FCC’s decision, its preemptive effect may be reexamined."

3. Interference with Valid Federal Rules or Policies

In its Order, the FCC ruled that state regulation of Vonage’s DigitalVoice service would interfere with federal rules or policies, whether the service was classified as either an information service or a telecommunications service. The Court ruled that the FCC’s determinations deserved weight, and that they had not arbitrarily or capriciously determined that state regulation would interfere with valid federal rules or policies.

4. Preemption of Minnesota’s 911 Requirements

As part of its preemption of state regulation, the FCC also preempted Minnesota’s 911 requirements. The stated reason for the preemption was that the Vonage would not be able to comply with Minnesota’s 911 requirements, and that the requirements acted as a barrier to entry if not met, thereby impermissibly barring Vonage from operating in Minnesota. The Court agreed with the FCC regarding the need to set national 911 compliance standards for VoIP providers, and held that the FCC’s preemption of Minnesota’s 911 requirements was neither arbitrary nor capricious.

5. NYPSC Argument Regarding Fixed VoIP

The Court ruled that the challenge to the part of the FCC’s order addressing fixed VoIP was not ripe for judicial review on the theory the statement in the FCC’s Order regarding fixed VoIP was merely a prediction of what the FCC would do, and did not constitute an actual decision. “The [O]rder only suggests the FCC, if faced with the precise issue, would preempt fixed VoIP services. Nonetheless, the order does not purport to actually do so and until that day comes it is only a mere prediction.” Based on the Court’s constitutional limitation to decide only actual cases and controversies ripe for review, the Court declined to rule on the NYPSC’s argument regarding fixed VoIP.

FUTURE IMPLICATIONS

 

The Petitioners may appeal this ruling to the Eighth Circuit en banc or directly to the United States Supreme Court. Based on the lack of certainty for fixed VoIP providers, it is likely that states will seek to impose their traditional telephone regulation schemes upon these type of providers. VoIP providers should examine whether the states are preempted from imposing this regulation. Providers should carefully examine this ruling, along with the FCC Vonage Order and the VoIP USF Order, in making their determinations. Further, the ultimate question as to whether VoIP service is a telecommunications service or an information service remains unanswered by the FCC. This decision, as well as any appeal of this case, should be monitored carefully.