Southwestern Bell Telephone Co. v. Apple

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
OCT 16 2002
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

SOUTHWESTERN BELL
TELEPHONE COMPANY,

Plaintiff - Appellant,
v.

ED APPLE, Chairman, BOB
ANTHONY, Vice Chairman, and
DENISE BODE, Commissioner, in
No. 00-6030
their official capacities as
Commissioners of the Oklahoma
Corporation Commission;
OKLAHOMA CORPORATION
COMMISSION; and AT&T
COMMUNICATIONS OF THE
SOUTHWEST, INC.,

Defendants - Appellees.

Appeal from the United States District Court
for the Western District of Oklahoma
(D.C. No. CIV-97-1507-A)

Colin S. Stretch (Mary W. Marks, Southwestern Bell Telephone Company,
Oklahoma City, OK, Michael K. Kellogg & Sean A. Lev, Kellogg, Huber,
Hansen, Todd, & Evans, P.L.L.C., Washington, D.C., with him on the briefs),
Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, D.C., for
Plaintiff-Appellant, Southwestern Bell Telephone Company.

Michael J. Hunseder (Lawrence Lafaro, AT&T Corp., Basking Ridge, NJ, Mark
Witcher, AT&T Corp, Austin, TX, & David L. Lawson, Sidley, Austin, Brown &
Wood, Washington, D.C., with him on the brief), Sidley, Austin, Brown & Wood,
Washington, D.C., for Defendant-Appellee, AT&T Communications of the
Southwest, Inc.

Rachel Lawrence Mor, Deputy General Counsel, Andrea Johnson, Senior
Attorney, Oklahoma City, OK, submitted a brief for Defendant-Appellee,
Oklahoma Corporation Commission.

Before EBEL, McKAY, and LUCERO, Circuit Judges.

EBEL, Circuit Judge.

This case concerns certain obligations that the Telecommunications Act of

1996, Pub. L. No. 104-104, 110 Stat. 56 (codified at 47 U.S.C. § 251 et seq.),

(“the Act”), imposed on incumbent providers of local telephone service. Two of

the Act’s obligations on incumbent service providers, such as Southwestern Bell

(“SWBT”), are at issue in this case: a resale duty and a duty to provide access to

elements of the incumbent’s network. The United States District Court for the

Western District of Oklahoma found that an end-user limitation imposed by

SWBT on its optional toll calling plans sold to AT&T was an unreasonable resale

restriction, in violation of the Act. In a separate order, it instructed SWBT to

provide AT&T with immediate access to certain network elements. Exercising

our jurisdiction pursuant to 28 U.S.C. § 1291, we reverse the district court’s order

pertaining to the end-user limitation and vacate its order dealing with access to

network elements.

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 I. THE ACT

In 1996, Congress enacted the Telecommunications Act of 1996, which

“fundamentally change[d] telecommunications regulation” by introducing

competition in the local service market. See First Report and Order,

Implementation of the Local Competition Provisions in the Telecomm. Act of

1996, 11 FCCR 15,499 ¶ 1 (1996) (“Local Competition Order”.) 1 Prior to the

Act, telephone service was a regulated monopoly, in which incumbent providers

enjoyed protection from new companies entering the market. The Act sought to

“remove the outdated barriers that protect monopolies from competition and

affirmatively promote efficient competition.” Id. Under the Act, incumbent local

exchange carriers (“ILECs”), ones which previously had enjoyed a monopoly over

the provision of local telephone service, acquired affirmative duties. Incumbent

LECs must (1) provide unbundled access to their network elements 2 (“unbundled

1
In addition to the Act’s implementing regulations dealing with the resale
duty, see 47 CFR §§ 51.601-51.617, the FCC’s extensive Local Competition
Order guides telephone providers, state commissions, and federal courts in
interpreting provisions of the Act. This Order continues to endure a protracted
process of modification, but the parties agree that the relevant portions for this
case remain the same as in the initial order. See Local Competition Order, 11
FCCR 15,499 (1996), modified on recon., 11 FCCR 13,042 (1996), vacated in
part, Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997), aff’d in part, rev’d in
part sub nom. AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366 (1999), decision on
remand, Iowa Utils. Bd. v. FCC, 219 F.3d 744 (8th Cir. 2000), aff’d in part, rev’d
in part sub nom. Verizon Communications Inc. v. FCC, 122 S. Ct. 1646 (2002).
2
Network elements include “discrete facilities” of the incumbent’s
(continued...)

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access provision”), 47 U.S.C. § 251(c)(3), and (2) “offer for resale at wholesale

rates any telecommunications service that the carrier provides at retail to

subscribers who are not telecommunications carriers” (“resale provision”). 47

U.S.C. § 251(c)(4)(A). The resale duty also prohibits ILECs from imposing

“unreasonable or discriminatory conditions or limitations” on the resale of “such

telecommunications service.” 47 U.S.C. § 251(c)(4)(B).

These distinct duties on ILECs offer unique opportunities to new market

entrants and are premised on different pricing strategies. Under the unbundled

access provision, a new competitor local exchange carrier (“CLEC”) can acquire

various network elements from an ILEC and can reconfigure them in various

packages to sell to end-users. Unbundled access “permit[s] new entrants to offer

competing local services by purchasing from incumbents, at cost-based prices,

access to elements which they do not already possess, unbundled from those

elements that they do not need.” See Local Competition Order ¶ 231 (emphasis

added). In contrast, if a CLEC buys services under the resale provision, it is able

to resell that service under its own name, but is limited to selling the service that

the ILEC provides “at retail.” 47 U.S.C. § 251(c)(4)(A). These services are

purchased at wholesale rates, which are determined by subtracting costs avoided

(...continued)
2

network, such as switches and loops, as well as an incumbent’s Operational
Support Systems (“OSS”).

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from the ILEC’s retail rate. See 47 U.S.C. § 252(d)(3). In other words, the

proper starting point for determining the wholesale price under the resale

provision is the retail price (from which one subtracts the ILEC’s avoided costs),

whereas under the unbundled access provision, the starting point is cost. 3 See

generally AT&T Communications of the S. States, Inc. v. Bell South Telecomm.,

Inc., 268 F.3d 1294, 1297-98 (11th Cir. 2001) (discussing different pricing

methodologies).

II. BACKGROUND

AT&T seeks to enter the Oklahoma market for local telephone service. The

parties agree that SWBT, an incumbent provider of local service in the state, is

obligated to resell to AT&T telephone services that SWBT provides to its own

customers. The services at issue are certain optional toll calling plans (“OTCP”),

under which customers can opt to make unlimited calls within a certain

geographic radius for a flat monthly fee. The OTCP allows customers to widen

their “‘free calling’ area, and thereby turn what would otherwise be considered

toll calls [long distance] into local calls that are covered by the local service fee.”

3
The parties do not contest the pricing determination of either the resale of
the optional toll calling plans or access to the OSS, but we include the different
pricing strategies to illustrate the distinction between the unbundled access and
resale provisions.

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(Aplt. B. at 10.) SWBT offers these plans to single-users only, and specifically

prohibits multiple users from sharing one plan. SWBT seeks to impose this

single-user limitation on AT&T’s resale of the plan, essentially requiring that

AT&T only sell one plan to one end-user. AT&T contends that this condition is a

“restriction on resale,” which is generally presumed to be unreasonable under the

Act. SWBT, on the other hand, contends that the condition is a “use limitation”

as opposed to a restriction on resale, and that eliminating the restriction would

allow AT&T to resell services that SWBT does not currently provide to its own

customers.

AT&T challenged the single-user limitation before the Oklahoma

Corporation Commission (“OCC”), which agreed with SWBT. The OCC

concluded that AT&T literally would be offering a different service for resale

than the one that SWBT currently offers its customers, a situation that the Act

does not require. It further concluded that the restriction was reasonable and non-

discriminatory. AT&T appealed the OCC’s decision to the United States District

Court for the Western District of Oklahoma, which disagreed with the OCC and

held that the restriction was a resale restriction and that SWBT had not overcome

the restriction’s presumption of unreasonableness.

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 III. DISCUSSION

A. Standard of Review

Although the Act provided for federal court review of state commission

decisions concerning interconnection agreements, see 47 U.S.C. § 252(e)(6), 4 it

did not articulate the standard of review that courts should apply to those

decisions. See Philip J. Weiser, Chevron, Cooperative Federalism, and

Telecommunications Reform, 52 Vand. L. Rev. 1, 20 (1999). The Tenth Circuit

has joined most other federal courts in applying a de novo standard when

reviewing state commissions’ interpretations of the Act and its regulations, as

those decisions turn on determinations of federal law. Southwestern Bell Tel. Co.

v. Brooks Fiber Communications of Okla., Inc., 235 F.3d 493, 498 (10th Cir.

2000). See also MCI Telecomm. Corp. v. Bell Atlantic-Pennsylvania, 271 F.3d

491, 517 (3d Cir. 2001); US West Communications v. MFS Intelenet, Inc., 193

F.3d 1112, 1117 (9th Cir. 1999); MCI Telecomm. Corp. v. BellSouth Telecomm.,

Inc., 112 F. Supp. 2d 1286, 1290-1292 (N.D. Fla. 2000); US West

Communications, Inc. v. Hix (“Hix I”), 986 F. Supp. 13, 19 (D. Colo. 1997)

4
“[A]ny party aggrieved by [a state commission determination concerning
an interconnection agreement] may bring an action in the appropriate Federal
district court to determine whether the agreement . . . meets the requirements of
section 251 of this title and section.” 47 U.S.C. § 252(e)(6). The dispute in this
case involved the Oklahoma Corporation Commission’s resolution of disputes
over SWBT and AT&T’s interconnection agreement.

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(holding that courts should apply de novo review to questions of whether the state

commissions’ actions were “procedurally and substantively in compliance with the

Act and [its] implementing regulations”); see also Michigan Bell Tel. Co. v.

Climax Tel. Co., 121 F. Supp. 2d 1104, 1108-09 (W.D. Mich. 2000) (stating that

the Fourth, Fifth, and Ninth circuits have used de novo review of state

commissions’ application of the Act); US West Communications, Inc. v. Hix (“Hix

II”), 93 F. Supp. 2d 1115, 1130 (D. Colo. 2000) (applying de novo review to state

commission’s interpretation of the Act and its regulations); BellSouth Telecomm.,

Inc. v. ITC Deltacom Communications, Inc., 62 F. Supp. 2d 1302, 1307 (M.D. Ala.

1999) (adopting de novo standard of review for questions of whether state

commission “properly interpreted and applied the Act”) (internal quotation marks

omitted); Weiser, supra, at 20 (stating that “federal courts have declined to accord

state agencies [deference] . . . when it comes to construing ambiguous statutory

terms or filling gaps in the Telecom Act” and collecting cases). 5

5
In US West Communications, Inc. v. Public Serv. Comm’n of Utah, 75 F.
Supp. 2d 1284, 1287 (D. Utah 1999), the court declined to follow Hix I and
applied a “deferential standard” to the state commissions’s interpretations of the
Act. Subsequently in Southwestern Bell Tel. Co. v. Brooks Fiber
Communications of Okla., Inc., 235 F.3d 493 (10th Cir. 2000), however, we
instructed that district courts should review de novo whether state commission
determinations are “in compliance with the Act and [its] implementing
regulations,” joining with the Fourth, Fifth and Ninth Circuits. 235 F.3d at 498.

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 Once federal courts determine that state commissions properly interpreted

the Act and its regulations, courts apply an arbitrary and capricious standard to

review the remaining state commissions’ determinations. MCI Telecomm. Corp.,

112 F.Supp. 2d at 1291; see also AT&T Communications of the S. States, Inc. v.

BellSouth Telecomm., Inc., 7 F. Supp. 2d 661, 668 (E.D.N.C. 1998) (explaining

that federal courts review de novo state commission’s interpretation of the Act, but

that if state commission’s interpretation is in compliance with federal law, that

federal courts review all other issues using arbitrary and capricious standard); Hix

I, 986 F. Supp. at 19 (same).

Most federal courts to analyze claims similar to the ones at issue in this case

have applied de novo review, and reserved the arbitrary and capricious standard

for highly technical issues. See, e.g., Bell Atlantic-Pennsylvania, 271 F.3d at 520-

21 (reviewing de novo whether directory publishing services were a

“telecommunications service” that ILEC was obligated to offer CLEC at wholesale

rates under § 251(c)(4)(A)); AT&T Communications of the S. States, 268 F.3d at

1296 (characterizing what services an ILEC must provide to a CLEC under the

resale provision as “a purely legal question” to be reviewed de novo); U.S. West

Communications, Inc., 193 F.3d at 1120-26 (reviewing de novo whether certain

services were exempt from the Act’s resale provisions, but applying an arbitrary

and capricious standard of review to state commission’s characterization of a

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switch as a “tandem switch” because it was not “a determination of compliance

with the requirements of the Act and its implementing regulations”); Sprint-

Florida, Inc., 139 F. Supp. 2d at 1345 (reviewing de novo state commission’s

determination that voice mail was a “telecommunications service” that ILEC had

to offer CLEC at wholesale rates under the Act’s resale provision). Accordingly,

we review the issues presented de novo.

B. Resale Duty

Under the Act, ILECs only have a duty to offer for resale at wholesale rates

“any telecommunications service that the [ILEC] provides at retail to subscribers

who are not telecommunications carriers,” 47 U.S.C. § 251(c)(4)(A), and an ILEC

may not impose unreasonable restrictions on the resale of those

telecommunications services, id. § 251(c)(4)(B). Both parties agree that SWBT

must resell its OTCPs to AT&T at wholesale rates. AT&T contends, however, that

SWBT’s single-user limitation on its OTCPs amounts to an unreasonable

restriction on resale as prohibited by § 251(c)(4)(B). If aggregating end-users on

one OTCP converts the OTCP into a “different service” than SWBT offers at

retail, as the OCC found, then SWBT is not required under the Act to offer such a

service to AT&T at a wholesale rate. See Local Competition Order ¶ 872 (“The

1996 Act does not require an incumbent LEC to make a wholesale offering of any

service that the incumbent LEC does not offer to retail customers.”).

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 The Act’s regulations further reiterate that an ILEC need only offer to a

CLEC at wholesale the services that the ILEC provides at retail. The regulations

instruct that ILECs must provide telecommunications services for resale “that are

equal in quality, subject to the same conditions, and provided within the same

provisioning time intervals that the LEC provides these services to others,

including end users.” 47 CFR § 51.603(b) (emphasis added). The Local

Competition Order provides even more guidance about the parameters of an

ILEC’s resale duty. It explains that the “principal distinction” between the resale

provision and the unbundled access provision is that under the unbundled access

provision, new entrants “will have greater opportunities to offer services that are

different from those offered by incumbents.” Local Competition Order ¶ 332

(emphasis added.) It goes on to state,

More specifically, carriers reselling incumbent LEC services are limited to
offering the same service an incumbent offers at retail. This means that
resellers cannot offer services or products that incumbents do not offer. The
only means by which a reseller can distinguish the services it offers from
those of an incumbent is through price, billing services, marketing efforts,
and to some extent, customer service.

Id. (emphasis added).

To “determine the services that an incumbent LEC must provide at

wholesale rates,” under the resale provision, one “examin[es] that ILEC’s retail

tariffs.” See Local Competition Order ¶ 872. Focusing on what service the ILEC

offers at retail, as opposed to what service the CLEC wishes to offer, maintains the

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statutory differences between the resale and unbundled access provisions. To

approach the issue focused on what the CLEC wishes to sell, “would . . . force[]

[ILECs] to offer to new entrants a telephone services package different from that

offered at retail, which collapses the distinction between the unbundled service

elements offered under the unbundled access provision and the bundled service

elements offered under the resale provision.” AT&T Communications of the S.

States, Inc., 268 F.3d at 1304 (holding that if an incumbent does not offer a

service package to its retail customers that lacks operator services, it is not

required to offer new entrants a service package that lacks such services). As

discussed above, the resale provision and the unbundled access provision are based

on distinct pricing methodologies, so eliminating the distinction between the two

would carry “serious cost implications.” Id.

The one court to examine a similar factual pattern dealing with a limitation

on aggregation of toll service for retail concluded that the CLEC could not resell

the toll service stripped of the “use limitations that [the ILEC] imposed on its own

customers.” See AT&T Communications of the Southwest, Inc. v. Southwestern

Bell Tel. Co., 86 F. Supp. 2d 932, 966 (W.D. Mo. 1999), rev’d in part, vacated in

part, and remanded sub nom. Southwestern Bell Tel. Co. v. Mo. Pub. Serv.

Comm’n, 236 F.3d 922 (8th Cir. 2001). In that case, AT&T argued, as it does

here, that the restriction prohibiting AT&T from “purchasing toll service that

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SWBT only sells to single customers and reselling the service to groups of

customers” amounted to an unreasonable restriction on resale. Id. at 965. The

court squarely rejected that argument, and found that the state commission

reasonably concluded that “eliminating the single customer restriction from

[SWBT’s] toll service would transform it into a different service.” Id. at 966.

Therefore, the court upheld the state commission’s determination that “SWBT was

only required to resell toll service with the same use limitations that it imposed on

its own customers.” Id.

Here, SWBT’s retail tariffs 6 for its OTCPs clearly state that “the sharing of

this service for multiple end users or the aggregation of traffic from multiple end

users onto a single service shall not be permitted.” (App. at 131, § 10.1(G).) The

service that SWBT provides at retail to its customers is an OTCP that is available

only for use by a single user, and for which aggregation of multiple end-users or

traffic explicitly is prohibited. We therefore conclude that AT&T may purchase

OTCPs from SWBT under the resale provision and resell them subject to the same

single-user limitation that SWBT is subject to when it sells OTCPs at retail. See

6
SWBT’s tariff was before the OCC as part of the commission’s public
record, even though SWBT did not provide the OCC with the tariff separately as
part of its appendix. The testimony before the OCC regarding the single-user
limitation in SWBT’s tariff was undisputed. Although our record is limited to
what was before the OCC, see GTE South, Inc. v. Morrison, 6 F. Supp. 2d 517,
523 (E.D. Va. 1998), the OCC had the tariff before it and SWBT has provided a
copy of its tariff to this court for reference.

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MCI Telecomm. Corp. v. BellSouth Telecomm., Inc., 40 F. Supp. 2d 416, 426-27

(E.D. Ky. 1999) (holding that “forcing [an ILEC] to provide for resale to [a

CLEC], a package that [the ILEC] does not even offer to its own customers”

would be contrary to the resale provision of the Act). If AT&T wishes to offer

services that SWBT does not provide at retail to its own customers, such as an

OTCP stripped of the single-user limitation, then it may do so by leasing

unbundled network elements under the unbundled access provision, and generating

its own service, but it may not do so under the resale provision.

We reject AT&T’s argument that the single-user limitation prevents it from

pursuing high-volume discounts. In the Local Competition Order, the FCC found

it “presumptively unreasonable” for “incumbent LECs to require individual

reseller end users to comply with incumbent LEC high-volume discount minimum

usage requirements, so long as the reseller, in aggregate, under the relevant tariff,

meets the minimal level of demand.” Local Competition Order ¶ 953. The

prohibition on aggregating end-user traffic, however, does not prevent AT&T from

buying multiple OTCPs in bulk at a discount (if they are offered at volume

discounts by SWBT to its customers) and selling them individually, subject to the

same use limitations as SWBT sells them, to smaller customers. Volume discounts

pertain to the quantity bought. What AT&T is attempting to do has nothing to do

with buying multiple OTCPs at an established bulk discount and then reselling

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them to separate end users at a lower per-unit price; AT&T is trying to change the

nature of the service. 7

Finally, we find that imposing the single-user limitation on AT&T is

consistent with the Act and reasonable, because it allows SWBT to protect the

access charges it receives. Access charges are the charges that long-distance

carriers such as AT&T pay to use the local network to originate and terminate

long-distance calls. These access charges help subsidize universal

service–affordable basic telephone service for all customers, even those who live

in rural areas where it is more expensive to provide local service. See 47 U.S.C.

§ 254(b); Qwest Corp.v FCC, 258 F.3d 1191, 1195 (10th Cir. 2001). The Local

7
A simple analogy illustrates the distinction between utilizing high-volume
discounts and manipulating restrictions on a flat-rate system. Assume that a gym
membership for one person costs $100 a month and allows one person unlimited
use of the gym. It is strictly non-transferable. The gym also offers gym passes,
whereby a visitor can use the gym for $10 per visit. One can make a bulk
purchase of 8 passes in a booklet for $72 (or $9 a visit). A person must purchase
at least 8 passes in bulk, however, to receive the discounted rate of $9 per visit.
If one purchases a book of 8 passes and resells them to his friends for $9.50 each,
each friend has received a discounted rate to which he would not be entitled if he
bought a single pass directly from the gym. To the gym, however, the effects are
the same: the gym is being utilized eight times and it has received a sum of $72
for that use. By contrast, if the holder of a monthly unlimited use membership
allows other persons to use his or her monthly membership, the gym will be
experiencing heavier use than it bargained for in setting the monthly price for a
single user at $100 a month. The usage experienced by the gym certainly is
greater in allowing multiple users to take advantage of one’s non-transferable flat
rate, than if one acts as a true wholesaler and sells discounted tickets purchased
under a high volume discount.

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Competition Order specifically preserves the right of ILECs to receive these

access charges. “We conclude that the 1996 Act requires that incumbent LECs

continue to receive access charge revenues when local services are resold under

section 251(c)(4).” Local Competition Order ¶ 980. See Southwestern Bell Tel.

Co. v. FCC, 153 F.3d 523, 538 (8th Cir. 1998) (“The courts have recognized that

universal service concerns are valid considerations for FCC action.”). SWBT

contends that an OTCP includes access charges based on expected volumes from a

single customer and that if AT&T resells one of these plans to multiple users, then

it will avoid paying SWBT access charges that it would otherwise be required to

make for the services that it provides to those additional end-users. Unlike

aggregation in the high-volume discount context, where the effects on an ILEC are

the same whether the volume package is sold by SWBT to its own customers or to

AT&T, here SWBT stands to lose access charges based on long-distance traffic

from multiple users, because in pricing its OTCP it only budgeted access charges

based on a single user. Allowing AT&T to aggregate end-user traffic on an OTCP

would allow it to avoid paying access charges to SWBT for those long distance

calls, a result which contravenes the Act’s policy of protecting ILECs’ receipt of

access charges.

We reverse the district court’s order pertaining to the end-user limitation on

SWBT’s OTCP and affirm the OCC’s resolution of the issue.

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 C. OSS

The parties also disagreed over the time frame for and quality of access that

SWBT was required to provide AT&T to SWBT’s Operational Support Systems

(“OSS”.) 8 The OSS falls under the category of “unbundled network elements,” to

which new entrants are entitled access under the Act. The OCC found that SWBT

was required to provide AT&T with access to SWBT’s OSS on a schedule that was

triggered by the development of national standards. The district court rejected this

approach, ordering SWBT to “provide immediate access to OSS of the same

quality SWBT provides to its own customers.” SWBT argues that this standard is

incorrect and that this court should either reverse or remand it to the district court

with instructions to vacate or amend the order.

We dismiss this issue as moot, as both parties have reached a new agreement

regarding SWBT’s obligations with respect to OSS. We vacate the district court’s

opinion, as it is inconsistent with the parties’ agreement and because the FCC’s

current regulations do not require immediate access to OSS. See Implementation

of the Local Competition Provisions of the Telecomm. Act of 1996, 15 FCCR

3696, 3884 ¶ 437 (1999) (declining to adopt a specific timetable for access to OSS

8
Operational Support Systems are the “functions supported by an
incumbent LEC’s databases and information,” including “pre-ordering, ordering,
provisioning, maintenance and repair, and billing.” 47 C.F.R. §51.319(g).

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functions), remanded in part by United States Telecomm. Ass’n v. FCC, 290 F.3d

415 (D.C. Cir. 2002).

IV.

We REVERSE the district court’s opinion pertaining to the end-user

limitation on SWBT’s OTCPs and VACATE the district court’s opinion regarding

access to SWBT’s OSS. We REMAND this case to the district court for further

proceedings consistent with this opinion.

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