United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 11, 2000 Decided January 9, 2001
No. 99-1441
Association of Communications Enterprises,
Appellant
v.
Federal Communications Commission,
Appellee
AT&T Corporation, et al.,
Intervenors
Appeal of an Order of the
Federal Communications Commission
Charles C. Hunter argued the cause for appellant and
supporting intervenor Competitive Telecommunications Asso-
ciation. With him on the briefs were Catherine M. Hannan
and Robert M. McDowell.
Peter D. Keisler argued the cause for intervenor AT&T
Corp. With him on the brief were Mark C. Rosenblum, Roy
E. Hoffinger and C. Frederick Beckner III.
John E. Ingle, Deputy Associate General Counsel, Federal
Communications Commission, argued the cause for appellee.
With him on the brief were Christopher J. Wright, General
Counsel, and Laurence N. Bourne, Counsel.
Michael K. Kellogg argued the cause for intervenor SBC
Communications Inc. With him on the brief were James D.
Ellis and Martin E. Grambow.
Before: Edwards, Chief Judge, Rogers, Circuit Judge, and
Silberman, Senior Circuit Judge.*
Opinion for the Court filed by Senior Circuit Judge
Silberman.
Silberman, Senior Circuit Judge: The Association of Com-
munications Enterprises appeals from an order of the Feder-
al Communications Commission approving the transfer of
Commission licenses from Ameritech Corp. to SBC Communi-
cations Inc. in connection with the merger of the two compa-
nies. The order allows the merged company to avoid statuto-
ry resale obligations on certain advanced telecommunications
services by providing those services through a subsidiary.
We vacate.
I.
As all observers of the American telecommunications sys-
tem are well aware, when a 1982 consent decree dismantled
the Bell monopoly over many telecommunications services,
the Bell System's local exchange operations were severed
from its other operations and split geographically among
seven Regional Bell Operating Companies (RBOCs). Ameri-
tech and SBC were both RBOCs and provided various states
with local exchange and exchange access services, which
depend critically on maintenance and operation of the "local
loop," the physical infrastructure by which wire-based tele-
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* Senior Judge Silberman was in regular active service at the
time of oral argument.
phone service is provided. Because the local loop is a natural
monopoly, control over it allowed the Bell System, and then
RBOCs, to control telecommunications access to most homes
and businesses.
Today the Telecommunications Act of 1996 governs the
obligations of telecommunications carriers such as Ameritech
and SBC.1 The Act imposes on carriers certain duties in-
tended to open telecommunications markets to competition.
The Act's strictest obligations are levied on "incumbent local
exchange carriers" (ILECs), which are those local exchange
carriers (LECs) that were providing a given area with mo-
nopoly or near-monopoly telephone exchange service on the
Act's enactment date, as well as their successor and assigns.
ILECs are subject to stringent market-opening duties. Of
particular relevance to this appeal is the Act's ILEC resale
obligation, 47 U.S.C. s 251(c)(4), which requires ILECs "to
offer for resale at wholesale rates any telecommunications
service that the carrier provides at retail to subscribers who
are not telecommunications carriers." Section 251(c) also
requires ILECs to negotiate in good faith, to provide inter-
connection with other telecommunications carriers, to provide
unbundled access to network elements where technologically
feasible, and to allow physical collocation of equipment neces-
sary for interconnection or access to unbundled network
elements.
For some time, various ILECs have argued that ILECs'
s 251(c) resale obligations should not extend to their provi-
sion of so-called advanced services because ILECs do not
exercise market power over those services. The Act defines
"advanced services," regardless of transmission medium or
technology, "as high-speed, switched, broadband telecommu-
nications capability that enables users to originate and receive
high-quality voice, data, graphics, and video telecommunica-
tions using any technology."2 ILECs contended before the
__________
1 See Telecommunications Act of 1996, Pub. L. No. 104-104, 110
Stat. 56 (codified at 47 U.S.C.A. s 151 et seq. (Supp. 2000)).
2 Advanced services differ from most traditional telecommunica-
tions services in that they are digital, not analog. Instead of
Commission both that ILECs are not subject to s 251(c) in
their provision of advanced services and that, even if s 251(c)
does apply to ILEC's advanced services, the Commission
should simply forbear from applying it. The Commission
rejected both arguments. The Commission determined that
advanced services are telecommunications services like any
others and may not be provided by an ILEC unless the ILEC
complies with s 251(c).3 It also determined that it lacked
authority to forbear from applying s 251(c) to advanced
services. It concluded that exempting ILEC-provided ad-
vanced services from s 251(c) market-opening obligations "is
at odds with the technology[-]neutral goals of the Act and
with Congress' aim to encourage competition in all telecom-
munications markets." (Emphasis added).
In 1998 Ameritech and SBC proposed a stock-for-stock
merger that would make Ameritech a wholly owned subsid-
iary of SBC. The merging companies filed a joint application
requesting Commission approval to transfer control to SBC of
licenses and lines owned and controlled by Ameritech. The
Commission determined that this application compelled it to
consider whether the merger as a whole--not just the trans-
fer of individual lines--was consistent with the Act. Appel-
lant Association of Communications Enterprises (ASCENT),4
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maintaining a continuous channel of communications for the entire
information transfer, advanced services are usually transferred in
multiple discrete bundles of digital information, called "packets,"
that are transmitted individually over the most efficient route
available, and then reassembled instants later at their destination.
This process of separate transmission and subsequent reassembly is
called "packet-switching."
3 See Deployment of Wireline Services Offering Advanced Tele-
communications Capability, 13 F.C.C.R. 24,012, p p 11, 66-67 (Aug.
6, 1998) (Deployment Order); Deployment of Wireline Services
Offering Advanced Telecommunications Capability, 15 F.C.C.R. 385,
p p 10-11 (Dec. 23, 1999), pet. for review filed sub nom. MCI
WorldCom, Inc. v. FCC, No. 00-1002 (D.C. Cir. filed Jan. 3, 2000);
Deployment of Wireline Services Offering Advanced Telecommuni-
cations Capability, 14 F.C.C.R. 19,237, p 3 (Nov. 9, 1999).
4 During its opposition to the joint application, ASCENT was
known as the Telecommunications Resellers Association. For clari-
ty's sake we use the association's new name throughout.
a national trade association representing telecommunications
providers and resellers, opposed the application. ASCENT
alleged that the merger of two of the largest ILECs would
hinder competition and urged that certain competition-
enhancing conditions be imposed on the merged company,
after which Ameritech and SBC supplemented their applica-
tion to include a package of voluntary commitments.
The Commission approved the merger and permitted the
new company to offer advanced services through a separate
affiliate and, by doing so, avoid s 251(c)'s duties.5 Although
the Act extends an ILEC's market-opening obligations, in-
cluding the requirement that an ILEC sell its telecommunica-
tions services to a reseller at wholesale prices, to an ILEC's
"successor or assign," the Commission adopted a presumption
that the advanced services affiliate is not such a successor or
assign so long as it complies with various structural and
transactional safeguards.6 These include independent opera-
tions, separate officers, directors, employees, books, records,
and accounts, and transactions with SBC/Ameritech conduct-
ed on an arm's length basis. It is important to note that
although this case arises out of a merger proceeding, the
Commission's order has a broader application. Any ILEC
would be entitled, according to the Commission's logic, to set
up a similar affiliate and thereby avoid s 251(c)'s resale
obligations.
II.
Appellant's primary argument is that the Commission's
order is simply a device to accomplish indirectly what the
statute clearly forbids: the Commission's exercise of forbear-
ance authority over an ILEC's provision of advanced services.
Under the order ILECs can circumvent s 251(c)'s require-
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5 See Applications of Ameritech Corp. and SBC Communications
Inc., 14 F.C.C.R. 14,712, p 349 (Oct. 6, 1999) (Merger Order).
6 The Merger Order provides that if a court determines that the
affiliate is a successor or assign under the specified conditions, then
the new company's obligation to provide advanced services only
through an affiliate would terminate.
ment that they offer advanced services at wholesale prices by
merely creating a subsidiary--albeit a subsidiary that must
operate somewhat separately from the ILEC. And according
to appellant, Congress manifested a clear intent that the
Commission not forbear from regulating any ILEC's telecom-
munications services, including advanced services, unless cer-
tain market conditions are met. Intervenor AT&T trains its
fire on the Commission's interpretation of the phrase "succes-
sor or assign," claiming that its construction of those terms is
inconsistent with a number of cases in which those terms are
defined as used in other statutes. The Commission insists
that it is not actually utilizing its forbearance authority and
that the phrase "successor or assign" is sufficiently ambigu-
ous so that under Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984), we are obliged to
defer to the Commission's interpretation. As should be obvi-
ous, these arguments are quite interrelated. For even if we
conclude that the Commission has not formally used its
forbearance authority and that the phrase "successor or
assign" is ambiguous, the meaning of the statute, as revealed
by its structure, may render the Commission's "successor or
assign" construction unreasonable.
Section 10 of the Act provides in relevant part:
... [T]he Commission shall forbear from applying any
regulation or any provision of this chapter to a telecom-
munications carrier or telecommunications service, or
class of telecommunications carriers or telecommunica-
tions services, in any or some of its or their geographic
markets, if the Commission determines that--
(1) enforcement of such regulation or provision is not
necessary to ensure that the charges, practices, classifi-
cations, or regulations by, for, or in connection with that
telecommunications carrier or telecommunications ser-
vice are just and reasonable and are not unjustly or
unreasonably discriminatory;
(2) enforcement of such regulation or provision is not
necessary for the protection of consumers; and
(3) forbearance from applying such provision or regu-
lation is consistent with the public interest.
47 U.S.C. s 160(a). But the Commission "may not forbear
from applying the requirements of section 251(c) ... until it
determines that those requirements have been fully imple-
mented." 47 U.S.C. s 160(d). Because those requirements
have not been fully implemented here, the FCC (as it con-
cedes) may not forbear.7
Appellant argues that the Merger Order is "the legal and
practical equivalent" of forbearance. In other words, to apply
s 251(c) as narrowly as the Commission has done is akin to
forbearing from regulating. The Commission insists that it is
not actually "forbearing" but rather interpreting s 251(c) not
to apply to this affiliate structure. In other words, the
definition of ILEC in s 251(h) does not explicitly mention
affiliates, so the Commission claims authority to determine
case by case whether a particular affiliate is an incumbent
LEC or not. When it does so it is interpreting the statute
rather than determining whether to forbear.
We think appellant's argument is a powerful one. Al-
though the Commission has not explicitly invoked forbearance
authority (in direct violation of s 10), to allow an ILEC to
sideslip s 251(c)'s requirements by simply offering telecom-
munications services through a wholly owned affiliate seems
to us a circumvention of the statutory scheme. The Commis-
sion justifies its order by drawing our focus to its definition of
"successor and assign." The Commission reasons that the
affiliate structure it approved would be illegal only if it were
__________
7 Section 706 of the Act provides in relevant part that "[t]he
Commission ... shall encourage the deployment on a reasonable
and timely basis of advanced telecommunications capability to all
Americans ... by utilizing, in a manner consistent with the public
interest, convenience, and necessity, ... regulatory forbearance."
47 U.S.C.A. s 157 note. Ameritech and SBC argued that s 706 is
an independent grant of authority to forbear, but the Commission
concluded that s 706 was only an instruction that the Commission
should utilize s 10's forbearance authority in the context of ad-
vanced services. See Deployment Order p p 68-69.
obliged to treat an affiliate as a successor and assign of an
ILEC, because only under these circumstances would
s 251(c)'s requirements carry over to the affiliate. And since
"successors and assigns" is not defined in the Act, the Com-
mission's definition is entitled to Chevron deference.
The Commission's approach gives rise to a fierce argument,
mounted particularly by intervenor AT&T, that the Commis-
sion's definition of successor and assign is impermissible.
AT&T draws particularly on NLRB cases to claim that the
affiliate must be thought a successor or assign. See, e.g., Fall
River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 107
S. Ct. 2225 (1987); NLRB v. New Madrid Mfg. Co., 215 F.2d
908, 911 (8th Cir. 1954). AT&T emphasizes that the affiliate
markets the same category of services to the same body of
potential customers as did SBC/Ameritech. The Commission
decided the affiliate was not a successor or assign essentially
because the company did not transfer its "traditional business
operations"--its monopoly assets. Thus, the Commission has
permitted, through the technique of defining successor and
assign to exclude the transfer of advanced services to an
affiliate, the very result it had previously rejected--allowing
an incumbent LEC to avoid the resale obligation on its
advanced services.
Paradoxically the Commission is using language designed
by Congress as an added limitation on an ILEC's ability to
offer telecommunications services as a statutory device to
ameliorate s 251(c)'s restriction. We do not think that in the
absence of the successor and assign limitation an ILEC would
be permitted to circumvent s 251(c)'s obligations merely by
setting up an affiliate to offer telecommunications services.
The Commission is thus using the successor and assign
limitation as a form of legal jujitsu to justify its relaxation of
s 251(c)'s restrictions.
That an ILEC would not be permitted to avoid the limita-
tions on telecommunications services--including advanced
services--through a wholly owned affiliate, even in the ab-
sence of the "successor or assign" restriction, is evident by
examination of the very provision on which the Commission
relies to justify the affiliate structure in this case. The
Commission looks to 47 U.S.C. s 272, which allows ILECs to
provide certain maintenance and long-distance services--but
not advanced services--through a separate affiliate. As set
out in the Merger Order, the advanced services affiliate must
"operate largely in accordance with the structural, transac-
tional, and nondiscrimination requirements of [47 U.S.C.
s] 272(b), (c), (e), and (g)." Merger Order p 364.
But s 272 applies only to manufacturing activities, telecom-
munications services between different local access and trans-
port areas (LATAs), and interLATA information services--
not advanced services. See 47 U.S.C. s 272(a)(2). It sets out
a series of formal structural and transactional obligations
intended to check LECs' incentive to leverage their bottle-
neck assets into market power over other telecommunications
services. LECs can provide the services covered by s 272
only through a separate affiliate, which must "operate inde-
pendently" of its LEC; maintain separate books, records, and
accounts; have separate officers, directors, and employees;
and conduct all transactions with its parent LEC "on an arm's
length basis ... reduced to writing and available for public
inspection." Id. s 272(b)(1)-(3), (5). The LEC is prohibited
from discriminating between its s 272 affiliate and other
entities "in the provision or procurement of goods, services,
facilities, and information, or in the establishment of stan-
dards." Id. s 272(c)(1).
To be sure, obligations substantially similar to these bind
the new company and its advanced services affiliate by force
of the Merger Order. See Merger Order p 364.8 But s 272
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8 While the advanced services affiliate must be separate from the
merged company as a matter of corporate form, its separation does
not extend to various other matters, including some that constitute
deviations from the provisions of s 272. The Merger Order pro-
vides for certain joint services, including joint marketing and per-
formance of certain customer care services. Certain operation,
installation and maintenance functions of the affiliate may be per-
formed by the merged company, and the affiliate may use the
is not only an inapt analogy, it actually undermines the
Commission's position. As intervenor AT&T points out, s 272
affiliates are established primarily to provide interLATA
telephone service, which an ILEC is generally barred from
providing. See 47 U.S.C. s 271. Since the ILEC may not
provide this service in the first place, the s 272 affiliate
obviously does not succeed to an existing interLATA tele-
phone service business or to the assets the ILEC used to
provide that service. This point alone would render the
s 272 comparison inapposite for advanced services, which
were previously provided by the merged companies, see
Merger Order p 475. Yet the s 272 comparison is even more
damning than that, for s 272 evidences Congress' considered
judgment as to when an ILEC may legally provide telecom-
munications services through an affiliate and thereby avoid
some of the Act's strictures. Since Congress prescribed no
such affiliate structure for advanced services, we must as-
sume that Congress did not intend for s 251(c)'s obligations
to be avoided by the use of such an affiliate.
Congress thus has specified when conditions justify allow-
ing an ILEC to provide telecommunications services without
s 251(c)'s duties. And it has specified when an ILEC may
avoid the Act's burdens by providing telecommunications
services through a separate affiliate, and what services that
affiliate may provide. In short, the Act's structure renders
implausible the notion that a wholly owned affiliate providing
telecommunications services with equipment originally owned
by its ILEC parent, to customers previously served by its
ILEC parent, marketed under the name of its ILEC parent,
should be presumed to be exempted from the duties of that
ILEC parent.9
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merged company's "name, trademarks, and service marks on an
exclusive basis." Merger Order p p 364-65.
9 The Commission said that an affiliate can be a successor or
assign, see Deployment Order p 90, but that this affiliate was
neither. The Commission could just as well have determined that
the affiliate was itself a part of the ILEC and thus did not trigger
the "successor or assign" inquiry.
That is not to say that the Commission would not be
entitled to some running room in defining the terms successor
and assign. For instance if an ILEC sold its advanced
service to an unaffiliated company the Commission might well
be entitled to conclude that the new company was not a
successor and assign.
The real explanation for the Commission's rather tortured
statutory interpretation in this case is set forth powerfully in
intervenor SBC's brief. It is argued that the Commission's
order is justified because the clear purpose of the Telecom-
munications Act--particularly the requirements of s 251(c)--
is to prevent an ILEC from abusing its market power over
the local loop to prevent competition. If an ILEC has no
market power over advanced services, an affiliate structure to
offer those services should be permitted by concluding it is
not a successor or assign so long as the affiliate is sufficiently
separate. Of course, if intervenor's economic analysis is
correct it is not apparent why a separate affiliate would be
necessary--or even useful. It could be thought that the
affiliate structure is a non sequitur if an ILEC cannot use its
local loop monopoly to leverage its position in the advanced
service market.
But whether or not SBC's premise is economically sound, it
is unfortunately not Congress' premise. As the Commission
concedes, Congress did not treat advanced services different-
ly from other telecommunications services. See Deployment
Order p 11. It did not limit the regulation of telecommunica-
tions services to those services that rely on the local loop.
For that reason the Commission may not permit an ILEC to
avoid s 251(c) obligations as applied to advanced services by
setting up a wholly owned affiliate to offer those services.
Whether one concludes that the Commission has actually
forborne or whether its interpretation of "successor or as-
sign" is unreasonable, the conclusion is the same: The Com-
mission's interpretation of the Act's structure is unreasonable.
* * * *
The order of the Federal Communications Commission is
vacated.
So ordered.