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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 2, 2007 Decided December 4, 2007
No. 06-1274
QWEST SERVICES CORPORATION,
PETITIONER
V.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
VERIZON COMMUNICATIONS, ET AL.,
INTERVENORS
Consolidated with
06-1298, 06-1309
On Petitions for Review of an Order of the
Federal Communications Commission
Steven J. Perfrement argued the cause for petitioner
Qwest Services Corporation. With him on the briefs was
Robert B. McKenna.
2
Bruce D. Sokler argued the cause for petitioner iBasis,
Inc. On the briefs were Michael H. Pryor, Kemal Hawa,
Robert G. Kidwell, and Helen Gerostathos Guyton.
Richard K. Welch, Associate General Counsel, Federal
Communications Commission, argued the cause for
respondents. With him on the brief were Thomas O. Barnett,
Assistant Attorney General, U.S. Department of Justice,
Catherine G. O’Sullivan and Nancy C. Garrison, Attorneys,
Samuel L. Feder, General Counsel, Federal Communications
Commission, John E. Ingle, Deputy Associate General
Counsel, and Laurel R. Bergold, Counsel. Eric D. Miller,
Counsel, entered an appearance.
Helgi C. Walker argued the cause for intervenors AT&T
Corporation and Verizon Communications Inc. With her on
the brief were Michael E. Glover, Edward Shakin,
Christopher M. Miller, Eve Klindera Reed, Gary L. Phillips,
David W. Carpenter, and James P. Young. Christopher T.
Shenk and David L. Lawson entered appearances.
Before: SENTELLE and TATEL, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: This case involves
phone calls made with two kinds of prepaid calling cards.
The first kind uses internet protocol (“IP”) technology to
transport part or all of a telephone call (“IP-transport cards”).
The second offers a menu-driven interface through which
users can either make a call or access several types of
information (“menu-driven cards”). In the order under review
the Federal Communications Commission determined that
both types of cards offer “telecommunications services” and
3
that providers of those cards are therefore subject to access
charges, Universal Service Fund contributions, and other
obligations under the Communications Act. In the Matter of
Regulation of Prepaid Calling Card Services, 21 FCC Rcd
7290 (2006) (“Order”).
These consolidated petitions for review do not challenge
the substantive merits of that decision. Rather, they attack the
Commission’s decisions as to the retroactivity of its
substantive interpretation of the statute. iBasis contests the
decision to make the Order retroactive as to IP-transport
cards, and Qwest contests the decision to make it prospective-
only as to menu-driven cards.
We find no manifest injustice in applying the Order
retroactively to IP-transport cards and thus deny iBasis’s
petition for review. But we can discern nothing in the record
that justifies the Commission’s decision to foreclose
retroactive application of the Order’s statutory interpretation
to menu-driven cards in the calculation of a provider’s
liability for access charges. Accordingly, we grant Qwest’s
petition for review and vacate the Order insofar as it purports
to bar such an application.
* * *
Under the Communications Act of 1934, as amended by
the Telecommunications Act of 1996, providers of
telecommunications services are regulated as common
carriers, but providers of information services are not. 47
U.S.C. § 153(20), (44), (47); Nat’l Cable & Telecomm. Ass’n
v. Brand X Internet Servs., 545 U.S. 967, 975 (2005); see also
Brand X, 545 U.S. at 976-77 (describing the historical basis
for that distinction). In 2003, AT&T petitioned the
Commission for a declaratory ruling that its “enhanced”
4
prepaid calling cards—enhanced by the addition of an
advertising message from the card’s retailer—were
“jurisdictionally interstate” and provided information services.
See Am. Tel. & Tel. Co. v. FCC, 454 F.3d 329, 331 (D.C. Cir.
2006) (“AT & T”). While that petition was still pending,
AT&T alerted the Commission that it had developed menu-
driven cards and was considering the transport of calls via
prepaid calling cards using IP technology. Letter from Judy
Sello, Senior Attorney, AT&T, to Marlene H. Dortch,
Secretary, FCC (Nov. 22, 2004). AT&T amended its petition
to add a request for a declaratory ruling that these new
variations on its prepaid calling cards would be treated as
interstate information services. Id.
On February 23, 2005, the Commission released an Order
and Notice of Proposed Rulemaking in response to AT&T’s
petition. AT&T Corp. Petition for Declaratory Ruling
Regarding Enhanced Prepaid Calling Card Services, 20 FCC
Rcd 4826 (2005) (“Prepaid Card Order” or “NPRM”). As to
the enhanced prepaid cards described in AT&T’s original
petition, the Commission determined that those cards offered
telecommunications services—not information services—and
that the calls made with them are intrastate when they
originate and end in the same state, regardless of a call’s
actual route. Id. at 4830 ¶ 14, 4833 ¶ 22; see also AT & T, 454
F.3d at 331. The Commission declined, however, to extend
its declaratory ruling to menu-driven and IP-transport cards; it
stated that “[r]ather than try to address each possible type of
calling card offering through a declaratory ruling,” the
Commission was initiating a rulemaking “to consider the
classification and jurisdiction of new forms of prepaid calling
cards.” Id. at 4826 ¶ 2. Opening a new docket for that
proceeding, the Commission requested comment on the
proper classification of menu-driven and IP-transport cards.
Id. at 4839-41 ¶¶ 38-43.
5
The Commission released the Order at issue here on June
30, 2006. In a part of that Order that it labeled a declaratory
ruling, the Commission announced that IP-transport and
menu-driven cards “are telecommunications services and that
their providers are subject to regulation as
telecommunications carriers,” 21 FCC Rcd at 7293 ¶ 10, and
thus subject to the obligation to pay access charges to local
exchange carriers, id. at 7300 ¶ 27. It also indicated that
jurisdiction over calls would be governed by the traditional
end-to-end analysis, meaning that calls made with prepaid
cards that originate and end in the same state are intrastate,
regardless of a call’s actual route. Id. at 7290 ¶ 1, 7300 ¶ 27;
see also Prepaid Card Order, 20 FCC Rcd at 4827 ¶ 5. Both
aspects of the substantive decision—the requirements that IP-
transport and menu-driven card providers pay access charges
and that they pay the (generally higher) intrastate access
charges for those calls when appropriate—were thus against
iBasis’s interests as a provider of IP-transport cards and in
favor of Qwest’s interests as a local exchange carrier of calls
made by both types of cards.
Turning to the issue of remedy, the Commission said that
a declaratory ruling was, notwithstanding the proceedings’
launch as a rulemaking, “a form of adjudication” and
recognized that “[g]enerally, adjudicatory decisions are
applied retroactively.” Id. at 7304-05 ¶ 41. The Commission
decided that it would apply that “general rule” to IP-transport
cards but would “decline to give retroactive effect to our
ruling on menu-driven cards to avoid a manifest injustice.”
Id. at 7305 ¶ 41. iBasis and Qwest both take issue with the
retroactivity rulings, which in each case are adverse to their
respective interests. They filed petitions for review; AT&T
and Verizon intervened in opposition to Qwest. We
consolidated the petitions.
6
* * *
iBasis argues that the Order announces a rule rather than
an adjudicatory order, and thus that it cannot apply
retroactively, citing Bowen v. Georgetown University
Hospital, 488 U.S. 204, 208-09 (1988). In the alternative,
iBasis argues that even if the Order was an adjudication, its
retroactive application to IP-transport cards used before the
Commission announced its decision works a manifest
injustice. We reject both contentions.
The section of the Order that classifies IP-transport and
menu-driven cards as telecommunications services is labeled a
declaratory ruling. The Commission is authorized to issue a
declaratory ruling “to terminate a controversy or remove
uncertainty,” 5 U.S.C. § 554(e); see also 47 C.F.R. § 1.2, and
there is no question that a declaratory ruling can be a form of
adjudication, see, e.g., AT & T, 454 F.3d at 332. iBasis argues
that—despite the Commission’s characterization of its
action—the Order did not qualify as an adjudication because
the Commission’s initial pronouncement purporting to start a
rulemaking, the process it employed, and the result it reached
all bespeak a rulemaking. iBasis’s argument, then, is that if it
walks like a rule and talks like a rule, it must be a rule.
iBasis is clearly correct that the process started out as a
rulemaking and in part preserved that form. But the
Commission indisputably split the proceeding into a dual one,
half rulemaking and half adjudication, or at least purported to
do so. iBasis appears to assume that such a split is inherently
improper. But it points to no case and to nothing in the
Administrative Procedure Act or Communications Act that
bars such a bifurcation. Obviously if a party adversely
affected by the adjudication argued that the switch deprived it
of any right to which it would be entitled in an adjudication,
we would have to assess that deprivation under conventional
7
principles governing adjudications. But iBasis’s opening
brief, except for the circular argument that the switch
triggered a traditional characteristic of adjudication (the
possibility of retroactive application), pointed to no such
deprivation.
In its reply brief iBasis finally identified a possible
deprivation: the NPRM’s failure to provide interested parties
with notice that there was a risk of retroactive effect. Properly
raised, this would be an extremely serious claim against the
Commission’s curious way of doing business. But we
ordinarily do not consider claims raised for the first time in a
reply brief, Carter v. George Washington Univ., 387 F.3d 872,
883 (D.C. Cir. 2004), and we note here that even iBasis’s
reply brief fails to point to any fact or argument that it might
have adduced materially beyond what the Commission
actually discussed. For reasons unknown to us, other
participants in the proceedings filed materials on whether
Commission action should have retrospective effect. See
Joint Appendix (“J.A.”) 338-39 (Sprint), 342-43 (Verizon),
344-46 (AT&T), 347 (Verizon), 348-52 (Verizon), 353-65
(AT&T).
iBasis also argues that such a broadly applicable order as
in fact came forth—determining the classification of all IP-
transport and menu-driven cards—can only take the form of a
rule, and thus must be prospective only. There is no such
general principle. Most norms that emerge from a rulemaking
are equally capable of emerging (legitimately) from an
adjudication, NLRB v. Bell Aerospace Co., 416 U.S. 267, 294-
95 (1974), and accordingly agencies have “very broad
discretion whether to proceed by way of adjudication or
rulemaking,” Time Warner Entertainment Co. v. FCC, 240
F.3d 1126, 1141 (D.C. Cir. 2001). iBasis identifies nothing in
the problem of applying a statute to two discrete kinds of
prepaid calling cards that requires use of rulemaking.
8
Apart from its attack on the switch from rulemaking to
adjudication, iBasis argues the Commission’s determination
that IP-transport cards offer telecommunications services
cannot be applied retroactively because to do so works a
manifest injustice. We review an agency’s conclusions on
manifest injustice with “‘no overriding obligation to the
agency[’s] decision.’” Maxcell Telecom Plus, Inc. v. FCC,
815 F.2d 1551, 1554 (D.C. Cir. 1987) (alteration in original)
(quoting Retail, Wholesale & Dep’t Store Union v. NLRB, 466
F.2d 380, 390 (D.C. Cir. 1972)). Despite proceeding without
deference to the Commission’s determination, we find that
retroactive application of the Order to IP-transport cards does
not work a manifest injustice for the very same reasons that
persuaded the Commission. As the Commission put it:
“These calling cards offer the customer no capability to do
anything other than make a telephone call, and therefore they
are just like basic prepaid calling cards that the Commission
always has treated as telecommunications services.” Order,
21 FCC Rcd at 7305 ¶ 43. Moreover, the Commission had
already determined that the IP-transport of traditional long-
distance calls “did not change the regulatory classification of
the service at issue.” Id. at 7306 ¶ 43. And while that
previous determination was not strictly applicable to IP-
transport cards, it certainly “provided ample notice that
merely converting a calling card call to IP format and back
does not transform the service from a telecommunications
service to an information service.” Id. Under those
circumstances, it works no manifest injustice (indeed, no
injustice at all) to apply the declaratory ruling retroactively to
IP-transport card providers.
* * *
The classification of calls made via menu-driven prepaid
calling card affects Qwest as a local exchange carrier that
9
provides access for the origin and termination of such calls
over its facilities. As we mentioned earlier, the Commission’s
substantive decision was in Qwest’s favor: the determination
that IP-transport and menu-driven cards provide
telecommunications services meant that Qwest could collect
access charges, and the Order also clarified that for calls
originating and ending in a single state card providers were
liable for intrastate access charges, which according to the
parties are typically higher than for interstate service. Here
Qwest objects solely to that part of the Order precluding
retroactive application of the ruling to menu-driven cards.
Except to the extent that the Order directly adjudicated a
specific controversy between Qwest and a provider of menu-
driven prepaid calling card services, however, one might
question whether Qwest has standing to challenge the Order
on this basis. After all, the Commission’s opinion on
retroactivity, standing alone, is not necessarily the final word.
Disputes over collection of tariffed charges often proceed
before state agencies (when the charges are wholly intrastate)
or in federal district court, and these disputes can only
sometimes come before the Commission under 47 U.S.C.
§§ 207 and 208 because the Commission does not entertain
actions for unpaid tariffed charges. See In the Matter of
Petition for Declaratory Ruling that AT&T’s Phone-to-Phone
IP Telephony Services Are Exempt From Access Charges, 19
FCC Rcd 7457, 7471 ¶ 23 n.93 (2004) (“[T]he Commission
does not act as a collection agent for carriers with respect to
unpaid tariffed charges.”); see also Beehive Telephone, Inc. v.
Bell Operating Cos., 10 FCC Rcd 10562 ¶ 37 & n.90 (1995)
(same). In fact, Qwest’s briefs pointed out that the federal
district court for the District of Colorado was then
adjudicating Qwest’s claim against AT&T for tariffed charges
for access provided to AT&T for prepaid calling card calls.
Moreover, Qwest argued that here the Commission’s
retroactivity decision should enjoy no deference, and that
10
argument presumably would extend to the district court
adjudication. Qwest’s claim to standing (in so far as it
indirectly addressed the point) was, as we understand it,
essentially that it was currently injured by the risk that the
court would defer to the opinion stated in the Order.
We were thus startled to learn—just the day before we
were originally scheduled to hear arguments—that the District
of Colorado had approved a stipulated dismissal of Qwest’s
claims against AT&T two months earlier. We learned this
information not from Qwest, but from a letter sent by
intervenor AT&T. Qwest later admitted that “[a]s this
litigation had formed the basis for some of the factual and
legal analysis in both Qwest’s briefs to this Court and the
Order on Review itself, the [stipulated dismissal] appears to
raise the question of whether Qwest’s appeal has been
rendered moot.” Letter from Counsel for Qwest to Mark
Langer, Clerk, U.S. Court of Appeals for the D.C. Circuit
(Sept. 20, 2007). Despite this recognition, Qwest provided no
excuse for failing to bring this development to the immediate
attention of this court, suggesting that its failure to do so was
in fact inexcusable.
We nonetheless find that Qwest’s petition for review is
saved from potential mootness—and Qwest saved from
potential sanctions—by Qwest’s continuing dispute with
Verizon over access charge liability related to the “Golden
Retriever” menu-based card offered by Verizon’s
predecessor-in-interest MCI. While we are uncertain whether
standing could rest on the mere prospect of a possible dispute
whose outcome might depend on the Order’s views on
retroactivity, here the Commission’s Order specifically
reached out and touched the Golden Retriever service. See 21
FCC Rcd at 7294 ¶ 11, 7296 ¶ 15. It declared that the Golden
Retriever Card was “a telecommunications service and
therefore subject to interstate and intrastate access charges,”
11
but expressly denied the attempt by a local exchange carrier
(not Qwest, but Frontier Telephone of Rochester) to obtain a
declaratory ruling that it was entitled to access charges for
services rendered before the effective date of the Order. Id. at
7307 n.121. This statement appears to foreclose with one
hundred percent certainty any hope that the Commission
would consider Verizon liable to Qwest for pre-Order access
charges (e.g., in an action before it for the recovery of
overcharges, see 47 U.S.C. §§ 203(c), 207-209), and to
militate significantly against Qwest’s success in litigation in
federal district court or before state commissions or courts.
We find these injuries sufficient to sustain Qwest’s standing.
On to the merits. The Commission determined that its
“decision that menu-driven calling cards offer
telecommunications services and that their providers are
subject to regulation as telecommunications carriers shall have
prospective effect only.” Order, 21 FCC Rcd. at 7307 ¶ 45.
The Commission was not merely agnostic as to retroactive
application; it set forth its express intent to relieve menu-
driven card providers of the “burdensome” obligations
imposed by statute upon telecommunications carriers,
including liability to local exchange carriers for “access
charges” arising from the use of their services. Id.; see also
id. at 7307 n.121 (applying rule to Golden Retriever card).
Thus the Commission purported to foreclose retrospective
application of its own interpretation of the statute.
The reasoning the Commission offered to support its
decision was contained in a single paragraph, the relevant part
of which reads:
Unlike the case of cards using IP transport, the
Commission’s prior decisions did not clearly point in the
direction of treating providers of menu-driven prepaid
calling cards as telecommunications carriers. Indeed,
12
during the pendency of this proceeding, the Supreme
Court released the Brand X decision, which informs the
Commission’s analysis in this Order. Given the lack of
clarity in the law on this issue, both before and as a result
of the NPRM, we are concerned that retroactive
application of this Order to menu-driven prepaid calling
cards would be so unfair to providers of such cards as to
work a “manifest injustice.” For example, we recognize
that retroactive application of our decision would be
burdensome for menu-driven prepaid calling card
providers, in that the decision subjects them to access
charges, Universal Service Fund contribution obligations,
and the full panoply of Title II obligations. We also
recognize that, given the state of the law at the time,
parties may have relied on the assumption that they
would not be subject to these burdens.
Id. at 7306-07 ¶ 45 (footnotes omitted).
Thus, the Commission found that retroactivity would
work a manifest injustice, giving four reasons for that
conclusion: (1) a baseline lack of clarity in the law, (2) a
further obfuscation of the applicable law supposedly wrought
by the Commission’s NPRM, (3) the intervention and
clarifying force of the Supreme Court’s decision in Brand X,
and (4) the possible reliance of “menu-driven prepaid calling
card providers” on all this legal uncertainty.
We start with the presumption of retroactivity for
adjudications. As we said recently, reviewing the
Commission’s decision to give retroactive application to its
order on AT&T’s “enhanced” prepaid calling cards,
Retroactivity is the norm in agency adjudications no less
than in judicial adjudications. . . . For our part we have
drawn a distinction between agency decisions that
13
“substitut[e] . . . new law for old law that was reasonably
clear” and those which are merely “new applications of
existing law, clarifications, and additions.” The latter
carry a presumption of retroactivity that we depart from
only when to do otherwise would lead to “manifest
injustice.”
AT & T, 454 F.3d at 332 (alteration and second omission in
original) (citations omitted).
In reviewing agency decisions on retroactivity, it appears
that we have generally shown little or no deference to
agencies’ rejection of claims that retroactivity produced
manifest injustice, see Retail, Wholesale, 466 F.2d at 390; see
also Maxcell Telecom Plus, 815 F.2d at 1554 (following
Retail, Wholesale in a rulemaking context where the
retroactivity issue is now moot because of Bowen v.
Georgetown University Hospital), but have been quite
deferential to decisions regarding the retroactive effect of
agency action where retroactivity would not work a manifest
injustice, see AT & T, 454 F.3d at 334; Retail, Wholesale, 466
F.2d at 393. None of the parties has offered any arguments
that might justify any alteration of that structure (even if this
panel had authority to make such an alteration, which it does
not). Here, unusually, the Commission has simply offered no
plausible grounds to overcome the presumption of
retroactivity; its finding of manifest injustice is completely
unconvincing, and it offers no other reason for precluding
retroactive application of its statutory interpretation.
First, a mere lack of clarity in the law does not make it
manifestly unjust to apply a subsequent clarification of that
law to past conduct. Clarifications, which obviously fall on
the no-manifest-injustice side of the line drawn in the above
passage from AT & T, must presuppose a lack of antecedent
clarity. They stand in contrast to rulings that upset settled
14
expectations—expectations on which a party might
reasonably place reliance. See, e.g., AT & T, 454 F.3d at 332
(“AT & T does not and indeed cannot point us to a settled rule
on which it reasonably relied.”); Verizon Tel. Cos. v. FCC,
269 F.3d 1098, 1111 (D.C. Cir. 2001) (“Because the object of
the [petitioners’] reliance was neither settled . . . nor ‘well-
established,’ we are skeptical that retroactive liability against
the [petitioners] would actually impose a manifest injustice.”
(citation omitted)). Clarifying the law and applying that
clarification to past behavior are routine functions of
adjudication.
Nor is the Commission on firmer ground in imputing a
muddying effect to the NPRM or an enlightening effect to the
Brand X decision. The NPRM merely reinforced the general
understanding that the relevant law was unsettled. And while
the Supreme Court’s decision in Brand X may well have
“inform[ed] the Commission’s analysis” that menu-driven
cards offered telecommunications services, Order, 21 FCC
Rcd at 7307 ¶ 45, that decision deferred to and affirmed the
Commission’s own March 2002 interpretation of the relevant
statutory definitions. See Brand X, 545 U.S. at 997-1000.
The NPRM and Brand X decision are just further evidence of
what the Commission already recognized: that the application
of the statutory terms “telecommunications service” and
“information service” to these prepaid calling cards was
uncertain and subject to reasonable debate.
The Commission’s analysis observes that “parties may
have relied on the assumption that they would not be subject
to the[] burdens [imposed on telecommunications carriers].”
Order, 21 FCC Rcd at 7307 ¶ 45 (emphasis added). Perhaps
so. But for reliance to establish manifest injustice, it must be
reasonable—reasonably based on settled law contrary to the
rule established in the adjudication. The mere possibility that
a party may have relied on its own (rather convenient)
15
assumption that unclear law would ultimately be resolved in
its favor is insufficient to defeat the presumption of
retroactivity when that law is finally clarified.
Here, the proper classification of services provided by
various “enhanced” prepaid calling cards has been long the
subject of active debate. In particular, the Commission has
been scrutinizing IP-transport and menu-driven cards at least
since AT&T’s November 2004 letter to the Commission
seeking a declaratory ruling classifying those prepaid calling
card variants. As we have said in another context, once the
issue was “expressly drawn into question . . . we do not see
how the Commission could possibly find that [those objecting
to retroactive application] reasonably relied upon [their view
of the law].” Pub. Serv. Co. of Colo. v. FERC, 91 F.3d 1478,
1490 (D.C. Cir. 1996).
Finally, we note the Commission’s complete disregard of
the obvious fact that every loss that retroactive application of
its statutory interpretation would inflict on providers of menu-
driven card services is matched by an equal and opposite loss
that non-retroactivity would inflict on access suppliers such as
Qwest. The Commission having determined the liability for
such access costs under its interpretation of the statute, we see
no reason why the users should not pay in accord with that
interpretation. Even if the particular circumstances of an
individual case might conceivably support such forbearance
(which the Commission nowhere suggests), that potential
offers no reason for the Commission’s attempt at a sweeping
release from apparently applicable statutory obligations.
Thus, the Commission has offered only an unsustainable
theory of manifest injustice to support its decision against
retroactivity, pointing to nothing else in the record that would
support a departure from the presumption of retroactivity.
Accordingly, the Order must be vacated to the extent that it
16
foreclosed application of its substantive ruling in the
calculation of access charges before the Order’s issuance.
So ordered.