FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
AT&T COMMUNICATIONS OF
CALIFORNIA, INC.; TELEPORT
COMMUNICATIONS GROUP OF SAN
FRANCISCO; TELEPORT
COMMUNICATIONS GROUP OF LOS
ANGELES; TELEPORT
COMMUNICATIONS GROUP OF SAN
DIEGO, No. 08-17030
Plaintiffs-Appellants,
v. D.C. No.
3:06-cv-07271-JSW
PAC-WEST TELECOMM, INC.; OPINION
MICHAEL R. PEEVEY; GEOFFREY E.
BROWN; DIAN M. GRUENEICH; JOHN
BOHN; RACHELLE CHONG,
Commissioners of the California
Public Utility Commission in their
official capacity,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Jeffrey S. White, District Judge, Presiding
Argued and Submitted
October 6, 2010—San Francisco, California
Filed June 21, 2011
8363
8364 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
Before: Stephen Reinhardt and Marsha S. Berzon, Circuit
Judges, and Louis H. Pollak, Senior District Judge.*
Opinion by Judge Berzon
*The Honorable Louis H. Pollak, Senior District Judge for the U.S. Dis-
trict Court for Eastern Pennsylvania, Philadelphia, sitting by designation.
8366 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
COUNSEL
Randolph W. Deutsch, Max Fischer, and Mark E. Haddad of
Sidley Austin LLP, Los Angeles, California, for plaintiffs-
appellants AT&T Communications of California, Inc., Tele-
port Communications Group of San Francisco, Teleport Com-
munications Group of Los Angeles, and Teleport
Communications Group of San Diego.
Robert Allen Brundage of Bingham McCutchen LLP, San
Francisco, California; Tamar Finn of Bingham McCutchen
LLP, Washington, DC; and William Carroll Harrelson and
James Michael Tobin of Tobin Law Group, LLC, Tiburon,
California, for defendant-appellee Pac-West Telecomm, Inc.
Christopher Paul Witteman of the California Public Utilities
Commission, San Francisco, California, for defendants-
appellees Michael R. Peevey, Geoffrey E. Brown, Dian M.
Grueneich, John Bohn, and Rachelle Chong, Commissioners
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8367
of the California Public Utility Commission in their official
capacities.
Laurel Rodnon Bergold and Richard K. Welch of the Federal
Communications Commission, Washington, DC, for the Fed-
eral Communications Commission as amicus curiae.
OPINION
BERZON, Circuit Judge:
When a customer of telephone company A places a local
call to a customer of telephone company B, the two compa-
nies cooperate to complete the call. Traditionally, the tele-
phone company of the individual receiving the call (company
B) would bill the originating phone company (company A) for
completing, or “terminating,” the call, on a per-minute basis.
When the phone call went in the opposite direction—from a
company B customer to a company A customer—the billing,
too, would be reversed. Underlying this “reciprocal compen-
sation” arrangement was the empirically-based assumption
that, over time, the telephone traffic going in each direction
would even out.
In the late 1990s, however, a technological development
undermined that assumption: the explosive growth of dial-up
internet access. Unlike calls exchanged between friends and
family members, your internet service provider (ISP)1 never
calls you back; all the telephone traffic originates from your
phone line and terminates at the ISP’s. Following passage of
the Telecommunications Act of 1996, telephone companies
1
In light of the oppressive number of acronyms used herein, and for the
reader’s convenience, we have included a glossary of terms in an appendix
at the end of this opinion. Please note, however, that the definitions pro-
vided are meant only to apply to the terms as they are used in this opinion,
and that they may have alternate or additional meanings in other contexts.
8368 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
were allowed for the first time to compete with each other for
local telephone customers. Some of these companies—called
“competitive local exchange carriers” (CLECs), as distinct
from the state-regulated monopolies that prevailed before
1996, which are now known as the “incumbent local
exchange carriers” (ILECs)—realized that, in light of the
reciprocal compensation regime, on the one hand, and the
massively unidirectional traffic flows to ISPs, on the other,
they could make a great deal of easy money by putting the
two together. And so many of them did, targeting as their cus-
tomers ISPs providing dial-up internet access. Each time their
ISP customers received a phone call, the CLECs would bill
the originating phone company (which tended, at least at first,
to be an ILEC) for having terminated its call. But because the
ISPs rarely made any outgoing phone calls, the CLECs could
receive a great deal of compensation without ever having to
put the “reciprocal” in “reciprocal compensation.”
In 2001, the Federal Communications Commission (FCC)
addressed this game of regulatory arbitrage in the not-so-
succinctly-named In the Matter of Implementation of the
Local Competition Provisions in the Telecommunications Act
of 1996, Intercarrier Compensation for ISP-Bound Traffic, 16
F.C.C.R. 9151 [hereinafter, “ISP Remand Order”], which
imposed a new compensation regime for ISP-bound traffic. In
this case, we are asked to decide the proper scope of this alter-
native compensation regime.
Plaintiff-appellant AT&T (which is a CLEC in California)
maintains that the ISP Remand Order applies when the carrier
originating the call and the carrier terminating the call are
both CLECs. Defendants-appellees Pac-West (also a CLEC)
and the California Public Utilities Commission (CPUC)
[together, “Appellees”] contend that the ISP Remand Order’s
compensation regime applies only to traffic between a CLEC
and an ILEC. The CPUC agreed with Pac-West’s limited
reading of the reach of the compensation regime, finding it
inapplicable to the ISP-bound traffic originating with AT&T
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8369
and terminated by Pac-West, and so it assessed against AT&T
charges consistent with Pac-West’s state-filed tariff. AT&T
then sued Pac-West and the CPUC in federal district court,
alleging that the ISP Remand Order preempted Appellees’
attempts to assess AT&T charges for ISP-bound traffic based
on state-filed tariffs. The district court granted summary judg-
ment to Appellees, agreeing with their argument that the ISP
Remand Order does not apply to CLEC-to-CLEC traffic.
We agree with AT&T, and with the analysis contained in
an amicus brief filed upon our request by the FCC, that the
ISP Remand Order’s compensation regime applies to ISP-
bound traffic exchanged between two CLECs. We therefore
reverse.
REGULATORY BACKGROUND
Until passage of the Telecommunications Act of 1996
(TCA), Pub. L. No. 104-104, 110 Stat. 56 (codified, as
amended, in scattered sections of 47 U.S.C.), local exchange
carriers (LECs)—those carriers responsible for telephone traf-
fic within geographically-delineated regions known as Local
Access and Transport Areas (LATAs), as distinct from long-
distance (or “interexchange”) traffic—operated as
government-regulated monopolies. See Global NAPs Cal. v.
Pub. Utils. Comm’n of Cal., 624 F.3d 1225, 1228-29 (9th Cir.
2010); Pac. Bell Tel. Co. v. Cal. Pub. Utils. Comm’n, 621
F.3d 836, 839-40 (9th Cir. 2010); see also Verizon Commcn’s,
Inc. v. FCC, 535 U.S. 467, 475-76 (2002); AT&T Corp. v.
Iowa Utils. Bd., 525 U.S. 366, 371 (1999). With the TCA
Congress opened up the LEC market to new entrants, elimi-
nating their protected monopoly status. See Verizon
Commc’ns, 535 U.S. at 476; Global NAPs Cal., 624 F.3d at
1228. Both AT&T and Pac-West took advantage of the new
statute to compete with the two companies that had previously
enjoyed monopoly LEC status in different parts of California,
Verizon and Pacific-Bell (now SBC California). Thus, for
purposes of the local telephone markets relevant to this case,
8370 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
AT&T and Pac-West are CLECs, and Verizon and SBC Cali-
fornia are ILECs.
The TCA imposed special obligations on ILECs to mitigate
their dominant market position. See 47 U.S.C. § 251(c)(2).
But it also imposed on all “carriers”2 the duty “to interconnect
directly or indirectly with the facilities and equipment of other
telecommunications carriers.” Id. § 251(a)(1). “Interconnec-
tion allows customers of one LEC to call the customers of
another, with the calling party’s LEC (the ‘originating’ car-
rier) transporting the call to the connection point, where the
called party’s LEC (the ‘terminating’ carrier) takes over and
transports the call to its end point.” Global NAPs Cal., 624
F.3d at 1228 (quoting Verizon Cal. v. Peevey, 462 F.3d 1142,
1146 (9th Cir. 2006)).
Interconnection, however, is not costless. The TCA there-
fore obligates LECs “to establish reciprocal compensation
arrangements for the transport and termination of telecommuni-
cations.”3 47 U.S.C. § 251(b)(5); see also Global NAPs Cal.,
2
With certain exceptions not relevant here, the TCA defines “carrier” as
“any person engaged as a common carrier for hire, in interstate or foreign
communication by wire or radio or in interstate or foreign radio transmis-
sion of energy.” 47 U.S.C. § 153(11).
3
Although all carriers have the duty to interconnect and the duty to
establish reciprocal compensation arrangements, only ILECs have the stat-
utory duty to negotiate an interconnection agreement in good faith, see 47
U.S.C. § 251(c)(1), and only ILECs can be required to arbitrate an inter-
connection agreement if good-faith negotiations do not result in an agree-
ment, see id. § 252(b). So the TCA leaves something of an enforcement
gap: CLECs have statutory duties to interconnect with other LECs and to
provide reciprocal compensation, but there is no procedure specified for
one CLEC to require another CLEC to enter into an interconnection agree-
ment that would govern the terms of those duties. (It is possible—although
the matter is not before us—that 47 U.S.C. § 208(a), which erects a mech-
anism for filing complaints with the FCC, could provide a means of
enforcing the general TCA duty to interconnect and to establish reciprocal
compensation arrangements. See Western Radio Servs. Co. v. Qwest
Corp., 530 F.3d 1186, 1205 (9th Cir. 2008); see generally N. County
Commc’ns Corp. v. Cal. Catalog & Tech., 594 F.3d 1149, 1158-61 (9th
Cir. 2010).)
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8371
624 F.3d at 1228. “Under a reciprocal compensation arrange-
ment, the originating LEC must compensate the terminating
LEC for delivering its customer’s call to the end point.”
Peevey, 462 F.3d at 1146; see also 47 C.F.R. § 51.701(e).
Shortly after the passage of the TCA, the FCC clarified that
“reciprocal compensation obligations . . . apply only to traffic
that originates and terminates within a local area.” In the Mat-
ter of Implementation of the Local Competition Provisions in
the Telecommunications Act of 1996, Interconnection
Between Local Exchange Carriers and Commercial Mobile
Radio Service Providers, 11 F.C.C.R. 15499, 16013 ¶ 1034
(1996) [hereinafter, “Local Competition Order”].
Traditionally—that is, before the widespread adoption of
dial-up internet connectivity—reciprocal compensation
arrangements required the originating LEC to pay the termi-
nating LEC for each minute of each call (i.e., each “minute of
use,” or “mou”). See, e.g., ISP Remand Order, 16 F.C.C.R. at
9162 ¶ 19 (discussing “the traditional assumptions of per min-
ute pricing”). The logic behind this system was that, over
time, the number of calls going each way would be essentially
the same, and no LEC would pay more than its fair share of
the costs associated with terminating other LECs’ traffic. See
id. at 9162 ¶ 20, 9183 ¶ 69.
With the advent of dial-up internet access, however, this
arrangement led to a classic example of regulatory arbitrage.4
4
“Regulatory arbitrage” is a pejorative term referring to the practice of
operating a business to take maximum advantage of the prevailing regula-
tory environment (as opposed to delivering the maximum amount of value
to the business’s customers), usually at the expense of consumers, compet-
itors, or taxpayers, as the case may be. See, e.g., Global NAPs, Inc. v.
Verizon New Eng., Inc., 454 F.3d 91, 95 (2d Cir. 2006); ISP Remand
Order, 16 F.C.C.R. 9162 ¶ 21; see generally Rob Frieden, Regulatory
Arbitrage Strategies and & Tactics in Telecommunications, 5 N.C. J.L. &
TECH. 227 (2004).
In this context, the FCC explained, the prevailing intercarrier compen-
sation regime encouraged the “inefficient entry of LECs intent on serving
8372 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
Certain CLECs (including Pac-West) took advantage of the
traditional reciprocal compensation scheme to target as its
customers a species of company that received a high number
of telephone calls but originated very few—namely, ISPs
offering dial-up internet access. See ISP Remand Order, 16
F.C.C.R. at 9153 ¶ 2; 9161 ¶ 21; 9183-84 ¶¶ 69-70. Not only
do ISPs rarely, if ever, make outgoing calls, but calls to ISPs
are much longer than average telephone calls. See id. at 9153
¶ 2; 9162 ¶ 19 & 21; 9183 ¶ 69. Thus, CLECs predominantly
serving ISP customers could collect huge sums in “reciprocal”
compensation without ever having actually to reciprocate.
In response to the widespread practice of doing just that,
the FCC promulgated an order in 1999 addressing the prob-
lem of ISP-bound phone calls. See In the Matter of Implemen-
tation of the Local Competition Provision in the
Telecommunications Act of 1996, Intercarrier Compensation
for ISP-Bound Traffic, 14 F.C.C.R. 3689 (1999) [hereinafter,
“Declaratory Ruling”]. Applying an “end-to-end” analysis,
whereby the geographic location of the telecommunications
transmission’s beginning and end points are compared, the
FCC took the position that phone calls to an ISP do not actu-
ally terminate at the ISP’s computers, but instead continue on
to the servers (typically located across state lines or even in
foreign countries) hosting the particular websites visited by
the ISP’s customers. See id. at 3697 ¶ 12.
For present purposes, the Declaratory Ruling’s end-to-end
ISPs exclusively and not offering viable local telephone competition, as
Congress had intended to facilitate with the [TCA].” ISP Remand Order,
16 F.C.C.R. at 9162 ¶ 21. Indeed, the reciprocal compensation regime per-
mitted LECs to offer ISPs “below cost retail rates subsidized by intercar-
rier compensation,” id. at 9182 ¶ 68, and, in some instances, even made
it “possible for LECs serving ISPs to afford to pay [the ISPs] to use [the
LECs’] services.” Id. at 9162 ¶ 21. In short, the reciprocal compensation
regime for ISP-bound traffic “disconnect[ed] costs from end-user market
decisions. . . . [,] disort[ing] competition by subsidizing one type of ser-
vice at the expense of others.” Id. at 9155 ¶ 5.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8373
analysis had two primary consequences. First, the FCC held
that ISP-bound traffic is jurisdictionally interstate, see id. at
3701-02 ¶ 18; and second, the FCC concluded that because
ISP-bound traffic was not “local,” the statutory reciprocal
compensation obligation did not apply to it. See id. at 3706
¶ 26 n.87. There were no federal regulations or rulings gov-
erning intercarrier compensation for ISP-bound traffic at the
time. The FCC filled the gap by directing that “parties should
be bound by their existing interconnection agreements.” Id. at
3690 ¶ 1. Recognizing that some LECs had not yet entered
into interconnection agreements, the FCC specified that state
public utility commissions could “determine in their arbitra-
tion proceedings at this point whether reciprocal compensa-
tion should be paid for [ISP-bound] traffic.” Id. at 3704-05 ¶ 25.5
The Declaratory Ruling was subsequently challenged in a
petition to the U.S. Circuit Court of Appeals for the District
of Columbia, resulting in a decision vacating it as insuffi-
ciently legally justified and remanding to the FCC for further
proceedings. See Bell Atl. Tel. Cos. v. FCC, 206 F.3d 1, 3
(D.C. Cir. 2000).
On remand, the FCC issued a new ruling reaching the same
conclusion—that ISP-bound traffic is not subject to reciprocal
compensation—but, in light of the D.C. Circuit’s legal ruling,
on new grounds. See ISP Remand Order, 16 F.C.C.R. at 9151.
The FCC held that all local telecommunications traffic was
subject to the § 251(b)(5) reciprocal compensation obligation
unless it fell into one of the three exceptions contained in 47
U.S.C. § 251(g), for “exchange access, information access,
and exchange services.”6 The FCC then ruled that “Congress,
5
As discussed in note 3, supra, only ILECs can be required to arbitrate
an interconnection agreement. The Declaratory Ruling does not directly
consider the possibility that both the originating and terminating LEC
could be CLECs, likely because, so soon after passage of the TCA, ILECs
still dominated the marketplace.
6
“On or after the date of enactment of the [TCA], each local exchange
carrier . . . shall provide exchange access, information access, and
8374 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
through section 251(g), expressly limited the reach of section
251(b)(5) to exclude ISP-bound traffic.” 16 F.C.C.R. at 9154
¶ 3; see also id. at 9168 ¶ 37 (“ISP-bound traffic falls within
at least one of the three enumerated categories in subsection
(g).”).
In addition to setting forth a new legal basis for excluding
ISP-bound traffic from the statutory reciprocal compensation
obligation, the FCC acknowledged the degree to which ISP-
related regulatory arbitrage had distorted the market for tele-
communications services. Accordingly, and as an exercise of
the FCC’s power under 47 U.S.C. § 201(b),7 the ISP Remand
Order set forth “interim” rules for how LECs would be com-
pensated for ISP-bound traffic. These interim rules, central to
this appeal, had four components:
(1) Rate caps. Rather than implementing “a ‘flash cut’ to
a new compensation regime that would upset the legitimate
business expectations of carriers and their customers,” the
FCC imposed declining rate caps, starting at $.0015 per mou
and stabilizing, 36 months after the ISP Remand Order
issued, at $.0007 per mou. 16 F.C.C.R. at 9186-87 ¶¶ 77-78.
The rate caps had several limitations. First, they had “no
effect to the extent that states have ordered LECs to exchange
exchange services for such access to interexchange carriers and informa-
tion service providers in accordance with the same equal access and non-
discriminatory interconnection restrictions and obligations (including
receipt of compensation) that apply to such carrier on the date immedi-
ately preceding the date of enactment of the [TCA] under any court order,
consent decree, or regulation, order, or policy of the [FCC], until such
restrictions and obligations are explicitly superseded by regulations pre-
scribed by the [FCC] after such date of enactment.” 47 U.S.C. § 251(g).
7
“All charges, practices, classifications, and regulations for and in con-
nection with such communication service, shall be just and reasonable,
and any such charge, practice, classification, or regulation that is unjust or
unreasonable is declared to be unlawful . . . . The Commission may pre-
scribe such rules and regulations as may be necessary in the public interest
to carry out the provisions of this chapter.” 47 U.S.C. § 201(b).
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8375
ISP-bound traffic either at rates below the caps we adopt here
or on a bill and keep basis[8] (or otherwise have not required
payment of compensation for this traffic).” Id. at 9188 ¶ 80.
Insofar as particular interconnection agreements provided for
compensation at higher rates, those higher rates were to apply
only until “carriers renegotiate expired or expiring intercon-
nection agreements.” Id. at 9189 ¶ 82; see also id. (stating that
the new rate caps “d[id] not alter existing contractual obliga-
tions, except to the extent that parties are entitled to invoke
contractual change-of-law provisions”).
The FCC “d[id] not preempt any state commission decision
regarding compensation for ISP-bound traffic for the period
prior to the effective date of the interim regime we adopt
here,” but stated that “[b]ecause we now exercise our author-
ity under section 201 to determine the appropriate intercarrier
compensation for ISP-bound traffic . . . state commissions
will no longer have authority to address this issue.” Id. If the
rate caps did not adequately compensate LECs for their
expenses, the ISP Remand Order explained, the LECs should
look to their own customers for additional compensation. Id.
at 9189 ¶ 83. Finally, as it is difficult for some carriers to
identify particular traffic as ISP-bound, the FCC adopted a
rebuttable presumption that traffic between two carriers that
exceeds a 3:1 ratio of terminating traffic to originating traffic
is ISP-bound traffic subject to the new compensation regime.
Id. at 9187-88 ¶ 79.
8
“Bill and keep,” the FCC explained:
refers to an arrangement in which neither of two interconnecting
networks charges the other for terminating traffic that originates
on the other network. Instead, each network recovers from its
own end-users the cost of both originating traffic that it delivers
to the other network and terminating traffic that it receives from
the other network.
ISP Remand Order, 16 F.C.C.R. at 9153 ¶ 2 n.6 (citations omitted); see
also 47 C.F.R. § 51.713(a).
8376 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
(2) Growth cap. Next, the ISP Remand Order imposed a
“growth cap” on total ISP-bound minutes for which a LEC
could receive reciprocal compensation. Id. at 9187 ¶ 78. In
2001, a LEC could receive compensation for ISP-bound min-
utes equal to 110% of what the LEC received (on an annual-
ized basis) for the first quarter of 2001; in 2002, it could
receive 110% of what it received in 2001; and in 2003
onwards, it could receive compensation for the same amount
of ISP-bound traffic that it received in 2002. Id.
(3) New markets rule. Third, the FCC implemented the so-
called “new markets” rule, which provided that “where carri-
ers are not exchanging traffic pursuant to interconnection
agreements prior to adoption of [the ISP Remand Order], . . . .
carriers shall exchange ISP-bound traffic on a bill-and-keep
basis.” Id. at 9189 ¶ 81. Again, in a “bill and keep” compen-
sation regime, each carrier bills its own customers for its costs
and keeps those payments as its compensation, with no com-
pensation exchanged between the originating and terminating
LECs. See id. at 9153 ¶ 2 n.6.
(4) Mirroring rule. Last, the ISP Remand Order imposed a
special rule on ILECs only: the “mirroring” rule. Id. at 9194
¶ 89. The FCC thought that it would be “unwise as a policy
matter, and patently unfair” to permit ILECs to benefit from
the reduced rates the ISP Remand Order instituted for ISP-
bound traffic (for which ILECs were, by and large, net pay-
ors) while simultaneously allowing ILECs to recover the
higher rates applicable to other forms of traffic (for which
ILECs were typically net payees). Id. Accordingly, it man-
dated that “[t]he rate caps for ISP-bound traffic that we adopt
here apply, therefore, only if an incumbent LEC offers to
exchange all traffic subject to section 251(b)(5) at the same
rate.” Id.
As the ISP Remand Order emphasized, this new compensa-
tion regime was to be an interim measure. On the same day
the ISP Remand Order issued, the FCC published a notice of
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8377
proposed rulemaking, setting forth for consideration a whole-
sale revision of the intercarrier compensation regime. See
Developing a Unified Intercarrier Compensation Regime, CC
Docket No. 01-92, Notice of Proposed Rulemaking, 16
F.C.C.R. 9610 (2001).
Like its predecessor, the ISP Remand Order was chal-
lenged via a petition to the D.C. Circuit. Once more, that Cir-
cuit found the FCC’s legal justification for the new rules
lacking, rejecting the FCC’s reliance on § 251(g). See World-
Com, Inc. v. FCC, 288 F.3d 429, 433 (D.C. Cir. 2002). But
in light of the fact that “[m]any of the petitioners themselves
favor bill-and-keep, and there is plainly a non-trivial likeli-
hood that the Commission has authority to elect such a sys-
tem,” the D.C. Circuit refused to vacate the ISP Remand
Order, choosing instead to remand the case to give the FCC
the opportunity to provide an alternative legal justification for
its interim rules. Id. at 434.
Thus, all four components of the ISP Remand Order
remained in effect from the date of its issuance (April 27,
2001) until October 8, 2004, when the FCC granted in part a
petition of a CLEC, Core Communications, to forebear from
enforcing the ISP Remand Order. See Petition of Core Com-
munications, Inc. for Forbearance Under 47 U.S.C. § 160(c)
From Application of the ISP Remand Order, 19 F.C.C.R.
20179 (2004) [hereinafter, “Core Order”]. Specifically, the
FCC granted the petition with regards to the growth caps and
new markets rule.
With regard to the growth caps, the FCC found that they
were no longer in the public interest, particularly in light of
the growth of broadband internet access and the correspond-
ing decline in usage of dial-up internet services. See id. at
20186 ¶ 20; see also id. at 20187-88 ¶ 24 & 20189 ¶ 26. The
FCC explained that its decision to forebear from enforcing the
new markets rule was due to a decrease in its concern over
opportunities for arbitrage, primarily because of the wide-
8378 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
spread replacement of dial-up internet access with faster
broadband services. In light of that development, the FCC
explained, enforcing the new markets rule no longer out-
weighed the public interest in a uniform compensation
regime. See id. at 20186-87 ¶ 21; see also id. at 20187-88 ¶ 24
& 20189 ¶ 26. But the FCC declined to forebear from enforc-
ing the rate caps and mirroring rule, finding that the petitioner
had failed to justify their discontinuation. See id. 20186-88
¶¶ 19-20, 23 & 25.
Core Communications then petitioned the D.C. Circuit,
challenging the partial denial of its petition for forbearance,
and an ILEC petitioned to challenge the FCC’s partial grant
of Core’s petition. The D.C. Circuit upheld the Core Order in
its entirety. In re Core Commc’ns, Inc., 455 F.3d 267, 270
(D.C. Cir. 2006). The rate caps and mirroring rule remain in
effect today, but the FCC has not re-implemented the growth
cap or new markets rule.
Meanwhile, the FCC was dilatory in responding to the D.C.
Circuit’s 2002 remand in WorldCom. Therefore, on July 8,
2008, the D.C. Circuit granted a writ of mandamus, ordering
the FCC to provide a valid legal justification for its interim
ISP compensation regime “in the form of a final, appealable
order” no later than November 5, 2008. In re Core Commc’ns,
Inc., 531 F.3d 849, 861-62 (D.C. Cir. 2008). The FCC
responded with an order entitled In the Matter of Implementa-
tion of the Local Competition Provisions in the Telecommuni-
cations Act of 1996, Developing a Unified Intercarrier
Compensation Regime, Intercarrier Compensation for ISP—
Bound Traffic, 24 F.C.C.R. 6475 (2008) [hereinafter, “ISP
Mandate Order”]. The ISP Mandate Order asserted yet
another legal basis for its interim ISP compensation regime:
the FCC’s general rulemaking authority under 47 U.S.C.
§§ 201(b) and 251(j).9 See id. at 6478 ¶ 6. This time the D.C.
9
See note 7, supra; see also 47 U.S.C. § 251(i) (“Savings provision.
Nothing in this section shall be construed to limit or otherwise affect the
Commission’s authority under section 201.”).
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8379
Circuit accepted the FCC’s legal justification as reasonable,
see Core Commc’ns, Inc. v. FCC, 592 F.3d 139, 143-44 (D.C.
Cir. 2010), and rejected the argument that the interim rules
were arbitrary and capricious, see id. at 145.
The net result of these lengthy set of proceedings, as rele-
vant to this case, is as follows: The “new markets” rule, which
required LECs not exchanging traffic pursuant to an intercon-
nection agreement prior to the issuance of the ISP Remand
Order on April 27, 2001 to compensate each other on a “bill
and keep” basis, remained in effect until October 8, 2004,
when the Core Order was issued. The “mirroring” rule and
the rate caps (including its 3:1 rebuttable presumption regard-
ing ISP-bound traffic) have remained in effect continuously
since the ISP Remand Order was issued. From April 29, 2004
onwards, the intercarrier rate for ISP-bound traffic has been
capped at $.0007/mou.
FACTUAL AND PROCEDURAL HISTORY
Pac-West has been operating in California as a CLEC since
1996 and has had intrastate tariffs on file with the CPUC
since December 1998. These tariffs, which have been
amended several times since first filed, purport to set Pac-
West’s rates for, inter alia, terminating local traffic originat-
ing with another LEC; they apply only in the absence of an
interconnection agreement.
AT&T and Pac-West do not have (and have never had) an
interconnection agreement with each other. Therefore, at all
times relevant to this appeal, they have been exchanging traf-
fic indirectly, with the traffic routed primarily through one of
California’s two ILECs, Verizon and SBC California, with
whom both AT&T and Pac-West have interconnection agree-
ments. The ILECs thus served as conduits for traffic going
between Pac-West and AT&T. Pac-West’s agreements with
the ILECs provided that neither party would bill the other for
this “transit traffic,” and that for all transit traffic Pac-West
8380 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
terminated, Pac-West would bill the LEC originating the traf-
fic. Nonetheless, and for reasons unknown to us, for a few
years, Pac-West billed the ILECs rather than AT&T for transit
traffic AT&T originated.
Starting in July 2001, SBC California refused to pay Pac-
West for this transit traffic, and Verizon did the same begin-
ning in September 2002. Pac-West then began billing AT&T
for the traffic AT&T originated, but AT&T refused to pay.
The parties had no direct discussions about the issue until late
2003, when Pac-West sent AT&T a “formal request for nego-
tiation of an interconnection agreement between our compa-
nies as provided for in Sections 251(a)(1) and specifically
251(b)(5) of the [TCA].” AT&T responded in February 2004
by stating that it “has no interest in entering into such an
agreement”; that, as a CLEC, it had no obligation to negotiate
an interconnection agreement10; and that under the “new mar-
kets” rule, the two carriers should continue to exchange all of
their traffic (including that which was ISP-bound) on a “bill
and keep” basis. The parties had additional communications
but could not reach an accord.
Pac-West filed a complaint with the CPUC on October 20,
2004, alleging that AT&T owed it more than $3.5 million in
reciprocal compensation for the AT&T-originated traffic Pac-
West had terminated since August 2001, billed at Pac-West’s
state tariff rates. For the sole purpose of deciding the legal
issues, Pac-West stipulated that all AT&T-originated traffic it
terminated was ISP-bound; once the legal issues were
resolved, however, Pac-West reserved its right to demonstrate
later that at least some of the traffic was not bound to ISPs.11
Similarly, both parties stipulated to the amount of traffic at
10
Cf. note 3, supra.
11
The record evidence establishes that Pac-West terminated more than
115 times as much traffic from AT&T as AT&T terminated from Pac-
West.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8381
issue and the amount of compensation Pac-West would be
due ($7.115 million) if its state-filed tariff applied.
The CPUC issued its order on June 29, 2006, holding that
the “new markets” rule did not apply where, as here, two
CLECs are exchanging traffic indirectly and without an inter-
connection agreement. See Pac-West Telecomm v. AT&T
Commc’ns of Cal., Dec. No. 06-06-055, 2006 WL 1910202,
at *11 (Cal. Pub. Util. June 29, 2006). The CPUC ruled that
the “new markets” rule cannot be applied absent a “mirror-
ing” offer, because to do so would permit AT&T to receive
compensation in situations in which it is a net payee, but
avoid paying anything when, as in the AT&T—Pac-West
relationship, AT&T is a net payor. Because the “mirroring”
rule only applies to ILECs, which AT&T is not (in Califor-
nia), the CPUC held that AT&T could not benefit from the
“new markets” rule. See id. at *10. Relying on a 2005 FCC
order, T-Mobile,12 the CPUC held that in the absence of gov-
erning federal law, Pac-West’s state-filed tariff was the appro-
priate place to look for the applicable rate, and awarded Pac-
West $7.115 million in compensation, but no interest. See id.
at *13-17.
Thereafter, AT&T sought rehearing by the CPUC, arguing
for the first time that the CPUC lacked jurisdiction to hear a
dispute regarding interstate traffic outside of an arbitration
proceeding pursuant to 47 U.S.C. § 252. See Pacific Bell v.
Pac-West Telecomm, Inc., 325 F.3d 1114, 1126-27 (9th Cir.
2003) (discussing the state public utilities commissions’ pow-
ers under § 252 “to arbitrat[e], approv[e], and enforc[e] inter-
connection agreements”). The CPUC denied AT&T’s
rehearing request. See Pac-West Telecomm v. AT&T
Commc’ns of Cal., Dec. No. 07-03-016, 2007 WL 725667, at
*1 (Cal. Pub. Util. Mar. 1, 2007).
12
In re Developing a Unified Intercarrier Compensation Regime; T-
Mobile Petition for Declaratory Ruling Regarding Incumbent LEC Wire-
less Termination Tariffs, Declaratory Ruling and Report and Order, 20
F.C.C.R. 4855 (2005) [“T-Mobile”].
8382 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
In the meanwhile, AT&T filed this suit in the U.S. District
Court for the Northern District of California,13 requesting: (1)
a declaration that the CPUC’s order was preempted by the
TCA; (2) an order enjoining the CPUC from enforcing it; and
(3) an order requiring Pac-West to return the approximately
$10 million AT&T had paid it in accordance with the CPUC’s
decision.14 Following cross-motions for summary judgment,
the district court granted summary judgment to Pac-West and
the CPUC, upholding the CPUC’s decision in all respects. See
AT&T Commc’ns v. Pac-West Telecomm, No. C 06-07271,
2008 WL 3539669, at *1 (N.D. Cal. Aug. 12, 2008). With
regard to the applicability of ISP Remand Order’s ISP com-
pensation regime to “the manner in which two CLECs may be
compensated for the exchange ISP-bound traffic,” the district
court held that “this issue was not before the FCC when it
crafted the ISP Remand Order,” and so the ISP Remand
Order did not preempt the CPUC’s decision. Id. at *3 (cita-
tion omitted). AT&T timely appealed.
After oral argument on this appeal, we invited the FCC to
13
“Under 28 U.S.C. § 1331, a district court has jurisdiction to review a
decision by the CPUC to ensure compliance with federal law.” Global
NAPs Cal., 624 F.3d at 1231 n.3 (citing Verizon Md. Inc. v. Pub. Serv.
Comm’n of Md., 535 U.S. 635, 642 (2002)); see also Pacific Bell, 325
F.3d at 1124 (“In Verizon Maryland, the Supreme Court held that 28
U.S.C. § 1331 provides a basis for jurisdiction over an ILEC’s claim that
a state regulatory commission’s order requiring reciprocal compensation
for ISP-bound calls is preempted by federal law.” (citation omitted)).
Because we have jurisdiction, we do not consider whether there is a cause
of action on which AT&T is entitled to go forward, as that question is not
jurisdictional and has not been raised. See Western Radio Servs. Co., 530
F.3d at 1193.
14
Since April 13, 2007, and pursuant to Rule 67(a) of the Federal Rules
of Civil Procedure, AT&T has deposited the monies it would be obliged
to pay Pac-West under the CPUC’s decision with the district court. Fol-
lowing its grant of summary judgment to Pac-West and the CPUC, the dis-
trict court stayed the execution of its judgment, and AT&T has continued
to deposit the sums purportedly owed Pac-West during the pendency of
this appeal.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8383
submit its views regarding the scope of the ISP Remand
Order. The FCC accepted the invitation and submitted an
amicus brief on February 11, 2011, to which the parties
responded several weeks later.
DISCUSSION
We review the district court’s grant of summary judgment
de novo. See Pacific Bell, 325 F.3d at 1123 n.8. In so doing,
“we review de novo whether the CPUC’s orders are consistent
with the [TCA] and the implementing regulations, and we
review all other issues under an arbitrary and capricious stan-
dard.” Id.
[1] We begin with a few well-settled principles. First, there
is no question that, for jurisdictional purposes, ISP-bound
traffic is interstate in nature. See Pacific Bell, 325 F.3d at
1126. ISP-bound traffic is therefore subject to the FCC’s
congressionally-delegated jurisdiction. See Core Commc’ns,
592 F.3d at 143-44. Within this ambit, the FCC’s actions can
preempt state regulation to the contrary. See Barrientos v.
1801-1825 Morton LLC, 583 F.3d 1197, 1208 (9th Cir. 2009)
(citing City of N.Y. v. FCC, 486 U.S. 57, 63-64 (1988)); see
also Wyeth v. Levine, 129 S. Ct. 1187, 1201 (2009).
But, as the district court noted, “[a] matter may be subject
to FCC jurisdiction without the FCC having exercised that
jurisdiction and preempted state regulation.” 2008 WL
3539669, at *7 (quoting Global NAPs, Inc. v. Verizon New
Eng., Inc., 444 F.3d 59, 71 (1st Cir. 2006) (hereinafter
“Global NAPs I”)). Determining whether the FCC has chosen
to displace state law turns on the scope of its intent in exercis-
ing its jurisdiction. See Barrientos, 583 F.3d at 1208.
In issuing the ISP Remand Order, the FCC clearly under-
stood that it was displacing at least some state laws. See ISP
Remand Order, 16 F.C.C.R. at 9189 ¶ 82 (“Because we now
exercise our authority under section 201 to determine the
8384 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
appropriate intercarrier compensation for ISP-bound traffic,
however, state commissions will no longer have authority to
address this issue.”). Nonetheless, it is also well settled that,
with the ISP Remand Order and related pronouncements, the
FCC has not exercised its jurisdiction over all manifestations
of ISP-bound traffic. For example, this Court held in Peevey
that the CPUC correctly interpreted the ISP Remand Order as
not applying to interexchange (that is, non-local) ISP-bound
traffic. See 462 F.3d at 1159. Other courts have reached the
same conclusion. See Global NAPs I, 444 F.3d at 72; Global
NAPs, Inc. v. Verizon New Eng., Inc., 603 F.3d 71, 81-82 (1st
Cir. 2010) (“Global NAPs III”) (same, even after ISP Man-
date Order); cf. Global NAPs, Inc. v. Verizon New Eng., Inc.,
454 F.3d 91, 98 (2d Cir. 2006) (“Global Naps II”) (holding
that the FCC did not intend “to preempt the state commis-
sions’ authority to define local calling areas for the purposes
of intercarrier compensation”).
[2] In sum, it is well settled that the ISP Remand Order has
preemptive effect with regard to the ISP-related issues it
encompasses. The operative question in this case, then, is
whether the ISP Remand Order evidences the FCC’s intent to
exercise its jurisdiction over local ISP-bound traffic
exchanged between two CLECs.
I.
[3] We begin with the FCC’s language choice in that order.
To facilitate our inquiry, we reproduce the paragraph of the
ISP Remand Order setting forth the “new markets” rule in its
entirety:
[A] different rule applies in the case where carriers
are not exchanging traffic pursuant to interconnec-
tion agreements prior to adoption of this Order
(where, for example, a new carrier enters the market
or an existing carrier expands into a market it previ-
ously had not served). In such a case, as of the effec-
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8385
tive date of this Order, carriers shall exchange ISP-
bound traffic on a bill-and-keep basis during this
interim period. We adopt this rule for several rea-
sons. First, our goal here is to address and curtail a
pressing problem that has created opportunities for
regulatory arbitrage and distorted the operation of
competitive markets. In so doing, we seek to confine
these market problems to the maximum extent while
seeking an appropriate long-term resolution in the
proceeding initiated by the companion [Notice of
Proposed Rulemaking]. Allowing carriers in the
interim to expand into new markets using the very
intercarrier compensation mechanisms that have led
to the existing problems would exacerbate the mar-
ket problems we seek to ameliorate. For this reason,
we believe that a standstill on any expansion of the
old compensation regime into new markets is the
more appropriate interim answer. Second, unlike
those carriers that are presently serving ISP custom-
ers under existing interconnection agreements, carri-
ers entering new markets to serve ISPs have not
acted in reliance on reciprocal compensation reve-
nues and thus have no need of a transition during
which to make adjustments to their prior business
plans.
ISP Remand Order, 16 F.C.C.R. at 9188-89 ¶ 81 (emphases
added, footnote omitted). Use of the broad terms “carrier” and
“intercarrier compensation,” the former of which is a
statutorily-defined term encompassing both CLECs and
ILECs,15 suggests an intent to apply the “new markets” rule
to all intercarrier relationships, not solely to ILEC-CLEC
arrangements.
[4] Moreover, the FCC at other junctures in the ISP
Remand Order referred specifically to ILECs and CLECs,
15
See note 2, supra.
8386 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
further indicating that the terms “carrier” and “LECs,”16 used
throughout the order, applied generally to all “carriers,”
except as otherwise stated. For example, in the paragraph
describing the “mirroring” rule—which, everyone agrees,
applies only to ILECs—the ISP Remand Order referred spe-
cifically to ILECs seven times; not once did it use the generic
term “LEC” or refer to CLECs. See ISP Remand Order, 16
F.C.C.R. at 9193 ¶ 89. Ordinarily, we presume that the use of
“different words in connection with the same subject” signi-
fies that the drafter intended to convey different meanings by
its disparate word choice.17 Arizona Health Care Cost Con-
tainment Sys. v. McClellan, 508 F.3d 1243, 1250 (9th Cir.
2007); see also Warre v. Comm’r of the SSA, 439 F.3d 1001,
1005 (9th Cir. 2006).
Nonetheless, the CPUC and the district court held that other
portions of the ISP Remand Order indicate an intent to apply
the entire interim compensation regime only to ILEC-CLEC
combinations. For example, just after describing the “new
16
“Local exchange carrier,” like “carrier,” is a statutorily-defined term.
See 47 U.S.C. § 153(32) (“The term ‘local exchange carrier’ means any
person that is engaged in the provision of telephone exchange service or
exchange access.”).
17
This canon of interpretation is most commonly associated with stat-
utes and regulations. See McClellan, 508 F.3d at 1250; Boeing Co. v.
United States, 258 F.3d 958, 967 (9th Cir. 2001) (“[T]enets of statutory
construction apply with equal force to the interpretation of regulations.”
(citation omitted)). The ISP Remand Order is neither a statute nor a regu-
lation. But issues of form aside, just as in interpreting a judicial opinion,
see Michigan v. Mosley, 423 U.S. 96, 109-10 (1975) (White, J., concur-
ring), or a contract, see Montana v. Wyoming, ___ S. Ct. ___, 2011 WL
1631038, at *14 (2011) (Scalia, J., dissenting); Litton Fin. Printing Div.
v. NLRB, 501 U.S. 190, 205 (1991); Panaview Door & Window Co. v.
Reynolds Metals Co., 255 F.2d 920, 925 (9th Cir. 1958), applying the
canon in this context simply makes sense. The precision with which the
FCC used the terms “ILECs,” “CLECs,” and “carriers” throughout the ISP
Remand Order demonstrates that it “act[ed] intentionally and purposely”
when it used the disparate terms. See Atl. Cleaners & Dyers, Inc. v. United
States, 286 U.S. 427, 433 (1932).
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8387
markets” rule, the ISP Remand Order stated that “[t]he
interim compensation regime we establish here applies as car-
riers renegotiate expired or expiring interconnection agree-
ments. It does not alter existing contractual obligations . . . .”
ISP Remand Order, 16 F.C.C.R. at 9189 ¶ 82. The district
court reasoned that because “only ILECs have a duty to nego-
tiate interconnection agreements, . . . . [t]hat fact suggests that
the FCC was focused on the relationship between ILECs and
CLECs when it crafted the ISP Remand Order.” 2008 WL
3539669, at *9.
The CPUC and the district court found further evidence
that the FCC was concerned only with CLECs taking advan-
tage of ILECs in the description of the “mirroring” rule. In
setting forth that rule, the ISP Remand Order explained:
It would be unwise as a policy matter, and patently
unfair, to allow incumbent LECs to benefit from
reduced intercarrier compensation rates for ISP-
bound traffic, with respect to which they are net pay-
ors, while permitting them to exchange traffic at
state reciprocal compensation rates, which are much
higher than the caps we adopt here, when the traffic
imbalance is reversed. Because we are concerned
about the superior bargaining power of incumbent
LECs, we will not allow them to “pick and choose”
intercarrier compensation regimes, depending on the
nature of the traffic exchanged with another carrier.
The rate caps for ISP-bound traffic that we adopt
here apply, therefore, only if an incumbent LEC
offers to exchange all traffic subject to section
251(b)(5) at the same rate. Thus, if the applicable
rate cap is $ .0010/mou, the ILEC must offer to
exchange section 251(b)(5) traffic at that same rate.
Similarly, if an ILEC wishes to continue to exchange
ISP-bound traffic on a bill and keep basis in a state
that has ordered bill and keep, it must offer to
exchange all section 251(b)(5) traffic on a bill and
8388 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
keep basis. For those incumbent LECs that choose
not to offer to exchange section 251(b)(5) traffic
subject to the same rate caps we adopt for ISP-bound
traffic, we order them to exchange ISP-bound traffic
at the state-approved or state-arbitrated reciprocal
compensation rates reflected in their contracts. This
“mirroring” rule ensures that incumbent LECs will
pay the same rates for ISP-bound traffic that they
receive for section 251(b)(5) traffic.
ISP Remand Order, 16 F.C.C.R. at 9193 ¶ 89 (footnotes omit-
ted). As previously mentioned, the “mirroring” rule reflects
the FCC’s concern for the possibility of a different kind of
arbitrage created by the new rules: that ILECs, responsible for
terminating the majority of non-ISP-bound local traffic,
would be able to avoid paying anything to CLECs for ISP-
bound traffic (or paying the capped rate for ISP-bound traffic
if the ILEC and CLEC had an agreement) while still receiving
uncapped compensation for all other types of traffic.
The district court reasoned that “[i]f the FCC was con-
cerned about the possibility of regulatory arbitrage between
two CLECs, it is reasonable to assume that it would have
required the mirroring rule to apply to all LECs.” 2008 WL
3539669, at *10. The CPUC reasoned similarly in its decision
—that if the “new markets” rule could be applied in the
absence of a mirroring offer, then CLECs could exploit this
new opportunity for arbitrage by “ ‘pick[ing] and choos[ing]’
intercarrier compensation regimes” depending on the type of
traffic being exchanged, the very concern that led the FCC to
adopt the “mirroring” rule and apply it to ILECs. See 2006
WL 1910202, at *11. This potential loophole, created only if
the “new markets” rule applies absent a mirroring offer, led
both the CPUC and the district court to hold that the FCC
must have meant to apply the entire interim compensation
regime for ISP-bound traffic solely to ILEC-CLEC relation-
ships.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8389
[5] Although the ISP Remand Order could be clearer, we
are convinced that the CPUC and the district court erred in
holding that it does not apply to ISP-bound traffic exchanged
between two CLECs. At base, the rules implemented by the
ISP Remand Order addressed a particular problem: the oppor-
tunity for regulatory arbitrage created by application of the
prevailing reciprocal compensation scheme to local ISP-
bound traffic. As discussed, ISP-bound traffic is uniquely uni-
directional, and for that reason, incompatible with a compen-
sation regime that assumes relative traffic parity. The defining
feature of the problem the FCC sought to remedy is thus the
type of traffic being exchanged—ISP-bound traffic. It is true
that, at the time the ISP Remand Order was issued, the arbi-
trage problem was manifesting in a particular LEC-to-LEC
relationship: new CLECs, free to pick and choose particular
types of customers that would generate lots of unidirectional
traffic (ISPs), were taking advantage of the then-prevailing
reciprocal compensation regime at the expense of ILECs,
who, prior to the passage of the Act and the entry of CLECs,
served all customers within a particular area, and therefore
maintained those customers unless and until they were lured
away by CLECs. See ISP Remand Order, 16 F.C.C.R. at 9162
¶ 21. But the dominance of that CLEC-ILEC arrangement
was, as this case demonstrates, both transient and in no way
essential to the market distortions the FCC was trying to rem-
edy.
[6] Both the 1999 Declaratory Ruling and the 2001 ISP
Remand Order reflect that the FCC was well aware that the
market distortion problem was not limited to ILEC-CLEC
arrangements, and so addressed the problem of ISP-bound
traffic generally, regardless of the precise type of LEC-to-
LEC relationship in which it was manifested. The Declara-
tory Ruling, which first held that ISP-bound traffic was juris-
dictionally interstate, but chose not to impose a federal rule
regarding how that traffic ought to be compensated, described
the question that had arisen as “whether a local exchange car-
rier (LEC) is entitled to receive reciprocal compensation for
8390 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
traffic that it delivers to an information service provider, par-
ticularly an Internet service provider (ISP).” 14 F.C.C.R. at
3689 ¶ 1. The FCC noted: “This question sometimes has been
posed more narrowly, i.e., whether an incumbent LEC must
pay reciprocal compensation to a competitive LEC (CLEC)
that delivers incumbent LEC-originated traffic to ISPs,” but
stated that “[b]ecause the pertinent provision of the 1996
[TCA] pertains to all LECs, we examine this issue in the
broader context.” Id. at 3689-90 n.1 (citing 47 U.S.C.
§ 251(b)(5)).
[7] Similarly, in the ISP Remand Order, the FCC presented
the question it was answering as “whether reciprocal compen-
sation obligations apply to the delivery of calls from one
LEC’s end-user customer to an ISP in the same local calling
area that is served by a competing LEC.” 16 F.C.C.R. at 9159
¶ 13. As with “carrier,” “local exchange carrier” is a
statutorily-defined term that encompasses both CLECs and
ILECs. See note 16, supra. In concluding that ISP-bound traf-
fic was not subject to § 251(b)(5)’s reciprocal compensation
requirement, moreover, the ISP Remand Order repeatedly
indicates that it is the nature of the traffic, not the particular
intercarrier relationship, that prompted the FCC to institute
the interim rules.18 See, e.g., 16 F.C.C.R. at 9162 ¶ 19 (“The
Commission has struggled with how to treat Internet traffic
for regulatory purposes.”); id. at 9162 ¶ 20 (“The issue of
intercarrier compensation for Internet-bound traffic with
which we are presently wrestling is a manifestation of this
growing challenge.”); id. at 9163 ¶ 23 (“ISP-bound traffic is
not subject to the reciprocal compensation requirement in sec-
tion 251(b).”); id. at 9165 ¶ 30 (“Congress intended to exempt
18
As previously indicated, the D.C. Circuit in WorldCom, 288 F.3d at
434, rejected much of the ISP Remand Order’s legal justification for the
FCC’s interim compensation regime, which was based on 47 U.S.C.
§ 251(g), although it did not vacate the interim rules. Nonetheless, the
FCC’s reasoning remains essential to understanding the scope of the ISP
Remand Order, which was not changed by WorldCom.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8391
certain enumerated categories of service from section
251(b)(5) when the service was provided to interexchange
carriers or information service providers. The exemption
focuses not only on the nature of the service, but on to whom
the service is provided. “); id. at 9167 ¶ 34 (“Congress
intended to exclude the traffic listed in subsection (g) from the
reciprocal compensation requirements of subsection (b)(5).”);
id. ¶ 35 (“[W]e conclude that ISP-bound traffic is not subject
to the reciprocal compensation provisions of section
251(b)(5).”); id. at 9168 ¶ 37 (“Congress excluded all such
[ISP-bound] access traffic from the purview of section
251(b)(5).”); id. at 9172 ¶ 44 (“We conclude that this defini-
tion of ‘information access’ [in § 251(g)] was meant to
include all access traffic that was routed by a LEC ‘to or
from’ providers of information services, of which ISPs are a
subset.”); id. at 9175 ¶ 52 (“Having found that ISP-bound
traffic is excluded from section 251(b)(5) by section 251(g),
we find that the Commission has the authority pursuant to
section 201 to establish rules governing intercarrier compen-
sation for such traffic.”); see also ISP Mandate Order, 24
F.C.C.R. at 6476 ¶ 1 (“[W]e conclude that we have authority
to impose ISP-bound traffic rules.”).
[8] Although not presented with the precise issue before
us, other courts have similarly described the ISP Remand
Order as applying to ISP-bound traffic exchanged between
two LECs, not distinguishing traffic originating with ILECs
or terminating with CLECs. See Peevey, 462 F.3d at 1147
(“In the ISP Remand Order, the FCC held that § 251(g)
carves out a category of telecommunications traffic not sub-
ject to the reciprocal compensation requirement of
§ 251(b)(5), and that ISP-bound traffic is within this category.
. . . This was done to eliminate the regulatory arbitrage oppor-
tunity available to CLECs.” (citations omitted)); Core
Commc’ns, 592 F.3d at 141 (“At least as early as 1999 the
[FCC] was concerned that the regulatory procedures under
which the sending LEC compensated the recipient LEC were
leading to the imposition of excessive rates, and that these
8392 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
rates in turn were distorting the markets for internet and tele-
phone services.”); In re Core Commc’ns, 455 F.3d at 273
(“The Commission adopted ‘rate caps,’ which established a
gradually declining maximum rate that a carrier (typically, a
CLEC) could charge another carrier (typically, an ILEC) for
delivering a call to an ISP. Although the rate caps limited how
much carriers could recover from other carriers, the carriers
remained free to recover ‘[a]ny additional costs . . . from end-
users,’ that is, from their own customers.” (quoting the ISP
Remand Order, 16 F.C.C.R. at 9156 ¶ 4 (emphases added,
some citations omitted, alterations in original)); Global NAPs
II, 454 F.3d at 99 (“The ultimate conclusion of the [ISP]
Remand Order was that ISP-bound traffic within a single call-
ing area is not subject to reciprocal compensation.”); World-
Com, 288 F.3d at 430 (explaining that, in the ISP Remand
Order, the FCC “held that under § 251(g) of the [TCA] it was
authorized to ‘carve out’ from § 251(b)(5) calls made to
[ISPs] located within the caller’s local calling area”).
In sum, in adopting an interim compensation regime for
ISP-bound traffic, the FCC was primarily concerned with
arbitrage opportunities created by traffic of a particular
nature; we therefore measure the scope of the FCC’s intent
with regard to the reach of the ISP Remand Order on the same
basis. It is true that the FCC was also concerned with how its
new rules would play out in a regulatory environment in
which ILECs dominated the marketplace. For that reason, the
FCC adopted the “mirroring” rule, ensuring that the ILECs
would not unduly benefit from their dominant market posi-
tion. But this concern for new arbitrage opportunities that
ILECs were uniquely positioned to exploit was a corollary to
the FCC’s overriding concern for the arbitrage opportunities
created by ISP traffic generally. And as this case demon-
strates, arbitrage related to ISP-bound traffic in no way
depends on the participation of an ILEC. The ISP Remand
Order reflects this reality, imposing its rules on all LECs,
with the exception of the “mirroring” rule, which the FCC
singled out as applicable only to ILECs.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8393
The only verbiage in the various FCC orders concerning
ISP-bound traffic that supports Appellees’ view is one para-
graph of the 2004 Core Order discussing the “new markets”
rule, which states:
[T]he Commission concluded that different interim
intercarrier compensation rules should apply if two
carriers were not exchanging traffic pursuant to an
interconnection agreement prior to the adoption of
the ISP Remand Order. In this situation, if an incum-
bent LEC has opted into the federal rate caps for
ISP-bound traffic, the two carriers must exchange
this traffic on a bill-and-keep basis during the
interim period (the “new markets” rule). This rule
applies, for example, when a new carrier enters a
market or an existing carrier expands into a market
it previously had not served. The Commission imple-
mented this rule in order to confine the opportunities
for regulatory arbitrage to the maximum extent while
seeking an appropriate long-term resolution for the
problems associated with the existing intercarrier
compensation regime.
Core Order, 19 F.C.C.R. at 20182 ¶ 9 (emphasis added). The
district court reasoned that this paragraph indicates that the
FCC “did not intend the New Markets Rule to apply broadly
to any carriers that were not exchanging traffic pursuant to an
interconnection agreement. Rather, it intended the New Mar-
kets Rule to apply when a CLEC requested interconnection
from an ILEC, after the effective date of the ISP Remand
Order.” 2008 WL 3539669, at *9.
The district court misread ¶ 9 of the Core Order by con-
struing it without attending to its context. Coming, as it does,
just after a discussion of the “mirroring” rule, which applies
only to ILECs, see 19 F.C.C.R. at 20181-82 ¶ 8, it is almost
surely not intended as an exhaustive treatment of the “new
markets” rule. Instead, the paragraph explains how the rule
8394 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
would apply to an ILEC that has “opted into the federal rate
caps for ISP-bound traffic.” Id. at 20182 ¶ 9. Given the FCC’s
concern for ILEC arbitrage opportunities created by the new
rules, ¶ 9 is best understood as a reiteration that an ILEC can-
not simultaneously benefit from the “new markets” rule when
a new CLEC enters a market, and ignore the rate caps in its
dealings with other CLECs with whom the ILEC had previ-
ously been exchanging traffic. Cf. id. at 20186 ¶ 19 (“Nor
does [Petitioner] address the Commission’s concern that,
without the mirroring rule, incumbent LECs would too easily
be able to take advantage of the discrepancy between reduced
rates for ISP-bound traffic and higher rates for section
251(b)(5) voice traffic. The mirroring rule was adopted to pre-
clude incumbent LECs from paying reduced intercarrier com-
pensation rates for ISP-bound traffic, which they send to
competitive LECs, while collecting higher state reciprocal
compensation rates for traffic that they receive.”).
Other parts of the Core Order indicate, once more, that the
FCC’s primary focus was on the type of traffic creating arbi-
trage opportunities, without distinguishing (beyond the “mir-
roring” rule) between types of carriers. See, e.g., id. at 20181
¶ 5 (explaining that in the ISP Remand Order, “[t]he Commis-
sion found that the availability of reciprocal compensation for
this type of traffic [ISP-bound] undermined the operation of
competitive markets because competitive LECs were able to
recover a disproportionate share of their costs from other car-
riers, thereby distorting the price signals sent to their ISP cus-
tomers.”) (emphases added). Given this context and the
remainder of the Core Order, as well as the general references
to “carriers” and “LECs” throughout the other pertinent
orders, ¶ 9 of the Core Order simply cannot bear the weight
the CPUC and the district court placed upon it.
The district court also pointed to the FCC’s 2001 Notice of
Proposed Rulemaking (NPRM), issued the same day as the
ISP Remand Order, as evidence that the FCC did not intend
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8395
to apply the interim compensation regime to CLEC-CLEC
relationships. The district court explained:
[I]n the NPRM, the FCC stated that it did not “expect
to extend compensation rules to other interconnec-
tion arrangements that are not currently subject to
rate regulation and that do not exhibit symptoms of
market failure.” NPRM, 16 F.C.C.R. at 9612 ¶ 2
(emphasis added). The FCC explained this statement
by noting that, “we do not contemplate a need to
adopt new rules governing CLEC-to-CLEC . . .
arrangements.” Id. at 9675 n.2. From this statement,
one can infer that FCC did not believe that CLEC-to-
CLEC relationships exhibited the types of market
failure underlying its concerns about regulatory arbi-
trage. This provides further support for the Court’s
conclusion that the FCC was not focused on com-
pensation arrangements between two CLECs when it
crafted the ISP Remand Order.
2008 WL 3539669, at *10.
This reasoning, however, can easily be flipped over. It is
equally plausible—likely more so—to interpret the NPRM’s
statement as an acknowledgment that the FCC did not foresee
the situation presented here: a CLEC taking advantage of the
secondary arbitrage opportunity created by the interim rules
themselves—that is, benefitting from the “new markets” rule
while not being required to make a “mirroring” offer. Of
course, CLEC-to-CLEC relationships “d[id] not exhibit symp-
toms of market failure” at the time; the market failure pres-
ented in this case is only possible because of the interim
compensation rules themselves, which were issued the same
day as the NPRM. We therefore take the NPRM footnote at
face value: the FCC “d[id] not contemplate a need to adopt
new rules governing CLEC-to-CLEC . . . arrangements.” 16
8396 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
F.C.C.R. at 9675 n.2 (emphasis added)—that is, rules other
than those already adopted in the ISP Remand Order.19
[9] In conclusion, the district court and the CPUC erred in
holding that the ISP Remand Order’s interim compensation
regime did not apply to the ISP-bound traffic exchanged
between AT&T and Pac-West. Because we hold that the ISP
Remand Order does apply to the ISP-bound traffic at issue
here, the CPUC’s decision to rely on Pac-West’s state-filed
tariffs to set the rate in question is preempted. See Barrientos,
583 F.3d at 1208.
II.
Strongly bolstering our conclusion are the views of the
FCC itself. Following oral argument, the FCC was invited to
submit a brief as amicus curiae addressing “whether the
interim compensation regime established by [the ISP Remand
Order] . . . govern[s] the compensation due one [CLEC] for
the termination of presumptively ISP-bound traffic originating
with another CLEC, where the traffic is indirectly exchanged
and the two CLECs do not have an interconnection agree-
ment.” The FCC accepted the invitation and answered in the
affirmative, explaining that “the regulatory language, the
FCC’s description of the scope of its compensation regime,
and the regulatory purpose demonstrate that the new markets
rule (until forborne from on October 18, 2004) and the rate
caps . . . apply to CLEC-to-CLEC ISP-bound traffic.” Brief
for the FCC as Amicus Curiae at 15.
With regard to the language of the ISP Remand Order, the
FCC points out, as we have, that the order “made it clear that
[the] compensation regime applies ‘when carriers collaborate
to deliver calls to ISPs.’ ” Id. at 18 (quoting ISP Remand
Order, 16 F.C.C.R. at 9181 ¶ 66 (emphasis in original)).
19
A “new rule” that perhaps the FCC should have considered, but did
not, is applying a “mirroring” offer requirement to CLECs.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8397
“[H]ad it intended its compensation rules to apply only to
ILEC-to-CLEC ISP-bound traffic,” the FCC explains, the ISP
Remand Order “would not have used repeatedly the inclusive
terms ‘carriers’ and ‘LECs.’ ” Id. at 19.
The FCC also explains, as we also have done, that the “op-
portunities for regulatory arbitrage . . . occur under a recipro-
cal compensation system regardless of the identity of the
originating carrier as an ILEC or a CLEC.” Id. at 21. “Inter-
preting the compensation rules to apply only to ILEC-to-
CLEC ISP-bound traffic,” moreover,
would create a loophole in the FCC’s regulatory
regime for CLEC-originated ISP-bound calls. As to
that traffic, it would thwart full achievement of the
regulatory purpose by leaving unabated the very reg-
ulatory arbitrage opportunities and economic distor-
tions that the FCC sought to alleviate by the
adoption of its intercarrier compensation rules.
Id.
Although we do not defer to “an agency’s conclusion that
state law is pre-empted,” Wyeth, 129 S. Ct. at 1201, we do
defer to the FCC’s interpretation of the compensation regime
that it created, barring some “reason to suspect that the inter-
pretation does not reflect the agency’s fair and considered
judgment on the matter in question.” Chase Bank USA, N.A.
v. McCoy, 131 S. Ct. 871, 881 (2011) (quoting Auer v. Rob-
bins, 519 U.S. 452, 462 (1997)); see also Talk Am., Inc. v.
Mich. Bell Tel. Co., ___ S. Ct. ___, 2011 WL 2224429, at *6
(2011) (“In the absence of any unambiguous statute or regula-
tion, we turn to the FCC’s interpretation of its regulations in
its amicus brief.”). No such reason exists here, particularly
given that the FCC’s reasoning mirrors our own and that the
FCC is best positioned to describe the reach of its own orders.
8398 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
CONCLUSION
[10] In conclusion, we hold that the ISP Remand Order
governs the traffic exchanged between AT&T and Pac-West
and therefore reverse the district court’s grant of summary
judgment to the CPUC and Pac-West.
REVERSED.20
20
In light of our holding, we do not reach AT&T’s alternative argument
that the CPUC lacked jurisdiction to adjudicate the dispute in this case.
This case is not an appeal of the CPUC’s order. It is, rather, an affirmative
challenge to it brought under the Supremacy Clause and 28 U.S.C. § 1331.
See note 13, supra. Once we determine that the CPUC’s order is invalid—
as we have done—the question whether it could have issued a different
order is not before us.
AT&T COMMUNICATIONS v. PAC-WEST TELECOMM 8399
APPENDIX: GLOSSARY OF TERMS
Bill-and-keep: An intercarrier compensation arrangement
whereby a carrier “bills” its own customers
and “keeps” the revenue—i.e., where nei-
ther interconnecting carrier charges the
other for the termination of telecommuni-
cations traffic that originates on the other
carrier’s network. See 47 C.F.R.
§ 51.713(a).
carrier: With some exceptions not relevant to this
case, “any person engaged as a common
carrier for hire, in interstate or foreign
communication by wire or radio or in inter-
state or foreign radio transmission of ener-
gy.” 47 U.S.C. § 153(11).
CLEC: Competitive local exchange carrier; a LEC
that entered a particular market following
passage of the TCA.
CPUC: California Public Utilities Commission.
FCC: Federal Communications Commission.
ISP: Internet service provider; a company that
provides internet access to individuals;
most relevant to this case are those that
provide dial-up internet access.
LEC: Local exchange carrier; generally responsi-
ble for “local” (non-toll) telecommunica-
tions traffic within a telephone exchange;
can be one of two types: an ILEC or a
CLEC. See 47 U.S.C. § 153(32) (defining
“[l]ocal exchange carrier”); id. § 153(54)
(defining “[t]elephone exchange service”).
8400 AT&T COMMUNICATIONS v. PAC-WEST TELECOMM
ILEC: Incumbent local exchange carrier; in gen-
eral, refers to those LECs that enjoyed
monopoly status prior to the TCA. See 47
U.S.C. § 251(h).
mou: Minutes of use; how telecommunications
traffic is counted for billing purposes.
reciprocal
compensation: An arrangement between two carriers
whereby “each of the two carriers receives
compensation from the other carrier for the
transport and termination on each carrier’s
network facilities of telecommunications
traffic that originates on the network facili-
ties of the other carrier.” 47 C.F.R.
§ 51.701(e).
TCA: Telecommunications Act of 1996, Pub. L.
No. 104-104, 110 Stat. 56 (codified as
amended in scattered sections of 47
U.S.C.).