Vonage Holdings Corp. v. Nebraska Public Service Commis

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 08-1764
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Vonage Holdings Corp.; Vonage *
Network, Inc., *
*
Plaintiffs - Appellees, *
*
v. *
*
Nebraska Public Service Commission; *
Rod Johnson, in his official capacity as *
Commissioner of the Nebraska Public *
Service Commission; Frank E. *
Landis, Jr., in his official capacity as * Appeal from the United States
Commissioner of the Nebraska Public * District Court for the District of
Service Commission; Anne C. Boyle, * Nebraska.
in her official capacity as Commissioner *
of the Nebraska Public Service *
Commission; Tim Schram, in his *
official capacity as Commissioner of the *
Nebraska Public Service Commission; *
Gerald L. Vap, in his official capacity *
as Commissioner of the Nebraska *
Public Service Commission; Jeffrey L. *
Pursley, in his official capacity as *
Director of the Nebraska *
Telecommunications Infrastructure and *
Public Safety Department of the Public *
Service Commission, *
*
Defendants - Appellants. *
__________________________________

National Association of Regulatory *
Utility Commissioners; Federal *
Communications Commission; United *
States of America, *
*
Amici on behalf of *
Appellant, *
*
Computer & Communications Industry *
Association; Telecommunications *
Industry Association; Information *
Technology Industry Council; *
Information Technology Association of *
America; Fiber - To - The - Home *
Council; Verizon; Voice on the Net *
Coalition, Inc., *
*
Amici on Behalf of *
Appellee. *
___________

Submitted: December 12, 2008
Filed: May 1, 2009
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Before WOLLMAN, BYE, and RILEY, Circuit Judges.
___________

BYE, Circuit Judge.

The members of the Nebraska Public Service Commission,1 and the Director
of the Telecommunications Infrastructure and Public Safety Department2 (collectively

1
Rod Johnson, Frank E. Landis, Jr., Anne C. Boyle, Tim Schram, and Gerald
L. Vap.
2
Jeffrey L. Pursley.

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NPSC),3 appeal the district court's4 order enjoining the NPSC's enforcement of the
Nebraska Telecommunication Universal Service Fund Act (NUSF), Neb. Rev. Stat.
§§ 86-316 to 86-329, requiring nomadic interconnected voice over internet protocol
(VoIP) service providers to collect and remit a surcharge for the NUSF. We affirm.

I

Vonage Holdings Corp. and Vonage Network, Inc. (Vonage) provide, among
other services, nomadic interconnected VoIP service. VoIP is an internet application
used to transmit voice communication over a broadband internet connection. With
traditional circuit-switched telephone communications, the end-to-end geographic
locations of landline-to-landline telephone communications are known, and the
interstate or intrastate nature of the calls is readily determinable. VoIP-to-VoIP
communications originate and terminate at IP addresses and are tied to no identifiable
geographic location. In VoIP-to-landline or landline-to-VoIP communications, known
as "interconnected VoIP service," the geographic location of the landline part of the
call can be determined, but the geographic location of the VoIP part of the call can be
anywhere the VoIP customer obtains broadband access to the Internet. Thus, the
interstate or intrastate nature of VoIP-to-VoIP and interconnected VoIP service cannot
be determined by reference to the customer's billing address. Similarly, determining
the interstate or intrastate nature of VoIP service cannot be accomplished by reference
to the VoIP user's telephone number, because a customer living in one area code may
be assigned a telephone number from a different area code.

3
The Nebraska Public Service Commission has been voluntarily dismissed and
is no longer a party to this action. For ease of reference, we refer collectively to the
remaining defendants as the NPSC.
4
The Honorable Laurie Smith Camp, United States District Judge for the
District of Nebraska.

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 Finally, interconnected VoIP service may be "nomadic" or "fixed." Nomadic
service allows a customer to use the service by connecting to the Internet wherever a
broadband connection is available, making the geographic originating point difficult
or impossible to determine. Fixed VoIP service, however, originates from a fixed
geographic location. For example, cable television companies offer interconnected
VoIP service, and the transmissions use the cable running to and from the customer's
residence. As a result, the geographic originating point of the communications can
be determined and the interstate and intrastate portions of the service are more easily
distinguished. This case involves nomadic interconnected VoIP services. The
specific issue in the current litigation is whether nomadic interconnected VoIP service
providers may be subjected to a state regulation requiring them to collect a universal
service fund surcharge.

In 1997, Nebraska enacted the NUSF, authorizing the NPSC to establish a fund
to subsidize telecommunication services in high cost and remote areas throughout
Nebraska. In 2006, the Federal Communications Commission (FCC) issued an order
directing interconnected VoIP service providers to collect a federal universal service
fund (USF) surcharge. In 2007, the NPSC followed suit and ordered nomadic
interconnected VoIP service providers to collect a NUSF surcharge. Thus, VoIP
service providers operating in Nebraska were required to collect a fee on interstate
services for the USF, and a fee on intrastate service for the NUSF.

As part of its 2006 order, the FCC recognized the difficulties associated with
attempting to divine the interstate and intrastate nature of interconnected VoIP
communications. Thus, it established a "safe harbor" provision denoting 64.9 as the
percentage of a customer's interconnected VoIP communications determined to be
interstate, and to which the USF surcharge applied. See In the Matter of Universal
Service Contribution Methodology, 21 F.C.C.R. 7518, 7545 (2006) (extending 47
U.S.C. § 254(d) permissive authority to require interconnected VoIP providers to
contribute to the USF), petition for review denied, and vacated in part on other

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grounds, Vonage Holding Corp. v. FCC, 489 F.3d 1232 (D.C. Cir. 2007). VoIP
providers, unless they could determine actual interstate versus intrastate traffic,
collected and paid into the USF based on the safe harbor provision. In determining
intrastate usage for purposes of applying the NUSF, the NPSC simply adopted the
remaining 35.1 percent as necessarily reflecting the amount of intrastate nomadic
interconnected VoIP usage. Additionally, the NPSC used the customer's billing
address as a proxy for where nomadic interconnected VoIP services occurred. In
other words, even though there was no way to determine the geographic origin of the
communication, 35.1 percent of nomadic interconnected VoIP usage by customers
having Nebraska billing addresses was deemed intrastate.

Vonage refused to collect the NUSF surcharge and Director Pursely filed a
complaint with the NPSC to enforce the NUSF order. Vonage filed this action
seeking 1) a declaration the NUSF was preempted by federal law, and 2) a preliminary
injunction prohibiting Nebraska from enforcing the NUSF. Vonage argued, among
other things, the NUSF was preempted by 47 U.S.C. § 152(b)'s impossibility
exception, which the FCC had relied on to make regulation of VoIP service providers
subject only to federal oversight.

The district court held the NUSF was preempted and enjoined its enforcement.
Specifically, the court concluded the FCC, in an order resolving a dispute between
Vonage and the Minnesota Public Utilities Commission, had concluded nomadic
interconnected VoIP services were only subject to regulation by the FCC. See
Vonage Preemption Order, 19 FCC Rcd 22404 (Nov. 12, 2004), aff'd sub nom., Minn.
Pub. Utils. Comm'n v. FCC, 483 F.3d 570 (8th Cir. 2007) (Vonage Preemption
Order). The NPSC now appeals the district court's grant of a preliminary injunction,
arguing the court erred in concluding the Vonage Preemption Order preempted all
state regulation of nomadic interconnected VoIP service providers. The NPSC argues
the NUSF is consistent with and does not conflict with the FCC's imposition of the
USF.

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 II

We review the district court's grant of a preliminary injunction for abuse of
discretion, giving deference to the discretion of the district court. Doe v. South Iron
R-1 School Dist., 498 F.3d 878, 880 (8th Cir. 2007). An abuse of discretion occurs
if the district court rests its conclusion on clearly erroneous factual findings or if its
decision relies on erroneous legal conclusions. In re SDDS, Inc., 97 F.3d 1030, 1040
(8th Cir. 1996). We will not disturb a district court's discretionary decision if it
remains within the range of choices available, accounts for all relevant factors, does
not rely on any irrelevant factors, and does not constitute a clear error of judgment.
Walser v. Toyota Motor Sales, U.S.A., Inc., 43 F.3d 396, 401 (8th Cir. 1994).

[W]hether a preliminary injunction should issue involves consideration
of (1) the threat of irreparable harm to the movant; (2) the state of the
balance between this harm and the injury that granting the injunction will
inflict on other parties litigant; (3) the probability that movant will
succeed on the merits; and (4) the public interest.

Dataphase Sys., Inc. v. C L Systems, Inc., 640 F.2d 109, 114 (8th Cir. 1981).

A. Probability of Success on the Merits

Taking the factors out of order, the primary issue in this appeal is the district
court's application of the third Dataphase factor, i.e., probability of success on the
merits. The district court concluded the FCC had preempted all state regulation of
nomadic interconnected VoIP service providers under § 152(b)'s impossibility
exception. Under the impossibility exception, the FCC may preempt all state
regulation of services which would otherwise be subject to dual control if it is
impossible or impractical to separate the service's interstate and intrastate components,
and the state regulation interferes with valid federal rules or policies. See Minn. Pub.
Utils. Comm'n, 483 F.3d at 576. The district court found no evidence showing

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Vonage's nomadic interconnected VoIP services could be separated into interstate and
intrastate components. Further, relying on Minn. Pub. Utils. Comm'n, the district
court concluded the Vonage Preemption Order categorically preempted all state
attempts to impose regulations on nomadic interconnected VoIP services.

The NPSC argues the Vonage Preemption Order only preempts "traditional
telephone company" regulations, and in applying it to the NUSF the district court
interpreted it too broadly. It contends the scope of the order must be limited to the
type of regulation Minnesota was seeking to impose, i.e., provision of 911 services.
According to the NPSC, the type of regulation at issue in Minn. Pub. Utils. Comm'n,
acted as a barrier to entry into the market and clearly conflicted with federal
regulations prohibiting states from imposing entry conditions. Conversely, it contends
the NUSF is the state counterpart to a complimentary federal regulation – Nebraska
seeks to collect a fee on intrastate service while the FCC regulation only reaches
interstate service.

Vonage contends the language of the Vonage Preemption Order clearly states
the FCC intended to preempt all state regulation of nomadic interconnected VoIP
service providers. It concedes the FCC could implement a universal service fund
surcharge on both interstate and intrastate VoIP traffic, but argues only the FCC has
the authority to impose such an obligation. Further, it contends the potential for
conflict and overlap between various states attempting to implement similar
regulations will thwart federal objectives.

The Vonage Preemption Order provides:

In this [Order], we preempt an order of the Minnesota Public Utilities
Commission . . . applying its traditional "telephone company"
regulations to Vonage's DigitalVoice service, which provides voice over
Internet protocol (VoIP) service and other communications capabilities.
We conclude that DigitalVoice cannot be separated into interstate and

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 intrastate communications for compliance with Minnesota's
requirements without negating valid federal policies and rules. In so
doing, we add to the regulatory certainty we began building with other
orders adopted this year regarding VoIP . . . by making clear that this
Commission, not the state commissions, has the responsibility and
obligation to decide whether certain regulations apply to DigitalVoice
and other IP-enabled services having the same capabilities. For such
services, comparable regulations of other states must likewise yield to
important federal objectives.

19 FCC Rcd at 22404-05 (emphasis added).

In Minn. Pub. Utils. Comm'n, we interpreted the Vonage Preemption order,
holding: "The impossibility exception, if applicable, is dispositive of . . . whether the
FCC has authority to preempt state regulation of VoIP services." 483 F.3d at 578.
We concluded, as did the FCC, that VoIP services cannot be separated into interstate
and intrastate usage. Id. at 578-79. We find nothing in the NPSC's arguments here
to alter our earlier conclusion. Because Vonage's nomadic interconnected VoIP
service cannot be separated into interstate and intrastate usage, the impossibility
exception is determinative.

The impossibility exception further requires a finding the state regulation
interferes with valid federal rules or policies. The NPSC argues the NUSF does not
interfere with the USF because it only applies to the percentage of usage not
encompassed within the FCC's safe harbor provision, i.e., 35.1 percent. Thus,
according to the NPSC, the NUSF is consonant with federal regulations.

The district court's rejection of the NPSC's argument was not an abuse of
discretion. The Preemption Order states:

In [preempting Minnesota's regulation] . . ., we add to the regulatory
certainty we began building with other orders adopted this year regarding
VoIP . . . by making clear that this Commission, not the state

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 commissions, has the responsibility and obligation to decide whether
certain regulations apply to DigitalVoice and other IP-enabled services
having the same capabilities.

(Emphasis added).

A reasonable interpretation of this language is the FCC has determined, given
the impossibility of distinguishing between interstate and intrastate nomadic
interconnected VoIP usage, it must have sole regulatory control. Thus, while a
universal service fund surcharge could be assessed for intrastate VoIP services, the
FCC has made clear it, and not state commissions, has the responsibility to decide if
such regulations will be applied.

Additionally, the NPSC's arguments fail to address the conflict which would
arise if states adopted conflicting methods or proxies for determining which VoIP
customers are subject to their respective universal service fund surcharges. As noted,
a customer's billing address need not correspond to the area code affixed to the
customer's telephone number. For example, a customer with a Nebraska billing
address may be issued a telephone number with a Missouri area code. Under the
NUSF, 35.1 percent of the customer's nomadic interconnected VoIP usage will be
subject to a surcharge because Nebraska has chosen billing address as a proxy for
where the usage occurred. Assume Missouri also adopts a universal service fund
surcharge but chooses area code as its proxy for where usage occurs. The customer
will be subject to duplicative surcharges in Nebraska and Missouri. This potential for
conflict between state regulations militates in favor of finding preemption.

B. Remaining Dataphase Factors

The district court analyzed the remaining Dataphase factors and concluded they
carried less importance. It concluded the threat of irreparable harm and public interest
factors weighed in favor of issuing the injunction, while the balance of harm factor did

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not favor either party. We agree these factors are less important, and affirm the
district court's analysis of them. See 8th Cir. R. 47B.

III

The judgment of the district court is affirmed.5
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5
Because the district court correctly concluded the FCC has preempted state
regulation of nomadic interconnected VoIP service, we do not decide if VoIP is an
information service or a telecommunications service.

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