AT&T Corp. v. Public Utility of TX

United States Court of Appeals
Fifth Circuit
F I L E D
REVISED AUGUST 3, 2004
June 30, 2004
UNITED STATES COURT OF APPEALS
For the Fifth Circuit Charles R. Fulbruge III
Clerk

No. 03-50454

AT&T CORP. and AT&T COMMUNICATIONS OF TEXAS LP,

Plaintiffs-Appellees,

VERSUS

PUBLIC UTILITY COMMISSION OF TEXAS, ET AL.,

Defendants,

REBECCA KLEIN, in her official capacity as Chairman of the Public
Utility Commission of Texas; PAUL HUDSON, in his official capacity
as Commissioner of the Public Utility Commission of Texas; JULIE
PARSLEY, in her official capacity as Commissioner of the Public
Utility Commission of Texas,

Defendants-Appellants.

Appeal from the United States District Court
For the Western District of Texas

Before REAVLEY, DAVIS and DeMOSS, Circuit Judges,

W. EUGENE DAVIS, Circuit Judge:

Defendants, the Commissioners of the Texas Public Utilities

Commission (“Commissioners”) challenge the district court’s order
granting plaintiffs’, AT&T Corp. and AT&T Communications of Texas,

LP’s (“AT&T”), motion for summary judgment. The district court

determined that the Telecommunications Act of 1996 (“TA96")1

preempted the Texas statute which imposed a regulatory fee on

intrastate, interstate, and international calls originating in

Texas. We agree with the district court that the Texas assessment

on multijurisdictional carriers burdens those carriers more than

purely interstate carriers. The assessment is discriminatory, in

conflict with § 254(f) of the TA96, and preempted. We therefore

AFFIRM.

I

The TA96 amended the Telecommunications Act of 1934 to

encourage widespread competition among telecommunications providers

and at the same time provide universal telecommunications service

to all Americans. The new act empowered both States and the

Federal Communications Commission (“FCC”) to define universal

service and create universal service support programs. Both the

FCC and the States were given the power to collect assessments from

telecommunications carriers in order to subsidize these programs,

particularly services to rural, high cost, and low income users.

Under the TA96, the Federal Universal Service Fund specifically

subsidizes telecommunications providers who provide interstate

1
Pub. L. No. 104-104, 110 Stat. 56 (codified in scattered sections of title
47 U.S.C.).

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service to users in high cost and rural areas, low income users,

schools, and libraries, 911 service to rural areas, and relay

service to the hearing impaired. Similarly, Texas’s Public

Utilities Commission, through Texas Universal Service Support

Mechanisms, subsidizes intrastate telecommunications carriers who

provide these types of services intrastate.

Congress explicitly authorized the collection of funds to

support these universal service programs under TA96. The Federal

Universal Service Fund is supported by an equitable and

nondiscriminatory fee on all interstate telecommunications service

providers:

(d) Telecommunications carrier contribution

Every telecommunications carrier that provides interstate
telecommunications services shall contribute, on an
equitable and nondiscriminatory basis, to the specific,
predictable, and sufficient mechanisms established by the
Commission to preserve and advance universal service.

47 U.S.C. § 254(d) (emphasis added).

Congress empowered States to collect funds from carriers

providing intrastate telecommunications services. As with the

federal universal service scheme, the assessment must be equitable

and nondiscriminatory. Furthermore the state universal service

mechanisms cannot burden or rely upon the federal universal service

system:

(f) State authority

A State may adopt regulations not inconsistent with the
Commission's rules to preserve and advance universal

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 service. Every telecommunications carrier that provides
intrastate telecommunications services shall contribute,
on an equitable and nondiscriminatory basis, in a manner
determined by the State to the preservation and
advancement of universal service in that State. A State
may adopt regulations to provide for additional definitions and
standards to preserve and advance universal service within that
State only to the extent that such regulations adopt additional
specific, predictable, and sufficient mechanisms to support such
definitions or standards that do not rely on or burden Federal
universal service support mechanisms.

47 U.S.C. § 254(f) (emphasis added).

This dual universal service scheme allows the FCC to assess

interstate service providers to fund federal universal service

programs and allows the States to assess intrastate providers to

fund the state universal service programs. The statute, however,

has no provision for treatment of multijurisdictional carriers,

i.e., carriers that provide both intrastate and interstate service.

Congress’s omission on that issue is the source of the conflict in

this case.2

In 1997 the Texas Public Utilities Commission instituted its

state universal service program funded by the Texas Universal

Service Fund (“TUSF”). The Commission imposed a 3.6% fee to

provide revenue for the TUSF. The fee was imposed on all

telecommunications carriers who provide any intrastate service. As

2
We have previously dealt with the complications associated with
multijurisdictional carriers in determining that the FCC was not permitted to
assess intrastate revenues of multijurisdictional carriers. See Texas Office of
Public Utility Counsel v. FCC, 183 F.3d 393 (5th Cir. 1999). This is the first
time, however, that we have addressed the issue of whether States can assess the
interstate revenues of multijurisdictional carriers.

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to these carriers, however, the fee applied to all revenue they

derived from intrastate, interstate, and international calls

originating in Texas. Thus multijurisdictional carriers were

forced to pay both the federal universal service fee and the state

universal service fee on interstate calls originating in Texas.3

AT&T objected to paying both federal and state fee on its

revenue from interstate calls and brought this suit in the district

court to challenge the state fee. Plaintiff complains that the

Texas Universal Service funding mechanism is preempted by federal

law because the state fee on revenue derived from interstate calls

conflicts with 47 U.S.C. § 254(f). More particularly, AT&T argues

that the PUC universal service funding mechanism violates § 254(f)

because it creates an inequitable and discriminatory assessment on

interstate calls and “relies on or burdens” the federal support

mechanisms. AT&T moved for summary judgment on this preemption

issue. The district court granted the motion and struck down the

Texas Public Utility Commission’s funding mechanism finding that it

was preempted because it conflicted with § 254(f).

The Commissioners now challenge the district court judgment.

They argue, as they did before the district court, that 1) the

“rely on or burden” prong of 254(f) does not apply to state

universal service support mechanisms, like the Texas mechanisms in

this case, because the State has not provided standards for

3
The FCC funds the Federal Universal Service programs by assessing all
interstate calls at a rate of 7.2805%.

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universal service that differ from the federal standards; 2) the

regulation funding scheme does not “rely upon or burden” federal

mechanisms; 3) AT&T has not demonstrated that the Texas universal

service support mechanisms are discriminatory or inequitable; and

4) the Texas regulatory funding scheme does not violate the dormant

commerce clause. We agree with the district court’s decision to

grant summary judgment in favor of AT&T based upon the

discriminatory and inequitable nature of the state assessment and

do not reach the State’s remaining arguments.

II

This Court reviews a district court's grant of summary

judgment de novo, applying the same legal standards as the district

court in determining whether summary judgment was appropriate.

United States v. Lawrence, 276 F.3d 193, 195 (5th Cir. 2001) We must

therefore find any disputed facts in favor of the non-moving party

and determine whether a genuine issue of material fact exists in

the case. Walker v. Thompson, 214 F.3d 615, 624 (5th Cir. 2000).

All questions of law are reviewed de novo. Id. The material facts

in this case are not in dispute, therefore we review de novo the

district court's preemption decision and the interpretation of the

TA96.

Preemption of state law occurs in three circumstances:

Federal law will override state law under the Supremacy
Clause when (1) Congress expressly preempts state law;

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 (2) Congressional intent to preempt may be inferred from
the existence of a pervasive federal regulatory scheme;
or (3) state law conflicts with federal law or its
purposes.

Frank v. Delta Airlines Inc., 314 F.3d 195, 197 (5th Cir. 2002)

(citing English v. Gen. Elec. Co., 496 U.S. 72, 78-79, (1990)).

The burden of persuasion in preemption cases lies with the

party seeking annulment of the state statute. Green v. Fund Asset

Mgmt., L.P., 245 F.3d 214, 230 (3d Cir. 2001) (“Finally, we note

that the party claiming preemption bears the burden of

demonstrating that federal law preempts state law.” (citing

Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 255 (1984))).

AT&T claims that the Texas universal service assessment is

preempted through conflict preemption. Conflict preemption “arises

when ‘compliance with both federal and state regulations is a

physical impossibility,’ . . . where state law ‘stands as an

obstacle to the accomplishment and execution of the full purposes

and objectives of Congress[,]’” Pacific Gas & Elec. Co. v. State

Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 204 (1983),

where “the state law mandates or places irresistible pressure on

the subject of the regulation to violate federal law, . . . or

where the federal scheme expressly authorizes an activity which the

state scheme disallows.” Wells Fargo Bank of Texas NA v. James,

321 F.3d 488, 491 n.3 (5th Cir. 2003) (citations omitted). In this

case, if preemption exists at all it is because the state

regulation frustrates the purposes of Congress in passing § 254(f).

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 We now turn to the critical issue in this case: whether the

Texas universal service assessment conflicts with § 254(f) of the

TA96.

III

AT&T argued, and the district court agreed, that the Public

Utility Commission’s assessment of revenues derived from both

interstate and intrastate calls was inequitable and discriminatory

because it burdened multijurisdictional carriers more harshly than

their pure interstate competitors.

This Court has previously found a similar universal service

regulatory funding scheme to be inequitable and discriminatory. In

Texas Office of Public Utility Counsel v. FCC, 183 F.3d 393 (5th

Cir. 1999) (“TOPUC”) this Court determined that the FCC could not

collect on both interstate and international calls because such a

regulation was inequitable and discriminatory in violation of §

254(d). Plaintiff COMSTAT, a small, telecommunications carrier

carrying both interstate and international calls, had sued the FCC

for recovery of federal fees imposed by the FCC on its

international revenues. COMSTAT derived so little revenue from

interstate calls that its Federal Universal Service Fund tax

obligations exceeded its interstate revenues. COMSTAT argued that

the FCC assessment of the revenue it derived from both interstate

and international calls and the consequent unfairness violated the

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“equitable and nondiscriminatory” restriction placed upon any

Federal universal service funding mechanism scheme by § 254(d).

The Court agreed with COMSTAT’s reasoning:

Therefore, the agency’s interpretation of “equitable and
nondiscriminatory,” allowing it to impose prohibitive
costs on carriers such as COMSTAT, is “arbitrary and
capricious and manifestly contrary to the statute [§
254(d)].” COMSTAT and carriers like it will contribute
more in universal service payments than they will
generate from interstate service. Additionally, the
FCC’s interpretation is “discriminatory,” because the
agency concedes that its rule damages some international
carriers like COMSTAT more than it harms others. The
agency has offered no reasonable explanation of how this
outcome, which will require companies such as COMSTAT to
incur a loss to participate in interstate service,
satisfies the statute’s “equitable and nondiscriminatory”
language. We therefore reverse and remand this portion
of the Order for further consideration.

TOPUC, 183 F.3d at 434-35 (citations omitted).

Although TOPUC’s holding is based upon the “equitable and

nondiscriminatory” language in § 254(d), § 254(d) and (f) are

companion sections and § 254(d)’s “equitable and nondiscriminatory”

limitation on the federal funding mechanism is identical to the

language in § 254(f) limiting the State’s authority to fund

universal service:

(d) Telecommunications carrier contribution. Every
telecommunications carrier that provides interstate
telecommunications services shall contribute, on an
equitable and nondiscriminatory basis, to the specific,
predictable, and sufficient mechanisms established by the
Commission . . . .

* * *

(f) State authority. A State may adopt regulations not
inconsistent with the Commission’s rules to preserve and

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 advance universal service. Every telecommunications
carrier that provides intrastate telecommunications
services shall contribute, on an equitable and
nondiscriminatory basis, in a manner determined by the
State to the preservation and advancement of universal
service in that State.

47 U.S.C. § 254 (emphasis added).

Given the symmetry of §§ 254(d) and (f), TOPUC dictates the

result in this case. The assessment of interstate and intrastate

telecommunications revenues has the same inequitable and

discriminatory effect as the FCC’s assessment of interstate and

international revenues in TOPUC.4 Given the state regulation

scheme multijurisdictional carriers will be forced to pay an

approximate 11% fee on their revenue derived from interstate

telecommunications calls, while their pure-interstate-provider

competitors pay only the 7.28% federal fee on interstate revenues.

The result is a regulation that is clearly unfair and discriminates

between telecommunication service providers based solely upon their

presence in the intrastate market.

In TOPUC there was clear evidence that COMSTAT carried so few

interstate calls that it was forced to pay more in universal

service fees than it realized in interstate revenues, the revenues

that triggered the federal fee. AT&T has not, and admittedly

cannot, present evidence that its universal service fee obligation

outweighs its intrastate revenues. Nevertheless, the absence of

4
All of the reasoning in this opinion applies equally to the PUC’s assessment
of AT&T’s international revenue originating in Texas.

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such evidence does not defeat its assertion that the state

regulation is discriminatory.

Regardless of the amount of intrastate revenues a carrier

earns, the double assessment of interstate revenue puts

multijurisdictional carriers at a distinct competitive disadvantage

compared with the pure interstate carriers. The funding mechanism,

therefore, burdens multijurisdictional carriers more severely than

pure interstate or intrastate carriers. As this Court recognized

in TOPUC, a regulation scheme “is ‘discriminatory,’ because . .

.[it] damages some international carriers . . . more than it harms

others.” TOPUC, 183 F.3d at 434. AT&T is damaged more than its

non-multijurisdictional competitors thus making the PUC regulation

discriminatory and in violation of § 254(f).

IV.

For the reasons stated above the PUC’s assessment on both

interstate and intrastate calls creates an inequitable,

discriminatory, and anti-competitive regulatory scheme. Given the

parallel language used in §§ 254(d) and (f), we conclude,

consistent with our decision in TOPUC, that the PUC assesment of

interstate and international calls is discriminatory, conflicts

with § 254(f), and thus is preempted by federal law. We therefore

affirm the district court’s judgment.

AFFIRMED.

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