Southern Montana Telephone Co. v. Montana Public Service Commission

05/30/2017

DA 16-0439

IN THE SUPREME COURT OF THE STATE OF MONTANA

2017 MT 123

SOUTHERN MONTANA TELEPHONE CO.,

Petitioner and Appellant,

v.

MONTANA PUBLIC SERVICE COMMISSION,
DEPARTMENT OF PUBLIC SERVICE
REGULATION, an agency of the State of Montana,

Respondent and Appellee.
______________________________________

LINCOLN TELEPHONE CO.,

Petitioner and Appellant,

v.

MONTANA PUBLIC SERVICE COMMISSION,
DEPARTMENT OF PUBLIC SERVICE
REGULATION, an agency of the State of Montana,

Respondent and Appellee.

APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis And Clark, Cause Nos. ADV-2015-315 and
CDV 2015-314
Honorable Kathy Seeley, Mike Menahan, Presiding Judges

COUNSEL OF RECORD:

For Appellant:

Elizabeth A. Brennan, Brennan Law & Mediation, PLLC, Missoula,
Montana

For Appellee:

Justin W. Kraske, Jeremiah Langston, Special Assistant Attorneys General,
Montana Public Service Commission, Helena, Montana

Peter Michael Meloy, Meloy Law Firm, Helena, Montana
 For Amicus Curiae:

Jill Gerdrum, Axilon Law Group, PLLC, Missoula, Montana
(Attorney for Montana Telecommunications Association)

Submitted on Briefs: March 22, 2017

Decided: May 30, 2017

Filed:

__________________________________________
Clerk

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Justice Beth Baker delivered the Opinion of the Court.

¶1 The Montana Public Service Commission requires that certain regulated

telecommunications companies publicly disclose the compensation of their executive or

managerial employees earning more than $100,000 per year. Southern Montana Telephone

Company and Lincoln Telephone Company—both regulated by the Commission—filed

motions for protective orders to keep the salary information confidential. The Commission

denied the motions, relying in part on a new “rubric” that it developed by which it declared

it would judge such motions. Southern and Lincoln each appealed to the First Judicial

District Court. In two separate rulings, the District Court affirmed.

¶2 Southern and Lincoln appeal, raising several issues. We reverse on the sole ground

that the Commission’s “rubric” constitutes a de facto rule subject to Montana

Administrative Procedure Act (MAPA) rulemaking requirements.

PROCEDURAL AND FACTUAL BACKGROUND

¶3 Southern and Lincoln are privately-owned Montana telecommunications

companies. They also qualify as “public utilities” and are therefore subject to regulation

by the Commission. Sections 69-1-102, -3-101(1)(f), MCA. The Commission possesses

the authority to regulate privately-owned companies that provide a “regulated

telecommunications service”—like Southern and Lincoln—but it does not regulate “[r]ural

telephone cooperatives.” Sections 69-3-101(1)(f), -901(5), MCA.

¶4 The Commission certifies certain telecommunications public utilities as “eligible

telecommunications carrier[s]” (ETCs) for purposes of the Federal Telecommunications

Act of 1996. See 47 C.F.R. § 54.201(b) (2016); § 69-3-840(2), MCA. That Act’s purpose

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is, in part, to provide “universal” telecommunications services to “low-income consumers

and those in rural, insular, and high cost areas.” 47 U.S.C. § 254(b)(3) (2015). The Act

establishes the “universal service” fund (USF)—a series of federal subsidies made

available to ETCs for the purpose of providing such services. 47 U.S.C. § 254(e). Federal

law provides the requirements for ETC certification. 47 U.S.C. § 214(e). Only a company

that receives certification as an ETC may be eligible to receive USF subsidies. 47 U.S.C.

§ 254(e). The Federal Communications Commission delegates to the Commission the

authority to certify annually ETCs in Montana. 47 C.F.R. § 54.314; § 69-3-840(1), MCA.

The Commission must base its ETC certification on companies’ compliance with federal

statute. Section 69-3-840(2), MCA. The Commission has certified Southern and Lincoln

as ETCs, and each receives federal USF subsidies.

¶5 Pursuant to federal law, the Commission requires all ETCs to apply for

recertification annually. Section 69-3-203, MCA. Although all ETCs must submit certain

documentation to the Commission for recertification, most are unregulated telephone

cooperatives and not public utilities. Only ETCs that are subject to Commission regulation

as public utilities—including Southern and Lincoln—must submit “annual reports.” Mont.

Admin. R. 38.5.2602 (2000). The Commission prescribes the information that ETCs must

include in their annual reports.

¶6 Recently the Commission began requiring that privately-owned ETCs disclose in

their annual reports the names and compensation information for all executives and

managers earning more than $100,000 per year in total compensation. The Commission’s

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purpose in imposing this requirement was to increase transparency by disclosing to the

public how ETCs spend the federal USF subsidies that they receive.

¶7 Southern and Lincoln each filed motions for protective orders with the Commission.

The motions requested that the Commission permit them to not disclose their employees’

compensation information publicly. They agreed to provide the compensation information

to the Commission but argued that employee salaries constituted trade secret information

and that disclosure would violate the employees’ constitutional rights to privacy.

¶8 The Commission denied Southern’s and Lincoln’s motions for protective orders. It

concluded that the compensation information did not constitute a trade secret and that the

employees’ individual rights to privacy in their compensation did not clearly outweigh the

public’s right to know how the companies spent federal subsidies. In reaching the latter

conclusion, the Commission developed and employed a three-part “rubric by which to

judge companies’ motions for protective orders” of employee compensation information.

Under the rubric, the public’s right to know will outweigh the employees’ individual

privacy in their compensation information when: (1) “the employee is a manager or

executive of the telecommunications company”; (2) “the manager or executive has annual

compensation that exceeds $100,000”; and (3) “one-fifth or more of [the company’s] total

Montana revenues originate from sources tied to the company’s designation as an ETC”—

i.e., from the USF subsidies. The Commission held no hearings or rulemaking proceedings

before adopting this rubric, and applied it for the first time in the orders denying Southern’s

and Lincoln’s motions.

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¶9 Both Southern and Lincoln derive at least one-fifth of their total revenue from

federal funds. The Commission thus determined that the compensation information of the

companies’ executive or managerial employees earning more than $100,000 per year in

total compensation would not be “subject to confidentiality.” The Commission

subsequently denied Southern’s and Lincoln’s motions for reconsideration.

¶10 Southern and Lincoln each filed petitions for judicial review in the First Judicial

District Court. They raised several challenges, including an argument that the

Commission’s rubric constituted a “rule” under MAPA and that the Commission had

unlawfully adopted that rule without adhering to MAPA’s rulemaking requirements.

¶11 In separate orders, two different judges affirmed the Commission’s orders. Both

concluded in relevant part that the Commission’s “rubric” did not constitute a “rule” within

the meaning of MAPA. In its order in Southern’s case, the court explained that the

Commission was “not required to initiate rulemaking to determine which factors to apply

when balancing an individual’s right of privacy versus the public’s right to know. An

agency’s factual determination when conducting a legal analysis prescribed by the

Montana Constitution is not a rule.” The court stated further in that order that when the

Commission “identifies and applies factors with which to balance competing constitutional

mandates involving public records, it is not establishing a de facto rule.” Southern and

Lincoln appealed the court’s orders, and their appeals were consolidated.

STANDARDS OF REVIEW

¶12 In an administrative appeal, we apply the same standards of review that the district

court applies. Nw. Corp. v. Mont. Dep’t of Pub. Serv. Regulation, 2016 MT 239, ¶ 25,

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385 Mont. 33, 380 P.3d 787. A court reviews an administrative decision in a contested

case to determine whether the agency’s findings of fact are clearly erroneous and whether

its interpretation of the law is correct. Nw. Corp., ¶ 25.

DISCUSSION

¶13 Southern and Lincoln argue that the Commission’s rubric establishes a “standard”

that “implements” the Commission’s “policy” of making ETC federal funding more

transparent to the public. They therefore contend that it constitutes a de facto rule within

the meaning of MAPA and that the Commission was obligated to comply with MAPA’s

rulemaking procedures before implementing the rubric.

¶14 The Commission counters that the District Court correctly concluded that the rubric

was not a rule under MAPA. It emphasizes that the Commission is obligated to balance

the public’s constitutional right to know against the employees’ constitutional right to

privacy when considering companies’ motions for protective orders. The Commission

argues that its formulation of the rubric was simply a tool for applying this balancing test

on a case-by-case basis and was therefore not subject to rulemaking requirements.

¶15 MAPA defines a “rule” as “each agency regulation, standard, or statement of

general applicability that implements, interprets, or prescribes law or policy.” Section

2-4-102(11)(a), MCA. Before an administrative agency adopts a rule, MAPA mandates

that the agency “comply with the public notice and comment procedures detailed in

§§ 2-4-302 and -305, MCA.” State v. Vainio, 2001 MT 220, ¶ 27, 306 Mont. 439, 35 P.3d

948. These procedures include, among other requirements, that the agency give written

notice of its proposed rule, hold a hearing, afford interested parties the opportunity to

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submit data, views, or arguments, consider comments in those submissions, and issue a

statement explaining its reasons for adopting the rule. Sections 2-4-302, -305, MCA.

¶16 “Unless a rule is adopted in substantial compliance with these procedures, the rule

is not valid.” Vainio, ¶ 27. In Vainio, we reversed the defendant’s conviction for Medicaid

fraud because the conviction was based on his violation of Medicaid policies that the

Department of Public Health and Human Services had not adopted in compliance with

MAPA rulemaking procedures. Vainio, ¶ 71. We reached a similar conclusion in two

earlier cases. In Northwest Airlines v. State Tax Appeal Board, 221 Mont. 441, 720 P.2d

676 (1986), we held invalid a Department of Revenue auditor’s unilateral decision to

include airline carriers’ nonstop “flyover” miles in the agency’s tax apportionment formula

for determining a carrier’s corporate license tax. We concluded that the standard inclusion

of “flyover” miles constituted a rule under MAPA. Nw. Airlines, 221 Mont. at 445,

720 P.2d at 678. In Rosebud County v. Department of Revenue, 257 Mont. 306, 849 P.2d

177 (1993), we held invalid a Department of Revenue decision to alter the default method

for assessing the market value of heavy equipment. The Department sent a letter to all

county assessors directing them to use the new method. Rosebud Cnty., 257 Mont. at 308,

849 P.2d at 178. Although the Department later conducted rulemaking to adopt this new

method as a rule, we held that the rulemaking process was a “sham” because the

Department had denied “the public, the Legislature, and certain affected agencies” their

“right to participate effectively in the governmental process.” Rosebud Cnty., 257 Mont.

at 311, 849 P.2d at 180.

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¶17 The Commission’s rubric establishes a list of three formulaic criteria that it uses “to

judge companies’ motions for protective orders” of executive compensation information

and to determine “whether the right to know of the public outweighs the demand of

individual privacy involving ETC telecommunication company employee compensation.”

This rubric does not call for balancing individual interests on a case-by-case basis; it sets a

standard by which the Commission judges all motions for protective orders for salary

information of regulated ETCs. If the company’s circumstances fit the formula, there is no

further inquiry; all companies that receive at least twenty percent of their revenues from

federal subsidies must disclose the compensation information of executives earning over

$100,000 per year in total compensation, while all companies that do not meet the twenty

percent threshold may keep that information confidential.

¶18 The term “rubric” is defined as “[a]n established rule, custom, or law” or as “[a]n

authoritative rule, esp. for conducting a public worship service.” Black’s Law Dictionary

1529 (Bryan A. Garner ed., 10th ed. 2014) (emphasis added). The Commission’s

description of its formula as a “rubric” is apt: it sets a “standard . . . of general applicability”

that “implements” the Commission’s “policy” of providing for greater public disclosure of

how ETCs spend the federal subsidies they receive. Section 2-4-102(11)(a), MCA. It

therefore constitutes a rule within the meaning of MAPA.

¶19 MAPA categorizes “substantive rules” as either “legislative rules” or “adjective or

interpretive rules.” Section 2-4-102(14), MCA. “Legislative rules” have the force of law

and are invalid unless adopted via rulemaking. Section 2-4-102(14)(a), MCA. “Adjective

or interpretive rules,” in contrast, lack the force of law, § 2-4-102(14)(b), MCA, and may

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be adopted with publication of a statement of the advisory nature of the rule in the

Administrative Rules of Montana. Section 2-4-308, MCA. The Commission failed to

follow either process. It did not conduct rulemaking, so the rubric did not meet the

requirements for a “legislative rule.” Section 2-4-102(14)(a), MCA. The Commission also

failed to adopt the rubric as advisory only “in accordance with” MAPA’s requirements for

adopting an “adjective or interpretive rule.” Sections 2-4-102(14)(b), -308, MCA.

¶20 The Commission developed and announced its rubric in the orders denying

Southern’s and Lincoln’s motions for protective orders. It did not give advance notice to

potentially interested parties of its intent to adopt this rubric or provide such parties an

opportunity to comment on the rubric. The rubric is therefore invalid for failure to comply

with MAPA rulemaking requirements. Vainio, ¶ 27; §§ 2-4-302, -305, MCA. The District

Court incorrectly concluded otherwise.

CONCLUSION

¶21 We reverse the judgments of the District Court in Southern’s and Lincoln’s cases

and instruct the court to vacate the Commission’s orders and to remand for further

proceedings on the companies’ motions for protective orders.

/S/ BETH BAKER

We Concur:

/S/ JAMES JEREMIAH SHEA
/S/ MIKE McGRATH
/S/ DIRK M. SANDEFUR
/S/ MICHAEL E WHEAT

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