United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 13, 2006 Decided July 14, 2006
No. 05-1096
AMERICAN TELEPHONE AND TELEGRAPH COMPANY,
PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
QWEST SERVICES CORPORATION, ET AL.,
INTERVENORS
On Petition for Review of an Order of the
Federal Communications Commission
David W. Carpenter argued the cause for petitioner.
With him on the briefs were David L. Lawson, James P. Young,
and Judy Sello.
Richard K. Welch, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on the
brief were Thomas O. Barnett, Acting Assistant Attorney
General, U.S. Department of Justice, Catherine G. O'Sullivan
and Nancy C. Garrison, Attorneys, Samuel L. Feder, General
Counsel, Federal Communications Commission, John E. Ingle,
2
Deputy Associate General Counsel, and Laurence N. Bourne,
Counsel. Jacob M. Lewis, Attorney, entered an appearance.
Michael K. Kellogg argued the cause for intervenors.
With him on the brief were Sean A. Lev, Michael E. Glover,
Edward H. Shakin, Bennett L. Ross, Robert B. McKenna,
Bradford M. Berry, Samir C. Jain, and Lisa R. Youngers. Scott
K. Attaway and Jeffrey G. DiSciullo entered appearances.
Before: RANDOLPH and GARLAND, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge RANDOLPH.
RANDOLPH, Circuit Judge: At issue in this petition for
review is the proper regulatory classification of “enhanced”
prepaid calling cards, a product AT&T introduced in 1994 and
no longer sells. Prepaid calling cards allow purchasers to make
long-distance telephone calls without subscribing to a long-
distance service or using a credit card. Instead, the purchaser
buys a fixed number of minutes at a fixed price. When he wants
to make a call, he dials a toll-free number printed on the card to
reach the service provider’s “platform.” When prompted by the
platform, the user enters a unique identification number
associated with the card, and then dials the number he is trying
to reach. The “platform” routes the call, and the duration of the
call is deducted from the minutes remaining on the card.
AT&T’s “enhance[ment]” to this service was the
addition of an advertising (or other) message the card user heard
before his call was completed. AT&T provided the cards at
wholesale rates to large retail outlets such as Wal-Mart and other
third party distributors. These distributors could design or
choose the advertising message that was played when one of
their purchasers used the card. At the time of the Federal
3
Communications Commission’s action in this case, AT&T
stored and played more than one hundred different messages
from its distributors, each matched to the appropriate cards.
The events leading to this case began when AT&T
became embroiled in a dispute with the Regulatory Commission
of Alaska over AT&T’s refusal to pay intrastate access charges
on enhanced prepaid calling card calls between two parties
within the same state. Seeking the upper hand in this dispute,
AT&T sought a declaratory ruling from the Commission that its
service was “jurisdictionally interstate.”1 See 47 C.F.R. § 1.2.
Among other things, AT&T asserted that its calling cards were
solely an “information service,” 47 U.S.C. § 153(20). The
Commission disagreed. It found that AT&T’s enhanced prepaid
calling card service is a “telecommunications service” under the
Communications Act of 1934 because it does not “offer” to the
card user “anything other than telephone service, nor is the
customer provided with the ‘capability’ to do anything other
than make a telephone call.” AT&T Corp. Petition for
Declaratory Ruling Regarding Enhanced Prepaid Calling Card
Servs., 20 F.C.C.R. 4826, 4830 (2005) (“Order”).2 The
1
A ruling in AT&T’s favor would have meant that it had to
pay only lower interstate access charges. The Commission ordinarily
determines the jurisdictional nature of calling card calls based on the
location of the calling and called parties, not the actual transmission
path of the phone call. See The Time Machine, 11 F.C.C.R. 1186,
1190 (1995). The Commission’s jurisdictional ruling – that this
framework applied to AT&T’s enhanced prepaid calling cards despite
their advertising component – is not before us. See AT&T Corp.
Petition for Declaratory Ruling Regarding Enhanced Prepaid Calling
Card Servs., 20 F.C.C.R. 4826, 4833-36 (2005).
2
A “telecommunications service” is “the offering of
telecommunications for a fee directly to the public,” 47 U.S.C.
§ 153(46), with “telecommunications” defined as “the transmission,
between or among points specified by the user, of information of the
4
Commission also determined that “the provision of the
advertising message is an adjunct-to-basic service and therefore
not an ‘enhanced service’ under the Commission’s rules.” Id. at
4831. Taking note of AT&T’s statement that it had “sav[ed]”
about $160 million in universal service fund contributions “since
the beginning of 1999” by characterizing its enhanced prepaid
calling cards as “information services,” id. at 4828 n.14 (quoting
AT&T’s November 2004 SEC Form 10-Q), the Commission
directed AT&T to repay “any past due universal service
amounts.” Id. at 4836.3
AT&T concedes that the Commission’s classification
ruling is reasonable; it does not quarrel with the Commission’s
interpretation of the statutory and regulatory texts or its
determination that the enhanced prepaid calling card is an
“adjunct-to-basic” service. Instead, AT&T claims that the
Commission improperly made its ruling retroactive.
The Commission action constituted adjudication.
Retroactivity is the norm in agency adjudications no less than in
judicial adjudications. See SEC v. Chenery Corp., 332 U.S. 194,
203 (1947) (“Every case of first impression has a retroactive
effect, whether the new principle is announced by a court or by
an administrative agency.”); see also NLRB v. Bell Aerospace
user’s choosing, without change in the form or content of the
information as sent and received.” Id. § 153(43). An “information
service,” on the other hand, is “the offering of a capability for
generating, acquiring, storing, transforming, processing, retrieving,
utilizing or making available information via telecommunications.”
Id. § 153(20).
3
“Every telecommunications carrier that provides interstate
telecommunications services” must “contribute, on an equitable and
non-discriminatory basis” to the federal universal service fund. 47
U.S.C. § 254(d) (emphasis added). Providers of information services
are exempt.
5
Co., 416 U.S. 267, 294-95 (1974). As Judge Friendly observed
in NLRB v. Majestic Weaving Co., 355 F.2d 854, 860 (2d Cir.
1966), “courts have not generally balked at allowing
administrative agencies to apply a rule newly fashioned in an
adjudicative proceeding to past conduct.” Nevertheless, he
continued, “judicial hackles” are raised when “an agency alters
an established rule defining permissible conduct which has been
generally recognized and relied on throughout the industry that
it regulates.” Id. For our part we have drawn a distinction
between agency decisions that “substitut[e] . . . new law for old
law that was reasonably clear” and those which are merely “new
applications of existing law, clarifications, and additions.”
Verizon Tel. Cos. v. FCC, 269 F.3d 1098, 1109 (D.C. Cir. 2001)
(internal quotation marks omitted). The latter carry a
presumption of retroactivity that we depart from only when to
do otherwise would lead to “manifest injustice.” Id.; see also
Clark-Cowlitz Joint Operating Agency v. FERC, 826 F.2d 1074,
1081 (D.C. Cir. 1987) (en banc); 2 RICHARD J. PIERCE, JR.,
ADMINISTRATIVE LAW TREATISE § 13.2, at 881-82 (2002).
The Commission’s decision in this case did not change
settled law; AT&T does not and indeed cannot point us to a
settled rule on which it reasonably relied. See Williams Natural
Gas Co. v. FERC, 3 F.3d 1544, 1554 (D.C. Cir. 1993); Clark-
Cowlitz, 826 F.2d at 1083-84. Before the Order, the
Commission had not determined the regulatory classification of
AT&T’s service or a precise analogue. AT&T argues that the
Commission affirmed AT&T’s own classification of the calling
cards as an “enhanced” service contained in a 1994 “cost
allocation manual” the Commission’s staff accepted for filing,
without objection. But as the Commission noted, this filing did
not fix the regulatory classification of the calling card service
beyond the purpose of the manual. See Order, 20 F.C.C.R. at
4837. Unlike the current situation, in 1994 AT&T was subject
to dominant carrier regulation that required cost allocation, the
6
universal service fund was not yet in existence, and the statutory
definitions of telecommunications and information services had
not been fixed. Id. AT&T’s reliance on this old filing, in the
face of such significant legal change, and without authoritative
Commission action beyond its staff’s “acceptance” of the filing,
could not have been reasonable. See Verizon, 269 F.3d at 1110.
Because the classification of AT&T’s enhanced prepaid
calling card service was before the Commission for the first
time, AT&T might gain some support if the Commission’s
precedents clearly pointed toward the opposite result. But they
did not. Here the Commission relied primarily on the statutory
definitions of telecommunications and information services,
finding that no “offer” of an information service was made to
the end users of the cards. See Order, 20 F.C.C.R. at 4830. In
the past, the Commission made it clear that this was the analysis
it would follow. See Inquiry Concerning High-Speed Access to
the Internet Over Cable and Other Facilities, 17 F.C.C.R. 4798,
4822 (2002) (“[W]e conclude that the classification of cable
modem service turns on the nature of the functions that the end
user is offered.”). AT&T’s claim that it relied on the language
of the Commission’s “enhanced services” regulation, 47 C.F.R.
§ 64.702(a), rings hollow.4 The Commission viewed this
regulatory definition, crafted before the Telecommunications
Act of 1996 created a statutory class of “information services,”
as congruent with the current statute. See Order, 20 F.C.C.R. at
4830 & n.26; see also Implementation of the Non-Accounting
Safeguards of Sections 271 and 272 of the Communications Act
4
An “enhanced service” is one “offered over common carrier
transmission facilities . . . which employ[s] computer processing
applications that act on the format, content, code, protocol or similar
aspects of the subscriber’s transmitted information; provide the
subscriber additional, different, or restructured information; or involve
subscriber interaction with stored information.” 47 C.F.R.
§ 64.702(a).
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of 1934, As Amended, 11 F.C.C.R. 21,905, 21,955 (1996)
(“[T]he differently-worded definitions of ‘information services’
and ‘enhanced services’ can and should be interpreted to extend
to the same functions.”). Although the Commission treated
previously-classified enhanced services as information services
under the new terms of the statute, see id., it could not change
the meaning of the 1996 Act with its prior regulation. To the
extent that AT&T relied on the Commission doing just that, it
was taking its chances.
The Commission also determined that even under its
older “enhanced services” regime, AT&T’s advertising service
was “adjunct-to-basic” and therefore not an information service.
See Order, 20 F.C.C.R. at 4831. The Commission’s precedents
in this area are a mixed bag. On the one hand, AT&T notes
Commission language suggesting that services are not adjunct-
to-basic unless they provide information used “in the provision
and management of the customers’ telephone service,” N. Am.
Telecomms. Ass’n Pet. for Declaratory Ruling, 3 F.C.C.R. 4385,
4391 (1988) (“NATA Centrex Order”). Yet in the same order,
the Commission also stated that an adjunct-to-basic service
“facilitate[s] the provision of basic services without altering
their fundamental character,” id. at 4388, the very test it applied
in the Order under review. See 20 F.C.C.R. at 4831. As to the
Commission’s application of these various formulations, it is
difficult to discern any clear policy. The Commission has found
that an interactive “talking yellow pages” directory service is
enhanced, see Nw. Bell Tel. Co. Petition for Declaratory Ruling,
2 F.C.C.R. 5986, 5987-88 (1987), but that ordinary directory
assistance is adjunct-to-basic, see, e.g., N. Am. Telecomms.
Ass’n Petition for a Declaratory Ruling, 101 F.C.C.2d 349, 360
(1985). It has found that a service providing additional billing
information upon request is enhanced, see NATA Centrex Order,
3 F.C.C.R. at 4391, but that a service providing a time of day
announcement is adjunct-to-basic, see Pac. Nw. Bell Tel Co.
8
Petition for Delcaratory Ruling to Clarify the Regulation Status
of Time-of-Day Service, 1986 WL 292485, at *2 (Mar. 4, 1986).
The Commission’s rulings reflect a highly fact-specific, case-by-
case style of adjudication. Its determination that AT&T’s
advertising add-on to prepaid calling cards is adjunct-to-basic is
simply the latest application of this approach.
AT&T also was on notice that the Commission might
require it to pay universal service fees based on its calling card
revenues. The Commission cited The Time Machine, Inc., 11
F.C.C.R. 1186, 1192-93 (1995), and its “universal service
contribution forms” as evidence that prepaid calling cards are
ordinarily considered telecommunications services and that the
revenues derived from those services must be included when
calculating universal service support. Order, 20 F.C.C.R. at
4837. AT&T argues that the same forms exempt enhanced
services revenues. This may be the case, but there is also
Commission law stating that when a telecommunications service
is offered alongside an information service, the provider must
continue to contribute to the universal service fund based on
“end-user telecommunications revenue . . . exclud[ing] enhanced
services [revenue].” Policy and Rules Concerning the Interstate,
Interexchange Marketplace, 16 F.C.C.R. 7418, 7446 (2001); see
also id. at 7447-48. At the very least, the Commission’s
reasoning demonstrates that there was not a clear rule of law
exempting AT&T’s “enhanced prepaid calling cards” from
universal service contribution.
In short, the Order “represents a new policy for a new
situation, rather than . . . a departure from a clear prior policy.”
Williams Natural Gas Co., 3 F.3d at 1554 (internal quotation
marks omitted). The Commission’s decision to apply its policy
to the case before it was not manifestly unjust. Rather than
exercising caution in light of ambiguous agency law, AT&T
unilaterally chose not to pay universal service contributions
9
without Commission sanction or approval. In doing so it
assumed the risk of an adverse Commission decision. See
Global NAPs, Inc. v. FCC, 247 F.3d 252, 260 (D.C. Cir. 2001).
This is especially so in light of our long-standing principle that
“the breadth of agency discretion is, if anything, at zenith when
the action assailed relates primarily not to the issue of
ascertaining whether conduct violates the statute, or regulations,
but rather to the fashioning of . . . remedies and sanctions.”
Niagara Mohawk Power Corp. v. Fed. Power Comm’n, 379 F.2d
153, 159 (D.C. Cir. 1967). The petition for review is denied.
So ordered.