Global Naps, Inc. v. Verizon New England, Inc.

United States Court of Appeals
For the First Circuit

No. 05-2657

GLOBAL NAPS, INC.,

Plaintiff, Appellant,

v.

VERIZON NEW ENGLAND, INC., d/b/a Verizon Massachusetts;
MASSACHUSETTS DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY;
PAUL B. VASINGTON, in his capacity as Commissioner;
JAMES CONNELLY, in his capacity as Commissioner;
W. ROBERT KEATING, in his capacity as Commissioner;
DEIRDRE K. MANNING, in her capacity as Commissioner;
EUGENE J. SULLIVAN, JR., in his capacity as Commissioner,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Rya W. Zobel, U.S. District Judge]

Before

Lynch, Circuit Judge,
Campbell, Senior Circuit Judge,
and Howard, Circuit Judge.

Andrew Good, with whom Philip G. Cormier, Good & Cormier,
William J. Rooney, and Jeffrey Melick were on brief, for Global
NAPs, Inc.
Scott H. Angstreich, with whom Bruce P. Beausejour, Keefe B.
Clemons, Sean A. Lev, and Kellogg, Huber, Hansen, Todd, Evans &
Figel, P.L.L.C. were on brief, for Verizon New England, Inc.
Thomas A. Barnico, Assistant Attorney General, with whom
Thomas F. Reilly, Attorney General, and Daniel J. Hammond,
Assistant Attorney General, were on brief, for the Massachusetts
Department of Telecommunications and Energy and its Commissioners.
Joel Marcus, Counsel, Samuel L. Feder, General Counsel, and
Daniel M. Armstrong, Associate General Counsel, on brief for the
Federal Communications Commission, amicus curiae.

April 11, 2006
 LYNCH, Circuit Judge. The Massachusetts Department of

Telecommunications and Energy (DTE), acting as an arbitrator of a

dispute over an interconnection agreement between Verizon New

England, Inc. and Global NAPs, Inc., issued an order requiring

Global NAPs to pay Verizon compensation for certain phone calls;

the amount Global NAPs owes is at least $42 million. The question

before the DTE involved a particular variant on a larger question

of allocation of compensation for telephone calls placed to

internet service providers (ISPs). The larger question has been

addressed in a series of orders from the Federal Communications

Commission (FCC). At the heart of this case is one such order, the

ISP Remand Order.

The DTE, in an arbitration order, required Global NAPs to

pay Verizon access charges for all "virtual NXX" traffic, including

non-local ISP-bound traffic, rejecting Global NAPs' argument that

state commissions were preempted by the ISP Remand Order from

regulating intercarrier compensation for all ISP-bound traffic.

Global NAPs filed suit challenging the DTE's conclusion in federal

district court. Verizon and the DTE argued that the DTE retained

authority to decide the issue because the FCC order only preempted

state commission regulation of "local" traffic sent to an ISP, and

the FCC did not hold that virtual NXX traffic is such local

traffic.

-3-
 The district court never reached the preemption issue,

because it found that Global NAPs had implicitly consented to the

"jurisdiction" of the DTE to resolve the dispute, and so could not

later challenge the DTE's jurisdiction to impose access charges for

ISP-bound traffic. It granted Verizon and the DTE's motions for

partial summary judgment. No party on appeal agrees with that

reasoning.

In the end, we affirm, though on different grounds. A

party contesting an issue of whether federal law has preempted a

state commission's authority does not waive judicial review of the

argument by first presenting it to the commission in the course of

an arbitration under the Telecommunications Act of 1996. Because

the preemption question was not waived, it must be addressed. The

issue is one of federal law over which the federal court exercises

de novo, not deferential, review. We reach the merits and hold

that the FCC did not expressly preempt state regulation of

intercarrier compensation for non-local ISP-bound calls as are

involved here, leaving the DTE free to impose access charges for

such calls under state law.

I.

Regulatory Background

Prior history between these parties is set forth in our

opinions in Global NAPs, Inc. v. Verizon New England, Inc. (Global

NAPs I), 396 F.3d 16 (1st Cir. 2005), and Global NAPs, Inc. v.

-4-
Massachusetts Department of Telecommunications & Energy (Global

NAPs II), 427 F.3d 34 (1st Cir. 2005).

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.), was enacted "to end the local telephone monopolies and

create a national telecommunications policy that strongly favored

competition in local telephone markets." Global NAPs I, 396 F.3d

at 18; P.R. Tel. Co. v. Telecomms. Regulatory Bd., 189 F.3d 1, 7

(1st Cir. 1999); see also Verizon Md. Inc. v. Pub. Serv. Comm'n,

535 U.S. 635, 638 (2002); AT&T Corp. v. Iowa Utils. Bd., 525 U.S.

366, 371 (1999). To achieve this goal, the TCA requires the former

local phone monopolies, called incumbent local exchange carriers

(ILECs), to allow competitive local exchange carriers (CLECs) to

interconnect with their networks. See 47 U.S.C. § 251(c)(2).

Interconnection permits customers of one local exchange carrier to

make calls to, and receive calls from, customers of other local

exchange carriers. Global NAPs II, 427 F.3d at 36. The TCA also

requires the ILECs to negotiate in good faith the terms of

interconnection agreements with the CLECs. See 47 U.S.C.

§ 251(c)(1). "These agreements provide the terms of

interconnection and 'fulfill the duties' enumerated in § 251."

Global NAPs II, 427 F.3d at 37 (quoting 47 U.S.C. § 251(c)(1)).

Section 252 prescribes the process by which

interconnection agreements are to be formed. 47 U.S.C. § 252.

-5-
Under this provision, if negotiations between local exchange

carriers do not result in a final agreement, either party can

petition the relevant state commission to arbitrate unresolved

issues. See id. § 252(b)(1). The state commission must limit its

consideration of the agreement to the matters specifically

presented in the petition for arbitration and in the response. See

id. § 252(b)(4)(A). The state commission has "the authority to

decide the open issues between the parties, and to impose

conditions on the parties for the implementation of the terms of

arbitration into an agreement," Global NAPs I, 396 F.3d at 19

(citing 47 U.S.C. § 252(b)(4)(C)), so long as its resolutions are

consistent with § 251 and any regulations promulgated by the FCC,

see 47 U.S.C. §§ 252(c)(1), 253(a). Once an agreement is

concluded, it is submitted to the state commission for final

approval. Id. § 252(e).

State commission decisions are subject to judicial review

in federal court under 47 U.S.C. § 252(e)(6):

In any case in which a State commission makes
a determination under this section, any party
aggrieved by such determination may bring an
action in an appropriate Federal district
court to determine whether the agreement or
statement meets the requirements of section
251 of this title and this section.

A. Reciprocal Compensation and Access Charges

The underlying issue on appeal is whether, as Global NAPs

argues, the FCC's ISP Remand Order preempted state commissions from

-6-
regulating intercarrier compensation for all ISP-bound calls.

Verizon and the DTE take the position that the FCC only expressly

preempted state regulation of intercarrier compensation for "local"

ISP-bound calls. This issue requires a brief discussion of the

distinction between local and "interexchange" calling and the

different mechanisms of intercarrier compensation that apply to

them.

The FCC and the DTE have maintained a distinction between

"local" and "interexchange" traffic. See Local Competition

Provisions in the Telecommunications Act of 1996 (Local Competition

Order) ¶¶ 1033-35, 11 F.C.C.R. 15499, 16012-14 (1996) (drawing the

distinction). Local traffic stays within the boundaries of a local

calling area. Interexchange (or "non-local") traffic crosses the

boundaries of a local calling area and is generally subject to toll

or long-distance charges paid by the calling party.1

Traditionally, local calling areas have been geographically

defined.

1
Interexchange traffic consists of so-called "local toll"
calls, which cross the boundaries of local calling areas but remain
within a local access and transport area (LATA), and "long
distance" calls, which cross the boundaries of LATAs. See SBC
Commc'ns Inc. v. FCC, 407 F.3d 1223, 1227 (D.C. Cir. 2005)
("IntraLATA service is what consumers generally know as local
service; intraLATA 'toll' calls, however, encompass those long-
distance calls that do not travel beyond the borders of a single
LATA."); SBC Commc'ns, Inc. v. FCC, 154 F.3d 226, 231 n.3 (5th Cir
1998); Mich. Bell Tel. Co. v. Chapelle, 222 F. Supp. 2d 905, 909
n.6 (E.D. Mich. 2002).

-7-
 Intercarrier compensation comes into play whenever two or

more carriers collaborate to complete a phone call. Whether a call

is "local" or "interexchange" generally makes a difference in what

regime of intercarrier compensation -- reciprocal compensation or

access charges -- applies to that call.

The TCA requires interconnecting local exchange carriers

(LECs) to establish "reciprocal compensation arrangements," 47

U.S.C. § 251(b)(5), under which the originating LEC compensates the

terminating LEC for the transport and termination of

telecommunications traffic. See Global NAPs II, 427 F.3d at 36

(citing 47 C.F.R. § 51.701). The FCC, in its initial regulations

implementing the TCA, limited reciprocal compensation obligations

"to [telecommunications] traffic that originates and terminates

within a local area," leaving interexchange calls outside the

reciprocal compensation regime. See Local Competition Order

¶ 1034, 11 F.C.C.R at 16013; see also Global NAPs II, 427 F.3d at

36-37.

In those regulations, the FCC made clear that it was

leaving in place the pre-existing access charge regime that applied

to interexchange calls:

[A]s a legal matter, . . . transport and
termination of local traffic are different
services than access service for long distance
telecommunications. . . . The [TCA] preserves
the legal distinctions between charges for
transport and termination of local traffic and
interstate and intrastate charges for
terminating long-distance traffic.

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Local Competition Order ¶ 1033, 11 F.C.C.R. at 16012-13;

see also id. ¶ 1035, 11 F.C.C.R. at 16013 ("Traffic originating or

terminating outside of the applicable local area would be subject

to interstate and intrastate access charges.").

Importantly, the FCC's initial TCA regulations also

reaffirmed the ability of states to regulate intrastate access

charges. As a result, Verizon's intrastate access charge tariffs

for all phone calls are approved by the DTE.

In its initial TCA regulations, the FCC also left with

the state commissions the power to define local calling areas

"consistent with [their] historical practice of defining local

service areas for wireline LECs," and decided that the states

should "determine whether intrastate transport and termination of

traffic between competing LECs, where a portion of their local

service areas are not the same, should be governed by section

251(b)(5)'s reciprocal compensation obligations or whether

intrastate access charges should apply to the portions of their

local service areas that are different." Id. ¶ 1035, 11 F.C.C.R.

at 16013.

B. Global NAPs' VNXX System

Under the traditional system for rating calls, whether a

call is "local" or "interexchange" depends on geographically

defined local calling areas. The DTE established the existing

geographic local calling area structure for Massachusetts after a

-9-
generic proceeding "in which all interested Parties had the

opportunity to comment." Verizon implements this system by

comparing the "NXX" numbers (the "NXX" is the middle three digits

of a ten-digit phone number) of the caller and the recipient. The

"NXX" has generally been associated with a particular "switch"

(that is, the equipment that routes phone calls to their

destination) physically located within a local calling area; NXXs

have thus served as proxies for geographic location. This means

that if the NXX numbers of the caller and the recipient were within

the same local calling area, one could assume that the caller and

recipient were actually physically within the same calling area and

bill the call as a local call.

Global NAPs has the ability to assign its customers

"virtual" NXXs (VNXX), so that a Global NAPs customer can be given

VNXX numbers that are different than those that would normally be

assigned to him based on his physical location. This allows a

party to call what appears to be a "local" number, although behind

the scenes that call is actually routed to a different local

calling area. When the party making such a call is a Verizon

customer, the call is transmitted outside the local calling area by

Verizon.

Many of Global NAPs' ISP customers use VNXX arrangements,

and many of these ISPs' end-user customers use Verizon for local

phone service. To access the Internet, the end-user dials in to a

-10-
VNXX number assigned to his or her own local calling area. Then,

Verizon transports the call across local calling areas to Global

NAPs' point of interconnection with the Verizon network. Global

NAPs and Verizon agree that "[u]nder VNXX arrangements, the Verizon

end user's call to the ISP's server is toll-free [to the end user]

whether or not the ISP's server is located in the same local

exchange area in which the end-user originates the call." (emphasis

added).

C. The ISP Traffic Debate

The treatment of intercarrier compensation for ISP-bound

traffic has been a matter of considerable debate in recent years.

Calls to ISPs tend to be long, and generally go exclusively from

the ISP customer to the ISP. This has created opportunities for

regulatory arbitrage. For example, in the context of reciprocal

compensation, since reciprocal compensation flows from the LEC

whose customer makes the phone call to the LEC whose customer

receives the phone call, an LEC with a high proportion of ISP

customers -- as Global NAPs has -- stands to gain a windfall in a

reciprocal compensation scheme which includes traffic to an ISP.

See Global NAPs II, 427 F.3d at 37 (citing Bell Atl. Tel. Cos. v.

FCC, 206 F.3d 1, 2-3 (D.C. Cir. 2000)).2

2
Global NAPs II involved the question of whether the
interpretation of a provision of an interconnection agreement by
one state commission precluded a different interpretation by
another state commission of an identically worded provision. 427
F.3d at 48-49. That case involved a different interconnection

-11-
 The FCC has issued several orders related to intercarrier

compensation for ISP-bound traffic. In 1999, the FCC ruled that

ISP-bound traffic was not subject to reciprocal compensation

obligations under 47 U.S.C. § 251, although it left to state

commissions the ability to conclude "pursuant to contractual

principles or other legal or equitable considerations, that

reciprocal compensation is an appropriate interim . . . rule"

pending final FCC rulemaking on the matter. Local Competition

Provisions in the Telecomms. Act of 1996 (Internet Traffic Order)

¶¶ 26, 27, 14 F.C.C.R. 3689, 3705-06 (1999).

The D.C. Circuit vacated the Internet Traffic Order on

March 24, 2000 and remanded to the FCC, "finding that the FCC's

rationale for treating ISP-bound traffic as interstate traffic for

the purposes of reciprocal compensation was inadequate." Global

NAPs II, 427 F.3d at 39 (citing Bell Atl. Tel. Cos., 206 F.3d at

9). On April 27, 2001, the FCC issued an order in response to the

D.C. Circuit's remand, holding once again that the "provisions of

section 251(b)(5) do not extend to ISP-bound traffic" but resting

its decision on a different legal ground. Local Competition

Provisions in the Telecomms. Act of 1996 (ISP Remand Order) ¶ 1-2,

16 F.C.C.R. 9151, 9153 (2001). The FCC also provided an interim

intercarrier compensation regime for at least some ISP-bound

traffic to supplant existing state regimes going forward. This

agreement than that at issue here. See id. at 36 n.1.

-12-
interim regime was meant to limit opportunities for regulatory

arbitrage. It is undisputed that this interim regime preempts

state commission regulation of intercarrier compensation for local

ISP-bound calls. The question here is whether the preemptive

effect extends to the interexchange ISP-bound calls at issue here.

The D.C. Circuit held that the FCC's new legal grounds as

expressed in the ISP Remand Order were still inadequate. See

WorldCom, Inc. v. FCC, 288 F.3d 429, 433-34 (D.C. Cir. 2002).

However, it chose not to vacate the FCC order, and so the ISP

Remand Order remains in force. See Global NAPs II, 427 F.3d at 40

(citing WorldCom, Inc., 288 F.3d at 434; Verizon Md. Inc. v. Global

NAPs, Inc., 377 F.3d 355, 367 (4th Cir. 2004)).

Simultaneously to the release of the ISP Remand Order,

the FCC issued a notice of proposed rulemaking to consider whether

it should reconsider the system of intercarrier compensation for

all calls, including calls to ISPs. See Developing a Unified

Intercarrier Compensation Regime (Intercarrier Compensation NPRM),

16 F.C.C.R. 9610 (2001); see also Developing a Unified Intercarrier

Compensation Regime (Intercarrier Compensation FNPRM), 20 F.C.C.R.

4685 (2005) (further notice of proposed rulemaking).

II.

Procedural History

Verizon and Global NAPs began the negotiation process for

a new interconnection agreement in 2002. Global NAPs I, 396 F.3d

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at 19-20. On July 30, 2002, Global NAPs filed a petition for

arbitration with the DTE for resolution of a number of open

disputes concerning the proposed interconnection agreement, id. at

20, including whether VNXX calls should be treated as local or

interexchange for purposes of intercarrier compensation. Included

with this petition was a marked-up version of the interconnection

agreement, reflecting Global NAPs' proposed changes. Verizon filed

its response to Global NAPs' petition on August 22, 2002, including

its own marked-up version of the interconnection agreement. The

parties filed direct testimony with the DTE on September 10, 2002.

An evidentiary hearing was held on October 9, 2002, and the parties

submitted briefs on October 21, 28, and 30, 2002.

With respect to the VNXX issue, Global NAPs argued that

allowing Verizon to impose access charges on such calls would

thwart technological advances. Indeed, Global NAPs argued that

VNXX traffic should be treated as local traffic, and therefore be

subject to the state reciprocal compensation regime or, to the

extent the traffic was ISP-bound, the federal interim compensation

regime. As detailed below, during the course of the administrative

proceedings Global NAPs also made clear its position that the ISP

Remand Order had preempted the DTE's authority to regulate

intercarrier compensation for all ISP-bound traffic, while leaving

in place the DTE's ability to regulate intercarrier compensation

for other intrastate calls.

-14-
 Verizon argued that the entire VNXX system was simply a

way for Global NAPs to engage in regulatory arbitrage. In effect,

Verizon argued, Global NAPs' VNXX system was a way to provide toll-

free services to Verizon customers (so that Verizon would not get

any fees from those customers), deprive Verizon of the access fees

it would normally get for toll-free calls, and instead require

Verizon to pay Global NAPs reciprocal compensation.

The DTE issued an order on December 12, 2002, resolving

all open issues. With respect to the VNXX issue, the DTE rejected

Global NAPs' position that all VNXX calls be treated as local for

intercarrier compensation purposes. It found Global NAPs' position

would create "considerable market distortion based on an implicit

Verizon subsidy of [Global NAPs'] operations." Instead, the DTE

decided that "VNXX calls will be rated as local or toll based on

the geographic end points of the call." It further found that

Verizon's proposal to have the parties collaborate to determine the

geographic end points of VNXX calls was "an acceptable starting

point," and ordered the parties to submit contract language with

the final agreement to implement Verizon's solution.

The DTE also rejected Global NAPs' arguments based on the

ISP Remand Order, finding that the order "explicitly recognized

that intrastate access regimes in place prior to the Act remain

unchanged until further state commission action" and "continues to

recognize that calls that travel to points beyond the local

-15-
exchange are access calls." The DTE expressed its intent to

continue enforcement of the existing intrastate access charge

regime.

The DTE ordered the parties to incorporate the arbitrated

terms into a final interconnection agreement by January 2, 2003;

this deadline was later extended to January 17, 2003 on the

parties' joint motion. Global NAPs I, 396 F.3d at 20 After the

DTE issued its December 12 order, the parties began negotiating

final terms of interconnection. However, on January 9, 2003,

Global NAPs informed Verizon that it refused to negotiate any

further. Instead, it attempted to adopt the terms of a different

agreement between Verizon and Sprint.3 Id.

Verizon responded on January 17, 2003 by filing a motion

for approval of a final arbitrated agreement, attaching a proposed

final agreement. Id. This agreement contained the following

provision, § 7.3.8, to deal with the VNXX compensation issue:

"[Global NAPs] shall pay Verizon's originating access charges for

all [VNXX] Traffic originated by a Verizon Customer, and [Global

NAPs] shall pay Verizon's terminating access charges for all [VNXX]

traffic originated by a [Global NAPs] customer." It is this

provision of the agreement that Global NAPs challenges, to the

3
"[T]he TCA requires ILECs to allow any requesting CLEC to
adopt the terms and conditions of any interconnection agreement it
has with any other CLEC, provided that agreement has been approved
by the requisite state telecommunications commission." Global NAPs
I, 396 F.3d at 19 (citing 47 U.S.C. § 252(i)).

-16-
extent that it requires payment of access charges for ISP-bound

traffic.

In a February 19, 2003 order, the DTE rebuffed Global

NAPs' attempt to opt into the Verizon-Sprint agreement. Id. It

approved Verizon's proposed final agreement and ordered the parties

to sign and file that agreement. The parties eventually4 filed a

final agreement on March 18, 2003, including § 7.3.8, and it is the

agreement currently in effect between the parties.

In the meantime, on December 30, 2002, Global NAPs

brought an action in federal district court challenging the merits

of the DTE's arbitration determination. Global NAPs I, 396 F.3d at

20. In its complaint, Global NAPs asserted that the DTE "lacked

jurisdiction to impose access charges on ISP bound traffic." It

also complained that the DTE's reasoning, at least with respect to

ISP-bound traffic, was "wholly at odds with the ISP Remand Order."5

The February 19, 2003 ruling by the DTE rejecting Global NAPs'

attempt to opt in to the Sprint-Verizon agreement led Global NAPs

to file a second action in district court, on March 3, 2003.

4
On March 14, 2003, the DTE, noting that the Global NAPs had
still not complied with its February 19, 2003 order, directed the
parties to file a fully executed interconnection agreement.
5
In its complaint, Global NAPs challenged a number of other
determinations made by the DTE, including the imposition of
transport costs on Global NAPs and the rejection of Global NAPs'
proposal to expand local calling areas. On October 28, 2005, after
the district court's summary judgment decision leading to this
appeal, Global NAPs stipulated to the dismissal with prejudice of
its remaining challenges to the DTE's decision.

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 On March 11, 2003, Global NAPs, Verizon and the DTE moved

to consolidate Global NAPs' two federal actions, and asked the

district court to first resolve the question of whether Global NAPs

was permitted to opt in to the Sprint-Verizon agreement before

ruling on the challenge to the arbitration agreement. On May 12,

2004, the district court affirmed the DTE's decision not to allow

Global NAPs to opt in to the Sprint-Verizon agreement. Global NAPs

I, 396 F.3d at 21. On January 19, 2005, in Global NAPs I, we

affirmed that judgment. Id. at 28.

Global NAPs then revived its challenge to the DTE's

December 12, 2002 arbitration order by filing a motion for partial

summary judgment in the district court on May 20, 2005.6 Global

NAPs argued that in the ISP Remand Order, "[t]he FCC expressed in

unambiguous language its intention to assert exclusive jurisdiction

over intercarrier compensation for ISP-bound traffic." Thus, it

argued, the DTE lacked the authority to require Global NAPs to

enter into an interconnection agreement that included § 7.3.8,

which required Global NAPs pay Verizon access charges for all VNXX

6
After this court's opinion in Global NAPs I, Verizon
demanded that Global NAPs pay the accrued access charges that
Global NAPs had failed to pay during the pendency of litigation.
As of February 2005, according to Verizon, Global NAPs had accrued
more than $42 million in unpaid access charges. Verizon threatened
to cut off service to Global NAPs if payment was not made. Global
NAPs filed for a preliminary injunction in the district court, and
the district court granted that request, on the condition that
Global NAPs post a $1 million bond, and expedited the briefing
schedule for the parties' cross-motions for summary judgment.

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traffic, including traffic bound for ISPs.7 Global NAPs based its

preemption argument solely on the FCC's ISP Remand Order.

Verizon and the DTE filed motions for partial summary

judgment in response, arguing that the ISP Remand Order did not

preempt the DTE from imposing access charges for non-local ISP-

bound traffic, but dealt only with the narrow issue of reciprocal

compensation for ISP-bound calls within a local calling area.

On September 21, 2005, the district court granted Verizon

and the DTE's motions for partial summary judgment. The district

court correctly noted that it was "unclear" whether the ISP Remand

Order preempted state commissions from imposing access charges on

all ISP-bound traffic. But it did not reach the merits of that

question; it held that since Global NAPs "voluntarily sought

arbitration by DTE after the FCC issued the ISP Remand Order and

thus impliedly consented to DTE's jurisdiction over its petition,

it may not now challenge DTE's authority on the basis of unsettled

law in order to avoid the consequences of its own business

strategy."

Global NAPs appeals, arguing (1) that it did not waive

any claim regarding the preemptive effect of the FCC's ISP Remand

7
Global NAPs argued that its petition for arbitration did not
raise the issue of whether access charges could be imposed on ISP-
bound traffic, and so, under 47 U.S.C. § 252(b)(4)(A), the DTE
could not decide the issue. The district court rejected this
argument, finding that it was sufficient that Global NAPs had
raised the issue of access charges for VNXX traffic generally to
the DTE. Global NAPs does not press this argument on appeal.

-19-
Order or impliedly consent to the DTE's authority to decide the

issue which had been preempted by the ISP Remand Order, and so the

district court erred in not reaching the merits of its claim; and

(2) that this court should reach the merits and find that the ISP

Remand Order preempts the DTE from imposing access charges for ISP-

bound traffic.8

III.

The District Court's "Jurisdictional" Holding

The district court's conclusion that Global NAPs could

not obtain review of the DTE's preemption decision, because Global

NAPs had "impliedly consented to the DTE's jurisdiction over its

petition," was error. The issue of preemption was squarely

presented to the DTE, the DTE decided this issue of federal law,

and Global NAPs challenged that decision before the district court.

The district court should have reviewed the DTE's conclusion, as it

would any other conclusion of federal law by a state commission.

Global NAPs admits that in its petition for arbitration,

it did not explicitly spell out its views with respect to

8
On November 1, 2005, Global NAPs moved this court to issue
a preliminary injunction to stop Verizon from cutting off service
pending appeal. On November 2, 2005, we issued an order enjoining
Verizon from cutting off service to Global NAPs, conditioned on
Global NAPs' payment of additional security in an amount determined
by the district court, and expedited our review. The district
court, on November 9, 2005, entered an order requiring $15 million
in additional security, which Global NAPs posted on November 14,
2005.

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intercarrier compensation for ISP-bound traffic,9 but points to a

number of instances during the administrative proceedings in which

it did. In testimony during the hearing before the DTE on October

9, 2005, Global NAPs' expert, Lee Selwyn, testified with respect to

the VNXX issue as follows:

Let me first preface my remarks on [the VNXX
issue] by making the point that we are
speaking here of traffic originating by
Verizon customers, terminating to Global NAPs,
that is not ISP-bound traffic. ISP-bound
traffic is not subject to any treatment other
than the reciprocal-compensation arrangement
as set forth in the FCC's ISP Remand Order.

In its brief to the DTE after the hearing, Global NAPs reiterated

this point:

In the ISP Remand Order, the FCC determined
that inter-carrier compensation for ISP-bound
traffic is solely within the jurisdiction of
the FCC and that on a going forward basis,
state commissions have been preempted from
addressing the issue. Thus the Department has
no jurisdiction to impose access charges or
other limitations on ISP in-bound
traffic. . . . The Arbitration Order should
be clear that the Interconnection Agreement is
not intended to regulate inter-carrier
compensation for ISP-bound traffic in any
manner.

Global NAPs made the same argument in its reply brief to the DTE

and in a February 27, 2003 letter to the DTE after the DTE issued

its December 12, 2002 order. The DTE rejected these arguments,

9
Global NAPs states that it did not do so because it was
laboring under the impression that there was no real dispute on the
issue.

-21-
requiring Global NAPs to pay access charges to Verizon for ISP-

bound VNXX traffic under the intrastate tariffs.

Global NAPs also argues that it could not voluntarily

consent to the jurisdiction of the DTE to determine access charges,

because the TCA requires arbitration before the DTE under 47 U.S.C.

§ 252(b) when negotiation leaves open issues, and because "[t]he

DTE may not enlarge its own subject matter jurisdiction beyond that

granted to it by the Act and FCC rulings implementing the TCA.

Neither may DTE jurisdiction be expanded by agreement of DTE

litigants."

Global NAPs' use of the phraseology of jurisdiction may

have led to some confusion. Questions about federal preemption of

state law in this context may or may not be properly thought of as

"jurisdictional" in nature. Cf. Wolf v. Reliance Standard Life

Ins. Co., 71 F.3d 444, 446-49 (1st Cir. 1995) (holding that ERISA

preemption is not jurisdictional but a waivable affirmative

defense).

In the end, however the claim is characterized, Global

NAPs properly presented an issue of federal preemption to the DTE,

and the DTE rejected Global NAPs' argument. This does not mean it

waived federal court review of the DTE's conclusion on that

question. See Global NAPs I, 396 F.3d at 21-22 ("[T]he federal

courts have subject matter jurisdiction to review state agency

determinations under the TCA for compliance with federal law,

-22-
pursuant to 28 U.S.C. § 1331."); United States v. R.I. Insurers'

Insolvency Fund, 80 F.3d 616, 619 (1st Cir. 1996) ("[A] federal

preemption ruling presents a pure question of law subject to

plenary review.").

IV.

Preemptive Effect of the ISP Remand Order

We reach the merits of Global NAPs' claim, confining

ourselves to the record before the agency. This case presents a

pure issue of law and the parties have asked us to decide it.

Furthermore, we may affirm on any ground supported by the record.

See Torres-Rosado v. Rotger-Sabat, 335 F.3d 1, 13 (1st Cir. 2003).

Before reaching the merits of Global NAPs' claim,

however, we must deal with an issue raised by the DTE, but rejected

by Verizon, regarding the appropriate standard of review of state

commission conclusions of federal law made pursuant to an

arbitration under 47 U.S.C. § 252(b).

A. Standard of Review of the DTE's Determination of
Preemption Issue

The DTE argues that "judicial review of an interpretation

of the [TCA] by a state commission in an arbitration should be

limited to the question whether the state commission's

interpretation of the [TCA] is reasonable."10 The DTE draws an

10
To the extent the DTE is arguing for a broad, Chevron-like
deference to the state agency whenever it has made a determination
regarding the meaning of an FCC order, see Chevron U.S.A., Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), that line of

-23-
analogy to the deferential standard of review given arbitral awards

under the Federal Arbitration Act (FAA), as expressed in cases like

JCI Communications, Inc. v. International Brotherhood of Electrical

Workers, Local 103, 324 F.3d 42, 48 (1st Cir. 2003).

The DTE argues that because Congress used the term

"arbitration" in § 252(b), we should treat state commission

arbitral decisions with the same deference as arbitral decisions

under the FAA, which predates the TCA. The DTE points out that

Congress used terms other than "arbitration" to describe other

types of actions taken by state commissions.

The DTE's position has no basis either in the TCA, its

legislative history, or in case law. The DTE points to nothing

more than the use of the term "arbitration" in the TCA. The DTE's

argument, furthermore, is in flat conflict with our holding in

Global NAPs I, where, in the context of review of a decision

pursuant to an arbitration, we held that determinations of federal

law by state agencies under the TCA were subject to de novo review.

See 396 F.3d at 23. We noted in Global NAPs I that "[e]ach of the

Circuits that has addressed the standard of review under the TCA

has held that where the state agency determination rests

reasoning has already been foreclosed by this court in Global NAPs
I: "Since the FCC, and not the individual state commissions, is the
agency with the power granted by Congress to administer the TCA,
through the formulation of policy, rulemaking, and regulation, we
do not afford deference to the DTE's interpretation of the statute
under [Chevron]." 396 F.3d at 23 n.7.

-24-
principally on an interpretation of the TCA, de novo review is

applied." Id. at 23 n.8. A number of circuits have reached this

conclusion in the context of federal court review of state

commission arbitrations under the TCA. See, e.g., MCI Telecomms.

Corp. v. Ohio Bell Tel. Co., 376 F.3d 539, 548 (6th Cir. 2004) (de

novo review of questions of federal law after state commission

arbitration); Ind. Bell Tel. Co. v. McCarty, 362 F.3d 378, 383 (7th

Cir. 2004) (same); MCImetro Access Transmission Servs., Inc. v.

BellSouth Telecomms., Inc., 352 F.3d 872, 876 (4th Cir. 2003)

(same).

The DTE states that it "does not seek consideration of

broader questions [than review of arbitration] regarding the proper

standard of judicial review for other determinations by state

commissions under the [TCA]." If we were to accept the DTE's

position, it would create a strange result. The standard of review

would vary not by the nature of the question presented

(interpretations of the TCA) but by the nature of the proceeding in

which the question is presented. Thus, under the DTE's view, a

state commission's conclusions of federal law when it is acting as

an arbitrator under § 252(b) would be subject to deferential

review, but the very same conclusions about the TCA made pursuant

to other state commission proceedings, such as the § 252(e)

approval process, would be subject to de novo review. Congress

-25-
surely did not intend such an odd result merely by using the term

"arbitration" in the TCA.

We review de novo the DTE's conclusion that the ISP

Remand Order did not preempt its authority to regulate access

charges for interexchange VNXX ISP-bound traffic. Cf. Nat'l Tower,

LLC v. Plainville Zoning Bd. of Appeals, 297 F.3d 14, 22 (1st Cir.

2002) (holding that issues based on specified provisions of the TCA

"present questions that a federal district court determines in the

first instance without any deference to the [local zoning] board").

B. Preemption

"The Supremacy Clause of Art. VI of the Constitution

provides Congress with the power to pre-empt state law." La. Pub.

Serv. Comm'n v. FCC, 476 U.S. 355, 368 (1986). "Pre-emption may

result not only from action taken by Congress itself; a federal

agency acting within the scope of its congressionally delegated

authority may pre-empt state regulation."11 Id. at 369; see also

City of New York v. FCC, 486 U.S. 57, 64 (1988) ("[I]n proper

circumstances the agency may determine that its authority is

exclusive and pre-empts any state efforts to regulate in the

forbidden area.").

11
There is no claim that the TCA itself either expressly or
impliedly preempts the state regulation in question here. See
Grant's Dairy-Me., LLC v. Comm'r of Me. Dep't of Agric., Food &
Rural Res., 232 F.3d 8, 15 (1st Cir. 2000) (describing branches of
preemption doctrine).

-26-
 In arguing for a broad reading of the ISP Remand Order,

Global NAPs points to language in the order which suggests that all

ISP-bound traffic is subject to the FCC's jurisdiction. See, e.g.,

ISP Remand Order ¶ 1, 16 F.C.C.R. at 9153 ("[W]e reaffirm our

previous conclusion [in the Internet Traffic Order] that traffic

delivered to an ISP is predominantly interstate access traffic

subject to [the FCC's jurisdiction]."); id. ¶ 57, 16 F.C.C.R. at

9177-78 (finding that ISP-bound traffic is "properly characterized

as interstate access" and thus is subject to FCC jurisdiction).

Even assuming that this language could cover the non-local

ISP-bound calls at issue here, it does not help answer the question

before us. A matter may be subject to FCC jurisdiction, without

the FCC having exercised that jurisdiction and preempted state

regulation. The question before us is whether the FCC intended in

the ISP Remand Order to exercise its jurisdiction over the precise

issue here, to the exclusion of state regulation. See Qwest Corp.

v. Scott, 380 F.3d 367, 372 (8th Cir. 2004) ("There is no dispute

in this case that the FCC has the power to preempt states from

establishing standards and requiring reports relating to special

access services. The fighting issue is whether the FCC actually

intended to do so . . . .").

In this context, the law requires a clear indication that

an agency intends to preempt state regulation. Hillsborough County

v. Automated Med. Labs. Inc., 471 U.S. 707, 718 (1985) ("[B]ecause

-27-
agencies normally address problems in a detailed manner and can

speak through a variety of means, . . . we can expect that they

will make their intentions clear if they intend for their

regulations to be exclusive."); see also Qwest Corp., 380 F.3d at

374 (finding no preemption of state regulation where FCC

regulations were "notably agnostic" on the question).12

The requirement of a clear indication of the agency's

intent to preempt is especially important in the context of the

TCA, which "divide[d] authority among the FCC and the state

commissions in an unusual regime of 'cooperative federalism,' with

the intended effect of leaving state commissions free, where

warranted, to reflect the policy choices made by their states."

Global NAPs II, 427 F.3d at 46 (quoting P.R. Tel. Co. v. Telecomms.

Regulatory Bd., 189 F.3d 1, 8 (1st Cir. 1999)). As we noted in

Global NAPs II, "[t]he goal of preserving a role for the state

regulatory commissions is reflected in a number of provisions in

the TCA." Id. at 46-47.

Also relevant is Congress's express pre-TCA instruction

that "nothing in this chapter [including 47 U.S.C. §§ 251, 252]

shall be construed to apply or to give the Commission jurisdiction

12
This requirement of clarity applies to express preemption,
see Hillsborough County, 471 U.S. at 713, and to certain types of
implied preemption, see id. at 718 (describing requirements of
"field" preemption); Geier v. Am. Honda Motor Co., 529 U.S. 861,
881, 885 (2000) (conflict preemption should not be found "too
readily in the absence of clear evidence").

-28-
with respect to . . . charges, classifications, practices,

services, facilities, or regulations for or in connection with

intrastate communication service by wire or radio of any carrier."

47 U.S.C. § 152(b); see also La. Pub. Serv. Comm'n, 476 U.S. at

370, 379 (relying on § 152(b) to find that the FCC could not

preempt state law depreciation regulation).

With these principles in mind, we turn to the facts of

this case. Global NAPs does not challenge the DTE's determination

that whether a call is local or "interexchange" should be based on

the geographic endpoints of the call, or the decision to impose

access charges on non-ISP-bound VNXX calls. Rather, the challenge

is to the DTE's imposition of access charges on that subset of VNXX

calls that are bound for an ISP. Global NAPs argues that we should

determine the scope of preemption by limiting our examination to

the text of the ISP Remand Order. Verizon and the DTE13 ask us to

also consider the context in which the order was passed and the

regulatory objectives of the order; they argue that the FCC only

intended to preempt state regulation of intercarrier compensation

for local ISP-bound traffic and did not address the question before

the DTE.

13
The DTE has joined almost all of Verizon's arguments on the
merits. At oral argument, the DTE explained that it did not wish
to join Verizon's arguments to the extent that they reached outside
the scope of the arbitration between the parties.

-29-
 Regardless of which approach is used, the ISP Remand

Order does not clearly preempt state authority to impose access

charges for interexchange VNXX ISP-bound traffic; it is, at best,

ambiguous on the question, and ambiguity is not enough to preempt

state regulation here.

Global NAPs cannot point to any language in the order

that explicitly preempts state regulation of access charges for the

non-local ISP-bound traffic at issue. Instead, Global NAPs'

central argument is that, in preempting state regulation of

intercarrier compensation for ISP-bound traffic in the ISP Remand

Order, the FCC did not expressly limit itself to traffic

originating and terminating within a local calling area. It

suggests that the interim federal regime of intercarrier

compensation established by the ISP Remand Order actually applies

to all ISP-bound calls, so that the preemptive effect of the order

should extend to the access charges at issue here. Global NAPs

points in particular to paragraph 82 of the ISP Remand Order, in

which the FCC stated:

The interim compensation regime we establish
here applies as carriers renegotiate expired
or expiring interconnection agreements. . . .
This Order does 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. Because we now exercise our authority
under section 201 to determine the appropriate
intercarrier compensation for ISP-bound
traffic, however, state commissions will no
longer have authority to address this issue.

-30-
ISP Remand Order ¶ 82, 16 F.C.C.R. at 9189. It argues that if the

FCC intended only to preempt state regulation of reciprocal

compensation for local ISP-bound traffic, it would have expressed

its intent more clearly, by specifying "local ISP-bound traffic."14

Global NAPs' argument ignores an important distinction.

The FCC has consistently maintained a distinction between local and

"interexchange" calling and the intercarrier compensation regimes

that apply to them, and reaffirmed that states have authority over

intrastate access charge regimes. Against the FCC's policy of

recognizing such a distinction, a clearer showing is required that

the FCC preempted state regulation of both access charges and

reciprocal compensation for ISP-bound traffic. Cf. Shaw's

Supermarkets, Inc. v. N.L.R.B., 884 F.2d 34, 36 (1st Cir. 1989)

("The law that governs an agency's significant departure from its

own prior precedent is clear. The agency cannot do so without

explicitly recognizing that it is doing so and explaining why.").

Indeed, in the ISP Remand Order itself, the FCC

reaffirmed the distinction between reciprocal compensation and

access charges. It noted that Congress, in passing the TCA, did

not intend to disrupt the pre-TCA access charge regime, under which

14
Global NAPs also argues that we "confirmed" the preemptive
effect of the ISP Remand Order in Global NAPs II, in which we said
that the "FCC . . . made clear that it had exclusive regulatory
authority to address the issue, so that state commissions no longer
have the power to do the same." 427 F.3d at 40. This was not a
holding of the case; rather, it appeared in the background section
of the opinion and merely paraphrased ¶ 82 of the ISP Remand Order.

-31-
"LECs provided access services . . . in order to connect calls that

travel to points -- both interstate and intrastate -- beyond the

local exchange. In turn, both the Commission and the states had in

place access regimes applicable to this traffic, which they have

continued to modify over time." ISP Remand Order ¶ 37, 16 F.C.C.R.

at 9168.

Furthermore, the context in which the ISP Remand Order

was issued casts additional doubt on Global NAPs' contention. The

Supreme Court has held that in interpreting its own prior cases

"[i]t is a maxim not to be disregarded, that general expressions,

in every opinion, are to be taken in connection with the case in

which those expressions are used." See Cent. Va. Cmty. Coll. v.

Katz, 126 S.Ct. 990, 996 (2006) (internal quotation marks omitted)

(quoting Cohens v. Virginia, 19 U.S. (6 Wheat.) 264, 399-400

(1821)). Such a rule also properly applies to interpretations of

agency orders, especially where the order itself details the

background against which it was passed. See Qwest Corp., 380 F.3d

at 373-74 ("The FCC's statement . . . is susceptible of a broader

interpretation if plucked out of context, but we conclude that when

the [FCC order] is read as a whole, the [FCC's] expressed intent to

preempt state regulation does not extend to performance

measurements and standards.").

The issue that necessitated FCC action in the Internet

Traffic Order and the ISP Remand Order was "whether reciprocal

-32-
compensation 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." ISP Remand Order ¶ 13, 16

F.C.C.R. at 9159; see also WorldCom, Inc., 288 F.3d at 430 (stating

that the question before the FCC involved "calls made to [ISPs]

located within the caller's local calling area"). The order

expressly holds at a number of points that ISP-bound traffic is not

subject to reciprocal compensation under § 251(b)(5). See ISP

Remand Order ¶ 23, 16 F.C.C.R. at 9163 ("In [the statutory

analysis] section, we reexamine our findings in the [Internet

Traffic Order] and conclude that ISP-bound traffic is not subject

to the reciprocal compensation requirement in section 251(b)

. . . ."); id. ¶ 44, 16 F.C.C.R. at 9172 ("ISP-bound traffic . . .

is excepted from the scope of the 'telecommunications' subject to

reciprocal compensation under section 251(b)(5)."). There is no

express statement that ISP-bound traffic is not subject to access

charges.

In issuing the ISP Remand Order and setting forth the

interim federal intercarrier compensation regime, the FCC was

focused on limiting the problem of regulatory arbitrage. Id. ¶ 77,

16 F.C.C.R. at 9187 (the interim compensation regime "serves to

limit, if not end, the opportunity for regulatory arbitrage"). In

discussing these regulatory arbitrage opportunities, the FCC

mentions only the problems created by requiring reciprocal

-33-
compensation for ISP-bound traffic. Id ¶ 68, 16 F.C.C.R. at 9181-

82 ("Carriers . . . have the incentive to seek out customers,

including but not limited to ISPs, with high volumes of incoming

traffic that will generate high reciprocal compensation

payments.").15

This court invited the FCC to file a brief as amicus

curiae on the question of the preemptive effect of the ISP Remand

Order. The FCC's helpful brief, while not taking a position on the

outcome of this appeal, nonetheless supports the conclusion that

the order did not clearly preempt state regulation of intrastate

access charges. The brief states that "[t]he ISP Remand Order does

not provide a clear answer to [the] question" of whether the order

"was intended to preempt states from establishing" a requirement of

intercarrier compensation for interexchange VNXX ISP-bound calls.

It notes that "[i]n some respects, the ISP Remand Order appears to

address all calls placed to ISPs" but also that "the administrative

history that led up to the ISP Remand Order indicates that in

addressing compensation, the Commission was focused on calls

between dial-up users and ISPs in a single local calling area."

15
Indeed, Verizon suggests that interpreting the ISP Remand
Order as preempting state access charge regulation as well as
reciprocal compensation regulation would create new opportunities
for regulatory arbitrage, by requiring Verizon to pay compensation
on all calls to ISPs, including "toll-free calls to ISPs . . . for
which [ILECs] had previously received compensation under
established rules."

-34-
Thus it concludes that the ISP Remand Order "can be read to support

the interpretation set forth by either party in this dispute."

The FCC further notes that "in establishing the new

compensation scheme for ISP-bound calls, the Commission was

considering only calls placed to ISPs located in the same local

calling area as the caller." According to the FCC, "[t]he

Commission itself has not addressed application of the ISP Remand

Order to ISP-bound calls outside a local calling area" or "decided

the implications of using VNXX numbers for intercarrier

compensation more generally."

In response to the FCC's brief, Global NAPs makes an

argument that the DTE's imposition of access charges on VNXX ISP-

bound traffic "stands as an obstacle to the accomplishment and

execution of the full objectives of Congress" because the charges

"obstruct the FCC's declared policy of a uniform, rather than

patchwork, approach to the entire field of intercarrier

compensation" and "obstruct the FCC's effort to implement key

policies served by the [TCA]: universal service and competition in

the provision of such service." This particular argument, if

raised at all during initial briefing or oral argument, was barely

done so and may have been waived. See United States v. Zannino,

895 F.2d 1, 17 (1st Cir. 1990). Nonetheless, we address the point.

The Supreme Court has stated that, in determining whether

a federal agency regulation impliedly preempts state law because it

-35-
poses an obstacle to federal policy, "a court should not find pre-

emption too readily in the absence of clear evidence of a

conflict." See Geier v. Am. Honda Motor Co., 529 U.S. 861, 881,

885 (2000) (finding, in that case, such clear evidence). Global

NAPs does not point us to any clear evidence, in the ISP Remand

Order or elsewhere, that the DTE's imposition of access charges on

interexchange VNXX ISP-bound calls will obstruct the implementation

of federal objectives.

As to the FCC's purported policy of a uniform approach to

the "entire field" of intercarrier compensation, the ISP Remand

Order was focused on a particular issue of intercarrier

compensation; the FCC deferred fuller consideration of a unified

system of intercarrier compensation to a future rulemaking. See

ISP Remand Order ¶ 2, 16 F.C.C.R. at 9153 ("[I]n this Order we

. . . take interim steps to limit the regulatory arbitrage

opportunity presented by ISP-bound traffic while we consider the

broader issues of intercarrier compensation in the [Intercarrier

Compensation NPRM] proceeding."). As to the second point about

access charges serving as an obstacle to the goal of universal

service and competition for that service, Global NAPs says that the

access charges will "virtually eliminate competition in the non-

broadband internet access market." In the face of the FCC's long-

standing recognition of state authority over intrastate access

charges, and in the absence of clear evidence that the access

-36-
charges here would impede competition, this argument is

insufficient to find implied preemption.16

We find that there is a lack of clarity about whether the

ISP Remand Order preempts state regulation of the access charges at

issue here.17 Given the requirement of a clear indication that the

FCC has preempted state law, the ISP Remand Order does not have the

broad preemptive effect that Global NAPs seeks to assign to it.

V.

We affirm the entry of judgment for Verizon and the DTE.

Costs of appeal are awarded to Verizon and the DTE. The case is

remanded to the district court for any further proceedings.

16
Global NAPs, in its reply to the FCC's amicus brief, also
asks us to refer the question of the preemptive effect of the ISP
Remand Order to the FCC under the doctrine of primary jurisdiction.
This was an argument certainly not discussed in the initial
briefing or at oral argument, and we deem it waived. Zannino, 895
F.2d at 17.
17
Global NAPs relies on a decision by a Connecticut federal
district court, S. New Eng. Tel. Co. v. MCI WorldCom Commc'ns, Inc.
(SNET), 359 F. Supp. 2d 229 (D. Conn. 2005), which held that the
ISP Remand Order was unambiguous in its preemption of state
regulation of intercarrier compensation for all ISP-bound traffic.
Id. at 232. We simply disagree with the SNET court's analysis.

-37-