Title AT&T v. FCC
Argued November 12, 2004 Decided January 14, 2005
Subject Business
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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 12, 2004 Decided January 14, 2005
No. 03-1431
AT&T CORPORATION,
PETITIONER
V.
FEDERAL COMMUNICATIONS COMMISSION AND
UNITED STATES OF AMERICA,
RESPONDENTS
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 Peter H. Jacoby, James F. Bendernagel,
Jr., C. John Buresh, and Michael J. Hunseder.
Laurence N. Bourne, Counsel, Federal Communications
Commission, argued the cause for respondents. With him on the
briefs were Robert B. Nicholson and Steven J. Mintz, Attorneys,
U.S. Department of Justice, John A. Rogovin, General Counsel,
Richard K. Welch, Associate General Counsel, John E. Ingle,
Deputy Associate General Counsel, and Rodger D. Citron,
Counsel. Laurel R. Bergold, Counsel, entered an appearance.
2
Before: GINSBURG, Chief Judge, and TATEL and ROBERTS,
Circuit Judges.
Opinion for the Court by Circuit Judge ROBERTS.
ROBERTS, Circuit Judge: AT&T Corporation petitions for
review of a Federal Communications Commission order
interpreting AT&T's tariff on resales of 800 telephone service.
A provision of that tariff allows resellers to transfer their
business, so long as the recipient assumes all of the transferor's
obligations. Based on this provision, AT&T denied one re-
seller's request to move the "traffic" under its 800 plans to
another reseller without a transfer of the corresponding obliga-
tions. The Commission interpreted the tariff transfer provision
as not addressing the movement of traffic, and ultimately held
that AT&T could not refuse the transfer. We conclude that
traffic is a type of service covered by the transfer provision, and
that the Commission's contrary interpretation would render the
provision meaningless. We grant the petition for review.
I.
This case concerns the transfer of toll-free 800 telephone
service. At the time of the events in question, AT&T was the
dominant carrier of such service, which it provided pursuant to
tariffs filed with the FCC. Under the Communications Act of
1934, as amended, and the "filed rate doctrine" incorporated
therein, neither the carrier nor its customers could depart from
the terms set forth in AT&T's tariffs. See 47 U.S.C. § 203(c);
AT&T v. Cent. Office Tel., Inc., 524 U.S. 214, 22124 (1998);
Orloff v. FCC, 352 F.3d 415, 418 (D.C. Cir. 2003).
The tariff at issue here -- AT&T Tariff FCC No. 2 --
allowed companies to purchase and resell 800 service to small
businesses around the country. The tariff refers to this resale
business, as well as the underlying service itself, as Wide Area
Telecommunications Service (WATS). Any company could
3
qualify as a reseller so long as it met the requirements of one of
several plans described in the tariff. Companies qualified by
aggregating the WATS usage of multiple small businesses into
a single plan, and, under the tariff, the companies obtained
AT&T's service for these "end-user" businesses at a discounted
rate. In return, the reseller or "aggregator" company agreed to
meet certain obligations set forth by the carrier, including
commitments to purchase a certain volume of use.
In the early 1990s, as other carriers began to acquire a share
of the 800 market, the FCC began to loosen its regulation of
AT&T. Starting in 1991, the Commission no longer forced the
carrier to offer WATS only through the generic plans set forth in
Tariff No. 2. Instead, the FCC gave AT&T the option of
individually negotiating "contract tariffs" with particular resale
companies. As contract tariffs could be drawn to offer discounts
greater than those available under Tariff No. 2, many resellers
naturally sought to obtain them.
Alfonse Inga, a New Jersey businessman who owned several
aggregator companies, was one such reseller. In 1994, Mr. Inga
undertook a series of transactions designed to move his business
from Tariff No. 2 to a more lucrative contract tariff. First, his
companies -- each of which operated under CSTP II, a type of
plan offered under Tariff No. 2 -- transferred all nine of their
plans to a new entity, Combined Companies, Incorporated (CCI).
As required by Section 2.1.8 of Tariff No. 2, CCI expressly
agreed to assume all obligations of the transferor companies.
The transfer also stipulated that CCI would pass 80 percent of its
profits on to the transferor companies. Second, CCI attempted
to negotiate a contract tariff with AT&T. Third, as temporary
cover until this envisioned contract tariff became a reality, or as
a permanent alternative in case it never did, Mr. Inga planned
another transfer -- one between CCI and Public Services
Enterprises of Pennsylvania (PSE). PSE already had a contract
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tariff with AT&T at a substantially larger discount on AT&T's
800 service than that available to CCI under Tariff No. 2.
AT&T resisted this series of transactions. Fearing that CCI
would not have the assets to meet its obligations under the
transferred plans, AT&T initially refused to implement the first
transfer (from the Inga companies to CCI) unless CCI paid a
deposit -- a requirement not found in Section 2.1.8 of Tariff
No. 2. In 1995, the Inga companies and CCI brought suit against
AT&T in federal district court in New Jersey, and the court
ordered AT&T to drop the deposit requirement and implement
the transfer. Combined Companies, Inc. v. AT&T, No. 95908
(D.N.J. May 19, 1995) (unpublished opinion).
Meanwhile, CCI's negotiations for its own contract tariff
failed and CCI entered into the second transfer, moving substan-
tially all the 800 service in its CSTP II plans to PSE. As with the
first transfer, the CCI-PSE agreement called for PSE to pass
much of the realized profit back to CCI. The second transfer,
however, differed from the first in an important respect. The
parties attempted to structure the transaction to avoid Section
2.1.8 of Tariff No. 2, so that PSE would not have to assume
CCI's obligations on the transferred service. To do this, the
parties asked AT&T to move just the service to particular
end-user businesses -- the "traffic" under CCI's plans -- and to
leave the plans themselves otherwise intact. The parties hoped
that, as a result, 800 service would be billed under PSE's
substantially lower contract tariff rates, while CCI would remain
responsible for the obligations to the carrier under Tariff No. 2.
AT&T balked at this second transfer as well. AT&T
maintained that Section 2.1.8 applied to the transaction, and that
PSE thus had to assume CCI's obligations in order for the
transfer to go through. In addition, AT&T argued that the
proposed transfer violated the tariff's "fraudulent use" provi-
sions, as CCI almost certainly would fall short of its volume
5
commitments once the traffic was moved to PSE's account, and
AT&T had reason to believe that CCI would not have sufficient
assets to pay the resulting penalties.
The same district court that compelled AT&T to accept the
first transfer declined to rule on the second, holding that tariff
interpretation issues were within the primary jurisdiction of the
FCC. Id. at *15. When none of the parties brought the primary
jurisdiction matter to the agency, however, the district court
went ahead and issued its own decision interpreting the tariff.
See Combined Companies, Inc. v. AT&T, No. 95908 (D.N.J.
Mar. 5, 1996) (unpublished opinion). The Third Circuit vacated
this ruling as inconsistent with the primary jurisdiction referral,
and ordered the sides to bring the matter to the FCC's attention.
Combined Companies, Inc. v. AT&T, No. 965185 (3d Cir. May
31, 1996) (unpublished opinion).
The specific question referred to the FCC was "whether
section 2.1.8 permits an aggregator to transfer traffic under a
plan without transferring the plan itself in the same transaction."
Id. at *3. While the case was pending before the Commission,
AT&T entered into a settlement with CCI, extinguishing its
WATS plans and releasing all claims between the two parties.
Apparently as a result of this settlement, the Commission took
no action on the case for seven years. The Inga companies,
however, continued to claim damages stemming from AT&T's
denial of the CCI-PSE transfer, and in 2003 the Commission
finally addressed the Third Circuit referral.
The Commission held that Section 2.1.8 did not govern, and
therefore did not preclude, the movement of traffic without
attendant obligations. FCC Memorandum Opinion and Order at
68. In particular, the Commission reasoned that Section 2.1.8
applied only to the transfer of entire tariffed plans, and not to the
transfer of just the traffic component of such plans. Id. at 7. The
Commission also held that, even assuming the transaction
6
constituted fraud under the tariff, the tariff did not allow AT&T
to remedy such fraud by denying the transfer. Id. at 810. In
light of these holdings, the Commission ruled that AT&T could
not refuse the CCI-PSE transfer. Id. at 14. The Inga companies,
whose involvement in the federal district court action in New
Jersey is still ongoing, view the Commission's ruling as entitling
them to millions of dollars in damages.
AT&T now petitions for review of the FCC order.
II.
Our inquiry is governed by the Administrative Procedure
Act, which requires us to uphold an FCC order unless it is
"arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law." 5 U.S.C. § 706(2)(A). To clear this
threshold, the FCC's tariff interpretations must be "reasonable
and based upon factors within the Commission's expertise."
Global NAPS, Inc. v. FCC, 247 F.3d 252, 258 (D.C. Cir. 2001)
(citation omitted and alteration in original). Thus, we will
reverse the FCC only if its interpretations are "not supported by
substantial evidence, or the Commission has made a clear error
in judgment." Id. (same).
The Commission's order in this case is entirely predicated
on its determination that Section 2.1.8 of Tariff No. 2 does not
apply to the movement of traffic. At the time of the proposed
transfer to PSE, that Section read as follows:
Transfer or Assignment -- WATS Wide Area Telecommu-
nications Service . . . may be transferred or assigned to a
new Customer, provided that:
. . .
B. The new Customer notifies AT&T in writing that it
agrees to assume all obligations of the former Customer at
the time of the transfer or assignment.
7
The Section on its face does not differentiate between transfers
of entire plans and transfers of traffic, but rather speaks only in
terms of WATS -- the telephone service itself. The new and
former Customers referred to are the aggregators, in this case
PSE and CCI. Accordingly, any transfer of WATS required PSE
to assume CCI's obligations.
AT&T's basic argument before this court is that "traffic,"
even if it is not the same thing as a tariffed plan, is a type of
Wide Area Telecommunications Service covered by Section
2.1.8. In transferring traffic, the parties sought to reassign
particular end-user businesses from CCI to PSE, so that calls to
these businesses would be billed under PSE's lower rates. Thus,
CCI asked AT&T to transfer the billed telephone numbers
(corresponding to individual end-user locations) included in each
CSTP II plan. See Transfer of Service Agreement Forms. It
must be -- AT&T argues -- that what the parties sought to
transfer is a type of service covered by the tariff; that is why they
used the Transfer of Service forms. See AT&T Tariff FCC
No. 2, Section 3.1.1 (defining "800 Service and WATS" as
"telecommunications services which permit inward and outward
calling respectively between a station associated with an access
line in one location and stations in diverse geographical service
areas specified by the Customer").
The Commission does not respond directly to AT&T's
argument. Instead, both in its brief before this court and in its
order below, the FCC relies on a statement made by AT&T in
comments submitted in the administrative proceeding. There,
AT&T noted in passing that "in this case the relevant WATS
services are the CSTP II Plans." Comments of AT&T Corp. in
Opposition to Joint Petition for Declaratory Ruling and Joint
Motion for Expedited Consideration at 10. The Commission
interprets this statement as conceding that Section 2.1.8 can only
be triggered by the wholesale transfer of tariffed plans, and not
8
by the transfer of component parts such as individual billed
telephone numbers. See FCC Order at 67; FCC Br. at 1618.
AT&T, however, argues persuasively that the FCC misinter-
preted its comment. Immediately following the alleged conces-
sion, AT&T's submission noted that:
Section 2.1.8 , by its terms, allows a transfer of CCI's
service to PSE only if PSE agreed to assume all obligations
under those plans. Yet CCI explicitly amended the transfer
of services form to read "Traffic Only." By expressly
declaring that it did not intend to effectuate a transfer of all
obligations under the plans to PSE . . . the proposed trans-
fer, on its face, violated the terms of Section 2.1.8.
Comments of AT&T Corp. at 1011 (emphasis added) (citation
omitted). It appears quite clear, then, that AT&T did not
concede the inapplicability of Section 2.1.8 to transfers of traffic
only. Indeed, had AT&T been willing to make such a conces-
sion, it presumably would not have contested the meaning of this
provision before the Commission. Accordingly, the FCC's
reliance on AT&T's comment is plainly misplaced.
Absent such reliance, the Commission provides us with
little reason why the plain language of Section 2.1.8 fails to
encompass transfers of traffic alone. The Commission maintains
that " r ather than a single transfer request, here CCI and PSE
effectively made two requests: one by CCI to AT&T to decrease
its traffic, and another by PSE to increase its traffic." FCC
Order at 7; see FCC Br. at 17. But this hardly sheds light on the
meaning of the transfer provision. First, AT&T contends that a
simultaneous decrease and increase in the respective service of
CCI and PSE would in fact not accomplish the same objectives
as a transfer of service. AT&T argues that the transfer provision,
Section 2.1.8, was included precisely because there are practical
benefits to a transfer that would be lost through a transaction of
the sort hypothesized by the Commission. These include
9
guarantees against service interruptions and the loss of particular
800 numbers, as well as exemption from a requirement that
resellers obtain their end-users' written consent prior to the
transaction. See AT&T Br. at 2123.
Be that as it may, proceeding by analogy does not change
the fact that CCI and PSE did request a transfer -- a transaction
on its face at least potentially within the reach of Section 2.1.8,
which governs "Transfer or Assignment" -- instead of dropping
and adding traffic in separate transactions. George Eliot has
written that "the world is full of hopeful analogies,"
MIDDLEMARCH 83 (Penguin Classics 1994) (1872), and this
must be one of them, but likening the transfer at issue to a
different arrangement, and then analyzing how that arrangement
would fare under Section 2.1.8, does not advance the FCC's
position very far.
In addition, the Commission's failure to grasp AT&T's
comment reveals a more fundamental error in its approach. The
reason AT&T seemed to equate the transfers in this case with a
transfer of plans is that CCI sought to move virtually all of the
billed telephone numbers in each of its CSTP II plans. Thus, for
each of the nine plans, CCI asked AT&T to move all but one, or
all but two, of the telephone numbers included in that plan. See
Transfer of Service Agreement Forms. In so doing, CCI asked
AT&T to move nearly all the services -- all the benefits --
associated with its CSTP II plans. What was left behind were
CCI's obligations -- the burdens under the plans. Accordingly,
even if small scale transfers of traffic were outside the scope of
Section 2.1.8, allowing this transaction to go through would
create an obvious end-run around the unquestioned rule that new
Customers had to "assume all obligations" in transferring WATS
plans. Any reseller could circumvent Section 2.1.8 simply by
asking AT&T to move its business one billed telephone number
at a time. Using such a scheme, a reseller could move every
component of a plan, save its obligations to AT&T. The transfer
10
provision would then have no effect except in those cases where
the transferor foolishly fell within its scope by phrasing its
request in terms of the tariffed plans themselves.
The FCC itself recognized that the "purpose" of Section
2.1.8 "was to maintain intact the balance of obligations and
benefits between parties under the tariff when one customer
stepped into the shoes of another." FCC Order at 7. The
Commission's interpretation eviscerates this very purpose,
allowing PSE to take up essentially all of CCI's resale business
without assuming so much as one of CCI's obligations to
AT&T.1
As the foregoing discussion indicates, we find the Commis-
sion's interpretation implausible on its face. First, the plain
language of Section 2.1.8 encompasses all transfers of WATS,
and not just transfers of entire plans. In the absence of any
contrary evidence, we find that "traffic" is a type of service
covered by the tariff. Second, the FCC's interpretation, permit-
ting the movement of benefits without any assumption of
obligations, would render the transfer provision meaningless
1 The FCC contends that this entire line of argument --
challenging the Commission's interpretation as rendering Section
2.1.8 meaningless -- is not properly before us, as AT&T did not first
present it to the Commission in a petition for reconsideration. FCC
Br. at 15 & 19. We disagree. The Communications Act precludes us
from addressing only those issues upon which the Commission "has
been afforded no opportunity to pass." 47 U.S.C. § 405(a). It does
not prevent us from considering "whether the original question was
correctly decided," MCI v. FCC, 10 F.3d 842, 845 (D.C. Cir. 1993),
or whether the FCC "relied on faulty logic." Nat'l Ass'n for Better
Broadcasting v. FCC, 830 F.2d 270, 275 (D.C. Cir. 1987). The
analysis recounted above speaks to the soundness of the
Commission's ruling on the question initially presented, and not to
any novel legal or factual claims.
11
even in cases involving the transfer of entire plans, so long as the
parties asked the carrier to move all the beneficial plan compo-
nents rather than the plan itself. The whole purpose of the tariff
provision in question was to ensure that benefits could not be
transferred without concomitant obligations. It is utterly
untenable to contend that the provision does not apply when only
benefits are transferred.
In sum, the FCC clearly erred in ruling that Section 2.1.8 of
AT&T Tariff FCC No. 2 does not apply to a transfer of "traffic."
As this was a threshold determination in the FCC's order, we do
not reach the remaining issues addressed by the Commission and
argued by the parties before us. We also do not decide precisely
which obligations should have been transferred in this case, as
this question was neither addressed by the Commission nor
adequately presented to us.2 All we decide is that Section 2.1.8
cannot be read to allow parties to transfer the benefits associated
with 800 service without assuming any obligations. The petition
for review is granted.
2 At oral argument, AT&T's counsel repeatedly stated that Tariff
No. 2 expressly required PSE to assume the volume commitments that
form the heart of AT&T's concern in this case. See Transcript of Oral
Argument at 11, 13. In a motion submitted after the argument,
however, the Inga companies note that the only obligations
enumerated by Section 2.1.8 are "outstanding indebtedness for the
service" and "the unexpired portion of any applicable minimum
payment period." Intervenors Motion to Clarify and Correct the Facts
of the Record at 4. How this enumeration affects the requirement that
new customers assume "all obligations of the former Customer"
(emphasis added) is beyond the scope of our opinion.
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