TR Daily Court Says VoIP Is Information Service, Preempts PUC
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Friday, September 7, 2018

Court Says VoIP Is Information Service, Preempts PUC

In a 2-1 decision, a panel of the U.S. Court of Appeals for Eighth Circuit (St. Louis) today upheld a federal district court’s ruling that Charter Advanced Services LLC’s interconnected VoIP (voice-over-Internet-protocol) service is an information service under the federal Telecommunications Act and that state regulation of the service is thus preempted.

In “Charter Advanced Services (MN) LLC; Charter Advanced Services VIII (MN) LLC, v. Nancy Lange, in her official capacity as Chair of the Minnesota Public Utilities Commission, et al.” (case 17-2290), the Minnesota Public Utilities Commission was appealing summary judgment by the U.S. District Court for the District of Minnesota in favor of Charter, which had challenged the PUC’s oversight of its VoIP service, known as Spectrum Voice.

The FCC had filed an amicus curiae brief with the Eighth Circuit arguing that the PUC had overstepped its authority and that its “sweeping assertion of regulatory authority over VoIP service threatens to disrupt the national voice services market and to address how relevant FCC orders provide more measured and appropriate mechanisms for regulating VoIP service” (TR Daily, Oct. 30, 2017).

Charter subsequently argued in a supplemental brief that the FCC’s 2017 restoring Internet freedom (RIF) order expressly preempts states from regulating broadband Internet services by “reiterating the ‘longstanding federal policy of nonregulation for information services’ and emphasizing ‘Congress’s approval’ of that ‘preemptive federal policy’” (TR Daily, Jan. 11).

The Minnesota Attorney General’s Office responded that the FCC’s RIF order deals with broadband Internet access services, and that the VoIP service in question is not such a service, but rather falls within the “telecommunications management exception” described in the order.

In today’s opinion, Circuit Judge Ralph R. Erickson, who was joined by Circuit Judge James B. Loken, wrote, “How a service is classified affects a state’s ability to regulate the service. Telecommunications services are generally subject to ‘dual state and federal regulation.’ See Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 375 (1986). By contrast, ‘any state regulation of an information service conflicts with the federal policy of nonregulation,’ so that such regulation is preempted by federal law. See Minnesota Pub. Utilities Comm’n v. FCC, 483 F.3d 570, 580 (8th Cir. 2007); see also 47 C.F.R. § 64.702. The FCC has so far declined to classify VoIP services as either information or telecommunications services, despite repeated opportunities to do so.”

Judge Erickson added, “We conclude that the VoIP technology used by Charter Spectrum is an ‘information service’ under the Act. As the district court put it, ‘the touchstone of the information services inquiry is whether Spectrum Voice acts on the consumer’s information — here a phone call — in such a way as to “transform” that information.’ 259 F.Supp.3d at 987; see 47 U.S.C. § 153(24). IP-TDM [Internet protocol–time division multiplex] calls involve just such a transformation. For those calls, because information enters Charter’s network ‘in one format (either IP or TDM, depending on who originated the call) and leaves in another, its system offers “net” protocol conversion, which the FCC has defined as occurring when ‘an end-user [can] send information into a network in one protocol and have it exit the network in a different protocol.’’”

He continued, “We briefly address the Act’s carve-out from the definition of ‘information service.’ The definition of ‘information service’ excludes services that comprise a ‘capability for the management, control, or operation of a telecommunications system or the management of a telecommunications service.’ 47 U.S.C. § 153(24). The FCC has further defined this exception to include ‘(1) services “involving communications between an end user and the network itself (e.g., for initiation, routing, and termination of calls) rather than between or among users;” (2) protocol processing “in connection with the introduction of a new basic network technology (which requires protocol conversion to maintain compatibility with existing [CPE])” and (3) services “involving internetworking (conversions taking place solely within the carrier’s network to facilitate provision of a basic network service, that result in no net conversion to the end user).”’ 259 F.Supp.3d at 988-89 (quoting Non-Accounting Safeguards Order, 11 F.C.C.R. at 21957 ¶ 106).

“None of the exceptions alter our conclusion that Spectrum Voice is an information service. The first exception is inapplicable because the service at issue is ‘between or among users.’ The network protocol technology is an essential feature of Spectrum Voice’s offerings, as the ability to call users of legacy telephony services via Spectrum Voice is a vital selling point for consumers. The second exception is also inapplicable. Spectrum Voice’s service is not aimed at providing backwards compatibility for existing CPE. Instead, Spectrum Voice’s customers must receive new CPE (the eMTA) to utilize its services. Finally, the ‘internetworking’ exception does not apply. The FCC defines CPE as falling outside a carrier’s network. See In re Federal–State Joint Board on Universal Service, 18 F.C.C.R. 10958, 10067 ¶ 18 (2003) (defining CPE as ‘equipment that falls on the customer side of the demarcation point between customer and network facilities’). As such, the eMTA is located outside of the carrier’s network by definition. Since any conversion back into the original form of the information takes place outside of the network (in the eMTA), the ‘internetworking’ exception is inapplicable,” Judge Erickson said.

In his dissent, Circuit Judge L. Steven Grasz said, “Because I do not believe net protocol conversions qualify as information services under the federal Communications Act, I would reverse the district court’s conclusion that federal law preempts state regulation of Charter’s Spectrum Voice service.”

He noted that in a 1983 action in its “Computer Inquiry” proceedings, which distinguished between basis and enhanced services, the FCC said “that some protocol conversion is necessary to basic services, but it narrowly construed which protocol conversions are necessary while indicating that it would consider waiver applications for basic service providers that wanted to add other protocol conversions.”

“The Telecommunications Act of 1996, which amended the Communications Act, largely adopted the FCC’s basic service and enhanced service categories in its definitions of telecommunications service and information service, respectively, with a very important change that is relevant here: it did not include protocol conversions in the definition of information service,” Judge Grasz said.

“In a 1998 report to Congress, the FCC admitted that its prior discussion of protocol processing in its 1996 Non-Accounting Safeguards Order may be incorrect in light of that statutory definition, and it deferred the categorization of net protocol conversions to another day. In the Matter of Fed.-State Joint Bd. On Universal Serv., 13 FCC Rcd. 11501, 1998 WL 166178, at ¶¶ 49–52 (1998) (the ‘Stevens Report’) (discussing Non-Accounting Safeguards Order at ¶¶ 104–07). It remained unclear whether protocol conversions amounted to transforming information, making the service an ‘information service,’ or were simply part of transmitting information, making it a ‘telecommunications service,’” Judge Grasz continued.

“Twenty years later, the lack of clarity continues. This is at least in part because the entire telephone network is in the process of changing from time-division multiplex (‘TDM’) to internet protocol (‘IP’). … If the converters used to pass calls between old and new network lines during a transition are the defining feature of an information service, then any telecommunications service would become a lightly regulated information service while using conversion and revert back to being a heavily regulated telecommunications service as soon as the transition from TDM to IP is complete. Such an understanding would create a functional end-run around the statutory language stating a telecommunications service remains such ‘regardless of the facilities used,’” the dissenting judge said.

“While the FCC has not completely resolved the categorization of VoIP, it has issued some orders regarding IP lines, and Charter is avoiding that precedent based on a technicality regarding where conversion occurs. The FCC previously declared that AT&T’s service is a telecommunications service, even though it uses IP lines in the middle of its network, because the call still enters and exits the network on traditional phone lines. See In the Matter of Petition for Declaratory Ruling that AT&T’s Phone-to-Phone IP Telephony Services Are Exempt from Access Charges, 19 FCC Rcd. 7457 (2004) (‘IP-in-the-Middle Ruling’). Here, Charter’s calls technically begin on IP lines and end on traditional phone lines — even though their customers use traditional phone lines to begin calls — because the converter box is inside the customer’s home. The only practical difference between Charter’s network and AT&T’s network is whether the first converter box is inside or outside customers’ homes,” Judge Grasz said.

A spokesman for the PUC told TR Daily, “We are disappointed in the decision and strongly disagree with it. We believe the dissenting opinion was the correct reading of the law in this case. We are currently reviewing the decision and have not yet made any decision on next steps.”

FCC Chairman Ajit Pai said in a statement, “A patchwork quilt of 50 state laws harms investment and innovation in advanced communications services. That’s why federal law for decades has recognized that states may not regulate information services. The Eighth Circuit’s decision is important for reaffirming that well-established principle: ‘[A]ny state regulation of an information service conflicts with the federal policy of nonregulation’ and is therefore preempted. That is wholly consistent with the approach the FCC has taken under Democratic and Republican Administrations over the last two decades, including in last year’s Restoring Internet Freedom Order.”

Free State Foundation President Randolph May said, “The Eighth Circuit’s decision today holding that Charter’s VoIP service is an ‘information service’ not subject to state public utility-like regulation is very significant. Not only did the decision help clarify the regulatory status of VoIP services, but, more importantly it bolstered the FCC’s contention that state regulation of services determined to be information services under federal law are preempted. While in my view the law on this point was clear before today’s decision, the Eighth Circuit’s decision solidifies the case for preemption of state laws, for example those in Washington or California, that purport to impose net neutrality mandates inconsistent with the FCC’s non-regulation of information services.” —Lynn Stanton, [email protected]

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