Unintended Consequences

When Vonage and Brand X were decided earlier this month, press reports by CNET suggested the two cases were in conflict. See Unintended Consequences: Fed Court Bars PUC Regulation of VOIP Provider. Reading both decisions indicates otherwise.

In Brand X Internet Services v. Federal Communications Commission, No. 02-70518, ____ F.3d _____ (9th Cir. 2003) the Court addressed several cases consolidated before it. The controversies arose from the FCC's decision to classify Internet services provided by cable companies exclusively as an interstate "information service" under the definitions in the Telecommunications Act of 1996, 47 U.S.C. §§151-615 ("the Telecommunications Act"). The FCC's decision was embodied in a March 2002 Declaratory Ruling that conflicted with a prior decision by the Ninth Circuit in AT&T v. City of Portland, 216 F.3d 871 (9th Cir. 2000). In Portland, the Court had decided that cable modem service was not a "cable service" under the meaning of such in the Telecommunications Act, and contained both information service and telecommunications service components.

The Court of Appeals reviewed the FCC's interpretation under the standard set forth by the Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and concluded that the FCC ruling had to be set aside. In doing so, the Court reviewed its holdings in Portland, emphasizing that cable modem service included two distinct elements: 1) the "pipeline" (cable broadband) and 2) the Internet service transmitted over that pipeline. The Court reaffirmed its decision in 2000 that the transmittal element (the "pipeline") constitutes a telecommunications service, despite its combined offering with the Internet service.

In Vonage Holdings Corp. v. Minnesota Public Utilities Comm., Civ.No. 03-5287 (October 16, 2003), (full text courtesy of Netsuds.com) the District Court for the District of Minnesota considered the attempt of the Minnesota PUC to regulate Vonage, a provider of Voice Over Internet Protocol ("VOIP") service. Even though Vonage users required broadband service for it to function as expected, Vonage provided no broadband transmission service. Its users were dependent upon obtaining broadband services from some other provider.

The Court found that without a transmission element, the Vonage service qualified as an "information service" subject to federal regulation and not a "telecommunications service." "Vonage's services are closely tied to the provision of telecommunications services as defined by Congress, the courts and the FCC, but this Court finds that Vonage uses telecommunications services, rather than provides them."

Noting that the FCC had elected to regulate the information service sector with "a vacuum," the District Court found that the federal regulation had pre-empted the potential state authority. "What Vonage provides is essentially the enhanced functionality on top of the underlying network," said the Court, "which the FCC has explained should be left alone."

"VoIP services necessarily are information services," said the Court, "and state regulation over VoIP services is not permissible because of the recognizable congressional intent to leave the Internet and information services largely unregulated."

The Vonage court distinquished an earlier FCC tenative opinion that "phone to phone" VOIP services that used a gateway within the network "bear the characteristics of 'telecommunications services'" that may be subject to state authority. It based its distinction on a finding that Vonage provided only "computer to computer" and "computer to phone" or "phone to computer" service, not "phone to phone" service.

The Court noted "the attractiveness of the MPUC's simplistic 'quacks like a duck' argument, essentially holding that because Vonage's customers make phone calls, Vonage's services must be telecommunications services. However, this simplifies the issue to the detriment of an accurate understanding of this complex question."

The Court issued a permanent injunction against state imposition of telecommunications service requirements on Vonage.

Netsuds.com is hosting a Telecom Policy Summit & Reception in Minnesota on October 22 and provides links to original documents of that and other states.

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