For the second straight week the FCC and Chairman Ajit Pai are celebrating. The Eighth Circuit Court of Appeals has once again given the Commission an early Christmas present. Last week, it ratified the agency’s dubious competitive market test in the Business Data Services (BDS) Order although it is based on potential competition, a measure that has failed spectacularly in the past to constrain ILEC special access prices. Using that decision as a model, a similar competitive market test will almost certainly be used to eliminate ILEC unbundled network elements (UNEs) in most counties in the country.

As important as that Eighth Circuit Opinion was to competition using time-division multiplexed (TDM) technology, the use of UNEs has declined and will continue to do so as the industry transitions to packet-based Ethernet networks. The subsequent Opinion released on September 7, 2018, might have a bigger impact over time since it involves Internet regulation.   

In the Opinion, the Court found that the state of Minnesota could not regulate the VoIP service (Spectrum Voice) offered by Charter Communications in the state because VoIP is an “information service” regulated solely by the FCC. You can take it to the bank that this Opinion will be used by the FCC in its upcoming court battle against the numerous states that have created a patchwork of net neutrality rules to overcome the FCC’s Restoring Internet Freedom Order.

In the Charter case, the company separated its Spectrum Voice service from its regulated wholesale telecommunications business, identifying it is an “information service,” and thus immune from state regulations. The state disagreed, and the Minnesota Department of Commerce filed a complaint with the state’s Public Utilities Commission (MPUC). The MPUC ruled against Charter, concluding that VoIP is a “telecommunications service” as defined by the 1996 Telecommuncations Act and therefore subject to both federal and state regulations. 

Charter appealed that decision to the state district court, continuing to argue that Spectrum Voice is an “information service” under the Act, requiring complete preemption of any state regulation.  The case was complicated because for years, the FCC has refused to classify VoIP service as either a telecommunications or information services. It has done so to ensure that VoIP calls using the public switched network pay the appropriate inter-carrier compensation charges, but it has left VoIP a regulatory mess. 

In the absence of direct classification from the FCC, the district court reviewed previous FCC orders, and concluded that Spectrum Voice is an information service. The MPUC then appealed this decision to the Eighth Circuit.  That Court agreed with the district court.

As we have noted, “any state regulation of an information service conflicts with the federal policy of nonregulation. We may therefore affirm the district court if Charter’s VoIP offerings are an Information service under the Act. 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.”  IP-TDM 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.” (Eighth Circuit Court of Appeals, No. 17-2290, released September 7, 2018, at p. 6).
 

FCC Chairman Ajit Pai was rightfully thrilled about the decision and immediately issued the following 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.”
 

Parties supporting net neutrality will no doubt argue that the state laws mandating net neutrality are unaffected by this Opinion, since their rules don’t directly preempt the FCC’s. For example, some states assert that they have the freedom to require that only ISPs that observe the net neutrality rules can be used by state agencies. However, most courts are likely to quickly recognize this for what it is, a backdoor attempt to preempt the FCC. Moreover, if this view is accepted, a state could always find a way to work around federal requirements. Acceptance of this argument would set a very bad precedent for the country.

Therefore, we again plead for Congress to for once assume leadership and find a net neutrality compromise. It is not that hard!