FCC Adopts Order on Vonage's VOIP Petition

November 9, 2004. The Federal Communications Commission (FCC) adopted, but did not release, a Memorandum Opinion and Order that addressed Vonage Holdings Corporation's Petition for Declaratory Ruling regarding its DigitalVoice service in the state of Minnesota. The FCC found that Vonage's voice over internet protocol (VOIP) service, which is named DigitalVoice, is an interstate service, and that Minnesota cannot regulate as it had proposed in a September 2003 order. However, the FCC's order leaves many VOIP related issued to be decided by other proceeding, and perhaps, court opinions and/or legislation.

FCC Memorandum Opinion and Order. The FCC issued only a short release [2 pages in PDF] that provides a cursory description of this item. Also, four Commissioners issued separate statements, and Wireline Competition Bureau (WCB) Bureau Chief Jeffrey Carlisle answered questions from reporters after the FCC meeting. This item is FCC 04-267 in WC Docket No. 03-211.

The FCC release states that "the FCC found that the company's DigitalVoice service cannot practically be separated into intrastate and interstate components, precluding dual state and federal regulatory regimes. DigitalVoice customers can use their phones from a broadband connection anywhere in the world, making it difficult to determine whether a call is local, interstate or international in nature."

The FCC release also states that the FCC "found that regulations that would have been imposed by the Minnesota Commission were inconsistent with the FCC’s deregulatory policies, and that preemption was consistent with federal law and policies intended to promote the continued development of the Internet, broadband and interactive services." The release also offers this rationale: "Divergent state rules, regulations and licensing requirements could impede the rollout of such services that benefit consumers by providing them with more choice, competition and innovation."

However, the FCC release devotes more words to listing what the FCC order does not decide. First, it states that this order "does not signal that Vonage may cease its efforts to develop workable solutions. The Commission looks forward to addressing public safety issues comprehensively, with the participation of our state and local colleagues, in the broader IP Enabled Services Proceeding."

This refers to the FCC's notice of proposed rulemaking (NPRM) [97 pages in PDF] regarding regulation of internet protocol services, including voice over internet protocol (VOIP). This NPRM is FCC 04-28 in Docket No. WC 04-36. See, story titled "FCC Adopts NPRM Regarding Regulation of Internet Protocol Services" in TLJ Daily E-Mail Alert No. 837, Monday, February 16, 2004. See also, notice in the Federal Register, March 29, 2004, Vol. 69, No. 60, at Pages 16193 - 16202.

The FCC release further states that the order "does not express an opinion about the applicability to Vonage of general laws in Minnesota governing taxation, fraud, commercial dealings, marketing, advertising and other business practices. But the Commission expects states to continue playing a vital role in protecting consumers from fraud, responding to complaints, and enforcing fair business practices."

Finally, the FCC release states that "the question of whether DigitalVoice should be classified as an unregulated ``information service´´ under the Communications Act or a telecommunications service will be addressed in the Commission’s IP-Enabled Services Proceeding. The Commission will also address whether VoIP providers must provide access to the disabled, pay intercarrier compensation and contribute to the universal service fund, in the Commission’s IPEnabled Services Proceeding, which commenced in February of this year."

Chairman Powell summed up the order. "This decision today decides who has to decide." And, he said, this "one of the many landmark days of a phone revolution".

Minnesota Proceeding. On July 15, 2003, the Minnesota Department of Commerce (MDOC) filed an administrative complaint against Vonage with the Minnesota Public Utilities Commission (MPUC) alleging that Vonage offers telephone services in Minnesota, including local exchange service and long distance service, without a certificate under Minn. Stat. §§ 237.16 and 237.74, for those services. The complaint also alleges that Vonage violates Minnesota law by failing to provide 911 service.

On September 13, 2003, the MPUC issued its Order Finding Jurisdiction and Requiring Compliance [9 pages in PDF] finding that the MPUC has jurisdiction, and that Vonage must comply with Minnesota laws that regulate telephone companies, including obtaining certification from the state, complying with 911 rules, and paying 911 fees.

Vonage's FCC Petition. Vonage filed its petition with the FCC on September 22, 2003. See, part 1, part 2, part 3, part 4, part 5, and part 6 [slow downloading PDF scans].

It wrote that "The State of Minnesota is now seeking to impose common carrier regulation on the “intrastate’’ use of Vonage’s Internet application, on the theory that this service is “functionally the same as” a telephone service. If the State is permitted to enforce its order, Vonage -- and presumably other providers of two-way Internet communications applications available to residents of Minnesota -- would be required to obtain state certification before allowing Internet users physically located in Minnesota (assuming it could identify them) to use such services to communicate with other Minnesotans. Because Internet applications like Vonage’s service were designed to be provided ubiquitously over the Internet, neither Vonage nor other developers of similar Internet communications technologies can reasonably be expected to ever obtain a telecommunications carrier certification. Internet communications applications were never designed to comply with the legal and technical requirements applicable to fixed, switched telecommunications networks, let alone be saddled with obligations such as State tariff rules, rate regulation, and other forms of regulation typically imposed on common carriers."

Vonage wrote that "Minnesota’s regulation conflicts with this Commission's long-standing policy of deregulating information services", and that the FCC should "preempt Minnesota’s imposition of entry and rate regulation on Vonage’s service".

Vonage also wrote that "Minnesota has ordered Vonage to comply with the same rules as local exchange camers with respect to 911 services. Although Vonage does offer a 911 dialing service to its users and is committed to improving this service to enhance customer safety, the nature of Vonage’s service makes full compliance with Minnesota’s expectations impossible." Vonage also asked the FCC to "preempt these rules, both because they are inconsistent with Vonage’s offering of an information service as described above, and because they have a particular impact on customers who use Vonage service during interstate travel."

Finally, Vonage argued that "preemption is necessary because of the impossibility of separating the Internet, or any service offered over it, into intrastate and interstate components."

Vonage v. Minnesota. In addition to this regulatory proceeding, there is a court proceeding. Vonage filed a complaint in U.S. District Court in Minnesota against the MPUC and its Commissioners, in their official capacities. It seeks declaratory and injunctive relief. It argues that its VOIP service is an information service, not a telecommunications service.

On October 16, 2003, the U.S. District Court (DMinn) issued its Memorandum and Order [PDF] in Vonage v. Minnesota Public Utilities Commission, holding that Vonage is an information service provider, and that the MPUC cannot apply state laws that regulate telecommunications carriers to Vonage.

The Court wrote that "State regulation would effectively decimate Congress's mandate that the Internet remain unfettered by regulation." See, story titled "District Court Holds that Vonage's VOIP is an Information Service" in TLJ Daily E-Mail Alert No. 760, October 17, 2003.

The District Court concluded "that the VoIP service provided by Vonage constitutes an information service because it offers the ``capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.´´ 47 U.S.C. § 153(20). The process of transmitting customer calls over the Internet requires Vonage to ``act on´´ the format and protocol of the information. 47 C.F.R. § 64.702(a)."

The District Court continued that "For calls originating with one of Vonage's customers, calls in the VoIP format must be transformed into the format of the PSTN before a POTS user can receive the call. For calls originating from a POTS user, the process of acting on the format and protocol is reversed. The Court concludes that Vonage's activities fit within the definition of information services. 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."

The District Court also held that the Communications Act preempts the state laws being applied by the MPUC. It wrote that "Because Congress has expressed an intent that services like Vonage's must remain unregulated by the Communications Act, and because the MPUC has exercised state authority to regulate Vonage’s service, the Court concludes that that state and federal laws conflict, and pre-emption is necessary."

The MPUC appealed to the U.S. Court of Appeals (8thCir). Oral argument is scheduled for November 17, 2004.

On April 21, 2004, the FCC filed an amicus curiae brief [38 pages in PDF] with the Court of Appeals in which it requested that the Court defer its resolution of this appeal. The FCC wrote that it is "is currently engaged in administrative proceedings that will address Vonage's regulatory status in particular and the regulatory status of Internet telephony services more generally. There is a significant public interest in ensuring that the FCC's regulatory authority is not impaired by premature judicial resolution of these issues", and that the Court should wait until these proceedings are completed. See, story titled "FCC Files Amicus Brief in Vonage v. Minnesota PUC" in TLJ Daily E-Mail Alert No. 887, April 29, 2004.

Carlisle spoke after the meeting about the upcoming 8th Circuit oral argument. He said that "We have been in this position before, with regard to a number of cases, including reciprocal compensation, and also Brand X. And so, we would rather not repeat that here. We want to get as much clarity out as to what the FCC thinks about the jurisdictional nature of these services as possible. So, at least the judicial process knows what we think."

FCC Commissioners' Statements. FCC Chairman Michael Powell wrote in a separate statement [PDF] that "VOIP is barely a few years old as a retail offering and providers have already cut prices several times to compete for consumers. VoIP providers have begun offering local and long-distance calling plans for as low as $14.99 and $19.99 per month. Most recently, Vonage and AT&T slashed the monthly prices of their unlimited local and long-distance calling plans by $5 per month. If we let competition and innovation rage, unencumbered by the high cost of regulation, Consumers can expect more of the same -- lower prices, more choice, and more innovative offerings."

Powell (at right) continued that "Today's decision lays a jurisdictional foundation for what consumers already know -- that the Internet is global in scope. The genius of the Internet is that it knows no boundaries. In cyberspace, distance is dead. Communication and information can race around the planet and back with ease. The Order recognizes that several technical factors demonstrate that VoIP services are unquestionably interstate in nature. VoIP services are nomadic and presence-oriented, making identification of the end points of any given communications session completely impractical and, frankly, unwise. In this sense, Internet applications such as VoIP are more border-busting than either long distance or mobile telephony -- each inherently, and properly classified, interstate services."

"To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet", wrote Powell. "VOIP properly stands in this category and the Commission is merely affirming the obvious in reaching today’s jurisdictional decision."

FCC Commissioner Kathleen Abernathy wrote in a separate statement [PDF] that "There is no doubt that VoIP services of the type provided by Vonage are inherently interstate in nature."

She added that "Allowing the Minnesota utility regulations -- or comparable state regulations -- to stand would authorize a single state to establish default national rules for all VoIP providers, given the impossibility of isolating any intrastate-only component. Equally troubling is the prospect of subjecting providers of these innovative new services -- which are being rolled out on a regional, national, and even global scale -- to a patchwork of inconsistent state regulations. In short, failure to preempt state utility regulations would likely sound the death knell for many IP-enabled services and would deprive consumers of the cost savings and exciting features they can deliver."

FCC Commissioner Michael Copps wrote in a concurring statement [PDF] that "Today's decision finds that VoIP services like Vonage's DigitalVoice have an undeniably interstate character. That’s fine as far as it goes—but it doesn’t go very far. Proclaiming the service “interstate” does not mean that everything magically falls into place, the curtains are raised, the technology is liberated, and all questions are answered. There are, in fact, difficult and urgent questions flowing from our jurisdictional conclusion and they are no closer to an answer after we act today than they were before we walked in here.

He complained that the FCC "moves bit-by-bit through individual company petitions, in effect checking off business plans as they walk through the door. This is not the way we should be proceeding. We need a framework for all carriers and all services".

FCC Commissioner Jonathan Adelstein wrote in a concurring statement [PDF] that he is "not comfortable with all of the analysis" in the order. He wrote that "Where this Order falls short is its failure to account in a meaningful way for essential policy issues, including universal service, public safety, law enforcement, consumer privacy, disabilities access, and intercarrier compensation, and the effect of our preemption here." He added that "I also have reservations about our preemption of a State’s efforts to ensure the public safety of its citizens, based here on the linkage of the 911 requirement with a State certification."

Chairman Powell, in his statement at the meeting, responded to "the process concern, that wouldn't we rather answer all of the questions comprehensively, do everything now. Well, what I find interesting about that is that revolutionaries are a little less patient than that, and they are a little less messy than that. I think this is this is a classic example of letting the perfect be the enemy of the good. At some point it is a formula for paralysis. Because, there will always be more questions on the horizon. There will always be new challenges presented by new innovation". He said that the FCC can't "answer every possible question before you let a service come to the benefit of consumers". These comments were not a part of his written statement.

Carlisle explanation. Jeffrey Carlisle answered questions from reporters after the meeting about what is in the FCC's forthcoming order. He said that "This order does not address or explicitly preclude any possible approach on universal service for VOIP providers" at either the state or federal level.

He also answered that the order does not preclude state or local taxation of VOIP services, but that it does preclude state regulation of the terms of services and prices of VOIP services.

"The actual preemption analysis applies to certification requirements and 911 requirements that are made a condition to certification. It is possible that you could have different conclusions regarding preemption based on different state requirements. Those question, USF questions were not before the Commission." Carlisle added that other questions are being addressed in other FCC proceedings, including the USF proceeding, the intercarrier compensation proceeding, and the IP enabled services proceeding.

"This item is very clear that the 911 requirement is being preempted because it was a condition of certification. Certification was preempted. Therefore the 911 requirement had to fall."

Carlisle also asserted that the order, which the FCC has not released, "is clear".