U.S. Court of Appeals Affirms FCC Order Preempting State Regulation of Interconnected VoIP Service

Earlier today the U.S. Court of Appeals for the Eighth Circuit issued an opinion affirming the Federal Communications Commission’s (FCC) decision preempting state regulation of interconnected voice over Internet protocol (VoIP) services. Minnesota PUC v. FCC, No. 05-1069, slip op. The court was asked to review the FCC’s 2004 Vonage Order, which preempted the effort by the Minnesota Public Utilities Commission (PUC) to impose traditional state telecommunications regulation on Vonage’s VoIP service.

In response to the PUC’s effort, Vonage asked the FCC to preempt the PUC on two grounds. First, Vonage argued that it provided “information services” and not “telecommunications services,” and was therefore exempt from state telecommunications regulation. Second, Vonage invoked the so-called “impossibility exception” of Section 2(b) of the Communications Act, which allows the FCC to preempt state regulation of a service also subject to federal regulation, where it is impossible or impractical to separate the service’s intrastate and interstate components, and where the state regulation interferes with valid federal rules or policies.

In the Vonage Order the FCC did not decide whether Vonage’s VoIP offering was an “information service” or a “telecommunications service,” but it agreed that under the impossibility doctrine it would preempt the Minnesota PUC because it was impossible to separate the intrastate and interstate components of Vonage’s service. The FCC found that state regulation of the intrastate component of the service would interfere with the FCC’s policy of keeping these services largely free from regulation. As part of its analysis the FCC relied on the fact that it is difficult to distinguish intrastate from interstate calls due to the so-called “nomadic” nature of Vonage’s service; that is, the fact that Vonage customers can use their service, with a single telephone number, anywhere they have an Internet connection, so their service is not tethered to any particular location.

The Minnesota PUC and a number of other state PUCs appealed the FCC’s order. In addition to a general challenge of the FCC’s broad preemption ruling, the New York Public Service Commission (“PSC”) specifically challenged one aspect of the FCC’s Vonage Order that indicated the FCC would extend the preemptive effects of the order to so-called non-nomadic VoIP service providers, including cable companies. The New York PSC argued that the Vonage Order did not preempt state regulation of VoIP services offered to a fixed location or address, because with fixed services it should be possible to distinguish the intrastate and interstate components of the service. Cable companies and other providers of fixed VoIP service opposed the PSC’s position, arguing before the Eighth Circuit that specific language in the Vonage Order (including paragraph 32) extended the preemptive effects of the ruling to fixed VoIP services.

Upon review the Eighth Circuit generally found that the FCC had not been arbitrary or capricious in applying the “impossibility” doctrine, and so affirmed the FCC’s order. However, the court declined to address the question of whether the Vonage Order also preempts fixed VoIP service, holding instead that the question was not ripe for review.

On the larger question, the court applied the Administrative Procedure Act’s deferential standard to the FCC’s decision, under which the court will not substitute its own assessment of the facts in a technically complex area as long as the agency’s decision is not “arbitrary” or “capricious.” Applying that standard, the court upheld the agency. The court pointed to the FCC’s finding that there would be no practical means of identifying the geographic location of a user of Vonage’s service, that the service may access different websites or different IP addresses during a call, and that state regulation would interfere with federal policies in this area. For these reasons the court affirmed the FCC’s decision to preempt state regulation of Vonage’s Digital Voice service, and other nomadic services.

As for preemption of non-nomadic services, the court accepted the FCC’s argument that that the dispute was not ripe for review. The court pointed to language of the Vonage Order stating that the FCC “would” preempt state regulation of fixed VoIP services. This language showed that the FCC’s decision was “at most a prediction” of what the agency would do if faced with the question of whether to preempt state regulation of fixed VoIP services. The court concluded that the Vonage Order does not purport to actually preempt state regulation, but is instead a “mere prediction” of the FCC’s intent to do so. Accordingly, the court reasoned that because there is no current case or controversy on the question of preemption of fixed VoIP services the issue was not ripe for review.

Davis Wright Tremaine counsels fixed and nomadic interconnected VoIP service providers on these and other issues. If you would like additional information or assistance with these matters, please contact