Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 1 of 13 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO

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1 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 1 of 13 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW MEXICO NEW MEXICO PUBLIC REGULATION COMMISSION, Plaintiff, v. Case No. 6:08-CV WPJ-RHS VONAGE HOLDINGS CORP., VONAGE AMERICA INC., and VONAGE NETWORK INC., Defendants. DEFENDANTS REPLY IN SUPPORT OF THEIR MOTION TO DISMISS (PLAINTIFFS OPPOSITION FILED 8/15/2008 Doc. 12) When states first tried to regulate Vonage s services, the FCC declared that this Commission, not the state commissions, has the responsibility and obligation to decide whether certain regulations apply to DigitalVoice. Vonage Holdings Corp. Petition for Declaratory Ruling Concerning an Order of the Minn. Pub. Utils. Comm n, Memorandum Opinion and Order, 19 FCC Rcd 22404, (2004) ( Vonage Preemption Order ). The plaintiff here does not like the FCC s express assertion of exclusive federal jurisdiction. But rather than asking the FCC to reconsider or modify it, the plaintiff chose to make an end-run around it by filing this lawsuit. This, however, the plaintiff may not do. I. The Plaintiff s Well Pled Facts Are Irrelevant to the Motion to Dismiss. The plaintiff argues that Vonage s argument collapses because of the factual allegations in its complaint, including that Vonage has the technical ability to distinguish intrastate from interstate calls. Plaintiff s Response in Opposition to Defendants Motion to Dismiss at 9, Dkt. No. 12 ( Opp. ). But the Vonage Preemption Order rests on important federal policy judgments; it was not just a snapshot of where technology stood in 2004.

2 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 2 of 13 In the Order, the FCC concluded that there was no plausible approach to separating DigitalVoice into interstate and intrastate components for purposes of enabling dual federal and state regulations to coexist without negating federal policy and rules. 19 FCC Rcd at (quotation marks omitted, emphasis added). The FCC specifically contemplated that technology might someday permit Vonage to determine the geographical endpoints of each call, but held that [e]ven... if this information were reliably obtainable, Vonage s service is far too multifaceted for simple identification of the user s location to indicate jurisdiction. Id. at The FCC continued: Vonage has no service-driven reason to know users locations. [T]o require Vonage to attempt to incorporate geographic end point identification capabilities into its service solely to facilitate the use of an end-to-end approach [to permit states to regulate] would serve no legitimate policy purpose. Rather than encouraging and promoting the development of innovative, competitive advanced service offerings, we would be taking the opposite course, molding this new service into the same old familiar shape. Id. at (footnotes omitted). This policy determination was in keeping with prior FCC decisions. See id. at n. 96 (citing Petition for Declaratory Ruling that pulver.com s Free World Dialup is Neither Telecommunications nor a Telecommunications Service, Memorandum Opinion and Order, 19 FCC Rcd 3307, (2004) ( Attempting to require Pulver to locate its members for the purpose of adhering to a regulatory analysis that served another network would be forcing changes on this service for the sake of regulation itself. ). Thus, even assuming that all of the plaintiff s allegations are true, the FCC has already ruled for policy reasons that VoIP providers who have no service-driven reason to know users locations should not be forced to use such technology solely to facilitate state regulation. In addition, even if the plaintiff s factual allegations altered the policy foundations of the FCC s Vonage Preemption Order, they would still be irrelevant to this case because the order is not under review in this Court. Vonage Holdings Corp. v. Minn. Pub. Utils. Comm n, 394 F.3d 2

3 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 3 of , 569 (8th Cir. 2004) ( The Administrative Orders Review Act ( Hobbs Act ) prescribes the sole conditions under which the courts of appeals have jurisdiction to review the merits of FCC orders. No collateral attacks on the FCC Order are permitted. ); WWC Holding Co. v. Sopkin, 488 F.3d 1262, 1273 n.8 (10th Cir. 2007) (same). Thus, even if the NMPRC s authority to regulate Vonage stood or fell on a question of technology as the plaintiffs allege, the FCC s 2004 resolution of that question remains binding unless and until the FCC is persuaded to alter it. Nor does the inclusion of a safe harbor option under New Mexico law unsettle the FCC s 2004 assertion of exclusive federal jurisdiction, because the FCC rejected just such a proxy as a basis for a state to exercise regulatory jurisdiction over Vonage. Vonage Preemption Order, 19 FCC Rcd at n.98 (a percentage proxy would be unhelpful because it would not avoid frustration of federal policy). See also Motion to Dismiss at (explaining that the FCC s contribution factor is a financial parameter having nothing to do with the jurisdictional question). 1 Finally, it is important to note that if the plaintiff s factual allegations had the decisive effect the plaintiff claims for them, they would not just permit New Mexico to require universal service contributions; they would permit unlimited regulation of VoIP services. Thus, no matter how the plaintiff frames its suit, it is nothing more than an unlawful collateral attack on the Vonage Preemption Order. 1 Because Vonage s motion to dismiss focuses on the Vonage Preemption Order, we do not here address the technological issues the plaintiff is at pains to raise, e.g., Opp. at 2-4, If this Court concludes that the Vonage Preemption Order does not dispose of this litigation, Vonage believes the Court will likely conclude that the FCC itself must re-examine these issues under the doctrine of primary jurisdiction. It is not a sensible use of judicial resources for federal district courts across the country to make 50 or more individual re-examinations of matters Congress has committed to the FCC s expertise. 3

4 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 4 of 13 II. Plaintiff s Narrow Reading of the Vonage Preemption Order Is Wrong. The plaintiff also argues that the Vonage Preemption Order preempts only a small set of regulations relating to certification, tariffs, and other entry regulations rather than state regulations generally. See Opp. at 12, 14. This is wrong for several reasons. First, the plaintiff just misses the point of the Vonage Preemption Order, which was not what, but who. The FCC was not deciding once and for all what obligations would apply to VoIP; it was addressing the jurisdictional question of who would make those decisions. That is why the FCC, at the beginning of the Order, said that its purpose was to mak[e] clear that this Commission, not the state commissions, has the responsibility and obligation to decide whether certain regulations apply to DigitalVoice. 19 FCC Rcd at (emphasis added). It explained that its decision will permit the state commissions to direct their resources toward helping us answer the questions that remain after today s Order questions regarding the regulatory obligations of providers of IP-enabled services. We plan to address these questions. Id. at (emphasis added). See also id. at ( while we have decided the jurisdictional question for Vonage s DigitalVoice here, we have yet to determine final rules for how regulations would apply); id. at n.46 (the FCC was ruling on the jurisdictional question ); id. at n.155 (the order made a jurisdictional determination ). By resolving the jurisdictional question, the FCC was stating that it would determine all the regulations, aside from general business regulations, that would apply to Vonage. Id. at The concurring statements by individual Commissioners are to the same effect. 2 2 Id. at (Powell) (VoIP, like cell phones, is properly an interstate communication service and the Commission is merely affirming the obvious in reaching today s jurisdictional decision ); id. at (Abernathy) (the Order provides much-needed clarity regarding the jurisdictional status of Vonage s DigitalVoice service ; [t]here is no doubt that [such services] are inherently interstate in nature ; the Order is an assertion of exclusive federal jurisdiction ); id. at 4

5 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 5 of 13 Second, the plaintiff s narrow construction of the Order is contradicted by the text. The FCC s own description of the regulations it was preempting traditional telephone company regulations is impressive primarily for its breadth. It is not a term of art, yet the FCC used that phrase or a comparable phrase seven times in the Vonage Preemption Order. 19 FCC Rcd at ; 22409, 11 n.30; 22416, 20 n.69; ; 22421, 26; , 42. If the FCC had intended a limited preemption, it would have used limited language. Furthermore, among the provisions the FCC identifies as being preempted is Minnesota Statute subd. 9, 3 which would have obligated Vonage to contribute to Minnesota s universal service program. 19 FCC Rcd at n.28. The plaintiff argues that the Minnesota statute in question covers subjects in addition to universal service, but that hardly helps their argument it only emphasizes once again the breadth of the preemption. Moreover, while there is no portion of the Vonage Preemption Order disclaiming an intention to preempt state universal service obligations, there is an express carve-out for other areas of state authority, such as laws concerning taxation; fraud; general commercial dealings; and marketing, advertising, and other business practices. Id. at (Copps) (noting that [t]oday s decision finds that VoIP services like Vonage s Digital- Voice have an undeniably interstate character ).\; id. at (Adelstein) (thrust of the Order was to address the challenge Vonage s service posed to the FCC s traditional jurisdictional analysis ). 3 In Vonage s motion to dismiss, Minn. Stat subd. 9 was erroneously cited as Minn. Stat (g). 4 Contrary to the plaintiff s suggestion (Opp. at 14-15), the statements of the individual FCC Commissioners leave no doubt about the scope of the preemption they intended. For example, Chairman Powell referred explicitly to the jurisdiction retained by the states under 47 U.S.C. 252 (dealing with interconnection), but made no similar reference to section 254 (dealing with universal service). Vonage Preemption Order, 19 FCC Rcd at Commissioner Abernathy s reference to collaboration with the States clearly meant states assisting the FCC in the exercise of the FCC s jurisdiction: I have often emphasized that, even where the FCC alone possesses the ultimate decisionmaking authority, this Commission and state regulators can and should collaborate in the development of sound policy. Id. at Commissioner Copps did 5

6 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 6 of 13 III. Preemption of State Universal Service Programs Is Fully Consistent With Federal Law Governing State Universal Service Authority. The plaintiff argues that the FCC has no authority to preempt state universal service programs because federal law, specifically 47 U.S.C. 254, protects such state programs. See Opp. at 15, 19. But that is yet another unlawful collateral attack on the Vonage Preemption Order. Moreover, the FCC certainly does have authority to preempt New Mexico s application of state universal charges and reporting requirements onto Vonage. Federal law permits states to impose universal service obligations only to the extent that they are not inconsistent with the Commission s rules. 47 U.S.C. 254(f). Thus, the statute itself provides that the FCC has ultimate authority over state universal service programs and can preempt state programs that run counter to federal policy. Moreover, even the NMPRC recognizes that the statute limits states to imposing universal service obligations only on telecommunications carrier[s] that provide[] intrastate telecommunications services. Id.; Opp. at 15. But the FCC has consistently refused to classify Vonage as a telecommunications carrier that provides telecommunications services both terms that have specific meanings under federal telecommunications law, see 47 U.S.C. 153(43), (44) & (46). The FCC specifically refused to make this classification in the Vonage Preemption Order itself. See 19 FCC Rcd at Indeed, even when the FCC imposed federal universal service obligations on Vonage, it once again refrained from classifying Vonage as a telecommunications indeed call the FCC s jurisdictional ruling narrow, but that was in the context of his concern that the FCC still had work to do in establishing a framework of regulations to provide a set of rules of the road for VoIP services, and that it would be sad if the Commission simply stopped at preempting state regulations without moving on to tackle the federal regulatory issues that remained. Id. at Similarly, Commissioner Adelstein was concerned with how soon the FCC might tackle federal universal service issues not whether state universal service charges were preempted. Had that been his concern, he would have cautioned against VoIP providers improperly arguing the Order applied to state universal service. Id. at

7 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 7 of 13 carrier, instead relying on the fact that its authority to impose universal service obligations on services like Vonage s is broader than the states authority. Universal Service Contribution Methodology, Report and Order and Notice of Proposed Rulemaking, 21 FCC Rcd 7518, (2006). While Section 254 allows for some state authority to impose state universal service obligations on telecommunications carriers, that fact provides no support to the notion that New Mexico may impose them on non-carriers like Vonage. IV. The Only Cases on Point Support Vonage. The four cases the plaintiff cites do not support its constricted reading of the Vonage Preemption Order. WWC Holding Co, 488 F.3d 1262, was a case about whether a wireless carrier qualified as an eligible telecommunications carrier under federal law, which has nothing to do with the Vonage Preemption Order. The Tenth Circuit had no trouble seeing that point, and, in one of the four reasons given for why the Order was irrelevant to the case it was deciding, happened to mention that the Vonage Preemption Order rejected market entry requirements (which it did, among other things). The plaintiff cannot get much mileage out of an off-hand statement in a case that has nothing to do with the Vonage Preemption Order or this case. The court in Minnesota Public Utils. Comm n v. FCC, 483 F.3d 570, did mention Minnesota s entry requirements as having been preempted, but the court never hinted that entry requirements were all that were preempted. Rather, the court repeatedly referred to the question before it as whether the FCC could lawfully preempt state regulation, including when it described the gist of the Order: the FCC determined it was appropriate to preempt state regulation because it was impossible or impractical to separate the intrastate components of VoIP service from its interstate components. Id. at

8 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 8 of 13 In Comcast IP Phone of Missouri v. Missouri Pub. Serv. Comm n, No , 2007 U.S. Dist. LEXIS 3628 (W.D. Mo. Jan 18, 2007), the court decided that the FCC had not preempted states from determining that Comcast s VoIP service was a telecommunications service. The court explained that Vonage Preemption Order preempted state regulation of Vonage s VoIP service, but because Comcast had not asked the court to evaluate whether its service was like Vonage s, the Court could not conclude that the Order applied. Id. at * With Vonage, not Comcast, before this Court, it does not matter whether the Vonage Preemption Order preempted state regulation of other services; what matters is that it preempted state regulation of Vonage s service on that point, the Comcast court explicitly supports Vonage. The plaintiff cites Mayor and City Council of Baltimore v. Vonage Am. Inc., 544 F. Supp. 2d 458 (D. Md. 2008), although it appears that it is actually referring to the unpublished decision on reconsideration. In any event, in neither opinion does the court hold[] that Baltimore s tax was not precluded by Vonage s impossibility argument. Opp. at 16. Indeed, in neither opinion did the court even address an argument that the Vonage Preemption Order preempted the city s action. The issues in that case, including whether the tax was fairly apportioned and whether a Vonage subscriber s use of a Baltimore address created a sufficient nexus for the city to impose a tax, Mayor and City Council of Baltimore v. Vonage Am. Inc., No , 2008 U.S. Dist. LEXIS 56349, at * 2 (D. Md. July 24, 2008), are simply irrelevant to this case. After attempting to draw support from four cases that have nothing to do with the present case, the plaintiff distinguishes Vonage Holdings, Corp. v. Neb. Pub. Serv. Comm n, 543 F. Supp. 2d 1062 (D. Neb. 2008), a case that is directly on point, on the grounds that the court took no evidence on factual issues and that the court erred by failing to adequately consider and rule upon the question of whether the imposition of the [state] USF surcharge interfered with a valid 8

9 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 9 of 13 federal policy. Opp. at 17. But the district court in Nebraska took no evidence because, as explained above, the facts alleged by the plaintiff here are irrelevant; the broad preemptive effective of the Vonage Preemption Order is a matter of law. And even if the facts regarding what is technically possible were relevant, those facts were already found by the FCC, and cannot be challenged here. The court did not err by failing to decide whether state USF surcharges interfered with federal policy that question was also decided by the FCC and is not open to collateral challenge. V. The Plaintiff s Competitive Advantage Argument Is Irrelevant. The plaintiff argues that if Vonage is not required to pay state universal service fees it will have an unfair advantage over its competitors. The argument is, of course, completely irrelevant: the only question before the Court is whether the FCC preempted state universal service charges. The wisdom of the FCC s policy decision cannot be collaterally attacked by a state that is unhappy with the FCC s choice. VI. The FCC s Imposition of a Federal Universal Service Obligation Did Not Implicitly Authorize State Universal Service Requirements. As Vonage anticipated in its Motion to Dismiss at 14-17, the plaintiff argued that the FCC s imposition of a federal universal service obligation on Vonage somehow supports its assertion of jurisdiction over Vonage. Opp. at Vonage will not repeat its Motion to Dismiss here, but will simply add that as noted above, supra at 6-7, state authority to impose universal service obligations is narrower than the FCC s authority, and the FCC expressly relied on that broader, ancillary authority to impose the federal obligation; the FCC s action thus does not support the plaintiff s assertion of jurisdiction. 9

10 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 10 of 13 VII. The FCC s Amicus Brief in the Eighth Circuit Cannot Alter the Scope of the Vonage Preemption Order. The plaintiff mentions, almost as an afterthought, that the FCC filed an amicus brief in the Eighth Circuit, in an appeal by the state of Nebraska after Vonage obtained an injunction against that state s attempt to impose universal service obligations on it. Opp. at 23. The FCC s brief urged that the injunction be dissolved, arguing that the Vonage Preemption Order did not preempt state regulation of universal service obligations. The plaintiff is right to give so little attention to the FCC s brief, for three reasons. First, the FCC s brief is not entitled to the Court s deference. The FCC takes official action by majority vote of the Commissioners. No vote, however, is required for FCC counsel to file an amicus brief. Even assuming that the Commission s General Counsel filed the brief with the permission of the Chairman, who, as chief executive officer of the Commission, is likely to have had some involvement in the decision to file the brief, there is no indication that the brief was shown to the other Commissioners, much less that a majority of them endorsed its contents. Without a vote, the Commission simply has not exercised any judgment to which a court should defer. See Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 212 (1988) (agency counsel s interpretations do not receive deference when the agency itself has articulated no position on the question ); Investment Co. Inst. v. Camp, 401 U.S. 617, 628 (1971) (deference is granted to administrative officials, not appellate counsel). See also MD/DC/DE Broadcasters Ass n v. FCC, 253 F.3d 732, 735 (D.C. Cir. 2001) ( The Federal Communications Commission is a collegial body ; it speaks through its orders, not through counsel s filings. ). Thus, unlike the case in Auer v. Robbins, 519 U.S. 452 (1997), in which an amicus brief offered an interpretation by the agency official legally charged with interpretive power, there is ample reason to suspect that the 10

11 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 11 of 13 [FCC s] interpretation [of its Order] does not reflect the agency s fair and considered judgment on the matter in question. Id. at Second, even if the FCC s brief were entitled to deference, it could not alter the clear terms of the Vonage Preemption Order. That Order explicitly preempted Minnesota s traditional telephone company regulations, including a state universal service obligation. Agencies may not, under the guise of interpreting agency regulations, de facto change those regulations. Christensen v. Harris County, 529 U.S. 576, 588 (2000). 6 Third, the absence of formal FCC action regarding the scope of the Vonage Preemption Order speaks much more loudly than the amicus brief submitted in the Eighth Circuit. There is no question that the current FCC can, by majority vote, clarify or modify the Vonage Preemption Order at any time. The FCC need not wait for a lawsuit or even a petition requesting such action. Given the deferential standard of review of an FCC order, it is hard to imagine why, if a majority of the Commission actually wished to narrow the Vonage Preemption Order, the FCC has not even hinted that it might do so. 7 5 Even if a majority of the Commission intended to use an amicus brief to announce that state regulators should be permitted to impose universal service obligations on interconnected VoIP providers, the FCC s brief fails to address any of the numerous obstacles to such action that the Commission would need to address before effecting that change in federal policy. Indeed, that is why there is a procedure for challenging FCC orders in the courts of appeals, which the FCC obviously cannot side-step by changing policy through briefs. 6 This appears to be a point on which the NMPRC and Vonage agree: agency counsel s comments cannot override the text of an FCC order. See Opp. at 22 n.5. 7 The fact that FCC s counsel has not attempted to participate in the present case supplies another reason for caution. Because the FCC s brief was not submitted to this Court, Vonage does not here address its arguments on the merits. If the Court should wish, Vonage would be happy to brief those arguments as well. 11

12 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 12 of 13 CONCLUSION For all of the reasons stated, Defendants respectfully request that their motion to dismiss be granted. Respectfully submitted, HOLLAND &HART LLP By /s/ Michael Campbell Michael Campbell, Esq. Larry J. Montaño, Esq. 110 N. Guadalupe, Suite 1 Post Office Box 2208 Santa Fe, New Mexico TEL: (505) FAX: (505) ~ and ~ Mark A. Grannis, Esq. Brita D. Strandberg, Esq. Joseph C. Cavender, Esq. HARRIS,WILTSHIRE &GRANNIS LLP 1200 Eighteenth Street NW, Suite 1200 Washington, DC TEL: (202) FAX: (202) ATTORNEYS FOR DEFENDANTS 12

13 Case 6:08-cv WJ-RHS Document 17 Filed 09/02/2008 Page 13 of 13 CERTIFICATE OF SERVICE The undersigned certifies that on September 2, 2008, I electronically filed Defendants Reply in Support of Their Motion to Dismiss using the CM/ECF system, which sent notification of such filing to the following Allen R. Ferguson, Jr. Associate General Counsel Office of the General Counsel New Mexico Public Regulation Comm Paseo de Peralta P.O. Box 1269 Santa Fe, NM allen.ferguson@state.nm.us Randolph B. Felker Carol J. Ritchie Felker, Ish, Ritchie & Geer, P.A. 911 Old Pecos Trail Santa Fe, NM randfelker@aol.com cjish@hotmail.com Attorneys for Plaintiff /s/ Michael Campbell Michael Campbell Larry J. Montaño _1.DOC 13