U.S. Court of Appeals Upholds Preemption of State USF for Nomadic VoIP Services
May 4, 2009
On May 1, the U.S. Court of Appeals for the Eighth Circuit upheld a district court injunction which barred the Nebraska Public Service Commission (PSC) from requiring Vonage to pay into the state version of universal service. The Court ruled that “nomadic” Voice over Internet Protocol (VoIP) services were previously found to be fully interstate and Federal Communications Commission (FCC) preemption of state regulation had been previously asserted and upheld by the Eighth Circuit. Nebraska had argued that since the prior ruling (concerning the Minnesota Public Utility Commission (PUC) 911 regulations), the FCC had created a “safe harbor” for VoIP companies that presumed a 64.9% interstate ratio for paying into the federal Universal Service Fund (USF) program. Nebraska contended that the FCC had thus concluded that the 35.1% of calls remaining must be intrastate and assessed Vonage accordingly. Vonage refused to pay and obtained a District Court injunction.

Nebraska appealed the injunction and defended its actions with two key attempts to distinguish this case from the earlier Minnesota PUC decision. First, Nebraska argued that in the Minnesota case the FCC and the Court of Appeals assumed that the interstate and intrastate calls could not be separated. In contrast, Nebraska contended that the FCC had now determined that such separation is possible by setting a 64.9% interstate safe harbor. Further, having chosen the 35.1% figure, Nebraska argued that its assessment did not conflict with the FCC policy. The Court rejected this claim, saying that “while a universal service fund surcharge could be assessed for intrastate VoIP services, the FCC has made clear it, and not state commissions, has the responsibility to decide if such regulations will be applied.” The Court went on to cite the potential problems that would arise if states were allowed to choose their own bases for determining which calls are part of the 35.1%. For example, while Nebraska used billing address as a proxy for where usage occurred, the Court said Missouri might choose an area code proxy and thus cause the same call to be assessed in both states.

Second, Nebraska argued that universal service fund payments are outside the scope of the FCC preemption in the Minnesota case. It contended that the FCC preempted only “traditional telephone regulations” and that state universal service assessments are not traditional regulations. Again, the Court rejected Nebraska’s position, finding that the FCC preemption in the Minnesota case had concluded that it is impossible to separate nomadic VoIP calls into interstate and intrastate categories, and thus had preempted all state regulation of such calls.

Points to note: (1) The logic of this decision – and thus the scope of the FCC’s preemption - applies only to “nomadic” VoIP. The Court expressly discussed “fixed” VoIP and implied strongly that the FCC’s preemption does not apply to such services. The example of fixed VoIP used was of service provided by a cable television company. Thus, this case prevents state regulation of nomadic VoIP but does nothing to shield fixed VoIP from PUC oversight. (2) This ruling upheld the issuance of a preliminary injunction; as such, it is not necessarily the end of the case. Practically speaking, however, it is unlikely that the Nebraska parties will pursue it further. In fact, the Nebraska PUC had already been voluntarily dismissed from the case before today’s ruling.

For more information regarding this client advisory, please contact your usual Kelley Drye attorney or any member of the Communications practice group. For more information on the Communications practice group, please click here.