The Morris Decision provides two clear takeaways regarding USF contributions: USF contribution assessments will not be waived absent special circumstances; and contributors must comply with USAC’s “pay-and-dispute” policy. Morris’ Request to the Commission sought review of a 2013 USAC decision denying Morris’ request for reversal of certain USF contribution assessments and late-payment penalties related to a 2000 Form 499A reporting error. In 2004 USAC, on Commission direction, had recalculated and reduced Morris’ USF contribution from approximately $370,000 to less than $20,000. In response to a 2012 Morris appeal, USAC subsequently nearly halved the related late-payment penalties, which had been calculated on the higher USF assessment, from almost $71,000 to approximately $40,000, but denied Morris’ request to reverse the outstanding USF contribution assessment.

In considering Morris’ appeal of the 2013 USAC decision, the Bureau reiterated its strong support for USAC’s pay-and-dispute policy which requires a contributor to pay any invoiced USF assessment even if the contributor disagrees with the amount or has filed an appeal with the Commission or USAC disputing the charges. Highlighting the Commission’s consistent upholding of the policy and its value in supporting the Commission’s goal of “ensuring stability and predictability of the fund”, the Bureau noted that Morris could have avoided late payment fees had it followed the pay-and-dispute policy. While the Morris Decision directed USAC to recalculate the late payment fees to reflect the reduced USF obligation, the Bureau’s message is clear that contributors must utilize the pay-and-dispute process for USF contribution obligations.

The Morris Decision also illustrates that the Commission will not reverse USF contribution obligations absent special circumstances and that financial hardship does not necessarily constitute a special circumstance. Morris asserted in its USAC and Commission appeals an inability to pay its USF obligations and late-payment penalties due to changes in its financial circumstances and argued that Morris would have suffered “serious financial jeopardy” had it followed the pay-and-dispute process. In rejecting Morris’ inability to pay argument, the Bureau explained that, when considering USF obligation waiver requests, the Bureau is not subject to the “ability to pay” considerations that must be considered in the context of Section 503 statutory forfeitures. The Bureau also pointed out that Morris had not identified precedent supporting reversal or reduction of USF contribution obligations based on inability to pay and suggested Morris establish a payment plan with USAC if the Company was unable to pay its USF obligation invoice in full. Consequently, the key takeaway for contributors is that they will face a high bar if seeking reduction or waiver of a USF obligation based on inability to pay.

The Stratos Decision clarifies another aspect of USF contributions – the scope of the USF contribution exemption for providers of government-only service. The Commission’s 1997 Universal Service First Report and Order exempted from direct USF contributions government and public safety entities that purchase telecommunications in bulk for their own needs and those carriers that provide interstate telecommunications service exclusively to government or public safety entities. Government entities were exempted based on the Commission’s determination that telecommunications was not a core part of the government entities’ business, and that they neither leased capacity to other entities nor charged for use of their networks. Public safety entities were exempted from contribution because they used services for public safety and welfare functions. However, the Commission did not explain the policy underlying including in the “government-only” exemption those carriers exclusively serving those government and public safety entities. Stratos’ petition, filed in 2009, requested the Commission clarify, or declare, that the government-only exemption extended to subcontractors that served government and public safety entities on behalf of a prime contractor. Stratos argued that distinguishing between prime contractors and subcontractors was a distinction without a difference because the end user remained the same – government and public safety entities.

The Bureau’s Stratos Decision offered several reasons for not expanding the government-only contribution exemptions to subcontractors including a preference for narrowly interpreting any USF exemption and the decreased USF contribution base that would result if more carriers qualified for a contribution exemption. The Bureau also noted the Commission’s concern that permitting subcontractors to claim the exemption would encourage carriers to implement business structures designed to limit contribution obligations. In particular, carriers that provided service to government entities as well as other end user customers, and therefore contributed to USF on all of those service revenues, would be incentivized to spin off their government services to a subsidiary serving only the government entities to avoid the USF contribution obligation. Finally, the Bureau noted the increased complexity that could result if prime contractors and subcontractors began to seek verifications from each other confirming only government customers were served. Interestingly, the Bureau likened this potential arrangement to the USF reseller certification procedure which the Stratos Decision stated “has been difficult to administer by the providers, the Universal Service Administrative Company, and the Bureau.” Accordingly, while the Stratos Order clarifies the limited scope of the government-only USF contribution exemption, it also provides insight into a key Bureau concern – decreases in the USF contribution base – and confirms that contribution exemption will be interpreted narrowly.

The Morris and Stratos Decisions came relatively soon on the heels of recent Commission orders resolving other USF contribution petitions. In a late March 2017 Order, the Commission ruled on petitions, filed between 2007 and 2013, of several carriers regarding the jurisdictional classification of private lines for USF contribution purposes. Similarly, in January 2017 the Commission ruled on appeals, filed between 2007 and 2012, by several carriers seeking credit for USF contributions made or revenues reported by their underlying carriers. These decisions, coming in relatively quick succession, could signal the start of a busy year that resolves and clarifies the many remaining long-pending USF-related petitions.

No one knows for sure, but the many pending cases and disputes on VoIP access charges collectively probably have hundreds of millions of dollars at stake. The FCC has exerted much effort to avoid making a decision on the court referrals and various petitions that it has received on the subject since 2005.

Always hopeful that it will moot the question with a comprehensive reform of "intercarrier compensation" within the next 12 months, the FCC has allowed the issue to stay undecided for five years and counting. Paetec and the 14 organizations on the Joint Brief, believe things have dragged on long enough and want the Court of Appeals to rule where the FCC is apparently afraid to tread.

As described in our February 19 posting on the Paetec case, Paetec sued CommPartners in federal district court seeking to collect terminating access charges on interconnected VoIP traffic sent to Paetec by CommPartners. The district court ruled against Paetec, concluding that "the access charge regime is inapplicable to VoIP-originated traffic" because such transmissions qualify for the FCC's "information services" exemption from access on the basis that IP-to-TDM calls involve "net protocol conversion." The district court went on to deny Paetec's claims on unjust enrichment and quantum meruit as well, concluding that the Telecom Act's access charge regime creates a statutory bar to those equitable legal arguments. This ruling, if allowed to stand, would be a huge policy victory for VoIP providers and ISPs and a very expensive defeat for ILECs.

Paetec sought and was granted permission to file an immediate appeal of the Court's rulings. Because the case is not complete, the appeal is "interlocutory" and may be heard only if the district court allows it (it did) and the Court of Appeals agrees to hear it. Paetec has filed its request with the Court of Appeals in D.C. The Joint Brief in support was filed May 20.

The D.C. Circuit has examined the issue several times since 1999, including a 2002 decision that the FCC rate cap could not be justified on the basis of 47 USC 251(g). WorldCom, Inc. v. FCC, 288 F.3d 429 (D.C. Cir. 2002). In that case, the Court rejected and remanded the FCC's rationale for the rate cap but did not vacate it, recognizing that there might be other legitimate bases for the policy. Subsequently, in June 2004, Core Communications asked the Court to order the FCC to respond to the remand, which remained pending. The Court declined, but in 2007 granted a renewed request for mandamus from Core. The FCC followed that order with the November 5, 2008 ruling which was the subject of the recent Court affirmation. The key legal discussion in the new decision is Court agreement that the FCC is legally empowered to rely on Section 201 of the Communications Act as the supporting basis for the rate cap.

The January 12 opinion reviews and rejects each of the Core Communications challenges to the FCC action. First, the Court finds that Section 201 is not a "general" provision superceded by the more specific Sections 251 and 252 in the area of compensation for ISP bound traffic (which has been found to be interstate, not local in nature). It also rejected arguments that the calls are "local" rather than interstate because they terminate at the ISP. The Court found that it has already been established and accepted that dial up internet calls do not stop at the ISP interface, but instead continue on to the websites being contacted. Similarly, the Court rejected a claim that the FCC was impermissibly discriminating against ISP bound calls by treating them differently from other calls. Finally, the Court rejected other arguments without discussion because they had been improperly raised before the Court.