The Second Circuit’s decision represents the second federal appellate decision in little over a month shooting down arguments of AT&T seeking to limit the scope of their interconnection obligations under Section 251. In April, we reported that the United States Court of Appeals for the Sixth Circuit ruled that a State commission may fashion interconnection obligations under Section 251(a) that differ from those applicable under Section 251(c)(2).

The Second Circuit’s opinion addresses the rates and sections of the Act applicable to “transit traffic.” The Second Circuit described the “principal question [as] whether AT&T, an interconnecting carrier, is obligated under § 251(c)(2) to provide this routing of traffic, or transit service, at lower TELRIC rates or whether AT&T is permitted to charge higher negotiated rates” under Section 251(a). The Second Circuit recognized that the provision of transit traffic service by ILECs is essential to most CLECs entering the market. The Court further acknowledged that, if ILECs are allowed to impose higher, negotiated rates rather than TELRIC rates, then the additional costs imposed on the CLECs would put the CLECs at a competitive disadvantage. The Court concluded that allowing an ILEC to impose unregulated rates on indirectly interconnecting CLECs would undermine the very purpose of the Act, namely, to provide CLECs with the tools necessary to compete with the ILECs and to offset the inherent advantages that ILECs have through their infrastructure. The Second Circuit also found that nothing in Section 251(c)(2) limits that provision to the transmission and routing of traffic between a CLEC and the ILEC’s end users. Accordingly, the Court held that ILECs are obligated under Section 251(c)(2) to provide transit traffic service at TELRIC rates and not higher negotiated rates under Section 251(a).

While the Court limited its order to rates charged by the parties to contract in dispute, the application of this decision and its rationale is not limited to those parties. The Act provides the option of negotiated resolutions under § 252(a) and expresses a preference for those negotiated resolutions. The Court agreed with the District Court that the DPUC erred in imposing regulated rates on all of AT&T’s transit service contracts. The Court joined other federal appellate courts facing similar questions by concluding that the DPUC’s order would undermine Section 252(a) and the preference for negotiated outcomes. Thus, while the Court did not issue an order requiring the use of TELRIC rates for transit traffic, it found that TELRIC-based rates are available to CLECs when other rates are not agreed upon – at least they will be in Connecticut, New York and Vermont, the States bound by the Second Circuit.

In reaching its conclusions, the Court addressed two other topics of note. Before reaching the substance of the primary issues – the application of Section 251(c)(2) to, and the rates for, transit traffic – the Court held that the FCC’s consideration but current inaction on the topic of whether Section 251(c)(2) applied to transit service did not pre-empt State commission action on the question of transit traffic rates. Rather, the Court found, in the absence of guidance from the FCC, that Congress gave State commissions the “latitude to exercise their expertise in telecommunications and the needs of the local market” and that the State commission was free to rule on the issue.

The Court also rejected AT&T’s argument that, because the agreement in dispute was fashioned as a commercial agreement and not expressly a Section 252 interconnection agreement, the DPUC did not have the authority to review it. The Second Circuit held that the DPUC had the authority to review the agreement and determine whether the subject matter fell under Section 251, and therefore, was subject to the regulatory framework of Sections 251 and 252 – in other words that it was, in fact, an interconnection agreement. The DPUC made just such a determination by concluding that negotiations for transit service should have been conducted by the carriers pursuant to Section 252.

This week, the Fourth Circuit issued an important decision concerning the jurisdiction and role of federal courts in the interpretation and enforcement of state-approved Interconnection Agreements (“ICAs”). In Central Telephone Co. v. Sprint Communications Co., the Fourth Circuit held that plaintiffs are not required to bring claims relating to the interpretation and enforcement of state-approved ICAs to a state commission before they can be heard in federal court. Instead, the court ruled that a party may bring a claim for breach of contract in federal court directly. This decision opens a new option for parties seeking to interpret and enforce ICAs, at least in the states within the Fourth Circuit (which encompasses Maryland, Virginia, North Carolina, South Carolina and West Virginia).

At the outset, the court noted two propositions that are roundly accepted and not in dispute in the case. First, it noted that a federal court has jurisdiction to interpret the terms of an ICA under 28 U.S.C. section 1331. Second, it also noted that “every circuit to have considered the question” has concluded that a state commission also has such authority to interpret the terms of an ICA. The question presented by Sprint, however, was the “more particularized” question of whether a state commission must interpret an ICA before a federal district court can do so.

In finding that the federal courts have jurisdiction in the first instance, the court held that neither the text of the 1996 Act nor the FCC decisions applying it provide state commissions with exclusive jurisdiction to interpret and enforce state-approved ICAs. Notably, relying in part on an FCC amicus brief disavowing the interpretation, the court disagreed with a Third Circuit decision, that held state commissions had exclusive authority to resolve disputes over ICAs in the first instance. Instead, the Fourth Circuit ruled that the FCC’s Starpower decision only stands for the proposition that state commissions have authority to interpret and enforce ICAs when asked to do so and not that state commissions have exclusive authority to do so.