8th Circuit: States Pre-empted From Regulating Cable VoIP

State regulation of interconnected VoIP is pre-empted because it’s an information service, the 8th U.S. Circuit Court of Appeals ruled Friday. One judge dissented. But overall, the 8th Circuit affirmed last year’s ruling by U.S. District Court in St. Paul on Charter Communications' complaint the Minnesota Public Utilities Commission overstepped its authority by imposing state regulations for traditional phone services on VoIP.

FCC Chairman Ajit Pai praised the decision without resolving longtime uncertainty of how interconnected VoIP should be classified under federal law. NARUC balked. VoIP providers said the decision may help their arguments in other states.

The case began in March 2013 when Charter transferred 100,000 Minnesota customers to an affiliate that provided VoIP phone service that wasn't PUC-certified. The state agency said interconnected VoIP is a telecom service subject to state regulation, but Charter and intervenor the Voice on the Net (VON) Coalition said it’s an information service and subject only to FCC regulation. The federal body never decided the question but last October submitted an amicus brief to the 8th Circuit saying that Minnesota VoIP regulation would disrupt the market, stifle competition and hurt consumers (see 1710300036). At June oral argument (see 1806120026), Circuit Judge James Loken said he took the filing “as, if not a marching order,” then as “strong guidance.”

Pai said the 8th Circuit decision “is important for reaffirming that well-established principle: ‘[A]ny state regulation of an information service conflicts with the federal policy of nonregulation’ and is therefore preempted.” The FCC took that approach under Democratic and Republican administrations for the past two decades, “including in last year’s Restoring Internet Freedom Order,” he said. “A patchwork quilt of 50 state laws harms investment and innovation in advanced communications services,” Pai said. “That’s why federal law for decades has recognized that states may not regulate information services.”

Ruling that VoIP is an information service pleased Commissioner Mike O'Rielly, he tweeted. "The Commission needs to take next step to affirmatively declare the same once and for all!" FCC Chief of Staff Matthew Berry praised the holding that state regulation of information services is pre-empted, tweeting that's consistent with the December 2017 net neutrality order.

“Because we agree with the district court, we affirm,” Loken wrote (in Pacer) with Judge Ralph Erickson. Charter's net-protocol conversion of traffic from TDM to IP or vice-versa is a transformation, he said. "Spectrum Voice’s service is an information service because it ‘mak[es] available information via telecommunications’ by providing the capability to transform that information through net protocol conversion.”

Dissenter Steven Grasz said he would have reversed the lower court. "The net protocol conversion in Charter’s service makes it either a telecommunications service or something entirely outside the primary categories of services in the Communications Act,” he wrote. “The one thing it cannot be is an information service.”

The PUC is “disappointed in the decision and strongly disagree[s] with it,” but hasn’t decided on next steps, a spokesman said. “The dissenting opinion was the correct reading of the law in this case.” NARUC General Counsel Brad Ramsay agreed: “The majority decision basically ignores the plain text of the statute and the functional … definitions in the Act.”

“It’s an important victory for the VoIP industry,” said VON Coalition Executive Director Glenn Richards. State commissions should consider the ruling that VoIP is an information service “as they decide whether to move forward with proposals to regulate VoIP,” he said. “It might also prove helpful in the handful of state legislatures that have yet to adopt VoIP preemption statutes.” The ruling pleased Charter.

The ruling comes as the Vermont Public Service Commission weighs VoIP classification. Comcast asked that PSC in March to reconsider a Feb. 7 decision that interconnected VoIP is a telecom service (see 1803070060). The company sought stay of phase two of the proceeding, in which the PUC asks how to regulate interconnected VoIP.

The decision isn’t good for customers, emailed Sherry Lichtenberg, National Regulatory Research Institute telecom principal. “The decision limits the ability of state commissions to ensure that VoIP carriers provide their customers with quality, reliable, and affordable service.”

“Not only did the decision help clarify the regulatory status of VoIP services, but, more importantly it bolstered the FCC’s contention that state regulation of services determined to be information services under federal law are pre-empted," said Free State Foundation President Randolph May. It "solidifies the case for pre-emption of state laws, for example those in Washington or California, that purport to impose net neutrality mandates inconsistent with the FCC’s non-regulation of information services.”

What Is VoIP?

The Telecom Act didn't include protocol conversions in the definition of information service, and in 1998 the FCC "deferred the categorization of net protocol conversions to another day," Grasz said. "Twenty years later, the lack of clarity continues. This is at least in part because the entire telephone network is in the process of changing from" TDM to IP.

Loken rejected Telecom Act exceptions to the definition of information service. The cable VoIP service is “between or among users,” he said. “The network protocol technology is an essential feature of Spectrum Voice’s offerings, as the ability to call users of legacy telephony services via Spectrum Voice is a vital selling point for consumers.” The service’s aim doesn’t try to provide backwards compatibility for existing customer premise equipment, he said. “Since any conversion back into the original form of the information takes place outside of the network … the 'internetworking' exception is inapplicable."

“If performing the conversion from TDM to IP inside a customer’s home is sufficient to convert a telecommunications service into an information service, then AT&T, or any similarly situated provider, could greatly reduce its regulatory burden simply by moving converter boxes inside customers’ homes,” countered Grasz. “A simple change of physical location would transform what used to be telecommunications services to information services.”

The majority relied “on the weakest and most internally inconsistent argument advocates present to favor an information services classification -- the net protocol conversion argument,” Ramsay emailed. “If there is a net protocol conversion, it miraculously changes the character of a phone call (and the level of consumer protections provided the provider’s customers), even though (i) those using the service cannot detect any change in their phone calls and (ii) as the FCC has continuously acknowledged, the new services compete directly with what everyone concedes is a ‘telecommunications service.’”