Appeal from the United States District Court for the Central District of California Margaret M. Morrow, District Judge, Presiding D.C. No. 2:07-cv-04801-MMM-SS
The opinion of the court was delivered by: O'scannlain, Circuit Judge
Argued and Submitted May 3, 2010-Pasadena, California
Before: Diarmuid F. O'Scannlain and Richard C. Tallman, Circuit Judges, and Joan Humphrey Lefkow, District Judge.*fn1
We must decide, among other issues, whether the California Public Utilities Commission acted arbitrarily and capriciously when it interpreted an interconnection agreement between two competitive local telephone exchange carriers as establishing the rate at which each must compensate the other for handling Voice-over-Internet-Protocol calls.
"Prior to 1996, local telephone service generally was provided by a local monopolist who offered services at prices regulated and imposed by a variety of governmental agen- cies." Pac. Bell Tel. Co. v. Cal. Pub. Utils. Comm'n, 2010 WL 3421187, at *2 (9th Cir. Sept. 1, 2010). Under this system, a single local exchange carrier ("LEC") provided all telephone service in a geographically confined area known as a Local Access and Transport Area ("LATA"). The passage of the Telecommunications Act of 1996 ("Act"), Pub. L. No. 104-104, 110 Stat. 56 (codified in part at 47 U.S.C. §§ 251-261), ended this system of regulated monopolies. In its place, the Act established a competitive regime under which formerly monopolistic local-service providers, or incumbent local exchange carriers ("ILECs"), and new local-service providers, or competitive local exchange carriers ("CLECs"), compete to provide telephone service in the same LATA.
Because each of the LECs operating within a LATA owns and operates an independent network of telephone lines, the customers of each LEC may call the customers of other LECs only if these networks are interconnected. For this reason, the Act requires LECs to interconnect their networks of telephone lines with the networks of other LECs. See 47 U.S.C. § 251(a)(1). "Interconnection allows customers of one LEC to call the customers of another, with the calling party's LEC (the 'originating' carrier) transporting the call to the connection point, where the called party's LEC (the 'terminating' carrier) takes over and transports the call to its end point." Verizon Cal. v. Peevey, 462 F.3d 1142, 1146 (9th Cir. 2006).
Interconnection gives rise to a potential problem, however. If one LEC's customer calls a second LEC's customer, the second customer's LEC will not be compensated for its role in completing the call because it does not bill the caller. This is so because people do not customarily pay for receiving phone calls, only for placing them. See generally Peter W. Huber et al., Federal Telecommunications Law § 2.1.1, at 79-85 (2d ed. 1999) (describing the manner in which telephone-service providers are compensated for their services). To ensure that each LEC is compensated for its role in such calls, the Act requires LECs to negotiate interconnection agreements that "establish reciprocal compensation arrangements for the transport and termination of telecommunications." 47 U.S.C. § 251(b)(5). To satisfy this obligation, LECs typically execute contracts referred to as "interconnection agreements" that establish the rate at which the originating carrier compensates the terminating carrier for completing a call. See Global NAPs, Inc. v. Verizon New Eng., Inc., 505 F.3d 43, 45 (1st Cir. 2007). For such calls, the originating carrier compensates the terminating carrier at the rate set forth in the carriers' interconnection agreement, rather than under the access charge regime applicable to long-distance calls. Id.
Although federal law requires LECs to execute interconnection agreements, the contracts themselves are creatures of state law. Ill. Bell Tel. Co. v. Global NAPs Ill., Inc., 551 F.3d 587, 591 (7th Cir. 2008); Verizon Cal., Inc. v. Peevey, 462 F.3d 1142, 1152 (9th Cir. 2007). Such contracts are executed under, and interpreted according to, state law. Ill. Bell Tel. Co., 551 F.3d at 591. Thus, when a disagreement over the terms of such an agreement arises, "the suit is not based on federal law in any realistic sense, but on a . . . term in a contract." Id.
Federal law permits a LEC that believes another LEC has violated the terms of an interconnection agreement to seek redress before a state public utilities commission. See Peevey, 462 F.3d at 1151-52; see also BellSouth Telecomm., Inc. v. MCImetro Access Transmission Servs., 317 F.3d 1270, 1274 (11th Cir. 2003) (en banc). If a party to such a proceeding believes that the state public utility commission's decision is incorrect, that party may seek review of the decision in federal court. Verizon Md. Inc. v. Pub. Serv. Comm'n of Md., 535 U.S. 635, 642 (2002).
Because federal law requires LECs to enter into interconnection agreements with other LECs operating within the same LATA, such agreements typically concern calls that originate and terminate within the LATA. See In re Implementation of the Local Competition Provisions in the Telecomms. Act of 1996, ¶ 1034, 11 FCC Rcd. 15499, 16013 (1996). Thus, "interLATA" calls-or those that involve the transport of a call originating in one LATA and terminating in another-generally fall outside the reciprocal-compensation regime described above. See SBC Commc'ns Inc. v. FCC, 138 F.3d 410, 412 n.1 (D.C. Cir. 1998). Calls within a single LATA, or intraLATA calls, are often purely local, although sometimes calls between distant geographic points within a single LATA are nevertheless long-distance calls. The latter type of such calls are known as "intraLATA toll calls." See Huber et al., supra, § 9.7, at 580. Interconnection agreements often set forth the rate of compensation applicable both to intraLATA calls and to intraLATA toll calls.
This appeal arises out of a dispute between two LECs that operate in California: Global NAPs California, Inc. ("Global")*fn2 and Cox California Telcom, LLC ("Cox").
To comply with their section 251(a)(1) obligation to interconnect their networks, Global and Cox executed a negotiated interconnection agreement on October 29, 2003. This agreement, the Network Interconnection Agreement ("Agreement"), established "the terms, conditions and pricing under which [Global] and Cox . . . ...