Federal court can hear Verizon suit against PSC

Daily Record, The (Baltimore), Aug 5, 2004 by Ann Parks

The federal courts have jurisdiction over a claim that Maryland regulators misapplied state law in interpreting a contract between Verizon Maryland Inc. and competing carriers over compensation for calls to Internet service providers, the 4th U.S. Circuit Court of Appeals has held.

The court reversed a 2002 decision by a federal judge in Baltimore, who dismissed Verizon's claim against the Public Service Commission of Maryland on the basis of jurisdiction. The matter, the 4th Circuit concluded, was not your average state-law contract claim.

[A]ccording to Verizon's complaint, whether it must pay reciprocal compensation on ISP-bound traffic under the terms of the agreement depends in substantial measure upon the requirements of the [Telecommunications Act of 1996] and the FCC's regulations and interpretations, Judge M. Blane Michael wrote this week for the appellate court.

The contractual duty at issue, the court noted, was imposed by the federal law, which mandates that local carriers establish reciprocal compensation agreements for the transport and termination of calls.

The scope of this duty is at the heart of Verizon's contract claim, and the resolution of that claim depends on the interpretation and application of federal law, Michael wrote for the 2-1 majority.

In a 37-page dissent, Judge Paul V. Niemeyer called the majority opinion an unprecedented holding that will open federal courts to state-law contract claims.

Expanding substantially the scope of federal jurisdiction under 28 U.S.C. Section 1331, the majority - holds for the first time that because the negotiated agreement in the case was mandated by the Telecommunications Act of 1996 - even though the contractual terms construed by the Maryland Public Service Commission were not so mandated - Verizon's claim that the Commission misinterpreted the agreement 'arises under' federal law, Niemeyer wrote.

Monday's decision also upheld the PSC's authority to arbitrate open issues on reciprocal compensation, but rejected the commission's claim that the Telecommunications Act was unconstitutional in that it requires the state to enforce the federal scheme or cede control to the Federal Communications Commission.

Mandate to cooperate

The 1996 act requires incumbent local telephone carriers to cooperate with competitors trying to enter a local market.

Under that mandate, Verizon entered into interconnection agreements with MCI WorldCom Inc. and others that called for reciprocal compensation. This meant that when a customer of one local carrier placed a call to the customer of a second local carrier, the first carrier agreed to pay the second for completing the call.

Problems soon arose, however. In 1997, Verizon refused to pay reciprocal compensation for calls its customers made to local numbers of Internet service providers that were customers of MCI; also, it refused to enter into an interconnection agreement with Sprint. Verizon argued that this heavy one-way traffic was unfairly benefiting local carriers that focused on ISPs.

The carriers complained to the Public Service Commission, which concluded that the calls were local and subject to reciprocal compensation under the agreements. In 1999, however, the Federal Communication Commission ruled that such calls were non-local.

Verizon then petitioned the PSC for relief. The request was denied in a June 1999 order, since the FCC continued to allow state commissions to determine whether the compensation provisions of interconnection agreements apply to ISP-bound calls.

In a 2000 arbitration proceeding between MCI and Verizon, the state commission imposed terms requiring payment of reciprocal compensation on ISP traffic.

Verizon sought review in federal court. In 2002, U.S. District Judge Frederic N. Smalkin dismissed, on the basis of jurisdiction, Verizon's claim that the PSC's interpretation of its interconnection agreement violated the parties' intent.

Smalkin also granted summary judgment against Verizon's other claims, upholding the PSC's authority to require reciprocal compensation in arbitration proceedings. (It also found that the PSC's June 1999 order was not contrary to federal law, a ruling that was not on appeal.)

The 4th Circuit affirmed on the question of the PSC's authority.

[T]he 1996 Act authorizes the PSC to arbitrate open issues on reciprocal compensation, and the FCC has declared that state commissions had the authority to require reciprocal compensation for ISP-bound traffic in arbitrations conducted during the time frame in this case, Michael wrote.

It remanded the case, however, on the jurisdiction question.

We are not saying that every dispute about a term in an interconnection agreement belongs in federal court, but when the contractual dispute (like the one here) involves one of the 1996 Act's essential duties, there is a federal question, Michael wrote.

Counsel for Verizon and the Public Service Commission could not be reached for comment yesterday.

WHAT THE COURT HELD

Case:

Verizon Maryland Inc. v. Global Naps Inc; Public Service Commission of Maryland et al., US 4th No. 03- 1448. Published. Opinion by Michael, J.; dissent by Niemeyer, J. Decided Aug. 2, 2004.