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July 30, 2004, 9:00 AM ET, Alert No. 949.
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4th Circuit Addresses Filed Rate Doctrine and Consumer Protection Statutes

7/28. The U.S. Court of Appeals (4thCir) issued its split opinion [20 pages in PDF] in Bryan v. BellSouth, a case regarding federal question jurisdiction in which the Appeals Court addressed the filed rate doctrine and universal service taxes.

Bryan filed a complaint in state court against BellSouth alleging, among other things, violation of a state consumer protection law in connection with BellSouth's line item billing of FCC universal services charges. The District Court, and the dissenting Judge on appeal, argued that this case arose under state law, and that there is therefore no federal question jurisdiction. The majority on appeal held that pursuant to the filed rate doctrine federal question jurisdiction exists. It reversed and sent the case back to the U.S. District Court.

Coincidentally, on July 27, 2004, the U.S. Court of Appeals (9thCir) issued its opinion [22 pages in PDF] in Verizon v. Covad, another case regarding the filed rate doctrine. See, story titled "9th Circuit Rules in Verizon v. Covad" in TLJ Daily E-Mail Alert No. 947, July 28, 2004.

Filed Rate Doctrine. The filed rate doctrine requires that common carriers and their customers adhere to tariffs filed and approved by appropriate regulatory agencies. It is a 19th Century principle that was developed to address the practices of railroad monopolies, such as price discrimination. It was based upon the assumption the market competition and the law of contract failed to operate effectively in this context. In 1934, principles for regulating railroad common carriers, including the filed rate doctrine, were transplanted into the Communications Act for the purpose of regulating telecommunications common carriers.

The 4th Circuit majority opinion, and the 9th Circuit opinion, offered different descriptions of the filed rate doctrine. The 4th Circuit opinion states that "The doctrine's purpose is twofold: to prevent discrimination among consumers and to preserve the rate-making authority of federal agencies." The Court continued that "authorizing a court to award damages that would effectively impose a rate different from that dictated by the tariff would usurp the FCC's authority to determine what rate is reasonable."

In contrast, Judge Noonan, writing for a unanimous panel of the 9th Circuit, wrote that "the filed rate doctrine now functions in the telecommunications field as an anomaly. It is a relict, open to repudiation by the FCC."

Judge Noonan regretted that there remains a statute that prevents the Court from ignoring the doctrine.

Universal Service. Pursuant to Federal Communications Commission (FCC) rules, which implement 47 U.S.C. § 254, BellSouth collects universal service fund revenues from its customers by placing a line item charge on monthly bills. Universal service includes a number of FCC administered subsidy programs that are funded by taxes collected by interstate telecommunications carriers. One of these programs is known as the schools and libraries program, and as the e-rate.

There was substantial debate in the House and Senate, mostly in 1998, regarding legislation that would have required phone companies to provide further information about the e-rate charges on monthly bills. Proposed legislation would have required phone companies to disclose that customers were being billed to subsidize a federal program. Some of the supporters were likely motivated by a desire to undermine public support for the e-rate program, while some of the opponents were likely motivated by a desire to prevent an undermining of support for the program. See for example, TLJ web page titled "S 1618, S 771, HR 3888, and HR 4018: Anti-Slamming, Anti-Spamming, and Truth in Billing Bills". However, in the end, neither the Congress, nor the FCC, required phone companies to disclose information about the e-rate charges.

District Court. In the 4th Circuit case, the plaintiff (Tomi Bryan) filed a complaint in state court in North Carolina alleging that the defendant (BellSouth) violated a state consumer protection statute in its billing, collection and disposal of universal service charges. She sought class action status.

BellSouth removed the case to the U.S. District Court (MDNC). At issue before the Appeals Court was whether this case arose under federal law (filed tariff), or state law (state unfair trade practices statute).

Nominally, this case is about subject matter jurisdiction of federal courts, based upon claims arising under federal law. However, in order to analyze the jurisdictional issue, the District Court, as well as the Court of Appeals, delved deeply into the nature of, and relationship between, the filed rate doctrine, and state consumer protection laws.

Bryan alleged that the amounts that BellSouth billed customers exceeded the amounts that BellSouth transferred to the FCC, that BellSouth failed to disclose certain information pertaining to the line item charges required by the North Carolina's unfair trade practices law, and that the BellSouth's line item charges were misleading. She plead violation of the North Carolina unfair trade practices law (based upon BellSouth's failure to disclose that the charges were excessive, how the charges were calculated, and that the charges also covered administrative expenses, costs, and profits), unjust enrichment (based upon excessive charges), and breach of covenant of good faith and fair dealing (for excessive charges). These are all state law claims.

BellSouth argued that all of the claims are barred by the filed-rate doctrine because they challenged BellSouth's filed tariff or, in the alternative, that they should be heard first by the FCC under the doctrine of primary jurisdiction.

The District Court dismissed the unjust enrichment and breach of covenant of good faith and fair dealing counts. The District Court also remanded to the state court the state unfair trade practices count, based upon its conclusion that the District Court lacked federal question jurisdiction. BellSouth appealed this remand.

Appeals Court. The Court of Appeals vacated and remanded the case to the District Court. Judge Robert King wrote the opinion of the Court, in which Judge Roger Gregory joined. Judge Michael Luttig wrote a thrashing dissent.

The Appeals Court majority held that the North Carolina unfair trade practices claim actually arises under federal law. The federal law is this case is the filed tariff.

While Bryan did not appeal the dismissals of the unjust enrichment and breach of covenant of good faith and fair dealing counts, the Appeals Court wrote, in dicta, that "Because only the FCC may decide what charge is lawful, it is beyond dispute that the court was correct to exercise jurisdiction and dismiss Bryan’s claims complaining that the FUSC was excessive."

The Appeals Court then addressed the main issue, which it summarized as whether the unfair trade practices count "of the Complaint would require the court to determine a reasonable rate for the" federal universal service charge "thereby presenting a substantial question of federal law and contravening the filed-rate doctrine."

It also stated the test as follows: whether the state count "effectively challenges the reasonableness of BellSouth's filed rate, giving rise to federal question jurisdiction and requiring dismissal pursuant to the filed-rate doctrine."

The Court reasoned that the complaint "nowhere purports to seek any form of damages other than a refund of some portion of the" line item universal services charge. Hence, "the only plausible reading of the Complaint is that" it "seeks a refund of a portion of the" line item universal service charge.

The Court concluded that because the amount of the line item charge is determinatively set forth in BellSouth's filed tariff, and because this tariff carries the force of federal law, "an action seeking to alter that rate presents a federal question". It held that the District Court erred in remanding the claim to the state court, and that the "claim must be dismissed pursuant to the filed-rate doctrine".

Luttig Dissent. Judge Luttig clashed sharply with the majority on jurisdiction.

Luttig gave a lengthy analysis and application of the Supreme Court precedent on arising under jurisdiction. In the end, he concluded that "the majority's analysis ... fails to heed even the most basic tenets of the Supreme Court's or this court's direction on the subject, adopting a standard drawn from a possible federal defense to plaintiff's claim" rather than from the plaintiff's right to relief.

He wrote that it a claim arising under federal law in only two circumstances. First, a claim arises under federal law where there is complete preemption, which exists when federal law so completely sweeps away state law that any action brought under state law is transformed into a federal action. Second, a claim arises under federal law where a well-pleaded complaint establishes that the plaintiff's right to relief under state law necessarily depends on resolution of a substantial question of federal law.

Luttig concluded that neither of these two circumstances is present in this case. Rather, he wrote that the majority opinion "adopts instead the different standard of whether a complaint ``effectively challenges´´ a filed rate".

Judge Luttig continued that "It is one thing to provide that ``arising under´´ jurisdiction exists in that narrow class of cases where the plaintiff's right to relief necessarily depends on the resolution of a substantial federal question or Congress has preempted state court jurisdiction. It is quite another to provide that jurisdiction is present so long as the plaintiff’s request for relief constitutes an ``effective challenge´´ to the rate set by federal law. Indeed, as this case demonstrates, a claim can easily be characterized as an ``effective challenge" to rates set in a tariff filed with a federal agency, even though the adjudication of the claim itself would require the court to decide no federal issues whatsoever."

Luttig added that BellSouth can raise the filed rate doctrine as a defense in a state court action. Of course, this is a class action lawsuit. It was likely brought in state court because the plaintiff's counsel anticipated that the state court would provide a forum more favorable for the plaintiffs. Also, federal judges are more likely to to give more weight to the federal filed rate doctrine than state court judges, and North Carolina state court judges are likely to give more weight to North Carolina consumer protection laws than federal judges.

Luttig's argument, if it were law, would weaken the impact of the filed rate doctrine, by slightly limiting the ability of phone companies to hide behind the filed rate doctrine to avoid liability for state fraud, breach of contract or violation of consumer protection laws. Nevertheless, he did not question the merits of the filed rate doctrine in an age when competitive markets and consumer protection laws are increasingly replacing price regulation by government agencies.

In contrast, in the 9th Circuit's opinion in roundly condemned the filed rate doctrine.

Judge Noonan would like to see the Congress to pound a wooden stake through the heart of the filed rate doctrine, while Judge Luttig merely wants the judiciary to give trial lawyers the ability to wield the cross of state jurisdiction to ward off some of the filed rate doctrine maneuvers of phone company lawyers in consumer protection cases.

Related Cases. On January 17, 2002, the U.S. Court of Appeals (9thCir) issued its opinion [12 pages in PDF] in Brown v. MCI WorldCom. William Brown filed a class action complaint in the U.S. District Court (CDCal) against MCI WorldCom alleging overcharging for phone services. The District Court dismissed his complaint, holding that his suit was barred by the filed rate doctrine. The Appeals Court reversed, on the grounds that Brown's complaint only sought to enforce an existing tariff approved by the FCC. This case is William Brown v. MCI WorldCom Network Services, Inc., No. 00-56171, an appeal from the U.S. District Court for the Central District of California, Judge Gary Feess presiding, D.C. No. CV-99-11522-GAF. This case is also reported at 277 F.3d 1166.

See also, California Court of Appeal opinion in Lovejoy v. AT&T, and story titled "California Court Rejects Filed Rate Doctrine Defense in Slamming Case" in TLJ Daily E-Mail Alert No. 262, September 6, 2001

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3rd Circuit Rules in First Amendment Case

7/29. The U.S. Court of Appeals (3rdCir) issued its opinion [17 pages in PDF] in The Pitt News v. Pappert, a First Amendment challenge brought by a newspaper to a state statute that restrained certain speech -- paid advertising of alcoholic beverages. The Appeals Court held that statute is unconstitutional, but on narrow grounds specific to this restraint.

The plaintiff in this case is The Pitt News, a newspaper created by the University Board of Trustees of the University of Pittsburgh and operated as a student organization. All of its revenue is derived from payments for advertisements published in The Pitt News. The defendants are Gerald Pappert, who was sued in his capacity as the Attorney General of the state of Pennsylvania, and other state officials.

The statute, enacted by the state of Pennsylvania, applied to speech by newspapers and a broad range of communications media that are affiliated with educational institutions. It banned speech that constituted "any advertising of alcoholic beverages".

The statute applied to any "publication published by, for or in behalf of any educational institution". It broadly covered publication "through the medium of radio broadcast, television broadcast, newspapers, periodicals or other publication, outdoor advertisement, any form of electronic transmission or any other printed or graphic matter, including booklets, flyers or cards, or on the product label or attachment itself."

As a consequence, The Pitt News lost advertising revenue, not only from ads for alcoholic beverages, but from restaurants that held alcoholic beverage licenses, including restaurants whose ads that did not reference the sale of alcohol. Revenues decreased, and the newspaper was reduced in size. Competing newspapers and broadcast media that targeted the University of Pittsburgh community, but that were not affiliated with the University, were not affected by the statute.

The Pitt News filed a complaint in U.S. District Court (WDPenn) against Pappert and others alleging that the statute violates the First Amendment of the U.S. Constitution. The District Court upheld the statute.

The Court of Appeals held that the statute is unconstitutional because it is an impermissible restriction on commercial speech, and also because the law is presumptively unconstitutional because it targets a narrow segment of the media.

Pennsylvania argued that the statute does not restrain speech. That is, The Pitt News is free to publish information and advertisements for alcoholic beverages. The statute merely prohibits The Pitt News from receiving payment for such speech.

The Appeals Court rejected this argument. It wrote that "If government were free to suppress disfavored speech by preventing potential speakers from being paid, there would not be much left of the First Amendment. Imposing a financial burden on a speaker based on the content of the speaker’s expression is a content-based restriction of expression and must be analyzed as such." The Court cited, Simon & Schuster, Inc. v. Members of the New York State Crime Victims Bd., 502 U.S. 105 (1991), which held unconstitutional New York's Son of Sam law.

Impermissible Restriction on Commercial Speech. The Appeals Court's first of two reasons for overturning the statute is that it is an impermissible restriction on commercial speech. The Appeals Court concluded at the outset, without discussion, that this is a case involving "commercial speech", and therefore must be reviewed under court created standards for analyzing the constitutionality of restraints on commercial speech.

Hence, the Appeals Court applied the four prong test created by the Supreme Court in Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557 (1980).

The Court summarized this test, quoting from Central Hudson: "First, ``we must determine whether the expression is protected by the First Amendment,´´ and this means that “it at least must concern lawful activity and not be misleading.´´ ... Second, ``we ask whether the asserted governmental interest is substantial.´´ ... If the first and second ``inquiries yield positive answers, we must determine whether the regulation directly advances the governmental interest asserted, and whether it is not more extensive than is necessary to serve that interest.´´"

The Court held that under the first prong, the expression is protected by the First Amendment. Second, it wrote that "preventing underage drinking and alcohol abuse" are substantial governmental interests under the second prong. However, the Court held, in applying the third prong, that the state has not shown that its statute alleviates the harm.

The Court explained that "We do not dispute the proposition that alcoholic beverage advertising in general tends to encourage consumption". But, it continued that the prohibition "applies only to advertising in a very narrow sector of the media (i.e., media associated with educational institutions), and the Commonwealth has not pointed to any evidence that eliminating ads in this narrow sector will do any good."

The Court also held that the statute fails to meet the fourth prong of the Central Hudson test. There is not a reasonable fit between the legislature's ends and the means chosen to accomplish those ends. The Court noted that 75% of the University of Pittsburgh community is above the legal drinking age.

Targeting a Narrow Segment of the Media. The Appeals Court's second of two reasons for overturning the statute is that it targets a narrow segment of the media. The Court discussed this concept at length. It outlined the concerns raised by statutes that target some but not all media, and suggested that "courts must be wary". In the end, it held that this particular Pennsylvania statute impermissibly targets a narrow segment of the media. However, there is no precise black letter statement of law in this opinion.

Perhaps, the reason for the Court's reluctance to articulate a specific principle is that the law abounds with disparate treatments of different segments of the information and communications media. The Communications Act and Federal Communications Commission (FCC) rules contain many such disparate treatments, as for example, in the different regulatory regimes for broadband access services provided over DSL and broadband access services provided by cable modem. Indeed, the FCC's existence, and communications law, are both premised on the notion that certain communications media (such as radio, television, cable, and satellite) should be subject to regulatory regimes that are not applied to certain other communications media (such as books, magazines, newspapers, pulpits, and lecterns). State and local governments also impose different tax and regulatory regimes on newspaper, telephone, cable and other types of companies.

Nevertheless, the Court did write that "laws that impose special financial burdens on the media or a narrow sector of the media present a threat to the First Amendment."

It added that "laws that impose financial burdens on a broad class of entities, including the media, do not violate the First Amendment", but, that "A business in the communications field cannot escape its obligation to comply with generally applicable laws on the ground that the cost of compliance would be prohibitive."

Finally, it wrote in vague terms that "courts must be wary that taxes, regulatory laws, and other laws that impose financial burdens are not used to undermine freedom of the press and freedom of speech. Government can attempt to cow the media in general by singling it out for special financial burdens. Government can also seek to control, weaken, or destroy a disfavored segment of the media by targeting that segment."

Commercial Speech. The Court did reject Pennsylvania's argument that there was no limitation on speech about alcoholic beverages. Pennsylvania had argued that the statute merely banned accepting payments from advertisers, which is not speech. The Court also rejected Pennsylvania's argument that it imposed no financial burden on a segment of the media. Pennsylvania had argued that it imposed no tax. The Court reasoned that banning payment for speech is like banning the speech, and that banning a type of advertising revenue, while not a tax, has the effect of imposing a financial burden.

The Court did not extend this type of analysis further. That is, newspapers do not publish alcoholic beverage ads in isolation. They publish them as part of a larger collection of content that includes current events, politics, social commentary, and other categories of speech that the Courts do no relegate to the less protected status of commercial speech. Moreover, limiting a newspaper's ability to derive revenue from one type of speech, can have the effect of limiting, or precluding, it from engaging in other, and more protected, types of speech. Thus, the Court might have viewed the statute as a restraint of more highly protected speech, and therefore, applied a strict scrutiny standard. But, it did not.

The Court also did not address whether or not legislative and regulatory processes are used to attack the revenue streams of publications, for the purpose of limiting political speech. For example, Katherine Graham argued that this happened when her newspaper, The Washington Post, published stories related to the Watergate scandal. She wrote in her biography, Personal History [Amazon], that friends of former President Richard Nixon challenged the Washington Post's FCC television broadcast licenses for its profitable stations in the state of Florida. Graham wrote that the filing of the FCC license challenges cut the Post's market capitalization by half.

Washington Tech Calendar
New items are highlighted in red.
Friday, July 30

The House and Senate will not meet from July 26 through September 6.

The Democratic National Convention will be held in Boston, Massachusetts on July 26 through July 30.

9:30 AM - 1:00 PM. The Federal Communications Commission's (FCC) Internet Policy Working Group (IPWG) will host an event that it describes as "a roundtable discussion to address international issues associated with the migration of communications services and applications to IP-based technologies". See, FCC notice [PDF]. Location: FCC, 445 12th Street, SW, Commission Meeting Room.

Extended deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its Public Notice (DA 04-1454) regarding a la carte and themed programming and pricing options for programming distribution on cable TV and direct broadcast satellite systems. This is MB Docket No. 04-207. See, notice of extension [PDF].

Monday, August 2

Deadline to submit applications to the Department of Commerce's (DOC) Technology Administration (TA) to join the TA's business development mission to Northern Ireland and the Republic of Ireland. This delegation will include U.S. based senior executives representing the information and communications technology sector. See, notice in the Federal Register, May 26, 2004, Vol. 69, No. 102, at Pages 29928 - 29930.

Wednesday, August 4

9:30 AM. The Federal Communications Commission (FCC) will hold a meeting. The event will be webcast. Location: FCC, 445 12th Street, SW, Room TW-C05 (Commission Meeting Room).

Friday, August 6

EXTENDED TO OCTOBER 8. Deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its public notice (DA 04-1690) requesting public comments on constitutionally permissible ways for the FCC to identify and eliminate market entry barriers for small telecommunications businesses and to further opportunities in the allocation of spectrum-based services for small businesses and businesses owned by women and minorities. See, notice in the Federal Register, June 22, 2004, Vol. 69, No. 119, at Pages 34672 - 34673. See also, notice of extension [PDF].

Deadline to submit comments to the Federal Communications Commission (FCC) in response to its notice of proposed rulemaking (NPRM) regarding the process for designation of eligible telecommunications carriers (ETCs) and the FCC's rules regarding high-cost universal service support. This NPRM is FCC 04-127 in Docket No. 96-45. See, notice in the Federal Register, July 7, 2004, Vol. 69, No. 129, at Pages 40839 - 40843.

Deadline to submit comments to the Federal Communications Commission (FCC) in response to its notice of proposed rulemaking (NPRM) regarding the rechannelization of portions of the 17.7-19.7 GHz band. This NPRM is FCC 04-77 in WT Docket No. 04-143. See, notice in the Federal Register, July 7, 2004, Vol. 69, No. 129, at Pages 40843 - 40850.

Deadline to submit comments to the Office of the U.S. Trade Representative (USTR) regarding its Special 301 out of cycle review of Israel and other nations. Section 182 of the Trade Act of 1974, which is codified at 19 U.S.C. § 2242, requires the USTR to identify countries that deny adequate and effective protection of intellectual property rights or deny fair and equitable market access to U.S. persons who rely on intellectual property protection. This is also referred to as the Special 301 provision. See, notice in the Federal Register, July 13, 2004, Vol. 69, No. 133, at Pages 42077-42078.