8th Circuit: FCC's Vonage Order Pre-empts All State Regulation of Nomadic iVoIP

On Friday, May 1, 2009, the U.S. Court of Appeals for the 8th Circuit ruled that the Nebraska Public Service Commission (NPSC) cannot impose intrastate Universal Service Fund (USF) surcharges on nomadic interconnected Voice over Internet Protocol (iVoIP) service providers. In affirming a lower federal court's ruling, the 8th Circuit determined that the Federal Communications Commission (FCC) has pre-empted all state regulation of nomadic iVoIP, under authority granted to the agency by federal statute.
 
Specifically, the 8th Circuit ruled that because it is impossible to separate iVoIP services’ interstate and intrastate components, the FCC’s prior order (Vonage Order) pre-empting all state regulation of iVoIP service prohibits states from assessing USF surcharges on nomadic iVoIP services.

Background on Nebraska's USF Surcharge

This case began when the NPSC directed that Vonage collect and remit intrastate USF surcharges on 35.1 percent of revenues Vonage booked from iVoIP traffic originating from its customers with Nebraska billing addresses. The NPSC reasoned that since the FCC adopted a "safe harbor" percentage of 64.9 percent to determine a nomadic iVoIP provider's interstate USF obligations, the balance of 35.1 percent must be intrastate traffic that the state agency could assess.

Vonage refused to collect the surcharge and instead sought an injunction and declaratory ruling in federal court. The federal court agreed with Vonage, on the grounds that the NPSC is pre-empted from regulating nomadic iVoIP under the so-called "impossibility exception" of the federal pre-emption doctrine, which provides the FCC sole jurisdiction if it is impossible or impractical to separate the service’s interstate and intrastate components.
 
The NPSC also argued that the FCC’s Vonage Order pre-empted only “traditional” state regulations, and that Nebraska's intrastate USF was consistent with the Vonage Order. The 8th Circuit disagreed, ruling that the Vonage Order, based on the impossibility exception, is dispositive of whether the FCC has sole jurisdiction over nomadic iVoIP.

Thus, the court concluded that because nomadic iVoIP services cannot be separated into interstate and intrastate components, the impossibility exception is determinative and the Vonage Order pre-empts all state regulation—including USF assessments—of nomadic iVoIP services. The 8th Circuit also pointed out that if each state assessed intrastate USF charges on the 35.1 percent traffic balance, providers like Vonage would be hit with duplicative USF surcharges across multiple states.

The 8th Circuit's decision comes somewhat as a surprise because the FCC had filed an amicus brief supporting states' right to assess intrastate USF surcharges on nomadic iVoIP providers. Now states (such as New Mexico and Kansas, which have also attempted to assess USF surcharges on nomadic iVoIP) may increase pressure on the FCC to modify intercarrier compensation and universal service rules to allow states to collect USF fees on nomadic iVoIP. Recent changes in the make up of the FCC, now majority Democratic, may also encourage states to request even broader authority over "intrastate" nomadic iVoIP.

Implications for Fixed VoIP

Finally, the 8th Circuit ruling contains some language that may tempt fixed VoIP providers to reconfigure their services to leverage uncertainty against state regulation of their particular product.
 
Specifically, the 8th Circuit noted that: "In VoIP-to-landline or landline-to-VoIP communications, known as ‘interconnected VoIP service,’ the geographic location of the landline part of the call can be determined, but the geographic location of the VoIP part of the call can be anywhere the VoIP customer obtains broadband access to the Internet. Thus, the interstate or intrastate nature of VoIP-to-VoIP and interconnected VoIP service cannot be determined by reference to the customer's billing address." (Emphasis added)

This language suggests that a fixed iVoIP product that includes remote access functionality may move the service closer to being classified as a nomadic service.

To read the full 8th Circuit decision, click here. Please contact us if you have questions regarding federal or state universal service obligations, or any other VoIP matter.