United States Court of Appeals, District of Columbia Circuit
February 6, 2017
Petitions for Review of an Order of the Federal
Mansinghani, Deputy Solicitor General, Office of the Attorney
General for the State of Oklahoma, argued the cause for State
and Local Government Petitioners. With him on the briefs were
E. Scott Pruitt, Attorney General, Patrick R. Wyrick,
Solicitor General, Nathan B. Hall, Assistant Solicitor
General, James Bradford Ramsay, Jennifer Murphy, Christopher
J. Collins, Mark Brnovich, Attorney General, Office of the
Attorney General for the State of Arizona, Dominic E. Draye,
Deputy Solicitor General, Leslie Rutledge, Attorney General,
Office of the Attorney General for the State of Arkansas, Lee
Rudofsky, Solicitor General, Nicholas Bronni, Deputy
Solicitor General, Danny Honeycutt, Karla L. Palmer, Tonya J.
Bond, Joanne T. Rouse, Derek Schmidt, Attorney General,
Office of the Attorney General for the State of Kansas,
Jeffrey A. Chanay, Chief Deputy Attorney General, Chris
Koster, Attorney General, Office of the Attorney General for
the State of Missouri, J. Andrew Hirth, Deputy General
Counsel, Brad D. Schimel, Attorney General, Office of the
Attorney General for the State of Wisconsin, Misha Tseytlin,
Solicitor General, Daniel P. Lennington, Deputy Solicitor
General, Gregory F. Zoeller, Attorney General, Office of the
Attorney General for the State of Indiana, Thomas M. Fisher,
Solicitor General, Jeff Landry, Attorney General, Office of
the Attorney General for the State of Louisiana, Patricia H.
Wilton, Assistant Attorney General, Adam Paul Laxalt,
Attorney General, Office of the Attorney General for the
State of Nevada, and Lawrence VanDyke, Solicitor General.
Jared Haines, Assistant Solicitor General, Office of the
Attorney General for the State of Oklahoma, David G. Sanders,
Assistant Attorney General, Office of the Attorney General
for the State of Louisiana, and Dean J. Sauer, Attorney,
Office of the Attorney General for the State of Missouri,
Michael K. Kellogg argued the cause for ICS Carrier
Petitioners. With him on the briefs were Aaron M. Panner,
Benjamin S. Softness, Stephanie A. Joyce, Andrew D. Lipman,
Brita D. Strandberg, Jared P. Marx, John R. Grimm, Robert A.
Long, Jr., Kevin F. King, Marcus W. Trathen, Julia C.
Ambrose, and Timothy G. Nelson.
D. Lipman and Stephanie A. Joyce were on the brief for
petitioner Securus Technologies, Inc.
M. Gossett, Attorney, Federal Communications Commission,
argued the cause for respondent. On the brief were Howard J.
Symons at the time the brief was filed, General Counsel,
Jacob M. Lewis, Associate General Counsel, Sarah E. Citrin,
Counsel, and Robert B. Nicholson and Daniel E. Haar,
Attorneys, U.S. Department of Justice. Mary H. Wimberly,
Attorney, U.S. Department of Justice, Brendan T. Carr, Acting
General Counsel, Federal Communications Commission, and
Richard K. Welch, Deputy Associate General Counsel, entered
Swanson, Attorney General, Office of the Attorney General for
the State of Minnesota, Kathryn Fodness and Andrew Tweeten,
Assistant Attorneys General, Eric T. Schneiderman, Attorney
General, Office of the Attorney General for the State of New
York, Robert W. Ferguson, Attorney General, Office of the
Attorney General for the State of Washington, Karl A. Racine,
Attorney General, Office of the Attorney General for the
District of Columbia, Lisa Madigan, Attorney General, Office
of the Attorney General for the State of Illinois, Maura
Healey, Attorney General, Office of the Attorney General for
the Commonwealth of Massachusetts, and Hector Balderas,
Attorney General, Office of the Attorney General for the
State of New Mexico were on the brief for amici curiae State
of Minnesota, et al. in support of respondents.
S. Richards was on the brief for intervenors Network
Communications International Corp. in support of respondents.
Jay Schwartzman argued the cause for intervenors The Wright
Petitioners. With him on the brief was Drew T. Simshaw.
Y. Chou was on the brief for amicus curiae The County of
Santa Clara and the County of San Francisco in support of
Before: Pillard, Circuit Judge, and Edwards and Silberman,
Senior Circuit Judges.
EDWARDS SENIOR CIRCUIT JUDGE.
Communications Act of 1934 ("1934 Act") authorized
the Federal Communications Commission ("Commission"
or "FCC") to ensure that interstate telephone rates
are "just and reasonable, " 47 U.S.C. §
201(b), but left regulation of intrastate rates primarily to
the states. In the Telecommunications Act of 1996 ("1996
Act"), Congress amended the 1934 Act to change the
Commission's limited regulatory authority over intrastate
telecommunication so as to promote competition in the
the passage of the 1996 Act, Bell Operating Companies
("BOCs") had dominated the payphone industry to the
detriment of other providers. Congress sought to remedy this
situation by authorizing the Commission to adopt regulations
ensuring that all payphone providers are "fairly
compensated for each and every" interstate and
intrastate call. 47 U.S.C. § 276(b)(1)(A).
"[P]ayphone service" expressly includes "the
provision of inmate telephone service in correctional
institutions, and any ancillary services." Id.
§ 276(d). The issues in this case focus on inmate
calling services ("ICS") and the rates and fees
charged for these calls.
the passage of the 1996 Act, the Commission avoided intrusive
regulatory measures for ICS. And prior to the Order
under review in this case, the Commission had never sought to
impose rate caps on intrastate calls. Rather, the FCC
consistently construed its authority over intrastate payphone
rates as limited to addressing the problem of
undercompensation for ICS providers.
a variety of market failures in the prison and jail payphone
industry, however, inmates in correctional facilities, or
those to whom they placed calls, incurred prohibitive
per-minute charges and ancillary fees for payphone calls. In
the face of this problem, the Commission decided to change
its approach to the regulation of ICS providers. In 2015, in
the Order under review, the Commission set permanent
rate caps and ancillary fee caps for interstate ICS calls
and, for the first time, imposed those caps on intrastate ICS
calls. Rates for Interstate Inmate Calling Services
("Order"), 30 FCC Rcd. 12763, 12775-76,
12838-62 (Nov. 5, 2015), 80 Fed. Reg. 79136-01 (Dec. 18,
2015). The Commission also proposed to expand the reach of
its ICS regulations by banning or limiting fees for billing
and collection services - so-called "ancillary
fees" - and by regulating video services and other
advanced services in addition to traditional calling
inmate payphone providers, joined by state and local
authorities, now challenge the Order's design to
expand the FCC's regulatory authority. In particular, the
Petitioners challenge the Order's proposed caps
on intrastate rates, the exclusion of "site
commissions" as costs in the agency's ratemaking
methodology, the use of industry-averaged cost data in the
FCC's calculation of rate caps, the imposition of
ancillary fee caps, and reporting requirements. And one ICS
provider separately challenges the Commission's failure
to preempt inconsistent state rates and raises a due process
the presidential inauguration in January 2017, counsel for
the FCC advised the court that, due to a change in the
composition of the Commission, "a majority of the
current Commission does not believe that the agency has the
authority to cap intrastate rates under section 276 of the
Act." Counsel thus informed the court that the agency
was "abandoning . . . the contention . . . that the
Commission has the authority to cap intrastate rates"
for ICS providers. Counsel also informed the court that the
FCC was abandoning its contention "that the Commission
lawfully considered industry-wide averages in setting the
rate caps." However, the Commission has not revoked,
withdrawn, or suspended the Order. And one of the
Intervenors on behalf of the Commission, the "Wright
Petitioners, " continues to press the points that have
been abandoned by the Commission.
reasons set forth below, we grant in part and deny in part
the petitions for review, and remand for further proceedings
with respect to certain matters. We also dismiss two claims
. We hold that the Order's
proposed caps on intrastate rates exceed the
FCC's statutory authority under the 1996 Act. We
therefore vacate this provision.
. We further hold that the use of
industry-averaged cost data as proposed in the Order
is arbitrary and capricious because it lacks justification in
the record and is not supported by reasoned decisionmaking.
We therefore vacate this provision.
. We additionally hold that the
Order's imposition of video visitation reporting
requirements is beyond the statutory authority of the
Commission. We therefore vacate this provision.
. We find that the Order's
proposed wholesale exclusion of site commission payments from
the FCC's cost calculus is devoid of reasoned
decisionmaking and thus arbitrary and capricious. This
provision cannot stand as presently proposed in the
Order under review; we therefore vacate this
provision and remand for further proceedings on the matter.
. We deny the petitions for review of the
Order's site commission reporting requirements.
. We remand the challenge to the
Order's imposition of ancillary fee caps to
allow the Commission to determine whether it can segregate
proposed caps on interstate calls (which are permissible) and
the proposed caps on intrastate calls (which are
. Finally, we dismiss the preemption and due
process claims as moot.
1934 Act, 47 U.S.C. § 151, et seq., established
a system of regulatory authority that divides power between
individual states and the FCC over inter- and intrastate
telephone communication services. New England Pub.
Commc' ns Council, Inc. v. FCC, 334 F.3d 69, 75
(D.C. Cir. 2003). Under this statutory scheme, the Commission
regulates interstate telephone communication. See
id; 47 U.S.C. § 151. This regulatory authority
includes ensuring that all charges "in connection
with" interstate calls are "just and
reasonable." 47 U.S.C. § 201(b). "The
Commission may prescribe such rules and regulations as may be
necessary in the public interest to carry out" these
FCC, however, "is generally forbidden from entering the
field of intrastate communication service, which remains the
province of the states." New England Pub., 334
F.3d at 75 (citing 47 U.S.C. § 152(b)). Section 152(b)
of the 1934 Act erects a presumption against the
Commission's assertion of regulatory authority over
intrastate communications. This is "not only a
substantive jurisdictional limitation on the FCC's power,
but also a rule of statutory construction" in
interpreting the Act's provisions. La. Pub. Serv.
Comm'n v. FCC, 476 U.S. 355, 373 (1986).
1996 Act "fundamentally restructured the local telephone
industry, " New England Pub., 334 F.3d at 71,
by changing the FCC's authority with respect to some
intrastate activities and "remov[ing] a significant area
from the States' exclusive control, " AT&T
Corp. v. Iowa Utils. Bd., 525 U.S. 366, 382 n.8 (1999).
Nevertheless, the states still primarily "reign supreme
over intrastate rates." New England Pub., 334
F.3d at 75 (quoting City of Brookings Mun. Tel. Co. v.
FCC, 822 F.2d 1153, 1155 (D.C. Cir. 1987)).
"Insofar as Congress has remained silent . . . §
152(b) continues to function. The Commission could not, for
example, regulate any aspect of intrastate communication
not governed by the 1996 Act on the theory that it
had an ancillary effect on matters within the
Commission's primary jurisdiction." AT&T
Corp., 525 U.S. at 382 n.8.
the strictures of § 152 remain in force, the changes
imposed by the 1996 Act were significant. Evidence of this is
seen in the "Special Provisions Concerning Bell
Operating Companies." 47 U.S.C. §§ 271-76.
Section 276 was "specifically aimed at promoting
competition in the payphone service industry." New
England Pub., 334 F.3d at 71. While local phone services
were once thought to be natural monopolies,
"[t]echnological advances . . . made competition among
multiple providers of local service seem possible, and
Congress [in the 1996 Act] ended the longstanding regime of
state-sanctioned monopolies." AT&T Corp.,
525 U.S. at 371; see also Glob. Crossing Telecomms., Inc.
v. Metrophones Telecomms., Inc., 550 U.S. 45, 50 (2007).
market history is illuminating. After AT&T had divested
its local exchange carriers into individual BOCs in 1982,
BOCs continued to discriminate against non-BOC payphone
providers and effectively foreclosed competition. The BOCs
accomplished this by generally making sure that other
providers were not compensated for calls using BOC-owned
payphone lines. See New England Pub., 334 F.3d at
71. Thus, because technology constraints forced many non-BOC
providers to use BOC-owned payphone lines, those providers
were often left uncompensated for payphone calls. The 1996
Act changed these market practices.
§ 276, Congress clearly aimed to "promote
competition among payphone service providers and promote the
widespread deployment of payphone services to the benefit of
the general public." 47 U.S.C. § 276(b)(1). Covered
payphone services include "inmate telephone service in
correctional institutions, and any ancillary services."
Id. § 276(d). Section 276 of the 1996 Act
authorizes the Commission "to prescribe regulations
consistent with the goal of promoting competition, requiring
that the Commission take five specific steps toward that
goal." New England Pub., 334 F.3d at 71. One
such step is to "establish a per call compensation plan
to ensure that all payphone service providers are fairly
compensated for each and every completed intrastate and
interstate call using their payphone, " and to prescribe
regulations to establish this compensation plan by November
1996. 47 U.S.C. § 276(b)(1), (b)(1)(A). The remaining
four steps further encourage or force competition between BOC
and non-BOC providers. Id. § 276(b)(1)(B)-(E).
Any state requirements that are inconsistent with FCC's
regulations adopted pursuant to § 276 are preempted.
Id. § 276(c).
Factual and Procedural Background
the years, payphone providers have sought to provide inmate
calling services to inmates in prisons and jails nationwide.
ICS providers now compete with one another to win bids for
long-term ICS contracts with correctional facilities. In
awarding contracts to providers, correctional facilities
usually give considerable weight to which provider offers the
highest site commission, which is typically a portion of the
provider's revenue or profits. See Implementation of
Pay Tel. Reclassification & Comp. Provisions of
Telecomms. Act of 1996, 17 FCC Rcd. 3248,
3252-53 (2002). Site commissions apparently range between 20%
and 63% of the providers' profits, but can exceed that
amount. Id. at 3253 n.34. And ICS providers pay over
$460 million in site commissions annually. Order, 30
FCC Rcd. at 12821.
long-term, exclusive contract bid is awarded to an ICS
provider, competition ceases for the duration of the contract
and subsequent contract renewals. Winning ICS providers thus
operate locational monopolies with a captive consumer base of
inmates and the need to pay high site commissions.
See 17 FCC Rcd. at 3253. After a decade of industry
consolidation, three specialized ICS firms now control 85% of
the market. Order, 30 FCC Rcd. at 12801. And ICS
per-minute rates and ancillary fees together are
extraordinarily high, with some rates as high as $56.00 for a
four-minute call. Id. at 12765 n.4.
reviewing this market situation, the FCC found that inmate
calling services are "a prime example of market
failure." Id. at 12765. In its brief to this
court, FCC counsel aptly explains the seriousness of the
Inmates and their families cannot choose for themselves the
inmate calling provider on whose services they rely to
communicate. Instead, correctional facilities each have a
single provider of inmate calling services. And very often,
correctional authorities award that monopoly franchise based
principally on what portion of inmate calling revenues a
provider will share with the facility-i.e., on the
payment of "site commissions." Accordingly, inmate
calling providers compete to offer the highest site
commission payments, which they recover through
correspondingly higher end-user rates. See
[Order, 30 FCC Rcd. at 12818-21]. If inmates and
their families wish to speak by telephone, they have no
choice but to pay the resulting rates.
Br. for FCC at 4.
February 2000, Intervenor Martha Wright filed a putative
class action against ICS providers on behalf of her grandson,
other inmates, and their loved ones to challenge ICS rates
and fees. Complaint, Wright, et al. v. Corr. Corp. of
Am., No. 1:00-CV-00293 (D.D.C. Feb. 16, 2000). In 2001,
the District Court stayed the case to afford the FCC the
opportunity to consider the reasonableness of ICS rates in
the first instance through rulemaking. Thereafter, in 2003
and in 2007, Martha Wright and others petitioned the
Commission for rulemaking to regulate ICS rates and fees.
Petition for Rulemaking, FCC No. 96-128 (Nov. 3,
2003); Petitioners' Alternative Rulemaking
Proposal, FCC No. 96-128 (Mar. 1, 2007).
record compiled by the Commission fairly clearly supports its
determination that ICS charges raise serious concerns. As
noted in the FCC's brief to the court:
Excessive rates for inmate calling deter communication
between inmates and their families, with substantial and
damaging social consequences. Inmates' families may be
forced to choose between putting food on the table or paying
hundreds of dollars each month to keep in touch. See
[Order, 30 FCC Rcd. at 12766-67]. When incarcerated
parents lack regular contact with their children, those
children-2.7 million of them nationwide-have higher rates of
truancy, depression, and poor school performance.
See [id. at 12766-67 & 12767 n.18].
Barriers to communication from high inmate calling rates
interfere with inmates' ability to consult their
attorneys, see [id. at 12765], impede
family contact that can "make prisons and jails safer
spaces, " [id. at 12767], and foster
recidivism, see [id. at 12766-67].
FCC at 4-5. Petitioners do not seriously contest these facts.
See Joint Br. for Pet'rs at 7 (acknowledging
that "calling rates often exceed, sometimes
substantially, rates for ordinary toll calls").
2013, the Commission issued an interim order imposing a
per-minute rate cap for interstate ICS calls, citing its
plenary authority over interstate calls under § 201(b)
and its mandate to ensure that providers are "fairly
compensated" under § 276. Rates for Interstate
Inmate Calling Services ("Interim
Order"), 28 FCC Rcd. 14107, 14114-15 (2013). ICS
providers petitioned for this court's review of the
Interim Order. The court stayed application of
certain portions of the Interim Order but allowed
its interstate rate caps to remain in effect. Order,
Securus Techs. v. FCC, No. 13-1280
("Securus I") (D.C. Cir. Jan. 13, 2014),
ECF No. 1474764 (staying only 47 C.F.R. §§ 64.6010,
64.6020, and 64.6060). In December 2014, the court held the
petitions in abeyance while the Commission proceeded to set
permanent rates. Order, Securus I (D.C. Cir. Dec.
16, 2014), ECF No. 1527663.
2015, the Commission set permanent rate caps and ancillary
fee caps for interstate ICS calls, and for the first time the
agency imposed caps on intrastate ICS calls. Order,
30 FCC Rcd. at 12775-76, 12838-62. The rate caps were set for
four categories - "all prisons" and three tiers of
jails based on size - and the rate caps varied by category.
Id. at 12770. The rate caps, which were made
effective immediately, ranged from $.14 to $.49 per minute,
but were to decrease as of July 1, 2018, to $.11 to $.22 per
minute. Id. In setting the rate caps, the Commission
used a ratemaking methodology based on industry-average cost
data that excluded site commissions as a cost. Id.
at 12790, 12818-38. The Order also imposed reporting
requirements on ICS providers, including for video visitation
services and site commissions. Id. at 12890-93.
providers Global Tel*Link; Securus Technologies, Inc.;
CenturyLink Public Communications, Inc.; Telmate, LLC; and
Pay Tel Communications ("Pay Tel") (collectively
"Petitioners") separately petitioned for review.
Various state and local correctional authorities,
governments, and correctional facility organizations
petitioned and/or intervened on behalf of Petitioners. Martha
Wright's putative class and various inmate-related legal
organizations ("Intervenors") intervened on behalf
of the Commission.
early 2016, the court consolidated the petitions for review.
On March 7, 2016, the court stayed the application of the
Order's rate caps and ancillary fee caps as to
single-call services while this case was pending. Order,
Global Tel*Link, et al. v. FCC, No. 15-1461
("Global Tel*Link") (D.C. Cir. Mar. 7,
2016), ECF No. 1602581. Subsequently, on March 23, 2016, the
court stayed the application of ...