Telecommunications: First Circuit Analyzes Standards for Local Boards to Overturn Interconnection Arbitrations (Web)

In dissecting arbitration under a federally regulatory agency’s scheme, WorldNet Telecommunications Inc. v. Puerto Rico Telephone Co., Nos. 06-1563/1564/1565/1566 (1st Cir. May 11, 2007)(available at http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=06-1563.01A), the First U.S. Circuit Court of Appeals affirmed in part and remanded in part a district court decision holding that: 1) a district court's decision was final regarding the “review of order” issued by a local telecommunications regulatory board; 2) the regulatory board had to reasonably conclude that incentive and cost-based liquidated damages were inconsistent with mandatory regulatory policy before the board could reject an arbitration decision that provided for liquidated damages; 3) the regulatory board had authority to enforce performance standards upon a local telecommunications exchange carrier in its agreement with a long distance telecommunications service provider in an interconnection agreement than the local carrier provided to its own customer.

In 2003, plaintiff WorldNet petitioned the Telecommunications Regulatory Board of Puerto Rico, the local regulatory authority, for arbitration to resolve 355 issues related to an interconnection agreement that it wanted to pursue with the Puerto Rico Telephone Co., referred to PRT, the local incumbent.

The First Circuit opinion explains that local exchange networks are obliged under the Telecommunications Act of 1996 to assist new market entrants, in order to spur competition. Under the act’s 47 U.S.C. §251 (c)(1), incumbent carriers must negotiate interconnection terms with competitors in good faith, but if negotiations fail parties “may petition a State commission to arbitrate any open issues.”

The disputed issues concerned the PRT performance standards and a liquidated damages schedule.

The board appointed an arbitrator who issued an order that adopted the liquidated schedule and performance standards.

The parties amended their interconnection agreement accordingly and followed 47 U.S.C. §251 (e)(1). But PRT challenged the interconnection agreement terms before the board, disagreeing with the performance standards and the liquidated damages amounts.

The board upheld the performance standards, but allowed PRT to “ramp-up” its performance slowly over the agreement’s three-year length.

PRT also challenged before the board the liquidated damages resolution, which found that the arbitrator was unreasonable because the damages were punitive against PRT instead of compensatory for Worldnet’s actual damages. Thus, the board set the arbitrator finding aside because it found that there were other more suitable means to encourage PRT to perform.

A federal district court affirmed the board's performance standards but remanded the liquidation damages issue to the Board for further analysis. On appeal, PRT sought review of the performance standards, and PRT as well as the board sought review on the liquidated damages issue.

The first issue addressed is whether the district court's holding is final. The court notes that the standard for reviewing agency decisions is deferential but varies in degrees by focusing on “matters of fact, policy and application of general standards.” Questions of law are de novo, but an agency receives deference when reviewing its own statute. A statute that states a different standard of review governs. Here, the district court's decision is final because it remanded the issue of whether the agreement’s liquidated damages provision could exceed actual damages to allow the board the opportunity to appeal it later.

The First Circuit agreed with the district court and found that the board did not adequately justify its rejection of the liquidated damages, but the appellate court’s reasoning differed. According to the telecommunications act and 47 U.S.C. §252(e)(3), the board can overrule an arbitrator's decision for two reasons–the arbitrator’s resolution doesn’t hold the carrier to other act obligations, and if the resolution fails to meet act pricing standards.

Both of these, the appeals court said, are inapplicable to this case. But the statute also states that a state has authority to enforce other state law requirements as long as they do not contradict the act.

The board, the First Circuit notes, assumed that liquidated damages exceeding a reasonable estimate of damages were forbidden because courts often are opposed to penalty clauses in private contracts. But local agencies make their own policies, and § 252 and the act give the board authority to establish state law requirements as long as they don't interfere with federal goals.

Thus, an arbitrated agreement is a presumptive solution that must be accepted unless the board finds that the arbitrator's resolution conflicts with statutes, agency rules or policies.

On remand, the appellate opinion notes, the board must understand that there is no rule against the board “adopting liquidated damages in excess of actual costs.”

The court discussed the tension between the arbitrator's authority and the board's authority, pointing out the limits on power. The board, it notes, must remain free to adopt an arbitrator's resolution and promote unity in interconnection dispute resolutions. But when arbitrators' decisions are overridden, there must be a conflict with state statutes, or agency rules or policy.

“This is a workable solution to the inherent conflict, not crisply addressed in the Act, between the arbitrator’s authority and that of the appointing Board,” the First Circuit notes.

The second issue reviewed on appeal is whether the board has authority to impose performance standards that require PRT to provide service to WorldNet that is superior to the service it currently provides itself. The arbitrator recognized PRT was only required to provide equal treatment to WorldNet, but the board decided that PRT could provide services that exceed the services it provides to its own customers.

The appeals court, however, decided that federal law does not forbid PRT offering superior service to its competitors but it does not explicitly enforce such requirements either. The telecommunications act permits state commissions to raise the bar on interconnection requirements. Although federal law states that PRT is only required to provide service that is equal to its competitors, the Court found that PRT has not shown that these standards are unattainable and the superior service does not violate the statute.

The performance standards depend on local law. Local Puerto Rico law does not prohibit setting performance standards exceeding current service in interconnection agreements. Additionally, where there are doubts under local law about the board's authority, the custom is to defer to the agency charged with administering the statute.

Thus, the First Circuit affirmed the board's decision on the second issue, where the board ruled it is authorized by state law to adopt superior service standards.

--Ogechi Eto, CPR Intern