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FCC Finds that Voice Over Internet Services are Subject to Federal, Not State Jurisdiction


11/15/04

In a landmark decision on November 9, 2004, the Federal Communications Commission determined that certain Internet protocol-based telephone services, also known as Voice Over the Internet or VoIP, are interstate in nature and therefore not subject to regulation by individual state utility commissions.  In preempting state regulation of certain VoIP services, the FCC drew a bright line which had not previously existed regarding the jurisdictional authority of the Federal government to regulate the burgeoning Internet telephony market.  This bright line provides certainty concerning market entry and regulation which should greatly spur investment in and promotion of VoIP services. 

The FCC's ruling in Vonage Holdings Corp. Petition for Declaratory Ruling Concerning an Order of the Minnesota Public Utilities Commission, WC Docket No. 03-211, Memorandum Opinion and Order, FCC 04-267 (November 9, 2004) came in response to a petition for declaratory ruling by Vonage, a provider of VoIP services.  In September, 2003, the Minnesota PUC issued an order requiring Vonage to obtain a certificate of authority to provide telephone services in Minnesota, provide 911 services, pay state 911 fees, and file a tariff with the Minnesota PUC stating the rates, terms and conditions pursuant to which Vonage would provide its telephone services in the state.  Vonage petitioned the FCC to preempt these attempts of the Minnesota PUC to treat Vonage as a traditional telephone company. 

In granting Vonage's petition, the FCC ruled that Minnesota's regulations directly conflict with the FCC's pro-competitive deregulatory rules and policies and that preemption is necessary to protect valid Federal regulatory objectives. 

The FCC found that the company's DigitalVoice service cannot practically be separated into intrastate and interstate components, noting that VoIP customers can use their phones from any broadband connection anywhere in the world, thus making it difficult to determine whether a call is local, interstate or international in nature.  In a separate statement, FCC Chairman Michael Powell declared:

"To subject a global network to disparate local regulatory treatment by 51 different jurisdictions would be to destroy the very qualities that embody the technological marvel that is the Internet.  The founding fathers understood the danger of crushing interstate commerce and enshrined the principle of federal jurisdiction over interstate services in the commerce clause of the U.S. Constitution." 

The FCC's order covered not only Vonage's VoIP services but also other types of IP-enabled services – including those offered by cable television companies – that have basic characteristics similar to Vonage's DigitalVoice service. 

In the VoIP world there are three types of voice calls that can be made: (i) a computer to computer call, which is an "all-Internet" affair that does not involve the traditional public switched telephone network (PSTN); (ii) a telephone to telephone call, where both the calling and called parties use regular telephones connected to the local PSTN, but the telephone carrier uses an IP-based network to transmit the call between the two points that connect to the PSTN; and (iii) a computer to telephone call, or vice versa, where one of the parties uses a VoIP service while the other uses a regular telephone connected to the PSTN.  Earlier this year, the FCC asserted exclusive jurisdiction over computer to computer calls.  See, Petition for Declaratory Ruling that pulver.com's Free World Dialup is Neither Telecommunications Nor a Telecommunications Service, WC Docket No. 03-45, Memorandum Opinion and Order, FCC 04-27 (February, 19, 2004).  Subsequently, the FCC refused to assert exclusive jurisdiction over telephone to telephone calls which use an IP-based network to transmit the calls.  See, Petition for Declaratory Ruling that AT&T's Phone-to-Phone IP Telephony Services are Exempt from Access Charges, WC Docket No. 02-361, Order, FCC 04-97 (April 14, 2004).  In its decision on Vonage's petition for declaratory ruling, the FCC asserted exclusive jurisdiction over computer to telephone and telephone to computer calls. 

The FCC's assertion of Federal jurisdiction (and preemption of state jurisdiction) over VoIP calls between a computer and a telephone, or vice versa, is significant because such calls are by far the most prevalent type of VoIP calls.  Until IP-based telephony becomes ubiquitous – and experts agree this is a question of when, not if – there would be no current market for VoIP services unless a VoIP customer is able to both call any telephone number and receive a call from any telephone number, including every telephone number connected to the PSTN.  Eliminating the spectre of having to comply with the regulations of utility commissions in 50 different states and the District of Columbia before being able to offer computer to telephone and telephone to computer voice services greatly reduces the barriers to entry into the VoIP market. 

The FCC's decision in the Vonage case is the latest development in a debate which has raged for the better part of two years over whether, how and by whom IP-based telephony services should be regulated.  Among the issues joined in that debate are: (1) the role of the states in regulating entry into and the terms and conditions of service in the VoIP market: (2) whether VoIP services should be required to provide emergency 911 services, services designed to meet the needs of deaf and disabled consumers and a host of other social programs and services; (3) whether VoIP calls should be subject to the Communications Assistance for Law Enforcement Act (CALEA) which authorizes electronic surveillance of telecommunications for law enforcement purposes; and (4) whether VoIP services should be subjected to a variety of taxes, fees and surcharges (both Federal and state) that are imposed on traditional telephone companies to support various social programs and services.  Two major pieces of legislation that addressed these issues were introduced in Congress last year – one by Senator John Sununu and the other by Congressman Chip Pickering – but neither made it to the floor of its respective house for a vote.  A number of state utility commissions instituted proceedings to address these issues but none has yet issued a decision.  In February of this year, the FCC initiated a major rulemaking proceeding (WC Docket No. 04-036) concerning the regulation of "IP-enabled services".  All of the above-referenced issues, plus a number of others, are subjects in that proceeding.  Comments and reply comments have been filed by interested parties, but there is no timetable for the FCC to adopt a comprehensive decision which addresses these numerous, very difficult and very contentious issues. 

Despite the FCC's decision in the Vonage case, the states have not been entirely left out in the cold.  The FCC decision must properly be read as a decision asserting jurisdiction over entry into the VoIP market.  The decision specifically leaves open the possibility that states will play a role in determining whether VoIP services will be subject to emergency service requirements, as well as state consumer protection and unfair business practices laws. 

However, pending a definitive decision from the FCC in its IP-enabled services proceeding on the broad range of issues attached to IP-based telephony – and definitive decisions from the courts in response to expected challenges to whatever decision the FCC issues – the question of Federal versus state jurisdiction over entry into the VoIP services market has been answered.  

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