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09/23/88 Trt Telecommunications v. Federal Communications

September 23, 1988












Nos. 86-1685, 86-1710, 86-1740 1988.CDC.369

Petitions for Review of an order of the Federal Communications Commission.


Wald, Chief Judge, and Robinson and Starr, Circuit Judges. Opinion for the Court filed by Circuit Judge Starr.


Telex and TWX are services that allow subscribers to communicate with each other by means of teletypewriters. Much in the manner of using a conventional telephone, a subscriber to the service can dial the number of another subscriber and, once "on line," send written data. *fn1 During the period at issue in this case, Western Union provided domestic Telex/TWX service; in addition, four companies known collectively as the "interconnected carrier parties" ("ICPs") provided international connections. *fn2 WU and the ICPs had exclusive control over domestic and international lines, respectively; a subscriber therefore used lines supplied by both in order to send overseas messages that either originated or terminated in the United States. The dispute before us concerns the division of revenues between WU and the ICPs for these transnational messages. I A

The history of the stormy WU-ICP relationship is beginning to rival that of the legendary squabble between the Hatfields and the McCoys. One pivotal difference, however, is that the parties here very much remember what their long-lived dispute is all about. It is over rates. But, before turning to the recent history of the revenue divisions that gave rise to this dispute, it is needful to recall the familiar outlines of the ratemaking mechanisms provided by the Communications Act of 1934, ch. 652, 48 Stat. 1064 (codified as amended at 47 U.S.C.).

Under the Communications Act, common carriers, such as WU, offer their communications services to the public pursuant to tariffs filed with the FCC. 47 U.S.C. § 203 (1982). As with other rate regulatory mechanisms, rates filed under the Act must be just, reasonable, and not unduly preferential. Id. §§ 201(b), 202(a). Under section 203, carriers initiate the ratemaking process by filing tariffs which may take effect after prescribed notice periods. The FCC may reject a tariff outright if it is "patently unlawful." See Western Union Int'l v. FCC (supra) 652 F.2d at 141 n.14. Alternatively, the Commission may set the rates for investigation and hearing. 47 U.S.C. § 204(a). In addition, the Commission may suspend the effective date of a filed tariff for a period of up to five months. After the five-month period has elapsed, the rates become effective, and a customer is obliged to pay at the designated rate. In the event the rates are later found unlawful, the Commission may require the carrier to effect a refund. 47 U.S.C. § 204(a).

A very different rate mechanism for setting rates is (or, more precisely, was) provided by section 222 of the Act, which, as the parties agree, controlled WU's provision to the ICPs of "outbound" service (service originating in the United States) at the time in dispute in this case. *fn3 Section 222(e)(1) provided for the division of charges following the consolidation or merger of telegraph carriers. Under this subsection, divisions between the ICPs and WU were to be determined by agreement between the parties, subject to FCC approval, or, failing that, by FCC prescription following notice and hearing. Section 222(e)(3) governed review of extant or proposed rates and allowed rate prescription by the Commission. Both provisions are set out in the margin. *fn4 As we shall presently see, it is the application of section 222 to the division of revenues for outbound Telex/TWX calls that provides the centerpiece of the present controversy.

With these various provisions in mind, we turn to the earlier-promised narrative, which, alas, will win no awards for brevity.


It was a generation ago, back in 1961, when WU first entered into contracts with the ICPs. It was at that time, in the first year of the Kennedy Administration, that WU first began offering domestic Telex service. Under these contracts, WU charged the ICPs the same rates for interconnection with its domestic Telex network that it charged the general public. In 1971, WU expanded its horizons, acquiring the TWX network from AT&T. The upshot was a new dimension to the WU-ICP relationship, as the former assumed AT&T's contracts with the latter. Unlike the Telex agreements, however, the TWX contracts provided for a 27 percent discount off AT&T's public rates. When the TWX contracts expired in 1973, WU and the ICPs engaged in a series of confrontations that set the stage for the present dispute.

Here is what happened. WU informed the ICPs that it would continue to provide TWX services to them only at the rates it charged regular domestic subscribers, just as it did for Telex services. Unenamored of the threatened termination of their long-standing discount, the ICPs refused to pay WU's public rate, claiming that WU had no right unilaterally to increase its share of the international charges. Instead, the ICPs continued to pay a discounted rate for the interconnections. Displeased by the ICPs' tack, WU filed suit in New York State court to compel payment of the deficiency. *fn5 Eventually, however, the dispute was resolved through agreements reached with individual ICPs during 1975 and 1976.

These settlement agreements went beyond resolving the TWX payment dispute to encompass rate arrangements for Telex service as well. The settlements provided, in brief, that WU would provide both its Telex and TWX services to the ICPs at a discount of approximately 5 1/2 percent below public rates. These agreements, at least as to the rates, were to remain in effect until December 31, 1977.


In anticipation of the expiration of the 1975-76 settlement agreements, WU filed revisions to its domestic tariff on December 1, 1977, increasing public Telex/TWX rates. The next day, WU filed a tariff setting rates for both inbound and outbound Telex/TWX services provided to the ICPs. These rates were equal to WU's proposed public rates. *fn6 As to the proposed public rates, governed by sections 201-205 of the Communications Act, see supra p. 4, the Commission suspended the tariffs and set them for investigation. See Western Union Telegraph Co., 67 F.C.C.2d 1420 (1978), J.A. at 1.

As to WU's proposed interconnection charges, the ICPs registered their opposition to the new tariffs with the FCC, just as they had resisted attempts to raise interconnection rates four years before. The ICPs claimed that, under section 222(e) of the Communications Act (which we previously described), WU was prohibited from unilaterally raising rates. The ICPs further argued that the division of charges could only be accomplished by (1) agreement between the ICPs and WU (and approved by the FCC) or (2) prescription by the Commission. Accordingly, the ICPs requested the FCC to reject the tariffs outright; in the alternative, they urged that the tariffs be suspended and investigated.

As to WU's proposed tariff for outbound services, the FCC found that the division of charges had to be made consistently with section 222(e) and that WU's unilateral action in setting rates was inconsistent with that provision. The FCC therefore rejected WU's tariff for outbound service. The Commission interpreted the pivotal statutory language in the following manner:

Section 222(e)(1) places an affirmative requirement upon WU and the [ICPs] to attempt to agree on a reasonable division of charges formula for outbound overseas traffic. In the event WU and the [ICPs] are unable to agree on a reasonable formula, which the Commission approves, or an existing division of charges is found after hearing to be unreasonable, the Commission must, by reason of Section 222(e)(1) prescribe a division of charges which will be just, reasonable, equitable, and in the public interest.

Designation Order, 68 F.C.C.2d at 113, P. 42, J.A. at 24.

As to inbound services, however, the FCC found that section 222(e) was inapplicable; rather, sections 201-205 of the Communications Act, which as we indicated above constitute the ordinary tariff mechanism (providing for carrier-initiated rates), controlled the charges for those services. Acting under those provisions, the FCC suspended WU's inbound tariff for the full statutory period of five months, imposed an accounting order, and added that filing to the already pending investigation of WU's public rates. Id. at 119-24, paras. 56-76, J.A. at 30-35.

Five months later, on August 10, 1978, WU's tariffs for inbound ICP Telex/TWX service became effective, and the ICPs became obligated to pay the full public rate. By virtue of the accounting order, however, WU remained subject to a Commission-mandated future readjustment in the event the FCC's investigation concluded that the ICPs were entitled to a discount. The rate for outbound ICP Telex/TWX service remained unsettled, however, pending resolution under the separate mechanism provided by section 222(e). It is the uncertainty over the proper rate to be charged during this unsettled-or hiatus-period that provides the basis for the current controversy.

Both the ICPs and WU sought review of the FCC's orders. *fn7 During the pendency of their petitions, the parties continued their settlement negotiations, eventually finding common ground in January 1979. Under the settlement, the parties' agreements would control rates for a two-year period-one year in either direction from the settlement date-from January 1, 1978 through December 31, 1979. Regaining their discount (at least in part), the ICPs were to pay for WU's interconnection services at a rate of 6 percent off the public tariff rate, including the retrospective adjustment. *fn8

The resolution was short-lived, however, as the Commission rejected the settlement agreements only four months after their announcement. Western Union Telegraph Co., 71 F.C.C.2d 621 (1979) (" Rejection Order "), J.A. at 60, petition for review dismissed sub nom. Western Union Int'l v. FCC, No. 79-1632 (D.C. Cir. Sept. 10, 1979). In doing so, the Commission was "concerned that the rate schedules contained in the Agreements unduly favor the [ICPs] vis a vis WU's public domestic users of the same Telex and TWX services." Id. at 628, para. 14, J.A. at 67. The Commission reasoned that "there does not appear to be any justification . . . for significantly different rate treatment for" the ICPs and public domestic customers. Id. at 629, para. 16, J.A. at 68. The Commission also expressed concern that the settlements called for rates to be set in absolute numerical terms rather than tied directly to public tariff rates. See supra n.8. This, the Commission feared, would only exacerbate the fractious "dispute-by-dispute" approach of the ICPs and WU to resolving their differences. The FCC further opined that "the parties' historical inability to agree on divisions of charges might jeopardize the provision of service to the public." Id. at 629, para. 17, J.A. at 68. It therefore concluded that the "public interest would best be served by Commission prescription of lawful charges for use of WU's domestic Telex/TWX networks." Id. at 630, para. 17, J.A. at 69.

The FCC also rejected the ICPs' assertion that the settlement agreements constituted the only means by which to settle rates for the preceding year. The Commission addressed the argument in the following way, which we take the liberty of quoting at length because it sets forth the FCC's interpretation of section 222(e) to which it was steadfastly to adhere throughout this litigation:

In support of the Agreements, which impute the settlement rates back through 1978 when charges were uncertain, the [ICPs] assert that the Commission does not have the authority to prescribe charges on a retroactive basis, i.e., back to the time when any prior agreements may have expired and no other agreements were in effect. Thus, the parties view the Agreements as the sole means of ascertaining applicable inbound charges for the period January 1, 1978 to August 10, 1978 and outbound charges from January 1, 1978 to the present time. Contrary to these views, we believe we have ample regulatory authority in appropriate cases to frame a remedy which will afford a party relief for a past period in which it was inequitably or unlawfully treated. Furthermore, in our opinion Section 222(e) implicitly empowers the Commission to determine a proper outbound division of charges for periods during which the parties were unable to reach an acceptable agreement. Absent this power, where carriers fail to agree, there would be no remedy during the hiatus period prior to Commission prescription. The failure of the Commission to act in a situation such as this could lead to basic unfairness and possibly, even the cessation of service in extreme cases, an outcome hardly envisioned by Congress. This is not a case where Commission determined charges would supersede a contract rate or tariff rate applicable at the time the service was provided. The fact is that no rates were in effect during the periods in question. We believe that in this unique circumstance we may decide upon reasonable charges for application during these periods, provided the carriers ultimately are unable to reach an acceptable resolution of their differences.

Id. at 630, para. 18, J.A. at 69 (footnote omitted).

The Commission concluded by "urg[ing] the parties to attempt to arrive at a mutually acceptable interim arrangement." Id. at 630, para. 19, J.A. at 69. It warned that in the event agreement was not forthcoming, the Commission was "prepared to prescribe interim charges . . . if necessary or to otherwise fashion an appropriate remedy for this interim period." Id. The Commission authorized the ALJ to prescribe an interim division of charges for outbound ICP traffic upon application by any party or on the ALJ's own initiative. Id. at 630 n.14, J.A. at 69.

In July 1979, the ALJ prescribed an interim division of charges that required the ICPs to pay WU the same rates as those paid by the general public. Western Union Telegraph Co., FCC 79M-845 (July 24, 1979), (" Interim Prescription Order "), J.A. at 98. *fn9 From that point on, the ICPs duly paid the public rate for both inbound and outbound traffic.

While the interim prescription ended immediate uncertainty over rates, it left unsettled the proper rates for the period during which the proper division of revenues between the parties was uncertain. As to inbound rates, governed by the conventional ratemaking principles embodied in sections 201-205, there were no rates in effect between the time the settlement agreements expired and the date the WU inbound tariff went into effect (1/1/78 to 8/10/78). As to outbound rates, controlled by section 222, there were no rates in effect between the time the settlement agreements expired and the date of the interim prescription (1/1/78 to 7/24/79). WU's protests to the contrary notwithstanding, the ICPs continued during this interim period to pay the rates established for Telex/TWX service in the 1975-1976 settlement agreements (which had expired on December 31, 1977). This amounted to a 5.5 percent discount off the public rates in effect at that time. *fn10

After the interim prescription, the ALJ continued his investigation of WU's rates, encompassing both public rates and revenue divisions with the ICPs. In March 1982, a second ALJ issued a decision concluding that WU's public rates were unreasonable and discriminatory. He also found that, as compared to its provision of service to the public, WU enjoyed "a significant cost difference" in furnishing interconnections to the ICPs. Western Union Telegraph Co., 95 F.C.C. 2d 922, 943, para. 86

But the ICPs' victory proved to be ill-fated. The Commission reversed the ALJ's findings, concluding that WU's rates were lawful and that the ICPs were not entitled to any discount. Western Union Telegraph Co., 95

The ICPs sought review of both the Final Decision and the Interim Prescription Order of July 1979. See supra n.9. The Second Circuit subsequently denied the petition for review. FTC Communications, Inc. v. FCC, 750 F.2d 226 (2d Cir. 1984). In reviewing the Final Decision, the Second Circuit found "substantial evidence to support the Commission's conclusion that WU's public rates were reasonable and that the [ICPs] are not entitled to a discount," and that "the Commission did not abuse its discretion." 750 F.2d at 230 n.5. *fn11 As to the Interim Prescription Order, the court found that, although section 222(e) by its terms did not confer the requisite authority, the Commission nonetheless possessed adequate authority under the "necessary and proper" clause of the Communications Act, section 4(i), 47 U.S.C. § 154(i). That provision authorizes the FCC to "issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions." The court found the FCC's interim prescription both consistent with the statutory scheme and necessary for the FCC effectively to carry out its statutory mandate. The court considered AT&T v. FCC, 487 F.2d 865 (2d Cir. 1973) , a case featured by the ICPs, entirely inapposite. That case involved a challenge to an FCC requirement that AT&T obtain the Commission's "special permission" before filing a new tariff. As the Second Circuit characterized ...

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