VoIP USF Ruling   On June 1, 2007, the U.S. Court of Appeals for the D.C. Circuit predominantly upheld the FCC’s Universal Service Contribution Methodology Report and Order and Notice of Proposed Rulemaking (“USF R&O”).  The USF R&O required interconnected VoIP providers to contribute to the Universal Service Fund (“USF”), established a 64.9% “safe harbor” for reporting interstate revenue and suspended the Carrier’s Carrier rule for two quarters.  Vonage Holdings Corporation (“Vonage”) and the Computer and Communications Industry Association (“CCIA”) challenged this decision.  As discussed below, the Court largely upheld the FCC’s USF R&O but vacated (or overturned) the FCC’s requirement that interconnected VoIP providers obtain pre-approval of traffic studies (if they choose to use them) and the FCC’s suspension of the Carrier’s Carrier rule, which effectively assessed USF charges twice on interconnected VoIP providers for two quarters after the release of the USF R&O.   Applicability of USF   The CCIA challenged the FCC’s authority to require interconnected VoIP providers to pay USF charges.  Even though the FCC has not classified interconnected VoIP as a “telecommunications service”, the FCC determined that interconnected VoIP providers are “providers of telecommunications” and, therefore, may be required to contribute to USF.  The Court upheld the USF R&O and agreed that the FCC could require interconnected VoIP providers to contribute to USF.   The Safe Harbor   The safe harbor allows interconnected VoIP providers to report a certain “default” percentage of 64.9% interstate traffic if they are unable to determine which calls are interstate and international (subject to USF) and which calls are purely intrastate (not subject to USF).  Vonage and the CCIA challenged the safe harbor as too high and argued for a lower threshold.  Vonage asserted that since VoIP is an “all-distance” service, which includes local calls, it should be given a lower safe harbor.  The 64.9% safe harbor ordered by the FCC is close to the interstate percentages reported by traditional wireline toll service providers and, according to Vonage, does not reflect an “all distance” service.  However, the Court concluded the Commission’s safe harbor was reasonable because interconnected VoIP products are more likely to attract customers interested in making a substantial number of interstate and international calls.   VoIP Traffic Studies   Under the USF R&O, interconnected VoIP providers must obtain prior approval to use data from traffic studies for the FCC Forms 499-A and 499-Q (if the company does not wish to invoke the safe harbor).  Wireless providers, on the other hand, need only submit these studies contemporaneously with their FCC Form 499 filings.  The Court struck down the pre-approval requirement because the FCC is required to apply USF obligations on an “equitable and nondiscriminatory basis.”  Thus, the FCC must apply the same traffic study approval measures to interconnected VoIP as it does to wireless carriers.    Carrier’s Carrier Rule   In addition, the Court struck down the FCC’s suspension of the Carrier’s Carrier Rule, which exempts revenue generated from other carriers from a company’s USF contribution base.  The FCC suspended the Carrier’s Carrier Rule for two quarters (the forth quarter of 2006 and the first quarter of 2007) fearing a net decrease in the USF contribution base.  By suspending this rule, interconnected VoIP providers were required to contribute to USF directly as well as indirectly.  An interconnected VoIP provider’s underlying carrier was required to contribute to USF as if the VoIP provider was still an end-user and usually would pass on their USF charge to the interconnected VoIP provider.  This resulted in the interconnected VoIP provider paying USF contributions twice for the two quarters the suspension was in effect.  The Court vacated this suspension because the Commission’s fear of decreasing the net contribution base did not justify these double charges. VoIP providers and their underlying carriers may have to revise their 2007 FCC 499-A filings.   Please feel free to contact us if you have any questions or we can be of any assistance to you.   June 2007   Back