Eighth Circuit Upholds FCC Decision Preempting State Regulation of VoIP

The Eighth Circuit just dealt a serious blow to state utility regulators' attempts to regulate Voice over Internet Protocol (VoIP) providers. In a dispute that originally arose between the Minnesota Public Utilities Commission and Vonage after Vonage failed to obtain a permit for its VoIP service, the Eighth Circuit recently affirmed an FCC decision that federal law can preempt state VoIP regulations because it is impossible to separate the service's interstate and intrastate components.

This decision could have an enormous impact for the burgeoning VoIP industry, since this will allow service providers to avoid the cost of complying with 50 different sets of state regulations.

The dispute began after Minnesota ordered Vonage to comply with its permitting requirement. Vonage petitioned the FCC and asked it to rule that Vonage was a provider of an information service, and not a telecommunications service, since information services are not subject to state regulations. The FCC declined to make that distinction, however, after it decided that it could avoid the difficult question of VoIP's classification by ruling on the easier issue of whether it was possible for Vonage to comply with both state and federal regulations. The FCC ruled for the VoIP company, and determined that the state regulations were preempted by federal rules.

After the FCC entered its decision, regulators from several other states petitioned for direct review in different federal appellate jurisdictions. The cases were consolidated in the Eighth Circuit, and the court began its review of the FCC VoIP decision.

How VoIP Works

VoIP, for those who may not know, is an application that utilizes the packet-switching technology of the Internet to transmit voice communications. VoIP is rapidly gaining ground against the traditional telecoms as more and more broadband Internet users recognize the cost-savings of this new technology.

The feature of VoIP most relevant to this case is the fact that VoIP communications begin and end at IP addresses, rather than at the endpoints of a fixed landline. IP addresses aren't tied to any geographic location, so someone can use a VoIP service while physically in Minnesota, New York or California, and the IP address that identifies the user will be the same.

As explained in the court's opinion, a VoIP customer who lives in Minnesota but is vacationing in New York could call his neighbor at home over their VoIP services, and could also call the same neighbor over VoIP while both are in California on business. The VoIP service recognizes the calls as coming from, and ending at, the same IP addresses in both cases. Taking the physical locations of the callers into account, however, the former would constitute an interstate call, and the latter an intrastate call. The VoIP service itself has no reliable way to know at what physical point a call is made or received, thus there is no effective way to tell whether a VoIP call is interstate or intrastate in nature.

"Impossibility Exception"

Therein lies the rub: The difficulty inherent in pinpointing the physical location of a VoIP user through technology currently in use triggers the "impossibility exception" present in 47 U.S.C. § 152(b). Under that exception, the FCC may preempt state regulations of a telecom service that would otherwise be subject to both federal and state rules if it is impossible (or impractical) to separate the service's intrastate and interstate components. In such a case, if the state regulation conflicts with the federal rule under the impossibility exception, the FCC may preempt it in favor of the federal regulation.

The FCC applied the impossibility exception to the facts of this case and ruled in favor of Vonage. The Eighth Circuit found that the application of the exception in this instance was neither arbitrary nor capricious, and affirmed the FCC's decision.

The state regulators argued that a decision involving VoIP and 911 calls that the FCC issued after the resolution of the Vonage petition undermined the Vonage impossibility exception argument, since it required VoIP providers to connect to 911 services based on their users' locations. The Eighth Circuit didn't buy it, however.

First, said the court, the FCC decided the Vonage petition based on the information before it at the time. Since the 911 order was not around when the FCC was hearing evidence on the Vonage issue, the court explained, its existence does not render the Vonage decision arbitrary or capricious.

Second, the court went on, the 911 order acknowledged the difficulties involved in pinpointing a user's actual location through IP addresses, and admitted that it was impossible to do so with present-day technologies. The order instead came up with a temporary solution that would provide local 911 access based on the information in a user's registration with the VoIP service. Thus, the court concluded, nothing in the 911 order contradicted the findings in the Vonage decision.

The court also noted that the FCC's Vonage decision contained a backdoor that allows a review of the issue if technology ever reaches a point where it is possible to determine a user's exact location based on IP addresses. That loophole opens up the possibility that VoIP companies could deliberately stifle any innovation in the field of VoIP user location in order to avoid the possible reversal of the decision and the renewal of state regulatory efforts. This could in turn result in fewer services of lower quality being available to VoIP subscribers.

Even if that ends up being the case, the deferential nature of administrative review means that the decision will most likely stand. After all, agencies don't have to come to the right decision as long as they conduct a good faith review of the issues before them.

The Eighth Circuit ruled that the FCC met that standard, and so VoIP providers should remain free from state regulation for the foreseeable future.