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Telephone Systems

The invention of the telephone in the late nineteenth century led to the creation of the American Telephone and Telegraph Company (AT&T). The company owned virtually all telephones, equipment, and long-distance and local wires for personal and business service in the national telephone system. Smaller companies seeking a part of the long-distance telephone market challenged AT&T's MONOPOLY in the 1970s.

In 1982, the U.S. JUSTICE DEPARTMENT allowed AT&T to settle a lawsuit alleging antitrust violations because of its monopolistic holdings. AT&T agreed to divest itself of its local operating companies by January 1, 1984, while retaining control of its long-distance, research, and manufacturing activities. Seven regional telephone companies (known as the Baby Bells) were given responsibility for local telephone service. Other companies now compete with AT&T to provide long-distance service to telephone customers.

In an effort to spur competition, however, the Telecommunications Act of 1996 allowed the seven regional phone companies to compete in the long-distance telephone market. The act also permitted AT&T and other long-distance carriers, as well as cable companies, to sell local telephone service.

Local telephone rates are regulated by state commissions, which also work to see that the regional telephone companies provide good maintenance and services. In addition, the use of a telephone for an unlawful purpose is a crime under state and federal laws, as is the WIRETAPPING of telephone conversations.

In 2002, the U.S. Supreme Court issued two rulings that had a significant impact on large regional telephone companies. The first was Verizon Communications v. FCC 535 U.S. 467, 122 S.Ct. 1646, 152 L. Ed. 2d 701, which had beginnings in the 1990s. Under the 1996 Telecommunications Act, multiple local exchange carriers (LECs) are allowed to compete in the same market. Incumbent LECs, or ILECs, are those that already have a presence in a market. Competing LECs (CLECs) are providers that want to enter an ILEC's market. The ILECs are required to share their telecommunications network with the CLECs for a GOOD FAITH negotiated price (47 U.S.C.A. Secs. 251–52). They must form a written agreement; if there are points of contention in the agreement, they must be submitted for binding ARBITRATION to the state utility commission. That decision may be appealed to a federal district court if either side believes that it constitutes a violation of the act.

Several LECs and state utility commissions challenged the FEDERAL COMMUNICATIONS COMMISSION (FCC), the federal agency charged with regulating communications, over the way it mandated pricing formulas. The Eighth Circuit Court of Appeals sided with the plaintiffs in Iowa Utilities Board v. FCC, 120 F.3d 753 (8th Cir. 1997). The Supreme Court reversed the Eighth Circuit's decision, concluding that the FCC was within its rights to establish a pricing methodology, and ordered the appellate court to determine whether that methodology met the requirements of the 1996 act (AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366, 119 S. Ct. 721, 142 L. Ed. 2d 835 (1999). In Iowa Utilities Board v. FCC, 219 F.3d 744 (8th Cir. 2000), the appellate court ruled that the FCC pricing rules were invalid.

On appeal, the Supreme Court again reversed the Eighth Circuit, observing that the FCC's methodology had been designed so that smaller companies could enter and compete more easily in local phone markets. The ILECs preferred a methodology that would have increased the amount they were allowed to charge the CLECs. The increase would have amounted to billions of dollars in charges. Moreover, the Court held that the FCC also has the authority to force ILECs to combine leased elements upon request by a CLEC. These include local, long-distance, Internet, and pay-per-call information and entertainment services.

In a decision that involved two cases, the Supreme Court ruled that state utility commissions and individual commissioners may be sued in federal court by long-distance phone companies that disagree with the way they are enforcing federal laws (Verizon Maryland v. Public Service Commission of Maryland, 535 U.S. 635, 122 S. Ct. 1753, 152 L.Ed. 2d 871 (2002), Mathias v. Worldcom Technologies, Inc., 535 U.S. 682, 122 S. Ct. 1780 (Mem), 152 L.Ed. 2d 911 (2002).

In the first of these cases, Bell Atlantic Maryland, the region's ILEC, had refused to pay reciprocal compensation to Worldcom, a CLEC. The second case involved the same issue, except that the ILEC in question was Ameritech Illinois. Under the 1996 Telecommunications Act, local calls trigger the ILEC's obligation to offer reciprocal compensation, while long-distance calls do not. The Maryland and Illinois ILECs refused to offer reciprocal compensation when their customers made phone calls to Internet service providers that were customers of the CLECs, arguing that a call to an Internet service provider is a long-distance call even though the number may be local. They reasoned that a phone call to another person connects the caller to that person, but a connection to the Internet gives the caller access to websites and information around the world—hence, a long-distance call.

The Maryland Public Service Commission and the Illinois Commerce Commission, respectively, rejected this argument, and the ILECs sued them in federal court, along with individual commissioners and the CLECs in question. The federal courts upheld the utility commission's decisions; the Forth and Seventh Circuit Courts did so, as well, on appeal (Bell Atlantic Maryland, Inc, v. MCI WorldCom, Inc., 240 F.3d 279 [4th Cir. 2001]; Illinois Bell Telephone Co. v. Worldcom Technologies, Inc., 179 F.3d 566 7th Cir. [1999]). One of the arguments made by the ILECs was that federal courts had no jurisdiction over these cases under the Telecommunications Act.

The Supreme Court held that the 1996 Telecommunications Act is a federal law, and as such, federal courts should be able to enforce the law by hearing cases brought against state regulators. As for whether individual commissioners could be sued, the Court cited Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed 714 (1908), and said that state officials can be sued in their official capacity as long as the suit alleges an ongoing violation of federal law, and as long as the relief sought can be characterized as prospective (looking toward the future).

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