On September 16, 2009, Global Crossing Bandwidth, Inc. (“GX”) filed a petition requesting that the Federal Communications Commission (“FCC” or “Commission”) review an August 17, 2009 Order (“Order”) released by the Commission‘s Wireline Competition Bureau (“WCB”). The Order denied GX‘s request for a review of the results of a 2007 audit by the Universal Service Administrative Company (“USAC”).
In its audit report, USAC had found that GX incorrectly reported revenue as non-assessable reseller revenue, as opposed to end-user revenue upon which Universal Service Fund (“USF”) contributions should have been assessed. GX‘s petition for a review of the Order by the full Commission is the last step that it can take before filing an appeal before the United States Court of Appeal for the D.C. Circuit. By all indications, GX intends to appeal should the Commission issue an adverse decision.
By way of background, the FCC currently requires wholesalers, like GX, to have documented procedures to ensure that the revenue they report as reseller revenue is in fact derived from entities that reasonably would be expected to contribute to the USF themselves. This requirement, known as the “Carrier‘s Carrier Rule,” has existed since the inception of the post-Telecommunications Act of 1996 USF revenue reporting worksheet – although several modifications have been made to the worksheet‘s instructions altering the compliance threshold for wholesale providers. Under the Carrier‘s Carrier Rule, if USAC determines that a carrier has failed to demonstrate a reasonable expectation that its customers were contributing to the USF, it reclassifies the carrier‘s non-assessable revenue as end-user revenue, and the carrier is then responsible for any additional USF assessments that result.
In the audit report mentioned above, USAC found, in relevant part, that GX reported as reseller revenues certain revenues from customers that did not in fact contribute to the USF. Furthermore, USAC found that the evidence GX presented (e.g., out-of-date reseller certifications, contract provisions, company website information and product descriptions) did not sufficiently support GX‘s argument that had a reasonable expectation that its customers would contribute directly to the USF as resellers. Based on this finding, USAC recommended that GX report as end-user revenue the revenue from those customers that did not contribute to the USF and re-file its 2005 FCC Form 499-A.
In its petition, GX first argues that the 2005 Form 499-A instructions provide carriers with flexibility in determining whether their customers are acting as resellers or end-users. GX maintains that “[n]othing in the 2005 FCC Form 499-A instructions required [GX] to rely on any particular type of evidence regarding its wholesale customers‘ status as contributing resale carriers.” GX‘s main point of contention with the Order is what it believes is the WCB and USAC‘s attempt to shift the focus from whether GX reasonably expected its wholesale customers to contribute to the USF to the different question of whether GX‘s customers actually contributed to the USF. GX asserts that simply because a customer ultimately did not contribute to the USF does not establish that GX‘s expectation that the customer would contribute was unreasonable or that the carrier‘s verification procedures were inadequate. GX believes that this point alone renders the Order arbitrary and capricious.
GX also asserts that both the WCB and USAC appear to have retroactively applied the requirements of the 2007 FCC Form 499-Ainstructions instead of the 2005 FCC Form 499-Ainstructions. Indeed, both USAC and the WCB note GX‘s failure to obtain reseller certifications or print-outs from the FCC‘s contributor webpage – evidentiary requirements GX maintains were not mandatory prior to 2007. In support of its argument, GX notes that the 2005 instructions did not even recommend, much less require, that carriers obtain reseller certifications in cases where a carrier had an independent reason to believe a customer was a reseller. GX maintains that such “retroactive application of such requirements, even assuming they were validly promulgated in 2007, is plainly impermissible.”
GX further argues that, even if USAC believes those requirements were implied by the language of the 2005 FCC Form 499-Ainstructions, the Order would not be any more valid. The Administrative Procedure Act (“APA”) requires any substantial change in Commission policy to be initiated through a formal rulemaking proceeding. However, the Commission has not instituted such a rulemaking procedure to establish a requirement that carriers maintain annual certifications or website printouts. GX argues this procedural deficiency makes those requirements “unenforceable even if they were not retroactively applied.”
Lastly, GX argues that “there is no factual or legal basis for USAC to shift others‘ contribution obligations” to GX. To support this claim, GX first notes that USAC and the WCB are requiring GX to make payments to the USF without having determined whether GX actually improperly classified any wholesale customers as resellers. If the non-contributing customers were actually resellers, GX maintains that there is no justification in either the 2005 Form 499-A instructions or the FCC‘s regulations for shifting the customers‘ contribution obligations to GX. In other words, non-contribution by a carrier‘s reseller customer cannot ipso facto convert that reseller into an end user.
GX then concludes that USAC‘s and the WCB‘s imposition of strict liability on carriers like GX violates Section 254(d) of the Telecommunications Act of 1996 (“Act”). Under Section 254(d) of the Act, all telecommunications carriers, including resellers, have an obligation to contribute to the USF. According to GX, if its customers were in fact resellers who simply failed to meet their own contribution obligations, forcing GX to contribute on their behalf would violate the mandatory contribution provisions of the Act because it would have the effect of exempting such resellers from contributing directly. Finally, GX argues that imposition of strict liability on GX violates GX‘s due process rights guaranteed by the Fifth Amendment.
CLIENT ADVISORY
Clients who are affected by the Carrier‘s Carrier Rule and who have questions regarding how a determination of this issue by the full Commission could affect their reporting obligations should contact Jonathan Marashlian at jsm@commlawgroup.com or 703-714-1313.
