The Front Lines - December 12, 2005

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Advancing The Cause of Competition in the Telecommunications Industry


On October 3rd, 2005, the U.S. Court of Appeals for the Second Circuit reversed a lower court ruling that had dismissed a lawsuit against all four RBOCs -- BellSouth, Qwest, SBC, and Verizon -- alleging violations of the Sherman Act, Section 1 (antitrust). Twombly, et al v. Bell Atlantic, ___ F.3d ___, 2005 WL 2420523 (2d Cir, NY).

Here's the pertinent background.

The plaintiffs were not CLECs or other competitors. Instead, the plaintiffs were CONSUMERS.

The action is styled as a class action. The allegations are that following the passage of the 1996 Telecommunications Act, the RBOCs conspired to exclude competitors from their respective geographic markets for local telephone and high-speed Internet services and also tacitly agreed not to compete against one another in said markets.

The District Court dismissed the suit for failure to state a cause of action upon which relief could be granted. The Second Circuit, however, reversed and remanded on a narrow procedural ground, finding instead that the plaintiffs had sufficiently pled enough facts to meet the notice pleading requirements of the Federal Rules of Civil Procedure. Having met the notice pleading requirements, the Second Circuit held that the lower court erred when it dismissed the suit.

The reversal means that the plaintiffs will be able to use discovery to build their case against the RBOCs. The suit remains subject to possible motions for summary judgment against the plaintiffs, but these filings cannot be made until after the plaintiffs have had a chance to use discovery to build their case.

The specific factual allegations used by the plaintiffs are most interesting. It was alleged that -

The RBOCs control 90% of the local telephone market in the U.S. The RBOCs have agreed (conspired) not to compete with one another in their respective territories. The result of this conspiracy has been to drive CLECs out of the market for local phone and high-speed Internet services. Plaintiffs (as consumers) were injured by forcing them as consumers of these services to pay at rates higher than they would otherwise pay in a competitive environment.

The factual predicates stated in support allegations of antitrust violations were -

The RBOCs engaged in "parallel conduct" by not competing with each other, conduct that cannot be explained but for the existence of a tacit agreement not to compete. This allegation was supported by alleging that -

  • The RBOCs' operating territories include pockets of territories surrounding other RBOC operating territories which provide the RBOCs competitive advantages to invade other RBOC territories, but such invasions have not occurred;

  • The RBOCs have frequently complained that FCC regulations implementing the 1996 Telecommunications Act hurt their businesses by forcing them to provide CLECs with access to their networks at rates that are below the cost of maintaining those networks. Such RBOC complaints should have served as a spur for the RBOCs to invade other RBOC territories to reap the benefits of being able to compete based on obtaining below cost network operations; but the RBOCs nevertheless ignored this "incentive";

  • Richard Notebaert, Qwest's CEO, stated publicly that competing in neighboring SBC territories "might be a good way to turn a quick dollar but that doesn't make it right"; * The RBOCs communicate frequently with each other through a myriad of organizations that provide the opportunity for a conspiracy to form and be conducted without the likelihood of detection; and

  • From the day the 1996 Act became law, the RBOCs have used every means available to destroy the ability of CLECs to compete.

The Second Circuit cited these and other facts to find that the antitrust lawsuit could not be dismissed for failing to state a cause of action. Thus, the plaintiffs may now proceed to the discovery stage.

At stake is some form of injunctive relief, treble damages and exposure to maximum fines of $100,000,000 per corporation, $1,000,000 per person or imprisonment of up to ten years or both.

CLECs and others - stay tuned.


On November 23, 2005, Frontier Telephone of Rochester, Inc. (Frontier) filed with the FCC a Petition for Declaratory Ruling that USA Datanet (Datanet) and any similarly situated carriers must pay tariffed originating interstate access charges for Feature Group A calls from Frontier's end users. Feature Group A calls require calling parties to input a seven-digit number, obtain dial tone from another carrier's switch, input a personal identification number, and then the telephone number of the called party.

In its petition, Frontier seeks a declaratory ruling that it is owed originating access charges for IP-transported Feature Group A calls for the following interstate access rate elements: 1) end office common trunk port; 2) end office local switching; 3) local transport tandem transmission - fixed; and 4) local transport tandem transmission facility.

Frontier filed its petition after the United States District Court for the Western District of New York stayed Frontier's case seeking payment of access charges from Datanet for originating Feature Group A access services. Frontier Telephone of Rochester, Inc. v. USA Datanet Corp., No. 05-CV-6056 CJS, Decision and Order, 13-14 (W.D.N.Y. Aug. 2,

2005). The court found it appropriate to stay the case pending the FCC's resolution of the issues raised by Frontier.

Frontier asked the FCC to consolidate its petition with existing WC Docket No. 05-276, which is examining petitions for declaratory rulings filed by SBC and VarTec on similar IP access charge issues. The FCC agreed to Frontier's request.

As a quick re-cap, on September 26, 2005, the FCC released a Public Notice requesting comments on Petitions filed by SBC and VarTec. Both Petitions request clarification regarding the application of access charges to certain providers of wholesale transmission using Internet Protocol (IP). As described below, SBC and VarTec take contrary positions on the issue.

On September 21, 2005, SBC filed a petition for declaratory ruling that wholesale transmission providers using Internet protocol (IP) technology to transport long distance calls are liable for access charges. SBC filed its petition after the United States District Court for the Eastern District of Missouri dismissed without prejudice SBC's claims seeking payment of access charges for long distance calls that were transported using IP technology. The court found it appropriate to defer the issues raised by SBC to the primary jurisdiction of the FCC.

In its Petition, SBC seeks a declaratory ruling that wholesale transmission providers using IP technology to carry long distance calls that originate and terminate on the public switched telephone network (PSTN) are liable for access charges under section 69.5 of the Commission's rules and applicable tariffs. SBC seeks a ruling that providers meeting these criteria are interexchange carriers.

VarTec filed a petition for declaratory ruling on related issues. Specifically, VarTec seeks a declaratory ruling that it is not required to pay access charges to terminating local exchange carriers (LECs) when enhanced service providers or other carriers deliver calls directly to the terminating LECs for termination.

VarTec also seeks a declaratory ruling that such calls are exempt from access charges when they are originated by a commercial mobile radio service (CMRS) provider and do not cross major trading area (MTA) boundaries. VarTec also seeks a declaratory ruling that terminating LECs are required to pay VarTec for the transiting service VarTec provides when terminating LECs terminate intraMTA calls originated by a CMRS provider.

As the industry rapidly migrates to IP-based calling, the issue of access charges and access charge reform is gaining traction in the courts and at the FCC. Access charges continue to be a tremendous source of revenue for ILECs and independent LECs and, as such, will continue to be tremendous motivation for lawsuits and other "self help" efforts to collect access charges from a variety of entities, some of which may or may not be applicable. If you have concerns, please contact your regulatory attorney and if you do not have one, contact us at: 703-714-1313 or via e-mail: mailto:


At The Helein Law Group we are frequently asked to provide advice regarding state and federal taxation of telecommunications and enhanced communications services. The firm's Telecommunications & Technology Regulatory Practice includes a separate focus that offers expert advice on federal and state excise taxes on communications products and services, as well as on state sales, use and gross receipt (excise taxes), and other "tax-like" regulatory fees that are or can be applied to a variety of communications and information technology services and products.

As a new service to its clients and readers of The Front Lines, we will begin publishing summaries of tax decisions relevant to the communications industry on a more frequent basis. We are taking these steps to highlight the dizzying array of taxes, changes in tax laws & regulations, and the importance of these changes have in the context of the telecommunications & enhanced services industries.

If you seek legal advice on issues pertaining to taxes or "tax-like" fees, please contact our firm at 703-714-1300 or via e-mail: mailto:

New York

In New York, a recent decision held that sales tax applies to purchases of electricity used to provide power to telecommunications equipment.

XO Communications, Inc. (XO), purchased electricity from Con Edison that was used to power its telecommunications equipment and filed a refund claim on the sales tax paid on its purchases of electricity.

XO relied on Section 1115(a)(12-a) of the N.Y. Tax Code that its purchases of electricity were used in the production, delivery, or rendering of telecommunications services. But it was held that the exemption in Section 1115(a)(12-a) does not apply to purchases of electricity.

XO then relied on Section 1115 (a)(12) claiming exemption for machinery and equipment used in manufacturing tangible personal property for sale. This argument was rejected because the term "machinery and equipment" does not include electricity and the electricity purchased did not produce tangible personal property for sale; but was used to produce a service.

XO's reliance on Section 1115(c)(1) was also rejected because telecommunications services are not corporeal property because they cannot be seen or handled and telecommunications are not taxed as tangible personal property under the Tax Law but as a service.

XO's final argument that under Section 1115(c)(1) its purchase of alternating current was a purchase of a raw material that was converted to direct current was rejected because the conversion was considered to be only an intermediate step in the process to sell it telecommunications services. XO New York, Inc., New York Division of Tax Appeals, DTA N 820005, 9/29/05.


Graham Packaging Company, L.P., recently lost its appeal to overturn the taxability of canned software based on the differences in the delivery method used, i.e., the difference between being received via computer disks as opposed to receiving via an electronic download.

The question presented was whether the renewal of a license to use canned computer software that was originally delivered by computer disk was subject to sales tax when updates are delivered via electronic download?

The Pennsylvania Department of Revenue held that the initial acquisition of canned software by disk, makes it tangible personal property and taxable. It issued Sales Tax Bulletin 2005-04 follows an earlier ruling against Graham, and effective 11/1/05, sales tax must be charged on all sales of canned software regardless of the delivery method.

Graham Packaging Company, LP, v. Commonwealth of Pennsylvania, No. 652 F.R.

2002, 9/1 and Sales Tax Bulletin, 2005-04, PA Department of Revenue, 11/1/05.

The Pennsylvania Department of Revenue also announced that it will soon update its Statement of Policy, 61 Pa. Code 60.20, to reflect the Federal Internet Tax nondiscrimination Act and the Mobile Telecommunications Sourcing Act, as well as Pennsylvania Act 23 of

2000 and Act 89 of 2002. In the meantime the Department provided a list of examples and definitions of both enhanced and non-enhanced telecommunication services.

Services that the Department has determined are enhanced telecommunications services include:

  • Data Processing
  • Information Retrieval Services
  • Video Programming
  • Video on Demand
  • Voice Service

Services that the Department has determined are not enhanced telecommunications services include:

  • Asymmetric Digital Subscriber Line (ADSL)
  • Asynchronous Transfer Mode (ATM)
  • Digital Subscriber Line (DSL)
  • Direct Broadcast Satellite (DBS)
  • Integrated Services Digital Network (ISDN)
  • Primary-rate Integrated Services Digital Network (PRI_ISDN)
  • T-1 and T-3 lines
  • Time Division Multiplexing (TDM)
  • Vertical Services
  • Plain Old Telephone Service (POTS)

Sales tax Bulletin 2005-03, Pennsylvania Department of Revenue, Issued



The Tennessee Court of Appeals has held that telephone central office machinery and equipment does not qualify for the industrial machinery equipment exemption under the Tennessee sales and use tax.

AT&T Corporation, Network Systems Division v. Loren Chumley, Commissioner of Revenue, S Tennessee, Tennessee Court of Appeals, Appeal from the Chancery Court for Davidson County, M2004-01514-COA-R3-CV, 10/21/05.


The Front Lines is a free publication of The Helein Law Group, P.C., providing clients and interested parties with valuable information, news, and updates regarding regulatory and legal developments primarily impacting companies engaged in the competitive telecommunications industry.

The Front Lines does not purport to offer legal advice nor does it establish a lawyer-client relationship with the reader. If you have questions about a particular article, general concerns, or wish to seek legal counsel regarding a specific regulatory or legal matter affecting your company, please contact our firm at 703-714-1313 or visit our website:

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Jonathan Marashlian
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