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At its open meeting today the Federal Communications Commission ("FCC" or "Commission") took a measured, but significant, step in the ongoing debate over regulation of voice-over-Internet-Protocol ("VOIP") services by preempting state regulation of certain aspects of VOIP provider operations. Specifically, the Commission ruled in a Memorandum Opinion and Order that Vonage Holdings Corporation's ("Vonage") DigitalVoice service is not subject to certification, tariffing and E911 requirements that the Minnesota Public Utilities Commission ("MPUC") otherwise imposes on intrastate telecommunications carriers. The Commission, however, limited its decision to Vonage's DigitalVoice service and services similar to DigitalVoice and certain state regulatory obligations. Outstanding questions regarding the regulatory classification of VOIP and other IP-enabled services and whether these services are subject to universal service obligations, intercarrier compensation, public safety requirements, access to services by disabled persons, and the Communications Assistance for Law Enforcement Act ("CALEA") will be addressed in other pending FCC proceedings.

In its petition, Vonage described its DigitalVoice service as a voice service that is accessible to customers only through specialized equipment and over a high-speed Internet connection provided by a telecommunications carrier, satellite or cable company. Accordingly, the service can be used anywhere that a broadband connection is available, making it difficult to discern a customer's location. Calls made between Vonage customers generally do not transverse the public switched telephone network ("PSTN"), although calls to non-Vonage customer do travel over the PSTN.

Last fall, the MPUC declared that Vonage is a common carrier under Minnesota law and directed Vonage, as a condition to offering intrastate service, to obtain a state operating certification, file a tariff containing its rates, terms and conditions, and comply with E911 requirements. [fn1] Vonage subsequently asked the Commission to rule that it is not subject to the MPUC's common carrier regulations. Simultaneously, Vonage appealed the MPUC's decision to the U.S. District Court for the District of Minnesota. The district court concluded that the MPUC did not have authority to regulate Vonage's DigitalVoice service because it was an "information" service and that federal law preempted state regulation of such services. [fn2] The MPUC has appealed the court's decision to the U.S. Court of Appeals for the Eighth Circuit. Oral arguments are scheduled for November 17 in St. Louis.

The Commission concluded today that the intrastate, interstate and international components of Vonage's DigitalVoice service cannot be separated. The Commission found that the inability to make this jurisdictional determination precludes dual state and federal regulatory regimes. Applying traditional preemption principles, the Commission concluded that state regulation of Vonage's VOIP service would impede federal authority over interstate communications in violation of the Commerce Clause. Furthermore, the Commission explained that the MPUC's regulations conflicted with federal deregulatory policies. The Commission noted that its conclusion is consistent with the Communications Act of 1934, as amended, which generally avoids regulation of the Internet. In addition, allowing states to subject VOIP services to traditional common carrier regulations could impede the development and deployment of such services to the detriment of consumers.

The Commissioners emphasized that today's decision addressed only the jurisdictional issue raised by Vonage's petition. The decision does not speak to any of the issues that have been raised in other proceedings pending before the Commission, such as the regulatory classification of VOIP services (i.e., are they regulated telecommunications services or unregulated information services) and how federal requirements regarding universal service, E911, intercarrier compensation, access to services by disabled persons, and CALEA apply to VOIP services. The decision also does not address the applicability of general state laws such as taxation, fraud and business practices. The Commissioners noted, however, that states still play a vital role in protecting consumers from fraud, responding to consumer complaints, and ensuring fair business practices.

Although all of the Commissioners generally agreed with today's decision, Commissioners Copps and Adelstein only concurred because of its limited scope. Copps and Adelstein argued that the Commission needs to adopt comprehensive and clear regulatory policies with regard to all IP-enabled services rather than simply addressing individual petitions in a piecemeal fashion. According to Copps, the Commission's "cherry-picking" of issues is irresponsible and simply raises additional questions regarding the regulatory status of VOIP. Adelstein noted that the Vonage decision has dramatic implications that are not addressed by the Commission, such as the ability of states to subject VOIP services to state universal service requirements and whether the Commission is overriding important state public safety requirements. Chairman Powell, however, stated that today's decision is "merely affirming the obvious" and that it is simply making clear that the Commission is responsible for addressing the more complicated issues regarding the regulation of VOIP. Commissioners Abernathy and Martin generally agreed with Powell, and Martin pointed out that the decision was timely in light of the upcoming oral arguments in the Vonage appeal before the Eighth Circuit.

In a press conference after the open meeting, Jeffrey Carlisle, Chief of the Wireline Competition Bureau ("WCB"), provided timelines for many of the open proceedings that affect VOIP. A list of the proceedings that Carlisle discussed is attached to this memorandum.

Pending VOIP Proceedings Discussed By J. Carlisle

Level 3 Petition	Requests that the FCC forbear from enforcing its rules to the extent they permit local exchange carriers to impose access charges on VOIP calls connected to the PSTN.	The 12 month statutory deadline applicable to forbearance petitions ends in December, although the FCC can extend it for three months (in this case, until March 2005).
SBC Petition	Requests that the FCC forbear from applying Title II common carrier regulations to IP platform services.	The 12 month statutory deadline applicable to forbearance petitions ends in February, although the FCC can extend it for three months (in this case, until May 2005).
Inflexion Petition	Requests that the FCC rule that VOIP services provided to underserved markets are exempt from the access charges.	Unknown.
CALEA Rulemaking	Considers whether CALEA applies to VOIP services.	Unknown.
Universal Service: Contribution Methodology	Suggests revising the methodology by which universal service contributions are collected.	The WCB anticipates sending a draft order to the Commissioners in Spring 2005.
Universal Service: Intercarrier Compensation	Considers revising the current methodology by which carriers compensate each other for carrying and terminating traffic.	The WCB anticipates sending a draft further notice of proposed rulemaking to the Commissioners within the next month; the proceeding will likely be resolved in 2005.
IP-Enabled Rulemaking	Considers whether IP-enabled services should be subject to FCC regulation.	The WCB anticipates sending a draft order to the Commissioners in Spring 2005.

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Footnotes

1: Complaint of the Minnesota Department of Commerce Against Vonage Holding Corp Regarding Lack of Authority to Operate in Minnesota, Docket No. P-6214/C-03-108 (rel. Sept. 11, 2003).

2: Vonage Holdings Corp. v. Minn. PUC, 290 F.Supp.2d 993 (D.Minn. 2003).