Federal Court Halts State Regulation of VoIP Provider
On October 16, 2003 the U.S. District Court in Minnesota released its decision enjoining the Minnesota PUC from regulating Vonage Corporation, a provider of voice over Internet Protocol (“VoIP”) services. The Minnesota PUC (the “PUC”) had ruled that since Vonage advertised itself as a telephone company offering services within Minnesota, the PUC could assert regulatory jurisdiction over Vonage. The district court determined that the specific VoIP service offered by Vonage, which involves Vonage converting the protocol of voice signals, is an “information service” under Federal law. The court further determined that because Congress has indicated that nascent Internet-based services are to remain unregulated, federal law preempts the Minnesota PUC’s authority over such services. Based upon these findings the court issued a permanent injunction denying the Minnesota PUC’s attempts to regulate Vonage’s services.
This decision is a victory for VoIP providers like Vonage who piggy-back on other firms’ underlying high-bandwidth services (DSL or cable modem service). It is, however, unlikely to be the last word on the question of what regulatory classification will apply to VoIP providers. Technically, this decision is binding only in Minnesota, and other state regulators continue to move closer to asserting regulatory authority over VoIP providers. As a result, Vonage and other VoIP service providers will likely need to continue litigating these issues. At the same time, the FCC will face increasing pressure to step in and resolve these complex policy questions.
Key Factor: Protocol Conversion Resulting in a Net Change in Form or Content
In ruling that Vonage’s service was an “information service” under federal law, the court focused primarily on the fact that Vonage’s service converted the protocol of the signals, which is a key factor in determining whether a service is an information service or a telecommunications services. Specifically, the court found that Vonage’s VoIP service offers the “capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing or making available information via telecommunications” – essentially quoting the definition of an information service under the Communications Act.
The court also determined that VoIP services do not fall into the category of phone-to-phone VoIP services. This finding is important because the FCC indicated in 1998 that phone-to-phone VoIP service is the one type of VoIP service that bears the characteristics of “telecommunications service.” The FCC identified four factors for determining when a service is phone-to-phone VoIP: 1) does the provider hold itself out as providing voice telephony service? 2) does the provider require the customer to use CPE (telephone equipment) different than that used to place a call over the normal phone network (the PSTN)? 3) does the provider allow the customer to call the same phone numbers used throughout the telecommunications industry? and, 4) does the provider transmit customer information without net change in form or content?
The court found that Vonage’s service did not satisfy the second and fourth factors identified by the FCC. With respect to the second factor, the court noted that Vonage customers must use special equipment to place a VoIP call. With respect to the fourth factor, the court found that Vonage’s service is not a telecommunications service because, from the user’s standpoint, the form of transmission undergoes a net change. That is, the signals are transformed from analog to digital (IP packets) and vice versa, as they are transmitted over the PSTN and Internet.
Having found Vonage’s service to be an “information service,” the court considered what, if any, authority Minnesota had to regulate it. Finding that Congress intended that information services must be free from regulation under the Communications Act the court ruled that the Minnesota PUC’s decision to regulate VoIP services was preempted by federal law.
The immediate impact of this decision is not clear. As we have noted in earlier updates, a number of states are investigating the proper regulatory treatment of VoIP. While the Vonage case from Minnesota will certainly be cited as precedent by Vonage and similar entities in other states, that decision is not legally binding outside Minnesota. State regulators typically are very interested in protecting their jurisdiction, and so may be motivated to learn from the Minnesota PUC’s loss and assert their jurisdiction based on more sophisticated reasoning.
Taken on its own, the Minnesota court decision probably takes some pressure off the FCC to step in to prevent regulation of VoIP — assuming that to be the FCC’s policy preference. If, however, regulators in other states are not deterred by this decision from asserting regulatory authority over VoIP, pressure on the FCC to act to resolve this issue will continue to mount.
Should you have any questions about the impact of district court’s decision on your operations, please contact us.