In a 2-1 decision, the U.S. Court of Appeals for the Eighth Circuit has affirmed a lower court’s ruling that classifies Charter Communications’ interconnected, fixed VoIP service as an “information service” under the Communications Act. As a result, state regulation of Charter’s VoIP services is preempted.[1]

The decision is interesting for many reasons: the Court’s classification of Charter’s service goes against the FCC’s approach of leaving VoIP somewhere between telecommunication services and information services, and applying regulation on a piecemeal basis; the structure and function of Charter’s VoIP technology played an important role in the outcome; Charter’s win could lead to similar outcomes in other states; and the decision could affect other ongoing communications issues and proceedings. Aside from the impact on VoIP regulation, the Eighth Circuit’s decision is important for the language addressing federal preemption of state regulation of information services. Federal Communications Commission Chairman Ajit Pai and Commissioner Michael O’Rielly both commented that the Court’s opinion supports federal preemption of state net neutrality regulations.

Background Details: Minnesota District Court Ruling

In 2013, Charter moved its VoIP offering – known as Spectrum Voice – from Charter Fiberlink to a newly created affiliate named Charter Advanced as part of a restructuring “to segregate its VoIP services from its regulated wholesale telecommunications services” and decrease state regulatory burdens. Thereafter, the Minnesota Department of Commerce filed a complaint with the Minnesota Public Utilities Commission (MPUC), raising “fifteen separate allegations, including that Charter Advanced was in violation of several Minnesota statutes.”[2]

Charter responded by arguing that state regulation of its VoIP service is preempted by federal law, but the MPUC issued an order concluding that VoIP is a “telecommunications service” as defined by the Communications Act and state regulation is not preempted. In response, Charter commenced an action in U.S. District Court arguing that its VoIP service is an “information service,” and seeking: (1) declaratory relief finding that Minnesota state regulations are preempted, and (2) injunctive relief prohibiting the Minnesota PUC from regulating Charter’s VoIP service.

When it moved for summary judgment, Charter made two arguments: (1) Spectrum Voice provides subscribers with the capability to convert calls between IP and TDM, and it accomplishes a “net protocol conversion” that is independently sufficient to render Spectrum Voice an information service; and (2) Spectrum Voice’s advanced communications features are closely integrated with its telecommunications aspect, making it an “offering” of an information service with a telecommunications component, rather than an offering of telecommunications alone. The district court agreed with Charter’s net protocol conversion argument, and concluded VoIP is an information service. The court did not address Charter’s "inextricably intertwined” argument. The Minnesota PUC appealed to the Eighth Circuit.

The Eighth Circuit’s Opinion

In a 2-1 decision, the Eight Circuit affirmed the lower court ruling. To determine whether to classify Charter’s VoIP service as a telecommunications service or an information service, the Court focused on whether the service “acts on the consumer’s information – here a phone call –  in such a way as to ‘transform’ that information.” The answer was yes because Charter performs “net protocol conversion.” With respect to IP-TDM or TDM-IP phone calls, information enters Charter’s network in one format and leaves in another.

How does Charter’s VoIP service work? Charter provides its VoIP customers with an embedded Multimedia Terminal Adapter (MTA), which sits inside of a customer’s broadband modem in the home. The MTA transforms voice calls from analog electrical signals into IP data packets. When a customer makes a phone call, it travels from the MTA on to Charter’s network, where a media gateway can convert the call from IP to TDM before sending it to the PSTN or a TDM network. For a call in TDM format to a Charter VoIP customer, the media gateway converts it from TDM to IP before sending it to the customer.

The majority also found that the various telecommunications management exceptions to the definition of information service did not apply. The Court said the first exception – services involving communications between an end user and the network itself (e.g., for initiation, routing, and termination of calls) rather than between or among users – does not apply because the service at issue is “between or among users.” It said the second exception – protocol processing in connection with the introduction of a new basic network technology (which requires protocol conversion to maintain compatibility with existing customer premises equipment (CPE)) – does not apply because Charter’s VoIP service is not aimed at providing backwards compatibility for existing CPE.  Instead, customers must receive new CPE (the MTA) to utilize the service. Finally, the Court said the third exception – services involving internetworking (conversions taking place solely within the carrier’s network to facilitate provision of a basic network service, that result in no net conversion to the end user) – does not apply because the FCC defines CPE as falling outside a carrier’s network. The Court explained that since any conversion back into the original form of the information takes place outside of the network (in the MTA), the “internetworking” exception is inapplicable.

The Dissent – Charter’s VoIP is a Telecommunications Service or Something Outside of the Categories of Services in the Communications Act

In contrast, the dissent found the issue on appeal to be much more narrow: whether the Communications Act categorizes net protocol conversions in interconnected VoIP as an information service. The answer, of course, was no – “the net protocol conversion in Charter’s service makes it either a telecommunications service or something entirely outside the primary categories of services in the Communications Act.” The dissent’s argument that Charter’s VoIP service is not an information service is just as good as the majority’s argument that it is. Here is a small taste of the dissent’s analysis:

If we assume that interconnected VoIP services “provide” “telecommunications” as defined in statute, then we must presume that no “change” occurs between the two phone sets on either end of the interconnected VoIP line. Charter argues that the telecommunications portion of its service is between the customer’s premises and the media gateway that performs the protocol conversion, but this argument is incorrect since the receiving phone, not the media gateway, is the “point[] specified by the user.” As a result, when addressing the question of whether Charter’s media gateway transforms information, in order to rule in favor of Charter, we would have to conclude that a device that does not change the form or content of information (because it is part of telecommunications) is also a device that transforms information (because it is an information service).

Also, the dissent argues that Charter is using a technicality to avoid the FCC’s IP-in-the-Middle Order[3] precedent because a Charter VoIP customer’s voice signal is converted from analog to IP at the embedded MTA which is located in the customer’s home. The FCC’s 2004 IP-in-the-Middle Order addressed an AT&T interexchange service that uses ordinary CPE with no enhanced functionality; originates and terminates on the PSTN; and undergoes no net protocol conversion and provides no enhanced functionality to end users due to the provider’s use of IP technology. That AT&T service involved traditional interexchange calls. When a call reaches AT&T’s network, AT&T converts it from its existing format into an IP format and transports it over AT&T’s Internet backbone. AT&T then converts the call back from the IP format and delivers it to the called party through local exchange carrier local lines.

Comparing the AT&T service at issue in the IP-in-the-Middle Order with Charter’s VoIP service, the dissent provides the following:

If performing the conversion from TDM to IP inside a customer’s home is sufficient to convert a telecommunications service into an information service, then AT&T, or any similarly situated provider, could greatly reduce its regulatory burden simply by moving converter boxes inside customers’ homes. A simple change of physical location would transform what used to be telecommunications services to information services. This may explain why the FCC has yet to make categorical pronouncements on protocol conversions. An overarching category for all net protocol conversions would create a potential pathway for every company to escape the heavier telecommunications service regulations.

Unlike the majority, the dissent correctly acknowledges that prior FCC orders do not and should not be “read to definitively resolve the regulatory classification” of VoIP services, implying that the FCC is the one that should make the classification decision. Without a doubt, that is the correct course of action. The FCC is the expert agency. There is no other administrative body or court of law that has more knowledge or is better positioned to define the regulatory classification of VoIP services. But, the FCC doesn’t like that approach. It would rather leave VoIP in regulatory limbo, applying certain regulations every so often when necessary. Like it or not, that tactic has worked. The FCC has adopted regulations for VoIP pertaining to access charges, interconnection obligations, universal service contribution, E911 and public safety requirements, assistance to law enforcement, accessibility requirements, and various other issues. Considering all the telecommunications service regulations that have been piled on top of VoIP, it seems VoIP is more of a telecommunications service than an information service. Certainly, the FCC’s VoIP regulations aren’t going away. That being said, it appears state regulation of VoIP is going away, in the Eighth Circuit at least.

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[1] Charter Advanced Services (MN), LLC v. Nancy Lange, Case No. 17-2290 (8th Cir. 2018). The U.S. Court of Appeals for the Eighth has appellate jurisdiction over U.S. district courts in Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

[2] Charter Advanced Servs. (MN), LLC v. Lange, 259 F. Supp. 3d 980, 983 (D. Minn. 2017).

[3] Petition for Declaratory Ruling that AT&T’s Phone-to-Phone IP Telephony Services are Exempt from Access Charges, WC Docket No. 02-361, Order, FCC 04-97 (2004) (IP-in-the-Middle Order).