Confusion, uncertainty, and fear: how the FCC's increased reliance on adjudication is harming carriers, competition, consumers, and investment.

• Author: Marashlian, Jonathan S.

TABLE OF CONTENTS I. INTRODUCTION 210 II. THE FCC'S USE OF ADJUDICATION UNNECESSARILY LIMITS STAKEHOLDER PARTICIPATION AND DISRUPTS DYNAMIC BUSINESS MODELS 212 A. Background 1. The APA: Rulemaking vs. Adjudication 213 a. Formal Rulemaking 214 b. Informal Rulemaking 214 c. Formal Adjudication 215 d. Informal Adjudication 215 2. Review of USAC Audit Decisions 219 B. The InterCall Order 220 1. How the InterCall Order Eroded the Contamination Theory, and How the FCC's Use of Adjudication Allowed the Change to Go Uncontested 225 a. Rewriting the Contamination Theory: the Pulver.com, Brand X, and Prepaid Calling Card Orders 227 i. The Pulver.com Order 228 ii. Brand X 229 iii. The Prepaid Calling Card Order 231 b. The InterCall Order 233 c. InterCall's Treatment of the Pulver.com Order 234 d. InterCall's Treatment of the Prepaid Calling Card Order 235 2. FCC's Application of the InterCall Order 237 a. MeetingOne Order 238 b. Vast Communications Consent Decree 239 c. Cisco WebEx LLC's Request for Review 241 i. WebEx's Position 242 ii. Industry Comments on WebEx's Request for Review Illustrate the Confusion and Uncertainty Caused by the FCC's Development of the Contamination Theory Through Ad Hoc Adjudications 244 3. Impact of the InterCall Order on Industry 246 C. Framework for Evaluating Agency Decision Making and Application to the InterCall Order 247 1. Legislative Fact 248 a. Framework 248 b. Application to the InterCall Order 250 2. Impacts of Agency Action on Nonparties to a Proceeding 253 a. Framework 253 b. Application of the InterCall Order 255 3. Ex Ante vs. Ex Post Decision Making 258 a. Framework 258 b. Application to the InterCall Order 259 D. Takeaways 260 III. JUDICIAL REVIEW OF THE FCC DECISIONS 261 A. Background 261 1. Standing 262 2. Appeals of FCC Decisions 268 a. Petition for Reconsideration 268 b. Review by the Federal Courts of Appeals 269 B. Conference Group, LLC v. FCC 270 1. The Arguments 271 a. The Petitioner's Argument 271 i. Violation of Section 553 of the APA 271 ii. Violation of Section 706(2)(a) of the APA 274 iii. Standing 275 b. The FCC's Argument 276 i. No Violation of Section 553 of the APA 276 ii. The InterCall Order was an Informal Adjudication 277 iii. The InterCall Order Did Not Propose a Substantive Rule 278 iv. Sufficient Notice-and-Comment Procedures 279 v. No Violation of Section 706(2)(a) of the APA 281 vi. InterCall's Services Were Reasonably Classified as Telecommunications 281 vii. InterCall's Services Were Reasonably Determined to be Insufficiently Integrated 282 2. The Court's Opinion 283 a. The Conference Group Lacked Standing 284 i. The Court's Reasoning 284 ii. The Court's Departure from District of Columbia Circuit Precedent 285 b. The InterCall Order Did Not Violate Section 553 of the APA 288 IV. SOLUTIONS 290 A. Broadening the Understanding of the Standing Doctrine 290 1. Amendment of the APA 291 2. Amendment of the Communications Act 292 B. Creation of Limited Notice-and-Comment Procedures for Informal Adjudication 294 1. Amendment of the APA 294 2. Amendment of the Communications Act 294 V. CONCLUSION 295 I. INTRODUCTION

The rulemaking-adjudication dichotomy runs deep in the world of administrative law. While agencies enjoy broad discretion in deciding whether to proceed by adjudication or rulemaking, much ink has been spilled over the various advantages and disadvantages of each process. In general, commenters agree that the strengths of the rulemaking and the adjudicatory processes complement one another, and that one or the other process might better serve an administrative agency depending on the situation at hand. Therefore, there is significant divergence among federal agencies in determining when and how to use rulemaking and adjudication.

As one of the earliest federal agencies to embrace the rulemaking process, the Federal Communications Commission's (FCC or the Commission) recent increased reliance on informal adjudication for policymaking warrants attention. Unlike agencies that traditionally rely more heavily on adjudication (e.g., the National Labor Relations Board (NLRB)), the FCC regulates highly technical industries. Moreover, the FCC's decisions generally do not involve two discrete parties embroiled in a dispute. Rather, Commission decisions tend to carry immediate industry-wide impact. As a result, the FCC has historically turned to rulemaking proceedings to set policy because they foster input and buy-in by stakeholders across an industry.

The FCC's shift toward informal adjudication is most noticeable in its regulatory oversight of the Universal Service Fund (USF)--the pool of surcharges imposed by the FCC on carriers' interstate and international enduser telecommunications and interconnected Voice over Internet Protocol (IVoIP) revenues to help support telecommunications services for low-income end users, and end users in hard-to-serve areas. As the USF supports one of the core objectives of the FCC (i.e., universal service), maintaining a stable USF contribution base is critical to the FCC's achievement of its policy goals. However, when confronted with rapidly evolving technologies, shrinking traditional telephone revenue (the primary funding source for the USF at its creation), and a Congress incapable of legislating quickly enough to cope with the changes in telecommunications technology, the FCC has been forced to both increase the USF contribution factor and broaden the Fund's contribution base to keep up with demand for USF support for newer communications technologies such as wireless and broadband.

While the FCC has the authority to extend USF contribution requirements beyond traditional telecommunications carriers to any provider of interstate telecommunications, its use of informal adjudication to do so presents a number of challenges for the telecommunications industry. First, the adjudicatory process is less predictable than rulemaking. Setting policy through adjudication makes planning more difficult for industry, particularly in a rapidly evolving and highly technical field. Second, adjudication limits the number of parties directly involved in a proceeding, which in turn restricts who can appeal the FCC's decision. Finally, adjudication tends to limit the public comment period, which disproportionately hurts small or new companies lacking the financial means to participate in the process through an appeal alone.

Given these drawbacks, one might ask why the FCC has turned to informal adjudication to set USF contribution policy. Informal adjudication is often a more expedient way to set policy precisely because it limits both stakeholder participation in the process, and the appeal options for non-parties to the adjudication. The FCC's tendency to use informal adjudication in the USF context may also be symptomatic of its reliance on the Universal Service Administrative Company's (USAC) (1) role as the stalking horse in the FCC's attempt to expand the USF contribution base. USAC administers the USF, but is prohibited from making policy decisions or interpreting the FCC's rules. Yet the FCC consistently allows USAC to expand the USF contribution base by broadly interpreting FCC rules. The Commission then ratifies USAC's expanded interpretation through adjudication when a contributor appeals a USAC decision.

Ultimately, the FCC's motive for using adjudication to set USF policy may not matter as much as its impact on the industry. Part I of this Article juxtaposes rulemaking with adjudication in the context of setting USF policy by examining the FCC's recent InterCall Order, (2) which extended USF contribution obligations to audio bridging services. Part II evaluates rulemaking and adjudication, considering whether the proceeding: (1) involves a question of legislative or adjudicative fact; (2) directly impacts non-parties to the proceeding; and (3) lends itself to ex ante or ex post decision making.

Based on these criteria, this Article argues that both the FCC and industry would be better served by using rulemaking to expand the USF contribution base. The FCC's reliance on rulemaking would benefit industry stakeholders by facilitating industry participation in the decision-making process, and making regulatory compliance more predictable. The FCC would benefit from the predictability and clarity of rulemaking, as opposed to lurching from appeal to appeal, allowing the FCC to better control its own policymaking agenda and to create more coherent policy.

However, this Article recognizes that agencies enjoy broad discretion in determining whether to use rulemaking or adjudication. Therefore, Part III also focuses on the role the judiciary can play in ensuring full review of FCC adjudicatory decisions. The Conference Group appealed the FCC's InterCall Order decision to the United States Court of Appeals for the District of Columbia Circuit. In Conference Group, LLC v. FCC, (3) the District of Columbia Circuit failed to reach the substance of the FCC's decision because it found that the Conference Group did not have standing to challenge the FCC's determination, because the Group was not a party to the adjudication. The Court also rejected the Conference Group's procedural argument that the InterCall Order constituted a substantive rule change requiring notice-andcomment rulemaking under the Administrative Procedure Act, (4) instead concluding that the FCC lawfully exercised its discretion when deciding to proceed via informal adjudication.

This Article argues that the District of Columbia Circuit erred, abdicating its role as a check on the FCC's authority, when it declined to reach the merits of the Conference Group's substantive challenge to the InterCall Order. If the FCC continues to rely on adjudication to make substantive policy changes, federal appellate courts can and should review FCC decisions to ensure that the FCC does not cut off aggrieved third parties' access to judicial review. District of Columbia...