Federal Legislation and State Commission Enforcement: Virginia Calls Time Out

By Richard D. Gary and Kristina Beard

The Virginia State Corporation Commission (Virginia SCC) has recently begun to decline to arbitrate disputes over interconnection agreements despite the fact that the Telecommunications Act of 1996 ("the Act" or "the 1996 Act") 1 expressly grants such regulatory authority. The Virginia SCC's refusal arises as a result of a decision by a federal district court in Virginia - GTE v. Virginia State Corporation Commission - which held that the Virginia SCC is not immune from suit in federal court for actions taken under the Act.

The Virginia SCC's position regarding the implementation of the Act raises significant questions with regard to the efficacy of the Act's application to local telephone markets in Virginia. Unless directly addressed, similar governmental immunity issues will likely also plague any potential electric industry restructuring legislation.

Structure of the 1996 act and why it raises a controversy about sovereign immunity

The controversy over the existence of sovereign immunity under the Act essentially arises from its structure. The 1996 Act - passed by Congress as part of Congress' effort to remove obstacles to competition and entry by new competitors in local telephone markets - requires incumbent local exchange carriers (LECs) to share their local network with competitors. This sharing can be accomplished in one of three ways: Incumbent LECs can agree to allow competing LEC's (CLECs) to interconnect their facilities with the incumbent's existing local network; CLECs may lease elements of existing networks; or CLECs may purchase the incumbent LEC's services at wholesale rates, for resale to retail customers. See 1996 Act, § 251.

If private negotiations between incumbent LECs and CLECs fail to produce an agreement on network sharing (generically an "interconnection agreement"), either party may petition the relevant state public utility commission to arbitrate open issues. See id. § 252(b). Whether an interconnection agreement is completed through negotiations or arbitration, it must be submitted to the state commission, who then must either approve or reject the agreement. See id. § 252(e)(1). Sections 251 and 252 of the Act set forth the obligations of a state commission and the standards a commission must follow in approving interconnection agreements and arbitrating open issues.

If a state commission fails to carry out any of its responsibilities in approving negotiated or arbitrated agreements, the Act provides that the Federal Communications Commission will preempt the state commission's jurisdiction, assume responsibility for the proceeding and act for the state commission. See id. § 252(e)(5). Thus, state commissions are given a choice as to whether they will act to arbitrate or approve/reject interconnection agreements.

When a state commission does arbitrate open issues or make a determination approving or rejecting an interconnection agreement, Section 252 provides a unique appellate process in that "any party aggrieved by such determination may bring an action in an appropriate federal district court to determine whether the agreement or statement meets the requirements of Section 251 and this section." Id. § 252(e)(6). The Act expressly deprives state courts of jurisdiction to review the action of a state commission in approving or rejecting an interconnection agreement. See id. § 252(e)(4).

Virginia SCC decision to refuse to act as regulator under the Act

As contemplated by § 252(e)(6), parties aggrieved by state commission decisions arbitrating interconnection agreements have brought various suits in federal district court. One such suit - GTE South Inc. v. Morrison, et al., Civ. Act. No. 3:97CV493 (E.D.Va. Nov. 7, 1997) - arose out of a consolidated arbitration conducted by the Virginia SCC pursuant to the 1996 Act, between GTE as the incumbent LEC and several CLECs, concerning various pricing issues. The SCC's arbitration order was appealed by GTE by bringing suit in federal court. GTE's suit named as defendants the CLECs and the individual state commissioners in their official capacities. See id.

The state commissioners moved to dismiss the suit on the ground that they were entitled to sovereign immunity. See Memorandum in Support of Motion to Dismiss, GTE, Civ. Act. No. 3:97CV493 (filed Aug. 11, 1997). The district court denied the motion to dismiss under Ex parte Young, which provides that suits against state officials seeking prospective injunctive relief from continuing violations of federal law are not barred by sovereign immunity. See Ex parte Young, 209 U.S. 123, 159-60 (1908). Ex parte Young thus permits a federal court to "enjoin state officials to conform their future conduct to the requirements of federal law." GTE, Nov. 7 order at 4 (quoting Quern v. Jordan, 440 U.S. 332, 337 (1979)).

The district court held that because GTE sought only prospective injunctive relief, under Ex parte Young the commissioners were not entitled to sovereign immunity. See id. The court also held that because the commission voluntarily undertook review under the 1996 Act - which indicates that review of state commission decisions will occur in federal court - it constructively waived its sovereign immunity. See id. at 4-5. 2

In response to the district court's order in GTE, as well as a series of other cases in which Virginia SCC decisions under the 1996 Act have been reviewed by federal courts, the SCC has recently declined to exercise regulatory authority under the 1996 Act over matters that might "arguably implicate a waiver of the Commonwealth's immunity, including the arbitration of rates, terms and conditions of interconnection agreements." See MCImetro Access Transmission Servs. of Virginia, Case No. PUC000225, at 2 (order issued Sept. 13, 2000) (declining jurisdiction over arbitration petition under 1996 Act).

See also, Focal Communications Corp., Case No. PUC000079 (order issued July 19, 2000) (same); Cavalier Telephone, LLC, Case No. PUC990191 (order issued June 15, 2000) (declining jurisdiction over arbitration petition under the 1996 Act and requesting petitioner to indicate whether it wanted to proceed with petition under state law only); Starpower Communications, LLC, Case No. PUC990023 (order issued Jan. 24, 2000) (dismissing petitions for arbitration and encouraging parties to carry requests for construction of agreements to FCC).

In its orders declining to hear arbitration petitions, the Virginia SCC states that although it has been informed by the U.S. District Court for the Eastern District of Virginia that its participation in arbitration of interconnection agreements under the 1996 Act constitutes a waiver of sovereign immunity, it has no power - either through statutory or constitutional grant - to waive the sovereign immunity of the Commonwealth of Virginia. See Cavalier, Case No. PUC990191, at 4. Accordingly, in order to avoid any action that may subject the Commonwealth to suit and "[u]ntil the issue of Eleventh Amendment immunity from federal appeal under the Act is resolved by the courts of the United States," the SCC states that it will no longer act solely under the Act's federally conveyed authority to arbitrate interconnection agreements or take any other action that might waive the Commonwealth's immunity. See id. at 8; MCImetro, Case No. PUC000225, at 2.

Presumably, this would include not only arbitration of interconnection agreements, but also approval/rejection of negotiated interconnection agreements. See 1996 Act, §§ 252(e)(1), (e)(6) (requiring state commission to approve/reject negotiated and arbitrated agreements and granting parties aggrieved by commission determinations under § 252 the right to bring an action in federal court). The Virginia SCC does indicate that it will continue to arbitrate at least some interconnection agreements under its authority pursuant to state law. See Cavalier, Case No. PUC990191, at 8.

Recent federal cases further questioning the existence of sovereign immunity under the Act

More recent federal decisions bear out the Virginia SCC's concern that, by participating in the Act's regulatory scheme, the state commission is subjecting itself to suit in federal court. In fact, the majority of federal district courts - and thus far all federal circuit courts - to decide the issue have determined that state commission defendants are not immune from federal suits brought pursuant to the 1996 Act. See, e.g., MCI Telecomm. Corp. v. Illinois Bell Tel. Co., 222 F.3d 323, 330 (7th Cir. 2000); MCI Telecomm. Corp. v. Pub. Serv. Comm'n of Utah, 216 F.3d 929, 934 (10th Cir. 2000); Michigan Bell Tel. Co. v. Climax, 202 F.3d 862 (6th Cir. 2000). These courts have held that under the doctrine of "gratuity constructive waiver," the state commissions have waived their sovereign immunity by participating in regulation under the Act. See, e.g., Illinois Bell, 222 F.3d at 338-44; Pub. Serv. Comm'n of Utah, 216 F.3d at 938-39; Bell Atlantic-Delaware Inc. v. McMahon, 80 F. Supp.2d 218, 233 (D.Del. 2000); Bell-Atlantic Pennsylvania Inc. v. Pennsylvania Pub. Util. Comm'n, 107 F. Supp.2d 653, 661-62 (E.D.Penn. 2000).

Under this theory, if Congress offers states a gift or gratuity that is not otherwise available to them, Congress may condition the state's acceptance of the gratuity on a waiver of the state's immunity. See Illinois Bell, 222 F.3d at 344; McMahon, 80 F. Supp.2d at 233. Because Congress could have preempted all state regulation of local phone service under its Article I powers, Congress' grant to the states of the opportunity to regulate the local telephone market by participating in the regulatory scheme of the Act constitutes a "gift or gratuity" not otherwise available to the states. Further, Congress conditioned the states' power to regulate local service, on their consent to suit in federal court. See 1996 Act § 252(e)(6).

Accordingly, because state commissions may decline to arbitrate or approve/reject an interconnection agreement under the Act, by voluntarily acting on an interconnection agreement a state commission has thus waived its immunity and invoked federal court jurisdiction over its decisions. See Illinois Bell, 222 F.3d at 344 ("states may waive their immunity by accepting a benefit from Congress that has conditions attached to that acceptance"); Pub. Serv. Comm'n of Utah, 216 F.3d at 938-39; McMahon, 80 F. Supp.2d at 232-33.

But see AT & T Communications of S. Cent. States Inc. v. BellSouth Telecomms. Inc., 43 F. Supp.2d 593, 601 (M.D.La. 1999) (rejecting gratuitous constructive waiver theory, on ground regulation of local telephone markets is a core state function and therefore that states cannot freely decline to participate in regulation under the Act).

Federal courts have held alternatively that even if states retain sovereign immunity from suit for actions taken pursuant to the authority of the 1996 Act, the doctrine of Ex parte Young allows suit to proceed against the individual state commissioners. See Illinois Bell, 222 F.3d at 345; Pub. Serv. Comm'n of Utah, 216 F.3d at 939-40; Climax, 202 F.3d at 867; Bell-Atlantic Pennsylvania, 107 F. Supp.2d at 663; McMahon, 80 F. Supp.2d at 234.

Impact of Virginia SCC decision on enforcement of the Act in Virginia and potential impact of sovereign immunity decisions on enforcement of the Act in other states

The Virginia SCC's decision to decline to arbitrate interconnection agreements under the authority of the 1996 Act means that parties seeking such arbitration in Virginia - and possibly other relief under the 1996 Act - ultimately will need to request that the FCC pre-empt the Virginia SCC and decide these cases directly.

Arbitration petitions, however, typically raise dozens of open issues, the resolution of which can require lengthy and involved evidentiary hearings before an arbitrator. The FCC may not be equipped to preside over the potentially numerous individual proceedings that might be necessitated by arbitration petitions relating to interconnection agreements in Virginia. Aside from the sheer volume of cases it may be forced to handle, the FCC likely is also not as well-equipped as a more local authority would be to consider and decide issues relating to Virginia's local telecommunications markets.

To solve the problem of state commission abstention from arbitration under the Act, Congress could amend the Act by removing provisions for FCC review and requiring state commissions to arbitrate interconnection agreements. However, the validity of the provisions for federal review of state commission decisions may then be called into question: Without the choice to assert regulatory authority under the Act, states cannot constructively waive their immunity under the doctrine of gratuitous constructive waiver. 3

It would seem that the answer may be to amend the Act to provide both for mandatory arbitration by state commissions and state court - rather than federal - review of commission decisions. 4

For now, because states have the choice to take no action on arbitration petitions - and may be subject to federal suit if they do act - other state commissions may follow Virginia's lead and refuse to assert regulatory authority under the 1996 Act in order to avoid being subject to suit in federal court. This possibility could leave the FCC unable to cope with the number of arbitration petitions that may default to it, thereby diminishing the effectiveness of the 1996 Act.

1. Pub. L. No. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of Title 47 of the United States Code).
2. The court later granted summary judgment for the defendants on the pricing issues. See GTE South Inc. v. Morrison, 6 F. Supp.2d 517 (E.D. Va. 1998), aff'd, 199 F.3d 733 (4th Cir. 1999).
3. There is of course still the possibility that federal review will be allowed under the doctrine of Ex parte Young.
4. Congress seems to have recognized that providing for federal court review of state commission actions under the 1996 Act raises issues of sovereign immunity and pending electric restructuring legislation provides for state court review of commission actions taken pursuant to such legislation. See, e.g, Comprehensive Electricity Competition Act, S. 1047, 106th Cong. (1999); H.R. 1828, 106th Cong. (1999). However, issues of sovereign immunity may still arise even in the context of state court review, as the U.S. Supreme Court has recently ruled that sovereign immunity bars damage suits against states even in state court, by persons (including corporations) suing under federal statutes that were enacted under Congress' Article I powers. See Alden v. Maine, 527 U.S. 706 (1999); see also Florida Prepaid Secondary Sch. Expense Bd. v. College Sav. Bank, 527 U.S. 627 (1999).

Contact information:
Section of Public Utility, Communications and Transportation Law
321 N. Clark St.
Chicago, IL, 60654