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2000 Term, Number 7 / January  22, 2001

Today the Supreme Court granted certiorari in ten cases, seven of which were consolidated into two groups. The two groups of consolidated cases and one additional case are of potential interest to the business community. Amicus briefs in support of the petitioners are due on March 8, 2001, and amicus briefs in support of respondents are due on April 9, 2001. Any questions about these cases should be directed to Donald Falk (202-263-3245), Eileen Penner (202-263-3242) or Miriam Nemetz (202-263-3253) in our Washington office.

1. Telecommunications Act of 1996 — Allocation of Costs Between ILECs and New Market Entrants. The Supreme Court granted certiorari in and consolidated Verizon Communications v. F.C.C. (No. 00-511), Worldcom, Inc. v. Verizon Communications (No. 00-555), F.C.C. v. Iowa Utilities Board (No. 00-587), AT&T Corp. v. Iowa Utilities Board (No. 00-590), and General Communications, Inc. v. Iowa Utilities Board (No. 00-602) to resolve three important issues related to the deregulation of local telephone markets under the Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C. §§ 151-276. Two of the issues concern the methodology by which traditional providers of local telephone service (known as "incumbent local exchange carriers" or "ILECs") may recover fees for use of their infrastructure from new market entrants. The other concerns the scope of the ILECs' obligation to combine unbundled network elements for the benefit of new entrants.

Historically, local telephone service was regulated as a natural monopoly, and states granted an exclusive franchise in each local service area to a single carrier, the ILEC. Spurred by technological advances that made it possible for multiple carriers to provide local telephone service, Congress enacted the Telecommunications Act of 1996 (the "Act") to introduce competition into the local telephony markets. Recognizing that it would not be feasible for new competitors to replicate the ILECs' existing network infrastructure, Congress provided various means for new market entrants to obtain access to the ILECs' networks.

The Federal Communications Commission ("FCC") issued findings and rules relating to the local competition provisions of the Telecommunications Act. In re Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 F.C.C.R. 15,499 (1996) ("Report and Order"). In its Report and Order, the FCC mandated that, in exchange for access to the local networks, the ILECs would be permitted to charge new market entrants fees based on the future costs of operating the local networks (known as TELRIC ("total element long-run incremental cost")). See Iowa Utilities Board v. F.C.C., 219 F.3d 744, 749 (8th Cir. 2000). The FCC provided that the future costs would be calculated based not on the actual costs of running the local networks, but instead on the costs of running a "hypothetical network" that theoretically would employ the "most efficient technology available in the industry." Id. at 749. In addition, the FCC promulgated numerous rules relating to the unbundling of network elements. See id. at 757. The rules included a requirement that, upon request by new entrants, the ILECs must combine unbundled network elements in any technically feasible manner ("additional combinations"). 47 C.F.R. § 51.315(c)-(f). 

Numerous local carriers and state utility commissions challenged the FCC's rulemaking. The cases were consolidated in the Eighth Circuit, which held, among other things, that the FCC exceeded its jurisdiction in promulgating the TELRIC pricing methodology and that the rules regarding additional combinations violated the Act. Iowa Utilities Board v. F.C.C., 120 F.3d 753 (8th Cir. 1997). The Supreme Court affirmed in part, reversed in part, and remanded. AT&T Corp. v. Iowa Utilities Board, 525 U.S. 366 (1999).

On remand, the Eighth Circuit addressed (among other issues) the three questions that are now before the Court. 219 F.3d at 749. First, the court struck down the "hypothetical network" pricing provisions adopted by the FCC, holding that the plain language of the Act dictates that ILECs may recover "the cost of providing the actual facilities and equipment that will be used by the competitor (and not some state of the art presently available technology ideally configured but neither deployed by the ILEC nor to be used by the competitor)." Id. at 751. Second, the court rejected the arguments of state regulators and the ILECs that the Act requires a pricing methodology based on the historical costs of the network infrastructure. Id. at 751-753. The court held that the term "cost" as used in the Act was ambiguous and that the FCC's adoption of the forward-looking TELRIC methodology was a reasonable interpretation of the Act and, thus, entitled to deference. Id. at 751-752. Third, the court struck down the additional combinations rules, holding that the plain language of the Act places the burden of combining elements on the new market entrants, not the ILECs. Id. at 759. That portion of the court's opinion is inconsistent with the Ninth Circuit's decision in U.S. West Communications v. MFS Intelnet, Inc., 193 F.3d 1112 (9th Cir. 1999), which upheld the FCC rules regarding additional combinations.

This case is of great significance because it involves the fundamental restructuring of the telecommunications industry, "a crucial segment of the economy worth tens of billions of dollars." AT&T Corp., 525 U.S. at 397. After almost five years, the process by which local telephone service is to be deregulated remains unsettled. This case affords the Court the opportunity to settle major issues concerning how the costs of deregulating the local telephony markets will be allocated between local carriers and new market entrants.

2. Pole Attachment Act — Internet And Wireless Attachments — FCC Regulatory Authority. Cable television and other telecommunications companies frequently attach their equipment to existing telephone or electric utility poles or underground conduits. To prevent telephone and power companies from charging monopoly rents for these attachments, Congress in 1996 amended the Pole Attachment Act, 47 U.S.C. § 224 ("Section 224"), to authorize the FCC to establish "just and reasonable" rates (id., § 224(b)(1)) that a utility may charge for a "pole attachment," defined as "any attachment by a cable television system or provider of telecommunications service to a pole, duct, conduit, or right-of-way owned or controlled by a utility" (id., § 224(a)(4)). The Supreme Court granted certiorari in National Cable Television Association, Inc. v. Gulf Power Company, No. 00-832, and Federal Communications Commission v. Gulf Power Company, No. 00-843, to decide whether the FCC's regulatory authority under Section 224 extends to: (1) attachments by cable television systems that simultaneously provide high-speed Internet access and conventional cable television programming; and (2) attachments by providers of wireless telecommunications services.

In February 1998, the FCC promulgated regulations implementing its authority under Section 224. In re Implementation of Section 703(e) of the Telecommunications Act of 1996, 13 F.C.C.R. 1667. Those regulations reflect the FCC's conclusion that its rate-setting power applies to all pole attachments by a cable television system, including attachments used to provide commingled Internet and traditional cable television services, and to all attachments by carriers of wireless services. Electric utility companies petitioned for review of the FCC's order, which petitions were consolidated in the Eleventh Circuit.

The Eleventh Circuit rejected the FCC's interpretation of Section 224. 208 F.3d 1263 (11th Cir. 2000). With respect to the agency's authority over wireless equipment, the court noted that Section 224 defines a "utility" as "any person * * * who owns or controls poles, ducts, conduits, or rights-of-way used, in whole or in part, for any wire communications." 208 F.3d at 1273 (quoting 47 U.S.C. § 224(a)(1)) (emphasis added; internal quotation marks omitted). Based on that language, the court concluded that "wires are integral to the FCC's authority" and that, "by negative implication," Section 224 "does not give the FCC authority over attachments to poles for wireless communications." Id. at 1274. The court also reasoned that, because wireless carriers can attach their transmission equipment to any tall structure, the poles owned and controlled by utilities "are not bottleneck facilities for wireless carriers." Id. at 1275.

The Eleventh Circuit also concluded that the FCC lacked regulatory authority over attachments for the delivery of Internet services. The court reasoned that Section 224 calls for the FCC to establish only two rates for pole attachments (208 F.3d at 1276) — the first applicable to "any pole attachment used by a cable television system solely to provide cable service" (id. (quoting 47 U.S.C. § 224(d)(3)) (internal quotation marks omitted)) and the second applicable to "charges for pole attachments used by telecommunications carriers to provide telecommunications services" (id. (quoting 47 U.S.C. § 224(e)(1)) (internal quotation marks omitted)). Concluding that "Internet service does not meet the definition of either a cable service or a telecommunications service," the court held that Section 224 "does not authorize the FCC to regulate pole attachments for Internet service" (id. at 1278), even if those attachments simultaneously deliver traditional cable television services.

This case is of interest to power companies, telephone companies, cable television companies, wireless communications companies, Internet service providers and other companies whose operations relate to or depend upon the transmission of Internet, wireless or other telecommunications services.

3. ERISA — Actions to Recoup Medical Benefits. Section 1132(a) of the Employee Retirement Income Security Act ("ERISA") authorizes federal actions by a participant, beneficiary, or fiduciary "to obtain * * * appropriate equitable relief" to enforce the terms of a benefits plan. 29 U.S.C. § 1132(a)(3). The Supreme Court granted certiorari in Great-West Life & Annuity Insurance Company v. Knudson, No. 99-1786, to decide whether a lawsuit by an employee benefit plan fiduciary against a plan beneficiary for reimbursement of paid medical benefits is a suit for "equitable" relief, and hence one over which the federal courts have jurisdiction under Section 1132(a)(3).

Janette Knudson was a covered beneficiary of her employer's health plan ("the plan"), for which Great-West Life & Annuity Ins. Co. ("Great West") was the third-party administrator. The plan includes a Right of Recovery provision, entitling the plan to reimbursement of any benefits it has paid on a beneficiary's behalf, for which the beneficiary has recovered from third parties. Following a serious automobile accident, Ms. Knudson's employer's health plan paid her and her medical providers $411,157 for medical care. Knudson subsequently sued the third parties allegedly responsible for her injuries in California Superior Court, obtaining a settlement of $650,000. The settlement attributed only 5% of the award to prior medical expenses.

After Knudson sent a check to Great-West for $13,838, representing 5% of the settlement amount, Great-West filed suit against Knudson in federal court to obtain reimbursement for the remainder of the medical expenses it had paid on her behalf. The district court granted Knudson's motion for summary judgment, holding that the plain terms of the plan limited Great-West's reimbursement to the amount that beneficiaries received from third parties for medical treatment, and the plain terms of Knudson's settlement limited the amount she had received for medical treatment to $13,838.

The Ninth Circuit affirmed on the different ground that ERISA did not authorize a federal cause of action for Great-West's claim. 2000 WL 145374, *1 (2000). The Court held that the availability of a federal remedy was controlled by FMC Medical Plan v. Owens, 122 F.3d 1258 (9th Cir. 1997), in which the Ninth Circuit had held that actions brought by fiduciaries to enforce recovery provisions in ERISA plans are actions not for "‘equitable' relief within the meaning of § 1132(a)(3)," but rather for money damages. 2000 WL 145374, at *1. In FMC, the Ninth Circuit explained that the right of reimbursement is not an equitable one of subrogation, in which the plan administrator "‘step[s] into the shoes'" of the beneficiary, nor of "restitution," which the court defined as "the return of ‘ill-gotten' assets," but rather one for money damages. 123 F.3d at 1261.

The Ninth Circuit's decision conflicts with decisions in the Seventh, Eighth and Eleventh Circuits, which have held that a claim for monetary relief under a reimbursement clause in a benefits contract is "equitable" within the meaning of Section 502(a)(3). See Administrative Committee v. Gauf, 188 F.3d 767 (7th Cir. 1999); Blue Cross and Blue Shield of Alabama v. Sanders, 138 F.3d 1347 (11th Cir. 1998); Southern Council of Industrial Workers v. Ford, 83 F.3d 966 (8th Cir. 1996). The Seventh and Eleventh Circuits have reasoned that such an action seeks specific performance of the reimbursement clause of the contract, an equitable remedy. See Gauf, 188 F.3d at 771.

This case is of interest to all employers that provide group benefit plans, as well as to plan administrators. A decision affirming would limit fiduciaries' access to the federal courts to vindicate claims for reimbursement from beneficiaries who have received payments from third parties.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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