Sprint Corp v. FCC, et al, No. 01-1266 (D.C. Cir. 2003)

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 5, 2002 Decided January 21, 2003

No. 01-1266

Sprint Corporation, et al.,

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

American Public Communications Council, Inc., et al.,

Intervenors

Consolidated with

Nos. 01-1521, 01-1522, 02-1041, 02-1042

On Petitions for Review of Orders of the

Federal Communications Commission

David P. Murray argued the cause for petitioners. With

him on the briefs were H. Richard Juhnke, John E. Benedict,

Randy J. Branitsky, Thomas F. O'Neil III, William Single

IV, Jodie L. Kelley, Mark C. Rosenblum and Daniel Meron.

Kurt W. Hague, David L. Lawson and Peter D. Keisler

entered appearances.

Joel Marcus, Counsel, Federal Communications Commis-

sion, argued the cause for respondents. With him on the

briefs were Robert B. Nicholson and Robert J. Wiggers,

Attorneys, U.S. Department of Justice, John A. Rogovin,

Deputy General Counsel, Federal Communications Commis-

sion, and John E. Ingle, Deputy Associate General Counsel.

Lisa E. Boehley, Counsel, entered an appearance.

Albert H. Kramer argued the cause for intervenors Ameri-

can Public Communications Council, et al. With him on the

brief were Robert F. Aldrich, Michael K. Kellogg, Aaron M.

Panner, Roger K. Toppins, Gary L. Phillips, James D. Ellis,

Michael E. Glover, Edward Shakin, and James G. Harral-

son. Edward G. Modell entered an appearance.

Before: Ginsburg, Chief Judge, and Rogers and Tatel,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Rogers.

Rogers, Circuit Judge: Sprint Corp., AT&T Corp., and

Worldcom, Inc. (collectively, "Sprint"), petition for review of a

Federal Communications Commission rule governing the

means by which payphone service providers are compensated

for certain calls made from their payphones. Sprint contends

that the rule was promulgated in violation of the notice and

comment requirements of the Administrative Procedure Act

("APA"), 5 U.S.C. s 553(b) (2000), and is also arbitrary and

capricious. Because the Commission failed to provide ade-

quate notice and opportunity to comment, we grant the

petition and remand the case to the Commission.

I.

Section 276(b)(1)(A) of the Telecommunications Act of 1996

("1996 Act") directs the Federal Communications Commission

to "establish a per call compensation plan to ensure that all

payphone service providers ["PSPs"] are fairly compensated

for each and every completed intrastate and interstate call

using their payphone...." 47 U.S.C. s 276 (2000). Two

types of calls may be placed from a payphone. The first and

most common type is the "coin call," in which the caller

inserts a coin directly into the payphone before making the

call; the rates for coin calls are set by State commissions. At

issue here is the second type of call--"coinless calls"--which

a caller places by using a service such as directory assistance,

operator service, an access code, or a subscriber 800 number.

The Commission explains in its brief that when a caller

places a coinless payphone call, the call is initially received by

the local exchange carrier ("LEC") that services the pay-

phone. If the call is local, the LEC completes the call itself;

if it is long distance, the LEC routes the call to a long-

distance carrier, typically an interexchange carrier ("IXC").

The IXC, such as Sprint, AT&T, and Worldcom, is the first

facilities-based carrier to receive the call. If the recipient of

the call is a customer of the IXC, the IXC will simply

transmit the call to the LEC that serves the customer; the

IXC is thereby able, Sprint acknowledges, to "track" comple-

tion of the call. If the call recipient is not a customer of the

IXC, however, the IXC transfers the call to a "reseller" of the

IXC's services. Two types of resellers exist. The first,

known as switchless resellers, do not possess their own

switching facilities and must rely on an IXC to perform the

switching and transmission functions that are required to

complete a call. When the IXC transfers the call to a

switchless reseller, the IXC handles the call as if it were

transferring it to one of its own customers, and the IXC is

again able to track the call to completion. By contrast, the

second type, switch-based resellers ("SBRs"), possess their

own switching capacities; hence, when an IXC routes a call to

an SBR, the SBR assumes control of the call, and, Sprint

asserts in its brief, the IXC can no longer track the call to

completion. As the parties acknowledge, in some instances

the SBR transfers the call to another SBR, which in turn

routes the call to yet another SBR, and so on.

 In 1996, the Commission issued a Notice of Proposed

Rulemaking ("NPRM") proposing a method for compensating

PSPs for coinless calls. Notice of Proposed Rulemaking, 11

F.C.C.R. 6716 (1996). A summary of this NPRM was also

published in the Federal Register. 61 Fed. Reg. 31,481.

After a period of notice and comment, the Commission deter-

mined that "the primary economic beneficiary" should bear

the burden of both tracking coinless payphone calls to com-

pletion and compensating PSPs for those calls. Payphone

Docket, Report and Order, 11 F.C.C.R. 20,541, 20,584 p 83

(1996) ("First Payphone Order"). The Commission therefore

concluded that the IXC, or the "underlying, facilities-based

carrier," should, as the primary economic beneficiary, com-

pensate the PSP "in lieu of a non-facilities-based carrier that

resells services." Id. at 20,586 p 86. The Commission did not

define the terms "facilities-based carrier" or "reseller." The

Commission determined, in response to petitions for reconsid-

eration or clarification, that SBRs possess the switching

capabilities necessary to track payphone calls and accordingly

clarified that SBRs are "facilities-based carriers" within the

meaning of the initial rule. Payphone Docket, Order on

Reconsideration, 11 F.C.C.R. 21,233, 21,277 p 92 (1996)

("First Reconsideration Order").

As facilities-based carriers, then, SBRs were obligated

under the First Reconsideration Order to compensate PSPs

for all completed coinless payphone calls they handled. Id.

IXCs, in turn, were required to compensate PSPs only for

those calls that the IXCs terminated on their own behalf or

on behalf of a switchless reseller, and not for those calls the

IXCs transferred to an SBR. Id. The Commission's Com-

mon Carrier Bureau ("Bureau"), in granting, two years later,

a waiver to IXCs that had not complied with the First

Payphone Order within the required one-year period, further

clarified that IXCs must provide requesting PSPs with infor-

mation about the SBRs to which the IXCs route their calls so

that the PSPs could identify precisely which SBRs owed them

compensation. Payphone Docket, Mem. Opinion and Order,

13 F.C.C.R. 10,893, 10,915-16 p 38 (1998). On review, the

court upheld the portions of the Commission's 1996 rules that

are pertinent here. Illinois Pub. Telecomms. Ass'n v. FCC,

117 F.3d 555, 566-67 (D.C. Cir. 1997).

In 1999, a coalition of the largest PSPs ("Coalition")

submitted to the Commission a petition for clarification of the

payphone compensation orders ("Coalition Petition"). The

Coalition requested that the Commission "clarify, on a going-

forward basis, which interexchange carrier is the party re-

sponsible for payment of per-call compensation when a dial-

around or subscriber call is made from a payphone." The

Coalition explained that "[t]he Commission's effort to assign

this obligation" jointly to IXCs and SBRs "has led to dis-

agreements among PSPs and IXCs, and has encouraged some

IXCs to shirk their payment responsibilities. This has in

turn contributed to a serious shortfall in payments of per-call

compensation." The Coalition suggested that "the best way

to reduce the shortfall would be to place the obligation for

payment of per-call compensation on the entity identified by

the Carrier Identification Code ('CIC') used to route the

compensable call from the Local Exchange Carrier's net-

work."

In April 1999, the Common Carrier Bureau issued a "Public

Notice" seeking "comment on the issues raised in [the Coali-

tion Petition's] request for clarification for payment responsi-

bility of per-call compensation when a dial-around or sub-

scriber call[ ] [is] made from a payphone." Common Carrier

Bureau Seeks Comment on the RBOC/GTE/SNET Payphone

Coalition Petition for Clarification, 14 F.C.C.R. 6476 (1999).

The Bureau's Notice summarized the Coalition Petition's

general request for clarification and its suggested method of

using CICs to identify the entity responsible for compensat-

ing the PSP. Id. The Notice included filing dates for

comments and reply comments, id., but the Bureau did not

publish the Notice in the Federal Register or issue a notice of

proposed rulemaking. Sprint and others filed comments that

focused mainly on the Coalition's proposal to rely on CICs,

with little discussion of the general method of requiring both

IXCs and SBRs to compensate PSPs for coinless payphone

calls. Sprint also registered a procedural objection, in a

letter to the Bureau, noting that the Commission could sub-

stantively alter the existing compensation rules only after

providing notice and an opportunity for comment.

Two years after the Bureau issued its Notice, however, the

Commission largely jettisoned the approach adopted in the

First Reconsideration Order. In the Second Order on Re-

consideration, 16 F.C.C.R. 8098 (2001) ("Second Reconsidera-

tion Order"), the Commission stated that it was "revis[ing]"

and "modify[ing]" its "rules to address the difficulty which

PSPs face in obtaining compensation for coinless calls placed

from payphones which involve a switch-based telecommunica-

tions reseller in the call path." Id. at 8098 p 1. Declining to

adopt the Coalition's proposed method of using CICs to

identify the carrier responsible for compensating the PSP, id.

at 8107 p 22, the Commission instead shifted the burden of

tracking all calls to completion and compensating PSPs to the

IXCs alone, while permitting the IXCs to recover these costs

from the SBRs to which they transferred the calls. Id. at

8098 p 2, 8106 p 18. The Commission explained that the IXCs

were in the best position to track calls and to make reporting

a condition of their contracts for providing services. Id. at

8105 p 16. The Commission also broadened IXCs' reporting

obligations to require IXCs to inform each PSP of the volume

of calls for each access-code and 800 number that the IXC

received from that PSP's payphones. Compare First Pay-

phone Order, 11 F.C.C.R. at 20,596 p 110, with Second Recon-

sideration Order, 16 F.C.C.R. at 8106 p 18. Finally, the

Commission noted that PSPs could continue to arrange alter-

native compensation schemes through private contracts with

IXCs and SBRs. Second Reconsideration Order, 16 F.C.C.R.

at 8106-07 p 19. The Commission amended its regulations to

reflect these changes. See 47 C.F.R. ss 64.1300, 64.1310

(2001). Denying reconsideration, the Commission rejected

the IXCs' objections to the new rule. Third Order on

Reconsideration and Order on Clarification, 16 F.C.C.R.

20,922 (2001). Sprint now petitions the court for review.

II.

Sprint's contention that the Commission erred by failing to

issue a new NPRM prior to promulgating a new rule in the

Second Order on Reconsideration is based on the notice

requirement of s 553(b) of the APA, which provides in rele-

vant part: "General notice of proposed rule making shall be

published in the Federal Register, unless persons subject

thereto are named and either personally served or otherwise

have actual notice thereof in accordance with law." 5 U.S.C.

s 553(b). The court has observed that the notice require-

ment of the APA does not simply erect arbitrary hoops

through which federal agencies must jump without reason.

Rather, the notice requirement "improves the quality of

agency rulemaking" by exposing regulations " 'to diverse

public comment,' " ensures " 'fairness to affected parties,' "

and provides a well-developed record that "enhances the

quality of judicial review." Small Refiner Lead Phase-Down

Task Force v. United States EPA, 705 F.2d 506, 547 (D.C.

Cir. 1983) (citations omitted). In contrast to an informal

adjudication or a mere policy statement, which "lacks the

firmness of a [prescribed] standard," an agency's imposition

of requirements that "affect subsequent [agency] acts" and

have a "future effect" on a party before the agency triggers

the APA notice requirement. Sugar Cane Growers Coop. v.

Veneman, 289 F.3d 89, 95-96 (D.C. Cir. 2002) (internal quota-

tions and citation omitted).

At the same time, agencies possess the authority in some

instances to clarify or set aside existing rules without issuing

a new NPRM and engaging in a new round of notice and

comment. For example, in City of Stoughton v. United

States EPA, 858 F.2d 747, 751 (D.C. Cir. 1988), the court held

that the EPA was not required to engage in a new round of

notice and comment where it merely adjusted a score under

the Comprehensive Environmental Response, Compensation

and Liability Act of 1980, Pub. L. No. 96-510, 94 Stat. 2767, in

response to public comments. The authority to clarify or

reconsider a rule may arise directly from a statute, as in the

Natural Gas Act, see Tennessee Gas Pipeline Co. v. FERC,

871 F.2d 1099, 1108 (D.C. Cir. 1989), or pursuant to agency

rulemaking authority, as in the case of the Commission,

whose procedures authorize it to set aside an existing rule, on

its own motion, within thirty days of promulgating the rule.

FCC Practice and Procedure, 47 C.F.R. s 1.108 (2001).

Underlying these general principles is a distinction between

rulemaking and a clarification of an existing rule. Whereas a

clarification may be embodied in an interpretive rule that is

exempt from notice and comment requirements, 5 U.S.C.

s 553(b)(3)(A), see Am. Mining Cong. v. Mine Safety &

Health Admin., 995 F.2d 1106, 1109 (D.C. Cir. 1993), new

rules that work substantive changes in prior regulations are

subject to the APA's procedures. Thus, in National Family

Planning & Reproductive Health Ass'n v. Sullivan, the court

described as "a maxim of administrative law" the proposition

that, " '[i]f a second rule repudiates or is irreconcilable with [a

prior legislative rule], the second rule must be an amendment

of the first; and, of course, an amendment to a legislative rule

must itself be legislative.' " 979 F.2d 227, 235 (D.C. Cir.

1992) (quoting Michael Asimow, Nonlegislative Rulemaking

and Regulatory Reform, 1985 Duke L.J. 381, 386); see also

Am. Mining Cong., 995 F.2d at 1109. The Commission

proceedings at issue illustrate the distinction. In the First

Reconsideration Order, the Commission clarified its initial

rule by providing a definition of the phrase "facilities-based

carriers." 11 F.C.C.R. at 21,277 p 92 (1996). Although defi-

nitions may vary in a way that would trigger the APA notice

requirements, see Nat'l Family Planning, 979 F.2d at 235

(citing Homemakers North Shore, Inc. v. Bowen, 832 F.2d 408, 412 (7th Cir. 1987)), the Commission's clarification in the

First Reconsideration Order merely illustrated its original

intent. By contrast, when an agency changes the rules of the

game--such that one source becomes solely responsible for

what had been a dual responsibility and then must assume

additional obligations, as occurred in the Commission's Sec-

ond Reconsideration Order--more than a clarification has

occurred. To conclude otherwise would intolerably blur the

line between when the APA notice requirement is triggered

and when it is not.

With these principles in mind, we turn to the Commission's

position that the APA notice requirement is inapplicable to its

determinations in the Second Reconsideration Order. The

Commission concedes that it did not publish a NPRM--or

even the Bureau's Notice--in the Federal Register. It also

acknowledges that, because the Bureau's Notice did not spe-

cifically name Sprint, any "actual notice" that the agency

provided to Sprint does not suffice under s 553(b). See Util.

Solid Waste Activities Group v. EPA, 236 F.3d 749, 754 (D.C.

Cir. 2001). Instead, the Commission contends that its deter-

minations in the Second Reconsideration Order did not neces-

sitate a new NPRM and that Sprint in fact received adequate

notice and opportunity to comment. The Commission offers

several alternative theories in support of its position.

First, the Commission maintains that it is permitted sua

sponte to reconsider its rules where a reconsideration order is

pending, so long as the original proposed rule supplied notice.

This principle, however, is inapposite in the context of new

rulemakings. The Commission points to a regulation that

authorizes the Commission, "on its own motion," to "set aside

any action made or taken by it within 30 days from the date

of public notice of such action...." Practice and Procedure,

47 C.F.R. s 1.108 (2001). This thirty-day deadline, the Com-

mission maintains, may be tolled by pending motions for

reconsideration, citing Central Florida Enterprises v. FCC,

598 F.2d 37, 48 n.51 (D.C. Cir. 1978). But the Commission's

effort to take refuge in its regulation fails. The court in

Central Florida merely stated that "where ... several peti-

tions are consolidated for hearing and decision, a petition for

reconsideration of any of the ensuing orders tolls the thirty

day period as to all orders in the case." Id. Although

Central Florida's holding might assist the Commission were

it merely setting aside an existing rule, in the instant case the

Commission, more than four years after issuing its original

rule, changed the payment and reporting obligations of affect-

ed parties. While maintaining that it was merely setting

aside a previous action, the Commission itself stated in the

Second Reconsideration Order that it was "revis[ing]" and

"modify[ing]" its rules. 16 F.C.C.R. at 8098 p 1. Moreover,

the Commission changed the text of the regulation appearing

in the Code of Federal Regulations. This stands in contrast

to the First Reconsideration Order, when the Commission

simply clarified the definition of a phrase that it had used in

the initial rule. 11 F.C.C.R. at 21,277 p 92.

The Commission's reliance on American Mining Congress

v. United States EPA, 907 F.2d 1179 (D.C. Cir. 1990), is

similarly unavailing. In that case, the court held that the

agency had complied with the APA's notice requirements

where it reinstated a rule that it had withdrawn eight years

earlier. 907 F.2d at 1182. Because the petitioners had two

opportunities for notice and comment before the agency

promulgated the reinstated rule, the court held that "[t]his

was more than enough to satisfy the requirements of the

APA." Id. Here, by contrast, the Commission has not

simply reinstated a previously withdrawn rule, much less the

rule it promulgated in the First Payphone Order. The rule

embodied in the Second Reconsideration Order differs from

the initial rule, which provided that the "underlying, facilities-

based carrier," without defining that term, should compen-

sate the PSPs. First Payphone Order, 11 F.C.C.R. at 20,586

p 86 (1996). When the Commission later defined the phrase

in the First Reconsideration Order, it clarified that "facili-

ties-based carriers" include SBRs. 11 F.C.C.R. at 21,277

p 92 (1996). Thus, the initial rule embodied a dual system of

payment responsibility involving both the IXCs and the

SBRs. Because the Second Reconsideration Order departs

from that understanding and effects a change in the regula-

tion, it is not identical to the initial rule. It also differs from

the initial rule because the Second Reconsideration Order

increases the IXCs' reporting obligations substantially be-

yond those contained in the First Payphone Order. 16

F.C.C.R. at 8106 p 18; see also Miscellaneous Rules Relating

to Common Carriers, 47 C.F.R. s 64.1310(a) (2001). Given

the changes to the payment-responsibility requirements, the

rule promulgated in the Second Reconsideration Order is not

a reinstatement of the original rule, and consequently nothing

in American Mining Congress would exempt the Commis-

sion's determinations from the APA notice requirement.

Second, the Commission maintains that it was not required

to issue a new NPRM because its determination in the

Second Reconsideration Order was a "logical outgrowth" of

the Bureau's Notice. "[A]n agency may make changes in its

proposed rule on the basis of comments without triggering a

new round of comments, at least where the changes are a

'logical outgrowth' of the proposal and previous comments."

City of Stoughton, 858 F.2d at 751. In order for a final rule

to be a "logical outgrowth" of a proposal, however, the agency

first must have provided proper notice of the proposal. "The

necessary predicate ... is that the agency has alerted inter-

ested parties to the possibility of the agency's adopting a rule

different than the one proposed." Kooritsky v. Reich, 17 F.3d 1509, 1513 (D.C. Cir. 1994). Whereas in Kooritsky, id.

at 1512, and City of Stoughton, 858 F.2d at 749, the agencies

began their rulemaking processes with NPRMs, here the

Commission did not publish a notice in the Federal Register.

Instead, it purported to act through the Common Carrier

Bureau, which lacks the authority under the Commission's

regulations to issue notices of proposed rulemaking. Com-

mission Organization, 47 C.F.R. s 0.291(g) (2001). Sprint,

therefore, was not on notice that the Commission was propos-

ing to "revise" its initial rule, much less that it would shift the

locus of payment responsibility in any manner other than the

Coalition Petition's CIC proposal. We leave open the ques-

tion whether adoption of the CIC approach also would have

necessitated a new NPRM. See Nat'l Family Planning, 979 F.2d at 235. Suffice it to say, there can be no "logical

outgrowth" of a proposal that the agency has not properly

noticed. See McClouth Steel Prods. Corp. v. Thomas, 838 F.2d 1317, 1323 (D.C. Cir. 1988).

Third, the Commission maintains that the Coalition Petition

and the Bureau's Notice placed Sprint on actual notice of the

new rule, and that this actual notice cures any procedural

deficiencies in the Commission's promulgation of a new rule.

But, as noted, the authority delegated to the Bureau by the

Commission to issue public notices does not extend to issu-

ance of NPRMs, 47 C.F.R. s 0.291(g), and Sprint could

reasonably assume that the Commission would not undertake,

as a result of the Bureau's Notice, consideration of more than

the proposal in the Coalition's Petition. Furthermore, the

comments submitted in response to the Bureau's Notice

demonstrate that the parties did not appreciate that the

Commission was contemplating revision of the dual scheme of

payment responsibility. Nor did anything in the Bureau's

Notice suggest that the Commission would impose additional

reporting requirements on IXCs, and the commenters under-

standably submitted no comments on this point. See MCI

Telecomms. Corp. v. FCC, 57 F.3d 1136, 1142-43 (D.C. Cir.

1995). Necessarily, then, the Bureau's Notice did not provide

"actual notice" sufficient to remedy the Commission's proce-

dural shortcomings.

In a last gasp, the Commission contends that even if the

APA notice requirement applied to the Commission's revision

of the initial rule in the Second Reconsideration Order and

the Commission failed to follow the requirement, the APA

incorporates a prejudicial error rule, and Sprint has failed to

show prejudice from the Commission's procedural shortcom-

ings. The APA instructs that reviewing courts take "due

account ... of the rule of prejudicial error." 5 U.S.C. s 706.

In Sugar Cane Growers Cooperative v. Veneman, 289 F.3d 89

(D.C. Cir. 2002), the court noted the standard established in

McLouth, 838 F.2d at 1324, and explained that "an utter

failure to comply with notice and comment cannot be consid-

ered harmless if there is any uncertainty at all as to the effect

of that failure." Sugar Cane Growers, 289 F.3d at 96. The

court observed that broadening the harmless error rule would

virtually repeal section 553's requirements: if the gov-

ernment could skip those procedures, engage in informal

consultation, and then be protected from judicial review

unless a petitioner could show a new argument--not

presented informally--section 553 obviously would be

eviscerated. The government could avoid the necessity

of publishing a notice of a proposed rule and perhaps,

most important, would not be obliged to set forth a

statement of the basis and purpose of the rule, which

needs to take account of the major comments--and often

is a major focus of judicial review.



Id. at 96-97.

The same dangers are present here. First, as noted, the

Commission's description of its determination in the Second

Reconsideration Order as a "revis[ion]" and "modif[ication]"

of its rules, as well as the Commission's amendment of its

regulations, indicates that more than a clarification of the

initial rule was involved. This fact alone may have prejudiced

Sprint insofar as it is procedurally more difficult to obtain

reversal of a new rule than to petition for reconsideration of a

clarification. Cf. Stuart-James Co. v. SEC, 857 F.2d 796, 801

(D.C. Cir. 1988). Second, although a showing of actual preju-

dice is not required under the prejudicial error rule, Sprint

has made a colorable claim that it would have more thorough-

ly presented its arguments had it known that the Commission

was contemplating a rulemaking. See Sugar Cane Growers,

289 F.3d at 97. The Second Reconsideration Order assumes,

for example, that the IXCs are in a superior position to track

calls because they may use their market leverage to impose

client reporting requirements as a condition of service. IXCs

might have been able to affect this determination (notwith-

standing the Commission's view that the technology exists for

IXCs to track calls) by presenting additional information

demonstrating shortcomings and burdens that the Commis-

sion had not adequately considered. Without notice of the

Commission's assumption that IXCs alone were in a superior

position, however, the IXCs had no opportunity to present

their evidence. Third, the Commission provided inadequate

notice that it was considering a change in reporting require-

ments, which under the new rule are more burdensome than

in the initial rule. Under the circumstances, the Commission

"has offered no persuasive evidence that possible objections

to its final rule[ ] have been given sufficient consideration."

Shell Oil v. EPA, 950 F.2d 741, 752 (D.C. Cir. 1991). Thus,

the effect of the Commission's procedural errors is uncertain,

and the Commission's "utter failure" to afford proper notice

and comment was not harmless. Sugar Cane Growers, 289 F.3d at 96.

Although the Commission must have flexibility to adjust a

regulatory scheme as concerns and problems arise in an

obviously complex and developing area, it must conform its

conduct to the APA notice requirement. Because the Com-

mission failed to issue a new NPRM to afford proper notice

and opportunity for comment, we grant the petition and

remand the case to the Commission. In light of the remand,

we do not reach Sprint's contention that the rule is arbitrary

and capricious.