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Sorenson Communs., Inc. v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

September 2, 2014

SORENSON COMMUNICATIONS, INC., PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF AMERICA, RESPONDENTS

Argued March 17, 2014.

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[Copyrighted Material Omitted]

Page 39

On Petition for Review of an Order of the Federal Communications Commission.

Christopher J. Wright argued the cause for petitioner. With him on the briefs were John T. Nakahata and Mark D. Davis. Timothy J. Simeone entered an appearance.

C. Grey Pash Jr., Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice; Robert B. Nicholson and Robert J. Wiggers, Attorneys; Jonathan B. Sallet, Acting General Counsel, Federal Communications Commission; and Richard K. Welch, Deputy Associate General Counsel. Jacob M. Lewis, Associate General Counsel, Federal Communications Commission, entered an appearance.

Roy T. Englert Jr. was on the brief for amicus curiae National Association of the Deaf in support of petitioner.

Before: HENDERSON and MILLETT, Circuit Judges, and GINSBURG, Senior Circuit Judge.

OPINION

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Ginsburg, Senior Circuit Judge:

When a hearing- or speech-impaired person wants to make a phone call, he can choose among several services that will assist him in doing so. One of these, video relay service (VRS), works much like a video call that any caller might make using a digital platform such as Skype or Apple FaceTime. The video call is placed to an American Sign Language interpreter, employed by the VRS provider, who then makes a standard voice call to the video caller's hearing recipient. The interpreter signs with the caller via the visual connection and speaks with the recipient via the voice connection, translating messages back and forth.

The petitioner, Sorenson Communications, Inc., has been the leading provider of VRS since the service began to gain popularity about ten years ago. Like all providers of VRS, Sorenson is paid by the minute at a rate set by the Federal Communications Commission and paid by the Commission from the Telecommunications Relay Services Fund. The per-minute rate is supposed to approximate the cost incurred to provide VRS, but in fact for much of the past decade the rate has generated revenues well in excess of that cost. In order more accurately to reflect cost until it could develop a new approach to reimbursement, therefore, the Commission lowered the per-minute rates first in its 2010 Rate Order and again in its 2013 Rate Order, the latter of which is the subject of Sorenson's petition for review. Having incurred costs under the pre-2010 rates that cannot be sustained under the new rates, Sorenson complains that the new rates are too low and, additionally, that the decremental rates it receives for minutes in excess of 500,000 and of 1,000,000 unreasonably favor its smaller, allegedly less efficient competitors.

Sorenson challenges the 2013 Rate Order as arbitrary and capricious, in violation of the Administrative Procedure Act, 5 U.S.C. § 706(2)(a), but its challenge is problematic for two principal reasons. First, it made nearly the same challenge to the 2010 Rate Order and lost in the Tenth Circuit. Second, in suggesting the Commission should be required to compensate providers for certain additional costs, Sorenson largely fails to demonstrate (or even to make a threshold showing) that the

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costs are necessary to the provision of VRS; it instead emphasizes that it did in fact incur those costs, discretionary though they may be. Because the 2013 Rate Order is not arbitrary and capricious for ignoring costs incurred unnecessarily, even when the consequence for the provider that incurred those costs might be ruinous, we find no fault with the new rates.

In one respect, however, Sorenson has demonstrated that additional consideration by the Commission is necessary: Providing service under the more demanding speed-of-answer requirement that the agency adopted as part of the 2013 Rate Order likely entails additional labor costs, a prospect nowhere addressed in the Order. We therefore vacate the new speed-of-answer requirement and remand that portion of the Order to the Commission to decide whether that requirement of improved service justifies increasing the rate of compensation concomitantly.

As for the tiered rates, we hold the Commission adequately justified the 500,000- and 1,000,000-minute cut-offs. As the agency explained, it was pursuing two goals -- setting rates to reflect economies of scale and transitioning the industry from rate regulation to competitive bidding. Because the task of balancing those goals is fairly within the discretion of the agency, we defer to its decision concerning the tiered-rate structure.

I. Background

Title IV of the Americans with Disabilities Act of 1990 (ADA) requires the Commission to make available telecommunications relay services (TRS), of which VRS is one, so that individuals with hearing or speech disabilities may have telephone service that is " functionally equivalent" to the voice system used by hearing individuals. 47 U.S.C. § 225. VRS users receive the enhanced service free of charge and the Commission compensates providers from the TRS Fund, which is financed by a tax the agency levies on the revenues of interstate telecommunications services. § 225(d)(3)(B); 47 C.F.R. § 64.604(c)(5)(iii). The statute directs the Commission to set compensation rates and functional requirements for providers in order to

(1) " ensure that [TRS is] available, to the extent possible and in the most efficient manner, to hearing-impaired and speech-impaired individuals," § 225(b)(1);
(2) " require that users of [TRS] pay rates no greater than the rates paid for functionally equivalent voice communication services with respect to such factors as the duration of the call, the time of day, and the distance from point of origination to point of termination," § 225(d)(1)(D); and
(3) " not discourage or impair the development of improved technology." § 225(d)(2).

When the FCC first recognized VRS as a form of TRS eligible for reimbursement, see In re Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities, Report & Order, 15 FCC Rcd. 5140, 5152-54, ¶ ¶ 21-27 (2000), video calling was " a specialized, niche market requiring customized hardware and software, as well as frequently unavailable broadband Internet access service." In re Structure & Practices of the Video Relay Serv. Program, Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities, Further Notice of Proposed Rulemaking, 26 FCC Rcd. 17367, 17380, ¶ 19 (2011) [hereinafter 2011 Notice ]. As video calling has proliferated generally, so has VRS; callers now use over 10 million minutes of the service per

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month. See Interstate TRS Fund Performance Status Report, Rolka Loube Saltzer Associates (TRS Fund Administrator) (June 2014), http://www.r-l-s-a.com/TRS/reports/2014-06TRSStatus.pdf (last visited August 25, 2014). Despite video calling having become " a mainstream, mass-market offering," 2011 Notice at ¶ 19, the market for VRS is highly concentrated and has become only more so in recent years: Sorenson provides about 80% of the VRS minutes logged every month, and its two principal competitors each provide another five to ten percent.

From the inception of VRS until 2007, the Commission annually set compensation rates based upon the average of all VRS providers' projected costs, as reported to a fund Administrator appointed by the agency. See In re Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities, Report & Order, 19 FCC Rcd. 12475, 12487-90, ¶ ¶ 17-24 (2004) [hereinafter 2004 R& O ]. During this period, the Commission developed a list of compensable costs that has consistently included, for example, directly attributable overhead, labor costs, executive compensation, and an 11.25% rate of return on investment. Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities, Report & Order & Declaratory Ruling, 22 FCC Rcd. 20140, 20161, ¶ 49, 20168-70, ¶ ¶ 74-80 (2007) [hereinafter 2007 Order ]; 2004 R& O, 19 FCC Rcd. at 12544-45, ¶ ¶ 181-82, 12566, ¶ 238. The Commission also consistently refused to compensate providers for a mark-up on expenses, the costs of research and development for enhancements that exceed mandatory minimum requirements, i.e., the baseline technical and operational standards providers must meet, see 47 C.F.R. § 64.604(b), and the costs of providing videophones, software, and technical assistance to VRS users. 2007 Order, 22 FCC Rcd. at 20161, ¶ 49, 20170, ¶ 82; 2004 R& O, 19 FCC Rcd. at 12543-44, ¶ ¶ 179-81, 12547-48, ¶ ¶ 189-90; see also In re Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities, Mem. Op. & Order, 21 FCC Rcd. 8063, 8071-72, ¶ ¶ 17-19 (2006) [hereinafter 2006 MO& O ] (denying request to add categories of compensable costs).

In 2007, the Commission sought to align reimbursement with actual compensable costs more closely and so adopted a three-year rate plan that included, for the first time, a tiered-rate structure. 2007 Order, 22 FCC Rcd. at 20161, ¶ 48, 20163, ¶ 53. In order to reflect economies of scale, providers were compensated at a lower per-minute rate for minutes in excess of 50,000 per month, and at a still lower rate for minutes in excess of 500,000 per month. Id. at 20167, ¶ 67.

In 2010, the Commission began a major effort to overhaul VRS compensation and cut back on waste and fraud. It issued a Notice of Inquiry in which it set forth problems with per-minute compensation and posed open-ended questions about a better methodology. See In re Structure & Practices of the Video Relay Serv. Program, Notice of Inquiry, 25 FCC Rcd. 8597 (2010). Pending this overhaul, the Commission announced it would set interim rates based in part upon actual historical costs instead of relying exclusively upon the projected costs providers had been submitting. In re Telecomms. Relay Servs. & ...


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