On February 12, 2004, the U.S. Federal Communications Commission (FCC) took the first steps towards clarifying the scope of regulations to be imposed by the Federal government on Internet-Protocol (IP) enabled services such as Voice-Over-IP (VOIP).

In a Memorandum and Order, the FCC granted a petition from Pulver.com seeking to have its VOIP service Free World Dialup (FWD) classified as an unregulated "information service." In granting the petition, the FCC decided that services like FWD will be immune from the vast array of government rules, taxes and other requirements that have been applied to "telecommunications services" for most of the 20th century. The FCC also issued a notice seeking public comment on the appropriate regulations for other types of VOIP services that more closely resemble traditional phone services. Finally, the FCC announced a separate rulemaking proceeding to address law enforcement’s need to wiretap VOIP services pursuant to the Communications Assistance for Law Enforcement Act.

These actions by the FCC are important to the extent that they end some of the regulatory uncertainty that previously surrounded IP-based voice services. Specifically, the FCC has now made it relatively clear that the more a VOIP service looks like a traditional telephone service, the more likely it is to be subject to federal regulation. At the same time, all VOIP providers are likely to be subject to regulation under CALEA, regardless of how their services are structured.

Background

Pursuant to the Communications Act of 1934, "telecommunications" and providers of "telecommunications services"1 are subject to a number of regulations by the federal government. These include, among other things, line-sharing requirements, mandatory contributions to the universal service fund, and in certain cases restrictions on the amount that can be charged for local phone services. Typical examples of services that fall within these classifications are the traditional, circuit-switched local telephone services provided by the incumbent local exchange providers such as SBC, Qwest and Verizon.

By contrast, "information services" have traditionally been exempt from these types of regulations. They are defined as "the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications . . ." Typical examples of unregulated information services are email and online service providers, such as AOL and Earthlink.

The Communications Assistance for Law Enforcement Act,2 passed in 1994, requires "telecommunications carriers" to build their networks in such a way as to accommodate the detailed surveillance requirements of law enforcement agencies. The entities impacted are those that provide "transmission or switching of wire or electronic communications" as a "common carrier for hire." Similar to the Communications Act, CALEA exempts "information services" from these wiretapping requirements. CALEA also imposes obligations on equipment manufacturers separate from those on service providers.

Impact of the New FCC Guidance

Relative to a Company’s Obligations Under the Communications Act

In its Memorandum and Order regarding Pulver.com, the FCC ruled that FWD was neither a provider of "telecommunications" nor a "telecommunications service" as defined under the Communications Act. As to the former classification, the FCC noted that Pulver.com’s service differs from the traditional notion of "telecommunications" in that it does not actually provide any "transmission" services or capabilities to its members. Instead it requires them to provide their own broadband internet connection to use the service. The Commission also noted that FWD’s primary function is not to actually deliver communications, but rather to simply act as a "directory service" for users. Users communicate directly with one another over the Internet, rather than over the public switched telephone network, using "soft phones" that they have downloaded onto their computers instead of traditional phones. Once it had made the determination that FWD did not constitute "telecommunications," the FCC was able to move quickly to the conclusion that FWD also did not meet the Communications Act’s definition of a "telecommunications service" in light of the fact that no "fee" is charged for the use of the service.

By contrast, the FCC found that FWD closely tracked the definition of "information services" contained in the Communications Act. Specifically, the commissioners noted that, among other things, FWD: (1) enables members to "acquire" information about other members’ online presence; (2) "stores" information, such as voicemail, which is accessible to other members; (3) assigns unique identifying information to users which they "utilize" to contact other members of the service; and (4) helps to "process" the beginning and end of a communication between two users. Consequently, the FCC held that FWD was more of an "internet application" than a true telecommunications service, despite the fact that it facilitated the exchange of direct "voice" communications between two individuals.

This decision suggests that VOIP services that are structured similarly to FWD, such as those offered by Skype and by Yahoo’s voice-over-instant-messaging service, are also likely to be classified as "information services" and thus to be exempt from traditional, burdensome telecom regulations. At the same time, the FCC made it clear in its Notice of Proposed Rulemaking, issued concurrently with the FWD decision, that those VOIP services looking more like a traditional telephone service are less likely to be granted the same type of hands-off regulatory treatment. This means that providers of VOIP services that allow voice calls to be placed between computers and traditional phones, that touch the public switched network, and that intend to charge users a fee for accessing the service should expect to face some level of oversight from the FCC, perhaps in the form of mandatory disability access, E911, or universal service requirements. While the FCC has acknowledged that it does not intend to subject these nascent services to the full panoply of traditional telecom regulations, it is also unlikely that it will allow them to remain entirely regulation-free.

Relative to a Company’s Obligations Under CALEA

The FCC also made it clear in its CALEA rulemaking announcement that the classification of a VOIP service as an "information service" for purposes of the Communications Act does not automatically exempt that service from CALEA. This is despite the fact that "information services" are defined the same way under both acts and are otherwise expressly exempt from CALEA’s requirements.

Instead, the FCC hinted that it would go to great lengths to read CALEA as broadly as possible in order to apply it to all types of IP-enabled services. The FCC justified their approach by acknowledging the need of law enforcement agencies to be able to intercept all types of voice communications, regardless of the form that those communications take. This suggests that the FCC may ultimately decide that CALEA applies to all forms of VOIP, regardless of whether or not they technically could be classified as an "information service." If this happens, VOIP service providers might be required to expend substantial resources in order to re-architect their existing networks to meet CALEA’s technical requirements. While it is not yet clear what specific legal mechanism the FCC would use to justify this decision,3 it would be reasonable for VOIP service providers of all types to assume that their services will be subject to CALEA in the near future.

Impact of the FCC’s Ruling on State Regulation of VOIP

Another important aspect of the Pulver.com ruling was the FCC’s statement claiming exclusive jurisdiction for the regulation of interstate VOIP services. The FCC ruled that federal authority is preeminent in the area of information services, and that "state-by-state regulation of a wholly Internet-based service is inconsistent with the controlling federal role over interstate commerce required by the Constitution."4

Notwithstanding this ruling, at least twenty-five states, including Minnesota and California, are currently in the process of drafting rules for the regulation of VOIP services. Given the recent timing of the FCC’s decision, and the fact that the ruling did not expressly extend to all types of VOIP services, it is unclear whether some of the states will choose to either suspend or modify the scope of their proceedings. We will continue to monitor these state actions until there is a clear resolution of the issue, which in the case of California may not be for another year and a half. In the interim, companies should not assume that VOIP services will be completely exempt from all forms of state regulation. This is due to the fact that the states’ exclusive power to enact consumer protection laws on behalf of their citizens has not been pre-empted by the FCC’s decision. For example, we could very easily see state specific regulations regarding the type of information that VOIP service providers must put in their monthly bills to consumers.

Considerations and Next Steps

The FCC’s recent rulings have ended some of the speculation around the scope of federal regulation of IP-enabled services such as VOIP. It is relatively clear that companies that intend to provide voice calling services in a form similar to that provided by Pulver.com’s FWD are likely to remain exempt from traditional telephony regulations and related charges. At the same time, VOIP services that look more like traditional telephony services by connecting to the public switched network and charging fees to customers should expect to receive a fair amount of regulation by the federal government.

In addition, all providers of VOIP services and their equipment manufacturers are likely to be required to comply with CALEA to some degree. The FCC has indicated that the importance of a clear and consistent regulatory classification of VOIP services is likely to be outweighed by its desire to ensure that law enforcement has the necessary means to access all new forms of communication. Therefore, it is recommended that service providers and VOIP equipment manufacturers:

  • Assess their current level of technical and legal compliance with CALEA’s requirements
  • Take steps to minimize any potential liabilities arising out of an inability to comply with CALEA; and
  • Establish internal processes for handling requests from customers and law enforcement agencies to intercept VOIP communications.

We will continue to track the FCC’s VOIP proceedings, and the rulemaking activities relating to CALEA in particular, and will report on any developments as they occur. If you need assistance assessing your CALEA strategy or developing internal policies and procedures to deal with likely federal and state regulation of VOIP services, or have other questions on these issues, please contact a Latham attorney.

Endnotes

1 The Communications Act of 1934 defines "telecommunications" as "the transmission, between or among points specified by the user, of information of the user’s choosing, without change in the form or content of

the information as sent and received." "Telecommunications Services" are defined as "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used."

2 Codified at 18 U.S.C. §§2510 et seq. and 47 U.S.C. §§1001 et seq.

3 Because "information services" are expressly exempt under CALEA, the FCC would be unable to compel compliance by VOIP service providers within that classification without a congressional modification of the Act. Alternatively, the FCC could seek to regulate VOIP services pursuant to a catch-all provision contained in the definition of "telecommunications carrier." This provision allows the Commission to require compliance by any service that "is a replacement for a substantial portion of the local telephone exchange service and that it is in the public interest to deem such a person or entity to be a telecommunications carrier" for purposes of the Act.

4 FCC Memorandum Opinion and Order, FCC 04-27, p. 11.

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