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Apr 30, 2004

THE LEGAL LINE

Ed Maldonado, Esq.

Dear Legal Line,

I read your column regularly and have some questions regarding a new project I just started for local phone services. I used to be just in the business of distributing cards and prepaid calling services through POS systems in locations I control. This changed last week when I obtained CLEC certification to provide local services in the state of Florida. Some of these services on the CLEC side will be prepaid and the rest, postpaid. I plan to market the local services through our existing locations. My plan is to focus on just UNE-P resold CLEC services so I don’t have to secure huge financial commitments, and can offer a flat-fee prepaid local dial tone service for customers who get cut off by BellSouth.

I am now in the final process of “negotiating” with BellSouth for an Interconnection Agreement. One of my employees used to work for BellSouth so he handled most of the process. To my surprise, there was no formal “negotiation” as was my impression. We just requested an Agreement, along with the changes we wanted regarding deposits, installations, and prepayments according to their tariff, and BellSouth gave us the changes without a hassle. The Agreement is now before the Florida Public Service Commission in order to get final approval. They have already told us that there is no problem and the Interconnection Agreement will be approved soon. It seems like this was all a routine “No-Brainer” type of activity. Why is such a big deal made over hiring a telecom attorney to negotiate the Interconnection Agreements? I know that attorneys need to earn a living too, but I don’t see the need for one in this process. Am I missing something about this process? Honestly I would rather use my telecom attorney for something I need (e.g. filing a lawsuit or writing a commercial contract) instead of something routine like this. What do you think, was an attorney necessary or is my agreement OK?

- Just Connect Me

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Dear Just Connect Me,

Well, congrats on the CLEC certification and Interconnect Agreement. A lot of prepaid businesses are now doing exactly what you are doing - transitioning and diversifying their services so that not all their eggs are in one basket. In regard to your Interconnect Agreement, it is always helpful to have someone who knows the LEC and how it works when working on the CLEC side of services. This can speed up the interconnection process tremendously for both technical and bureaucratic reasons.

As to your question as to whether an attorney is necessary, I think that having counsel available is always a good idea should you have questions about CLECs, state regulation, and the 96 Telecom Act. However, depending on your services, and your own knowledge of ILEC obligations, the extent to which you need an attorney may be greatly reduced. You are correct in that there is no formal sit-down or point-by-point “Negotiation” of the Agreement, as is common with commercial agreements. This is a misnomer in the industry.

Most of the time a telecom attorney will expend in “Negotiating” an interconnect agreement consists of reviewing the Agreement to see that there are no terms that violate the ILEC’s obligations under the law, state regulation or tariff. Should there be such terms, the attorney may contact the ILEC to have them stricken before review by the state commission’s staff, or wait and request the commission to do so. In all honesty, most states’ commissions will review the contract for such terms and conditions as a part of its review of the interconnect agreement prior to docketing it for final approval. The attorney’s review, by no means, is the last bastion of legal and regulatory review of the ILEC’s terms before the Agreement is approved. The likelihood of the LEC maliciously including terms substantially divergent to regulation or creating an unfair advantage is reduced, for the most part, because of the Commission’s review. This is not to say that it can’t happen. However, there are checks and balances in place to reduce the odds should you “Negotiate” on your own. So, as to your Interconnect Agreement being “OK” without an attorney reviewing it first, it’s probably alright but it would be wise to have it reviewed sometime in the near future.

I am personally going to agree with you on one issue - save your telecom attorney for the bigger battle. I honestly believe that a telecom attorney plays a more important role after the “Negotiation” of the interconnect agreement rather than in the “Negotiation” process. As you pointed out, there are those of my brethren who will disagree with your conclusion in regard the need for an attorney throughout the process of Interconnection “Negotiations,” as such services are a source of their livelihood. However, I agree with you, and believe that most real problems concerning an interconnection agreement center on the performance of the parties after the final agreement has been inked and approved.

My opinion is that when it comes to CLEC Interconnection legal problems - it’s all about performance issues. ILEC performance legal issues tend to focus on performance matters related to delays in provisioning, delays deploying equipment, actual charges of the ILEC not in the Agreement, and deposit requirements being increased without a valid reason. The ultimate legal question here is whether the “true” motive of the ILEC is to knock you out as CLEC competition, or are they doing all they are required. CLEC performance legal issues stem from much simpler rationales: either a refusal to pay the ILEC’s bill because of delays or performance problems by the ILEC that have caused damage or client loss to the CLEC; or the inability to pay because of mismanagement of the CLEC’s own business. In the majority of Interconnection legal disputes, ILEC performance problems usually arise as a defense to non-payment by the CLEC. While there have been a few pre-emptive lawsuits based on predatory behavior of the ILEC, most CLECs do not have the financial resources to initiate a cause of action or administrative proceeding unless it is necessary.

In terms of forums of legal remedy for such cases, there are basically two options: Administrative Remedy or the Courts. Generally, administrative remedies are found through voluntary or mandatory arbitration conducted by the State’s utility commission. This process is a bit more informal than the courts and does not have the same injunctive powers of the courts should a stay or hold particular to a unique aspect of the case be necessary to keep the status quo. The advantage of administrative remedy is cost. While there are some costs associated with the arbitration, they are far less than litigation.

Also, the utility commissions, as well as the FCC, are more familiar with the obligations imposed on ILECs by the 96 Telecom Act. This places them in a better position to properly resolve those issues. The courts are not necessarily so attuned such issues. The reason is that an interconnection agreement is more than just a commercial contract between providers that a court may rule breach and liability. It is an agreement compelled by sections of the Telecom Act (47 USC sections 251 and 252) and measured in part by the Sherman Act (the Federal Act that regulates monopolistic behavior) when it comes issues of predatory behavior or unwarranted delay. The proper balance between application of these two laws, and their regulation, is not necessarily something that the courts ordinarily do.

These issues are often perceived by the courts as “an all or nothing” application of law or remedy in CLEC cases. This can be seen in the numerous cases for “attempted monopolization of markets” based on ILEC performance issues which were initiated by CLEC plaintiffs, summarily dismissed, and upheld on appeal. Since 2001, the number of these cases has grown on the federal docket with a very definitive line of precedent developing - not in favor of CLEC interests. A good case for dissection by you legal eagles out there is Cavalier Telephone LLC v. Verizon Virginia, Inc., 330 F.3d 176 (4th Cir. 2003). Cavalier provides a good evaluation of the law, the balancing of Telecom Act and Sherman Act application, AND, a dissenting opinion favoring delay and lack of ILEC performance as a method of monopolization of the local markets in regard to CLECs. Here’s the Cavalier’s quick anatomy:

Cavalier filed against Verizon based upon a theory that the ILEC breached not only the terms of the interconnect agreement, but also the duties imposed by the Telecom Act by virtue of intentional delay in proving trunks and not providing rates per the Agreement, among other things. Cavalier claimed that this type of behavior denied them increased access to the ILEC’s services and blocked them out of competition per the Sherman Act. The lower court dismissed the case for failure to state a claim because Cavalier did not state a precise monopolization claim.

Cavalier appealed, raising issue under the “essential facilities doctrine” and an array of examples of performance issues related to Verizon. The U.S. Court of Appeals evaluated the entirety of the claim and ruled on a number of key issues:



1.) The Sherman Act cannot be used to enforce duties under the Telecom Act. They are two distinct Statutes, and two distinct purposes.



2.) Claims based in breached of the Telecom Act and interconnection agreements cannot be applied to the Sherman Act because the obligations imposed by both came substantially after the Sherman Act and are outside the scope of the legislative intent.



3.) Under the Sherman Act, conduct merely having the consequence of shutting out competition does not rise to the level of anticompetitive.



4.) Under the Essential Facilities Doctrine, an ILEC cannot be forced to new or “non-traditional business” or provision of service simply in order to respond to a CLEC’s increased demand for business.

Not to completely disenchant CLEC interests that conflict with ILEC performance, Senior Circuit Judge Greenberg dissented with a full opinion siding with rulings in the 2nd and 11th Appellate Circuits allowing essential facilities claims to survive motions to dismiss and claims related to undue delay by the ILEC. (FYI: Florida is a part of the 11th Circuit.) In sum, Judge Greenberg held that the body of law related to ILEC and CLEC issues have developed enough to allow disposition at trial as to essential facilities. As to the Sherman Act, Judge Greenberg did not dissent and in the end the dismissal was upheld anyway.

Why bring all of this up? Well, its just to give you an idea how complicated performance issues can get when it comes to working with the ILEC and then suing them in court. Because of this, many CLECs prefer to seek administrative remedies opposed to those in court. Likewise, the need for an attorney’s assistance is critical here. While I agree with you that an attorney is not absolutely necessary for “Negotiating” the Interconnect Agreement, what may come afterward most definitely does. Interconnect Agreements are empty without performance of them. How this is done may make a substantial difference in how your plan works, succeeds, or fails. Have an attorney review your Agreement, but more importantly, ask about their experience in fighting the performance issues with ILEC. It may be relevant in the future. Also, do not get confused by “Form” over “Substance” when it comes to using an attorney - some things can be prevented by contract and some things just develop over time. A seasoned Telecom attorney knows the difference.

Good Luck and Success in the Industry.

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