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Neustar, Inc. v. Federal Communications Commission

United States Court of Appeals, District of Columbia Circuit

May 26, 2017

Neustar, Inc., Petitioner
Federal Communications Commission and United States of America, Respondents CTIA - The Wireless Association, et al., Intervenors

          Argued September 13, 2016

         On Petitions for Review of Orders of the Federal Communications Commission

          Kannon K. Shanmugam argued the cause for petitioner. With him on the briefs were Marcie R. Ziegler, James E. Gillenwater, Amy E. Murphy, Tyrone Brown, Andrew G. McBride, Thomas J. Navin, and Brett A. Shumate.

          David M. Gossett, Deputy General Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were William J. Baer, Assistant Attorney General, Robert B. Nicholson and Scott A. Westrich, Attorneys, Jonathan B. Sallet, General Counsel, Federal Communications Commission, Jacob M. Lewis, Associate General Counsel, and Lisa S. Gelb and C. Grey Pash Jr., Counsel. Richard K. Welch, Deputy Associate General Counsel, Federal Communications Commission, entered an appearance.

          Peter Karanjia argued the cause for Association Intervenors. With him on the brief were Christopher J. Wright, John T. Nakahata, Mark D. Davis, William B. Sullivan, John R. Grimm, and James M. Smith. Timothy J. Simeone entered an appearance.

          Before: Tatel, Circuit Judge, and Edwards and Sentelle, Senior Circuit Judges.



         Neustar, Inc. petitions for review of orders of the Federal Communications Commission ("FCC" or the "Commission") naming another company to replace Neustar as the Local Number Portability Administrator ("LNPA" or "LNP Administrator"). Petitioner argues that the Commission erred in not properly determining issues relating to the new Administrator's corporate affiliations. Finding no error in the Commission's decision, for the reasons set forth below, we deny the petitions.

         I. Background

         The Telecommunications Act of 1996 ("Act") requires telecommunications providers to provide "portability" of telephone numbers, permitting customers to retain their current numbers when switching carriers. 47 U.S.C. § 251(b)(2); see also 47 U.S.C. § 153(37). To effectuate this requirement, the FCC must "create or designate one or more impartial entities to administer telecommunications numbering and to make such numbers available on an equitable basis." 47 U.S.C. § 251(e)(1).

         In its 1996 First Report and Order and Further Notice of Proposed Rulemaking, FCC 96-286, 11 FCC Rcd. 8352 (1996), the FCC "conclude[d] that it is in the public interest for the number portability databases to be administered by one or more neutral third parties, " id. ¶ 92, 11 FCC Rcd. at 8400-01 ¶ 92. Consequently, the Commission "direct[ed] the [North American Numbering Council ("NANC" or "Council")] to select as a local number portability administrator(s) . . . one or more independent, non-governmental entities that are not aligned with any particular telecommunications industry segment . . . ." Id. ¶ 93, 11 FCC Rcd. 8401 ¶ 93. This led to the creation of the LNP Administrator. The NANC LNPA Selection Working Group issued its report ("Working Group Report") on April 25, 1997. See generally North American Numbering Council, Local Number Portability Administration Selection Working Group (Apr. 25, 1997). In this report, the NANC recommended Lockheed Martin IMS ("Lockheed"), predecessor of Neustar, and Perot Systems, Inc. to serve as LNPAs. Id. § 6.2.4; see Second Report and Order, FCC 97-289 ¶ 25, 12 FCC Rcd. 12281, 12298 ¶ 25 (Aug. 18, 1997). The FCC generally adopted the recommendations of the Working Group in its 1997 Second Report and Order. Second Report and Order, FCC 97-289 ¶ 33, 12 FCC Rcd. 12281, 12303 (1997). In 1998, Perot Systems experienced significant performance difficulties and Lockheed became administrator for the entire country.

         In 1999, upon finding that Lockheed did not meet the neutrality criteria, the FCC issued an order allowing the LNPA contract to be transferred to a new independent affiliate: Neustar, Inc. Order, FCC 99-346 ¶ 1 (Nov. 17, 1999). It found "that Neu[s]tar, as currently structured and with the additional safeguards imposed herein, is in compliance with our neutrality criteria." Id. As a result of the transfer of the LNPA contract, Neustar is the incumbent LNPA. See March 2015 Order, FCC 15-35 ¶ 7.

         In 2009, Telcordia, a wholly owned subsidiary of Ericsson, petitioned the FCC "to institute a competitive bid process for the LNPA contract" and the FCC subsequently began a collaborative public process to develop the procedures to select the next LNPA. Id. ¶¶ 8-10. After this interactive process and the release of the bid documents, two companies submitted bids: Neustar and Telcordia. Id. ¶¶ 8-11. Following the review of these initial bids, the Commission issued a solicitation for Best and Final Offers ("BAFO"). Each company submitted a BAFO. Id. Just over a month later, Neustar submitted a second, unsolicited BAFO, which the NANC refused to consider. Id. After reviewing the bids, the NANC ultimately "recommended the selection of Telcordia as the sole LNPA . . . ." Id. ¶ 12. Neustar objected to this recommendation on procedural grounds concerning the selection process, see id. ¶ 14, and on substantive grounds regarding costs and the bidders' qualifications, see id. ¶¶ 65, 134, and "challeng[ed] Telcordia's neutrality showing, " id. ¶ 167.

         In its March 2015 Order approving recommendation of Telcordia as the LNPA, the FCC specifically addressed these concerns. See id. ¶¶ 14-198. First, contrary to Neustar's procedural objections, the FCC determined that selection of the LNPA does not require notice-and-comment rulemaking and "this proceeding is properly viewed as an informal adjudication." Id. ¶ 18; see id. ¶¶ 15, 18. Neustar had argued that because the prior selection of the LNPAs was incorporated into FCC rules, the selection of a new LNPA must be accomplished by a rulemaking to amend the existing rules. The FCC also sustained the rejection of Neustar's second BAFO. Id. ¶ 37.

         The FCC further determined that both bidders were qualified to serve as the LNPA, id. ¶ 81, and that the cost analysis warranted recommending Telcordia as the next LNPA, id. ¶ 153.

         As to neutrality, Neustar argued that Telcordia could not be neutral because its parent company, Ericsson, is an equipment manufacturer and service provider. Id. ¶ 169. Neustar maintained further that Ericsson, as Telcordia's sole owner, must be evaluated for alignment, undue influence, and whether it is a manufacturer of telecommunications network equipment. Id. The FCC rejected this argument.

         The FCC did, however, order the imposition of further safeguards and found "that, when considered together in light of the safeguards and conditions . . . adopt[ed] in this Order, Telcordia will not be subject to undue influence by Ericsson, nor will Ericsson adversely affect Telcordia's ability to serve as a neutral LNPA." Id. ¶ 168.

         The FCC supported its neutrality determination with several points. First, it emphasized that the challenged telecommunications sector connections were with Ericsson, not Telcordia. Id. ¶ 172. The FCC determined that "even to the extent Ericsson is 'aligned with' the wireless industry as that term is understood in our neutrality rules, it does not follow that Telcordia is so aligned." Id. n.593. It grounded this conclusion on a finding that "Telcordia is a separate company with a separate independent board of directors, each of whom owes fiduciary duties to Telcordia." Id. ¶ 172. The Commission further analyzed Telcordia's independence, reasoning that this independence is sustainable, "particularly when considered in conjunction with the conditions that we impose in this Order." Id. ¶ 172. The FCC emphasized that it "has, and will exercise ample authority to ensure that the contract includes targeted conditions to ensure that the LNPA is neutral and remains neutral throughout the term of the contract." Id. ¶ 173. It further stressed that neutrality is a key consideration and that regulations governing the LNPA and conditions it adopted in the Order were crafted "to ensure that such neutrality is preserved." Id. ¶ 179. The Commission further noted that Telcordia had implemented a number of safeguards described in its neutrality showing that, taken together with the conditions imposed in the Order, led the Commission to conclude "that Telcordia meets our neutrality requirements." Id.

         After detailing some of the conditions, including corporate structure, a majority independent board of directors, a biannual neutrality audit and a Code of Conduct, the FCC addressed the specific concern that "Ericsson might be tempted to prioritize those [other] contracts and sales over the LNPA contract." Id. ¶¶ 179-81. It recognized that Ericsson's role as Telcordia's sole owner "could present opportunities for Ericsson to exert undue influence over Telcordia." Id. ¶ 181. The Commission described the concerns about Ericsson as being "somewhat speculative" but did "acknowledge that they reflect[ed] potential incentive and ability" for Telcordia to benefit its parent corporation. Id.

         However, the Commission further concluded that its rules provided the flexibility to deal with the potential for undue influence that might impair neutrality. It noted that the FCC had "historically addressed such concerns by imposing conditions on the numbering administrators" and that it was doing so in the Order. Id. In keeping with this finding, the Commission "require[d] a condition that will restrict Ericsson's ability to exert undue influence on Telcordia by limiting Ericsson's direct influence on Telcordia's board of directors": a voting trust. Id. ¶ 182. It ordered that Telcordia adopt the proposed Code of Conduct with additional FCC-imposed conditions specifically targeted at this dynamic. Id. ¶ 186. After considering the comments and concerns in the record, it concluded that Telcordia was not "per se precluded from serving as the LNPA" by Commission rules, precedent, or any other reason. Id. ¶ 188. It further concluded that, given the safeguards and conditions set forth in the order, "Telcordia has demonstrated its commitment to maintain neutrality in its LNPA operations . . . ." Id. The Commission therefore determined that Telcordia met the neutrality requirements for appointment as the LNPA. The Commission required that the Code of Conduct "be finalized, " the voting trust be formed, and the appointment of trustees and independent directors be "in effect prior to Telcordia commencing to provide LNPA services . . . ." Id.

         Finally, the FCC ordered "that the North American Portability Management LLC, with Commission oversight, is directed to negotiate the proposed terms of the LNPA contract in accordance with this Order, and submit the proposed contract to the Commission for approval." Id. ¶ 199. On July 25, 2016, following successful contract negotiations and satisfaction of its conditions, the FCC issued a final decision. In the Matters of Telcordia Technologies, Inc. Petition to Reform Amendment 57 and to Order a Competitive Bidding Process for Number Portability Administration, FCC 16-92 ¶ 1, 2016 WL 4006478, at *1 ¶ 1 (July 25, 2016) (July 2016 Order).

         Neustar petitions this Court for review.

         II. Discussion

         On petition to this Court, Neustar reiterates the arguments it made to the FCC regarding the LNPA selection process and Telcordia's fitness to serve as the LNPA. Neustar argues that (1) the FCC violated the Administrative Procedure Act ("APA") by failing to engage in notice-and-comment rulemaking, (2) the FCC's selection of Telcordia was contrary to law or arbitrary and capricious based on an improper understanding and application of the neutrality regulations and its approach to Ericsson as Telcordia's sole corporate parent, and (3) the FCC's evaluation of the parties' bid costs was arbitrary and capricious. The FCC moved to dismiss the petition, arguing that this Court does not have jurisdiction. For the reasons discussed below, we conclude that this Court has jurisdiction, that the Order does not qualify as a rule, and that there is no requirement of notice-and-comment ...

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