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We are witnessing a swing in the antitrust pendulum from minimalist to populist poles. This entry briefly highlights the dynamics, potential changes, and, perhaps more importantly from a counseling perspective, what will change and what will remain the same.

At the minimalist antitrust pole, markets are viewed as self-correcting, i.e., no monopolist or manipulator will last for long and, therefore, government intervention should be limited as enforcement is more likely to harm than help markets. At the populist antitrust pole, we find a distrust of concentrated economic power and how it may be wielded.

We can observe a 40-year cycle in the antitrust pendulum’s swing. The late 1970s marks the rise to the “Chicago School” (markets are self-correcting and consumer price is the key factor). Twenty years later, in the 1990s, the pendulum swung toward the center with a more moderate or broader interpretation of consumer welfare. We are now moving toward the populist pole of the antitrust pendulum, that some call the “New Brandeis” or “Neo-Brandeis” movement, which echoes Justice Brandeis’ concern with economic concentration and abuse of market power.

Of course, the pendulum analogy is an oversimplification, but a helpful one in making sense of the changes in antitrust enforcement. As we see the intertwined evolution of consumer preferences and technology (broadly defined to include transportation, logistics, manufacturing, and services), markets and commercial relationships will change. That, in turn, results in varying degrees of societal disruption and shifting economic power.

Federal Legislation: There are several bills in Congress that propose a variety of changes to the antitrust laws, mainly focused on tech giants, including Amazon, Google, etc. The prospects for Federal legislation range from maybe to unlikely, but there is considerable effort afoot with Hill hearings and Committee reports. Proposed remedies range from forced divestitures (remember AT&T and the Baby Bells?) to limits on future acquisitions by dominant firms, etc.

State Legislation: Proposed state legislation is instructive and more likely to be enacted. For example, New York’s “Twenty-First Century Anti-Trust Act” passed the New York Senate on June 7. The bill does not view big business as neutral or benevolent, but rather reflects a concern with unilateral action. Senate Bill 933 adopts an EU antitrust approach that makes “abuse of a dominant position” illegal. Under that approach, there is no need to demonstrate monopoly power, with dominance having a lower burden of proof.

Litigation: In antitrust litigation, it is mistakenly assumed that market power must be proven through an econometric analysis by antitrust economists defining the product or service market and the defendant’s market power as an essential foundation to any claim of injury to competition. But market power may also be demonstrated through evidence showing that a defendant charged supra-competitive prices. This type of evidence is considered direct proof of market power, that is, the ability to raise prices above competitive levels. See FTC v. Indiana Fed’n of Dentists, 476 U.S.447, 460-61 (1986); Rebel Oil Company Inc. v. Atlantic Richfield Company, 51 F.3d 1421 (9th Cir. 1995). But judges, lawyers, and antitrust economists are so anchored to the economic analysis approach that the ‘mere’ proof of anticompetitive power is often deemed inadequate to establish an antitrust claim. Similarly, while monopsony (monopoly buyer power) has always been actionable, claims of monopsony are greeted with skepticism. Much of the New York bill reflects an effort to correct the gap between existing law and how the law is commonly understood and enforced.

Implications: If legislation is enacted, it may encourage government challenges against mergers, acquisitions, and abuse of a company’s dominant position. This, in turn, may create a litigation environment where disgruntled or disadvantage competitors are more likely to challenge the dominant firm’s business practices.

As astute readers have already deduced, these changes in antitrust analysis address how competition laws apply to actions by a single company or mergers among companies. The law regarding anticompetitive joint action, such as price fixing and bid-rigging will remain the same, but the environment surrounding the populist pole of antitrust tends to similarly increase scrutiny of joint action as illegal ‘combinations in restraint of trade.’ See the U.S. Dept. of Justice & Fed. Trade Comm’n, Antitrust Guidelines for Collaborations Among Competitors (April 2000).

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At its Open Meeting on April 22, the FCC adopted a Third Notice of Proposed Rulemaking seeking comment on proposed rules changes to 911 outage reporting. The proposed rules aim to help 911 call centers maintain emergency services and inform the public when to use alternatives to calling 911.

Customer Notification

One of the biggest proposed change is an obligation for Covered 911 Service Providers (“C9SP”) to notify “potentially affected customers,” of a 911 outage “as soon as possible, but no later than within 60 minutes of discovering that 911 is unavailable.”  The notice should be posted on the main page of the provider’s website and any Internet- or web-based applications and include: (i) a statement that there is an outage affecting 911 availability; (ii) alternative contact information to reach emergency services at the request of the affected PSAP(s), if such information is available; (iii) the time 911 service became unavailable; (iv) the time the affected service provider estimates that 911 service will become available again; and (v) the locations where customers are—or are expected to be—experiencing 911 unavailability.

The Commission seeks a wide range of input on this requirement, such as whether an outage should include instances where text-to-911 is still available when traditional voice calls are not and whether loss of transmission of ALI or ANI prompts public notification. The FCC proposes these notification requirements take effect by June 1, 2022.

PSAP Notification

The proposed rules would also require C9SPs to maintain up-to-date contact information for 911 outage notifications for each 911 special facility served. This must be updated annually.

The information provided to these contacts would also expand under the proposed rules, though it would be limited to available information. The proposed rule change mentions: (i) the name of the C9SP notifying the PSAP; (ii) the name of the provider(s) experiencing the outage; (iii) the date and time when the incident began; (iv) the types of communications service(s) affected; (v) the geographic area affected by the outage; (vi) expectations for how the outage might affect the 911 special facility (ex: dropped calls, missing metadata); (vii) the expected date and time of restoration; (viii) the best-known cause of the outage; (ix) the name, phone number, and email address at which the C9SP can be reached for follow-up; and (x) a statement as to whether the communication is the initial notification, an update, or the final outage assessment.

The FCC also asks what safeguards should be in place to protect this sensitive information from public disclosure. The FCC proposes that these notification requirements take effect by April 1, 2022.

Reliability Certification Changes

The FCC also proposed some changes to the 911 reliability certification. Specifically, the FCC seeks comment on whether less frequent reliability certifications should be required of C9SPs (ex: requiring C9SPs to submit reliability certifications every other year while requiring C9SPs to submit certifications if they have performed a “material network change”). The Commission also proposes requiring C9SPs that cease being a C9SP to notify the FCC via an affidavit during the time period that the reliability certification portal is open. Finally, the FCC notes that the reliability certification portal is open form July 30 – October 15 and asks if this is an adequate duration for providers.

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President Biden has now signed the American Rescue Plan Act of 2021 (H.R 1319, “Act”) into law. As many are aware, the $1.9 trillion package includes $7.17 billion for an Emergency Connectivity Fund to enable remote learning, for which the FCC is to issue rules within 60 days of the Act’s enactment. This blog entry describes a few other aspects of the Act that present significant opportunities for broadband service providers and their partners, particularly state and local governments.

Coronavirus State and Local Fiscal Recovery Funds

A major component of the Act overall is the relief funding appropriated to state and local governments.   Subtitle M of the Act creates a “Coronavirus State Fiscal Recovery Fund,” providing for payment of $220 billion to states, territories and Tribal governments, and a “Coronavirus Local Fiscal Recovery Fund,” providing $130 billion to local governments (including “metropolitan cities, non-entitlement units of local government, and counties”).[1]

How those funds are to be allocated among the various states and units of local governments is prescribed in detail in the Act. Importantly, while distributed funds may only be used for certain purposes, this is not a grant program where a state or local government must describe and apply for funds to support a particular project. In general, distribution will be of a prescribed amount, and is essentially automatic.

As compared to local government funding provisions under consideration as part of the CARES Act in 2020, the new Act gives states and local governments significant flexibility in how the Fiscal Recovery Fund monies may be spent. For both states and local governments, the funds can be used for a variety of purposes relating to COVID-19 fiscal recovery, including (to paraphrase): (A) to respond to “negative economic impacts” and to aid impacted industries, (B) to provide premium pay and grants to essential workers, and (C) to address budget shortfalls stemming from the pandemic.[2]

Of most interest for our purposes is subsection (D), which states that the Fiscal Recovery Funds may be used “to make necessary investments in water, sewer, or broadband infrastructure.” The Act does not elaborate further.

In short, states and local governments are about to receive a massive infusion of funding. They may conclude that the development of necessary broadband infrastructure is a worthy use of some of that money, particularly if such infrastructure is necessary to support their other COVID-related programs, and under the Act, they would be permitted to do so.

Two other points are also worth noting. Unlike some of the other new programs under the NTIA and FCC, the funds would not need to be expended until December 31, 2024. The Act also specifically allows the funds to be transferred to a private nonprofit organization, or special-purpose unit of state or local government.[3]

Coronavirus Capital Projects Fund

The Act provides $10 billion to states, territories, and Tribal governments (not local governments) “to carry out critical capital projects directly enabling work, education, and health monitoring, including remote options, in response to the public health emergency.”[4] The scope of that appropriation plausibly includes broadband-related projects. The Act directs the Treasury Department to establish a grant process to access the funding within 60 days of enactment.

Economic Development Administration (EDA) Appropriation

Section 6001 of the Act provides $3 billion to the Economic Development Administration within the Department of Commerce. Broadband projects in economically distressed communities are eligible for funding under the Public Works and Economic Adjustment Assistance programs.

Homeowners Assistance Fund

The Act appropriates nearly $10 billion for a “Homeowners Assistance Fund” that states can use for payment assistance for “qualified expenses” of households that need help due to COVID-19, including mortgage payment assistance.[5] The fund can be used for “internet service, including broadband internet access service.”  It is to remain available until September 30, 2025.

__________________________________

[1] Section 9901.

[2] Section 9001 of the Act, adding Sections 602 and 603 of the Social Security Act (42 U.S.C. §  801 et seq.).

[3] Section 9901 of the Act; Sec. 602(c)(3).

[4] Id.; Sec. 604.

[5] Section 3206.

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Local governments committed to supporting their citizens most adversely impacted by the COVID-19 pandemic should be encouraging the broadband providers serving their communities to take the necessary steps in the next several weeks to establish eligibility to participate in the $3.2 billion Emergency Broadband Benefit Program. This Program is administered by the Federal Communications Commission (FCC) and the Universal Service Administrative Company (USAC).

The Program was established in the Consolidated Appropriations Act enacted by Congress in December of last year. It provides a $50 discount to the monthly recurring charges for broadband Internet access services to low-income households and others experiencing a substantial loss of income due to COVID-19. For low-income households on Tribal lands, the monthly discount is $75. In addition, each low-income household enrolled in the Program is eligible for a one-time device reimbursement of $100 for a desktop, laptop, or tablet. USAC will pay the discounts and device reimbursements to the broadband services providers.

The priority application window for many fixed broadband service providers began on March 8, 2021 and extends through March 22, 2021. Service providers filing within this window and whose applications are approved will be eligible to enroll low-income households as the enrollment period begins in late April, as projected by the FCC. While the FCC has stated it will act expeditiously on all other applications, it is not committing to act on later-filed applications before the enrollment start date.

Why the rush? The Program ends as $3.2 billion in discounts and reimbursements are paid out. The FCC will be establishing an expenditure tracker to be updated regularly so that service providers and the public will have a sense of when the Program funding will be expended.

In short, the Program promises to provide a substantial benefit for those who need it most, and local governments have an important role to play in spreading the word. Specifically, localities should consider registering as an “outreach partner” for the program on the FCC’s Emergency Broadband Benefit webpage.

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A federal court decision last week will allow California to enforce its own net neutrality rules. As other states follow suit, the desire for a more uniform approach could lead to federal legislation clarifying the scope of FCC regulatory authority over broadband Internet access service.

On February 23, Judge John Mendez of the U.S. District Court for the Eastern District of California denied a motion by trade associations representing the Nation’s major broadband providers and wireless carriers to delay enforcement of California’s net neutrality law. This followed the U.S. Department of Justice (DoJ) February 8 decision to drop its lawsuit challenging California’s regulatory authority, in which the DoJ had argued that California’s net neutrality law is preempted by the Federal Communication Commission’s (FCC’s) Restoring Internet Freedom Order (notwithstanding that the FCC insisted in that Order that it had no regulatory authority over broadband).

California’s net neutrality law is perhaps the most comprehensive in the country, going beyond the FCC’s previous net neutrality rules (adopted in the 2015 Open Internet Order) by prohibiting the practice of “zero rating,” in which an Internet Service Provider (ISP) does not count certain allied services and applications against a user’s monthly data cap.

Now, broadband providers face the prospect of enforcement of California’s law, as well as the emergence and enforcement of net neutrality laws in other states. To date, seven states have adopted net neutrality laws (California, Colorado, Maine, New Jersey, Oregon, Vermont, and Washington), and several other states have introduced some form of net neutrality legislation in the 2021 legislative session (among them Connecticut, Kentucky, Missouri, New York, and South Carolina).

Faced with a patchwork of net neutrality rules, broadband trade associations may well conclude that a consistent set of rules is desirable. Federal legislation would likely be needed to accomplish this objective, especially if the California decision is affirmed on appeal. A federal legislative effort would almost certainly confront the larger question: what will be the FCC’s role with respect to broadband communications services? The Telecommunications Act of 1996, meanwhile, is increasingly long in the tooth.

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The 31.8% Universal Service Fund (USF) contribution factor for 1st Quarter 2021 and the ascendency of broadband to that of an essential service for our Nation’s citizens during the Covid-19 pandemic may prove to be the tipping point on USF contribution reform. The multi-year funding commitments under several USF-funded programs underscore the need for reform, as noted in recent article in Bloomberg Law.

This blog entry assumes USF programs will retain a major role in supporting broadband availability and affordability for unserved and underserved communities and individuals, including possible expansion of the E-rate program to support broadband service for students of low-income families lacking broadband connectivity. Funding from other programs such as those administered by the Rural Utilities Service (RUS) and those enacted by Congress in the Consolidated Appropriations Act of 2021, the Coronavirus Response and Relief Supplemental Appropriations Act will likely continue for the foreseeable future.

Background

In the Telecommunications Act of 1996, Congress added a standalone provision (codified at 47 USC § 254) for funding, preserving, and advancing universal service. This provision directed the FCC to adopt a universal service program grounded on several principles, including that “consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services … that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas.”

The generally accepted position that information services revenues are not USF-assessable is anchored in both the rigid, definition-based structure of the Communications Act and in § 254 (d) which establishes two classes of universal service contributors: telecommunications carriers that provide interstate telecommunications services (the “mandatory contributors”) and, as determined by the FCC (exercising its “permissive authority”) other providers of interstate telecommunications.  Telecommunications carriers and other providers are obligated to contribute, “on an equitable and nondiscriminatory basis…to preserve and advance universal service.”

The current funding mechanism implemented in 2000 is an adjustable percentage of end-user revenues for interstate (and most international) telecommunications services and telecommunications.  While likely based on trends in revenue generation during the mid-1990s, the unforeseen is now reality.  Revenues from interstate (and most international) telecommunications services and telecommunications are in decline as revenues from non-assessable information services (including Internet access services) are accelerating. The quarterly adjusted contribution factor has been on an upward trajectory for 20 years.

1st Quarter 2002        6.8 %

1st Quarter 2011        15.5 %

1st Quarter 2016        18.2 %

1st Quarter 2020        21.2 %

1st Quarter 2021        31.8 %

Since 2002, the FCC initiated several proceedings looking to expand the base of USF-assessable services. The most consequential is the 2006 Report and Order and Notice of Proposed Rulemaking in which the FCC extended USF contribution obligations to providers of interconnected VoIP services, exercising its permissive authority under Section 254(d) and concluding these entities are “providers of interstate communications” for purposes of universal service. The Commission determined that interconnected VoIP was a competitive alternative to legacy wireline voice services and, among other factors, stressed that USF contribution obligations should be assessed on a technology-neutral basis. Importantly, the FCC had not (and still has not) classified interconnected VoIP as either a telecommunications service or an information service. 

The 2012 Comprehensive Review

The FCC’s 2012 Further Notice of Proposed Rulemaking provides a comprehensive review of previous USF reform efforts and constitutes the Commission’s last serious effort to reverse the trajectory of the USF contribution factor. The FNPRM elicited comments looking to resolve long-standing questions of whether certain services are USF-assessable and, most importantly, approaches for establishing a more sustainable USF funding base, including:

  • a “value-added” approach in which each underlying service provider contributes based on the revenues it obtains rather than the current retail service model in which service providers contribute based on end-user revenues
  • attributing a dollar value to the transmission component of information services and assessing USF contributions on that value
  • relying on a case-by-case approach under its Section 254 (d) permissive authority to assess end-user revenues from other services per its decision on interconnected VoIP service revenues
  • by assessments based on assigned wireless and wireline telephone numbers
  • a connections-based system with multiple tiers based on speed or capacity increments

While a voluminous record was generated, no meaningful reforms or clarifications were adopted.

The Missed Opportunity

In the 2015 Open Internet Order, the FCC established net neutrality rules for the vast preponderance of Internet access service available in the United State, referred to as Broadband Internet Access Service (BIAS). The authority to adopt these rules was grounded in the Commission’s “re-classification” of BIAS from its longstanding status as an information service to a telecommunications service, subjecting BIAS providers to regulations under Title II of the Communications Act. However, the FCC punted on whether BIAS revenues would be subject to USF contribution rules, deferring the question to a subsequent proceeding.

The deferred proceeding on USF contributions was never initiated by Chairman Tom Wheeler and, subsequently, the Commission under Chairman Ajit Pai “re-classified” BIAS as an ‘information service” in its Restoring Internet Freedom Order. Despite fundamentally different conclusions on the status of BIAS under the Communications Act, in separate decisions, the D.C. Circuit affirmed the reclassification determinations in each of these FCC decisions.

Where Do We Stand in 2021?

At the close of his tenure as Chairman of the FCC, Ajit Pai acknowledged the challenges in funding USF programs and recommended $50 billion of the C-Band Auction receipts be set aside to fund these programs for up to five years. This contrasts to the decision of former FCC Commissioner Michael O’Reilly, as Chairman of the Federal-State Joint Board, refusing in 2019 to forward to the FCC USF contribution reform concepts offered by the Joint Board’s State Members.

USTelecom recently released its “First 100 Days: Building Our Connected Future; An Open Letter to President Biden and the 117th Congress,” setting out a series of telecom and technology proposals, including extending broadband to the 17 million school-age children lacking broadband connectivity in their homes. To secure reliable USF funding, USTelecom recommends “…direct Congressional appropriations and expanding the base of financial support for universal connectivity beyond just telephone consumers to include a broader cross-section of the Internet ecosystem, including its largest companies.” In part, the proposal tracks AT&T’s blog post from last summer recommending Congress directly appropriate funds to support USF programs. Another commentator recently suggested major technology companies that benefit from widespread highspeed Internet access should be USF contributors.

The Path Forward Remains to be Determined

For meaningful USF reform, two questions need to be answered: Whether Congress or the FCC should take the lead in establishing more sustainable and predictable funding mechanisms and how should those funding mechanisms be structured? A related goal should be to maintain the USF contribution factor within 3% to 6% of net service charges. Currently, the USF contribution factor, state transaction taxes, and carrier regulatory cost recovery charges, collectively add 35% to 40% to the monthly charges for interstate private line service.

Based on the Commission’s consideration of the question over the last two decades, the prevailing view is that the Communications Act limits the FCC’s authority/discretion to establish a more reliable funding mechanism. More creative approaches other than those already considered likely will be required to connect the separate universes of “information services” on the one hand and “telecommunications services” and “telecommunications” on the other. Thus, a legislative solution appears warranted.

Assuming predictability is important, direct appropriations by Congress may not be the best approach. Proposals to shift funds budgeted for USF support to other programs to meet overall budget restraints in subsequent years is a risk that should be minimized. On the other hand, Congress can amend the Communications Act to expand the USF funding base.

An approach that focuses on transmission capabilities, whether an information service or a telecommunications service, would be more inclusive and technology neutral. Funding derived under this approach could be supplemented by an annual assessment on technology companies that benefit most directly from the widespread availability of highspeed Internet access service, as noted above. The assessment could equal a meaningful, adjustable percentage of the annual projected USF program funding requirements.

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Enacted on December 27, 2020 as part of the Consolidated Appropriations Act of 2021, the Coronavirus Response and Relief Supplemental Appropriations Act (“Act”) establishes or re-appropriates a number of significant broadband-related support programs.  Reflecting the urgency of the COVID-19 situation, the Act calls for unusually prompt implementation by the administering agencies.  For example, solicitations of applications for the Broadband Infrastructure Deployment Grants and Tribal Broadband Connectivity Grants must be issued by the Department of Commerce within 60 days of the Act’s enactment.

While the details of participation are generally not yet known, interested broadband service providers—and potential partners—should take steps immediately to explore how to make the most of one or more of these opportunities, including how to structure a potential project and present a compelling case for funding, or how to qualify for a program and verify eligible customers.

The various programs are listed below.  For a more in-depth analysis of each program, please see our recent publication.

  • Broadband Infrastructure Deployment Grants (NTIA):  $300 million grant program for broadband projects by “covered partnerships” in eligible service areas. The term “covered partnership” is defined to mean (a) a State or one or more political subdivisions, and (b) a provider of fixed broadband service.
  • Tribal Broadband Connectivity Grants (NTIA):  $1 billion grant program for broadband infrastructure deployment, broadband affordability programs, distance learning, telehealth, and broadband adoption activities on Tribal land.
  • Emergency Broadband Benefit Program (FCC):  $3.2 billion for an Emergency Broadband Benefit Program providing a reimbursement subsidy for the provision of broadband service and associated equipment to qualified households in the form of a monthly discount not to exceed $50 ($75 for an eligible household on Tribal land).
  • Connecting Minority Communities Pilot Program(NTIA):  $285 million for grants to minority institutions, organizations, and consortia to support broadband development and adoption.
  • COVID-19 Telehealth Program(FCC):  An additional $250 million to the existing FCC Telehealth Program.
  • Amendments to Secure and Trusted Networks ReimbursementProgram (“Rip and Replace”):  $1.9 billion allocated to fully fund the program.  Adopted various amendments relating to reimbursement for providers obligated to remove and replace covered communications equipment.

For more information, please contact Casey Lide, lide@khlaw.com.

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The electric cooperatives in Georgia (Georgia EMCs) Tuesday received an outstanding pole attachment ruling from the Georgia Public Service Commission, protecting Georgia EMCs and their more than  four million member-owners, but also providing hope for more fair pole attachment regulation elsewhere in the country.

With the first and only ruling of its kind in the nation, the Georgia Commission adopted a six-year, $1/pole rate for any new attachments to EMC poles located in portions of Georgia not yet served by broadband. The Commission also adopted a $27.71 rate statewide for all existing cable company attachments to EMC poles. The PSC’s decision ordering one rate for existing attachments and a discount for unserved areas is designed to promote broadband in unserved areas while avoiding unjustified subsidies in areas already served. The $27.71 statewide rate in already-served areas allocates 26.94% of annual pole costs to cable company attachers, which is about 3.5 times the unjustified 7.4% FCC Cable Rate percentage the cable industry demanded.

Equally significant, the Georgia Commission largely adopted the terms and conditions proposed by the Georgia EMCs. These favorable and fair provisions include:

  1. An “Imposition Fee” of 25% on top of actual costs when the EMC must perform work the attaching entity was supposed to do;
  2. EMCs can reclaim reserved pole space for any reason;
  3. Solutions were implemented for double-wood and failures to transfer;
  4. Joint participation required for inventories and safety inspections;
  5. Unauthorized attachment penalty of $100 plus back rent;
  6. Detailed information may be required for attachment applications;
  7. Permit required for overlashing and EMC to get reimbursed for engineering required for overlashing; and
  8. A dispute resolution process was implemented

With this forward-thinking ruling by the Georgia PSC, the electric cooperatives in Georgia stand eager and ready to partner to deploy broadband in unserved areas and are committed to investing in economic growth and prosperity in their own backyards.

Keller and Heckman is proud to be part of the team the Georgia EMCs put together. Please let us know if you have any questions about this ruling or would like to discuss.

For more information, please contact Tom Magee, magee@khlaw.com.

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This is the second entry in our series on enterprise telecommunications services agreements, providing a framework for addressing the customer’s interests and risks in enterprise telecommunications services agreements.

While each carrier’s standard agreement is different, these agreements have three core components:

  1. The carrier’s standard policies and rules applicable to its services
  2. The legal terms and conditions or master agreement
  3. The business deal

Aspects of the business deal are distributed among these components.

Standard Policies and Rules

Carriers’ standard policies and rules governing customers’ use of its services primarily reside online and are incorporated by reference into services agreements. These include the carrier’s:

  • Acceptable Use Policy (AUP)
  • Network Security Policy
  • Privacy Policy
  • Service Level Agreements (SLAs) (sometimes SLAs are provided as attachments to the master agreement)
  • Service Pricing Schedules

Carriers reserve the right to modify these documents by posting revisions online with customer’s recourse for problematic changes limited to the right to terminate the service or the agreement—a non-starter for customers. As discussed below, changes to pricing schedules are intended to be less impactful.

The AUP sets out prohibited uses or abuses of its services that a carrier believes will damage its network, violate laws, or impair use of the service by others. The scope can be very broad, addressing such matters as copyright violations, interference with carrier network operations, and limitations on how the service may be used. To minimize uncertainty, the carrier may agree that the AUP, in effect on an agreement’s effective date, controls for the life of the agreement. For violations, carriers reserve the right to terminate service. This poses an untenable risk to enterprises that largely shares the carrier’s interest in stopping any abuse.

A customer-oriented approach is to add a provision to the agreement that states, in the event of an alleged or actual potential AUP violation, the carrier shall promptly notify the customer of the abuse, providing a brief period to remedy the offending conduct or demonstrate that there was no violation. The carrier may insist on the right to suspend the affected service until the violation ceases. This approach underscores the importance of inclusion of a thoughtful precedence clause so that an agreed modification to the AUP, and to any other online document, controls in the event of a conflict.

A carrier’s privacy policy must reasonably meet the most stringent state and foreign privacy laws in which it operates, which suggests major carriers’ policies are reasonably comprehensive. However, the prospective carrier’s policy should be reviewed to determine whether major gaps or variances exist as compared to the enterprise’s privacy policy. Several carriers maintain and update network security policies and practices that may be summarized in a Network Security Policy document. This document is both high level and non-negotiable. It is provided as an assurance that the carrier is vigilant in maintaining network security.

SLAs are service-specific and vary among carriers. Whether an SLA is sufficient is a business decision. SLAs specify latency, availability, Mean Time to Repair (MTTR) other technical performance requirements, and may include customer reporting obligations, escalation procedures, and billing credits for outages. Invariably, outage credits are nominal.  As a rule, the substance of SLAs is not negotiable, but the consequences of recurring SLA violations may be addressed, as discussed below.

The rates in the service pricing schedules are the carriers’ “rack rates.” A key element of the business deal is the negotiated rates for the desired services. These are included in attachments to the master agreement. The carriers routinely agree that the negotiated rates take precedence over rates in their pricing schedules.

Terms and Conditions (Master Agreement)

The legal terms and conditions that the enterprise has adopted for its template agreements are an appropriate baseline for assessing the legal terms and conditions of the carriers’ standard agreements. Negotiated provisions in cloud services agreements or collocation agreements may be relevant as well.

The termination right in most agreements for material breach has limited value in telecommunications services agreements. Problems tend to be service- or location-specific. An unplanned transition of hundreds of locations to a replacement carrier is not an optimum outcome for many customers. However problematic the service, connectivity to enterprise locations must be maintained. Persistent, significant billing or provisioning issues may warrant termination.

On the other hand, a tiered set of remedies that include a partial termination right is likely more helpful. Recurring SLA violations could trigger a carrier to conduct a root cause analysis and provide a remediation plan or a reprovisioning obligation for the affected service or customer location(s). If the problem persists, the customer should have the option to terminate the affected service(s). The incumbent carrier should be obligated to continue to deliver the problematic service, including any access component, for at least 90 days without charge, and the incumbent should be obligated to support the transition to another carrier’s replacement service.

Carriers limit their damages to an amount equal to the affected services or the negotiated minimum commitment securing cover damages is a challenge. As with partial terminations, a realistic transition period for continued service and support in migrating to replacement services should be part of any remedy for the carrier’s material breach of the agreement.

Customer preferences on dispute resolution (litigation or arbitration) and venue should be negotiated. Mutual disclaimers on consequential damages are standard. Choice of law may be a greater concern for agreements with substantial international and foreign services. An informal billing dispute process that precedes formal dispute resolution is recommended, as carrier billing systems and processes are often problematic.

SLAs are the service warranties—implied warranties of fitness for a particular purpose and merchantability are disclaimed. An intellectual property warranty is not routinely offered to customers. The carriers’ agreements often do include an intellectual property indemnity and may include personal injury and property damage indemnities, all of which warrant review by enterprise counsel.

A confidential Information provision should encompass information relating to the customer’s traffic and usage levels, network design, and any consolidated list of enterprise locations, even if not marked “Confidential.” The customer information provided in RFPs to carriers should be included within the scope of this provision. The carrier will likely insist that the agreement and negotiated pricing be kept confidential.

A less-obvious consideration is what happens at contract expiration. For enterprises with hundreds of locations, transitions entail monetary costs and operational challenges.  Existing services must remain until replacement services are provisioned to customer locations.  Generally, installed services remain in use until orders to disconnect are placed with the lame-duck carrier, but negotiated rates routinely revert to that carrier’s standard pricing schedule rates—increasing 50% or more at contract expiration. Thus, a clause is warranted to ensure reasonable end-of-contract transition support and price stability (contract rates remain in effect) for a defined period.

The Business Deal

Negotiated rates and charges are lower than rates in carriers’ pricing schedules and, preferably, are expressed as fixed rates, rather than percentage discounts of rates in pricing schedules. Carriers acknowledged negotiated rates take precedence over rates in pricing schedules. Non-recurring charges, principally provisioning costs, are often waived if the services remain in place for a defined period.

Carriers do not push aggressively for “exclusive service provider status.”  Customer preferences for an accountable service provider (or “one throat to choke”) and the integrated nature of enterprise voice and data services, coupled with the minimum expenditure commitment (either per year or for the contract term) often deliver a satisfactory outcome for a carrier. A customer’s failure to meet their minimum commitment typically triggers a shortfall payment obligation.

There are two other noteworthy pricing related provisions: (1) as noted above, a pricing review clause that requires at least one pricing review during a three-year term that allows the customer to call upon a reputable pricing consultant to assist in keeping rates at current market levels; and (2) a “business downturn” provision. This provision mitigates the risk of a substantial shortfall payment when a customer projects they are unlikely to meet their minimum expenditure commitment due to business slow-downs or a business unit sale or divestiture.

Other relevant non-pricing provisions are a customer option for one or two one-year renewal terms, as noted above; a technology review/upgrade clause, though drafting such a provision can be a challenge; and an account team support clause to ensure regular communications between enterprise staff and responsible carrier account team members.

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This is the first entry of a two-part series on the services agreements that major enterprises enter into with telecommunications carriers to meet company-wide telecommunications requirements, providing connectivity between enterprise locations, and to cloud resources, suppliers and customers, public voice networks, and the World Wide Web. These agreements may encompass domestic services, services between the United States and other countries (international services), and services between foreign countries (foreign services), or some combination of these.

Enterprises typically acquire wireless services and wireline services under separate procurements and agreements. This series focuses on agreements for wireline voice and data services including Internet access services (“telecom services”).[1] This entry provides an overview of the procurement process and the business deal. The second entry highlights the agreement structure,  an approach for counsel to assess business and legal terms, and conditions commonly found in telecom service agreements.

The Basics of Enterprise Telecom Services Procurements

A telecom services procurement is typically initiated to migrate to new or lower cost services, a significant change in telecommunications requirements (due to a major acquisition or geographic expansion), more favorable pricing, the desire to assess the capabilities of other carriers, or a combination of these. The agreements have a 3-5 year term, typically with one or more customer renewal options.

Telecom carriers are selected based on reliability, geographic reach of their networks, diversity of services, and price. Many enterprises rely on a primary carrier, sometimes with another carrier providing redundant service between major locations or to different regions, particularly for international and foreign services. This is true whether the enterprise is a technology firm, a major retailer (online or brick and mortar), a utility holding company, or is engaged in finance, payment processing, logistics, manufacturing, transportation, or energy production or distribution.

A threshold procurement question is whether the customer will rely solely on in-house procurement staff or retain telecommunications procurement consultants to execute the procurement. Engaging telecom procurement consultants may be the prudent approach for many enterprises, as these consultants likely have a better sense of market pricing and carriers’ current offerings and business objectives. Under either approach, a well-conceived RFP demonstrates there is a risk to the incumbent service provider(s) of losing the business and an opportunity for other carriers to win new business.

The in-house procurement team or consultants review current agreements and bills to determine usage, locations, and circuit mix for developing the demand set for the enterprise’s RFP. This is true whether the customer’s current network arrangement of services will be maintained or modified, including utilizing different services. A timely, thorough RFP facilitates an apple-to-apples comparison of responses from interested carriers.

Customer’s counsel should review the RFP, particularly if prepared by a consultant. It is preferable that legal terms and conditions consistent with the Company’s interests and practices be included in the RFP. Non-disclosure agreements (NDAs) protecting a customer’s data conveyed to a consultant and, subsequently, to the carriers receiving the RFP are appropriate.

The Business Deal  

Telecommunications voice and data services, including Internet access services, are standard offerings that are available from multiple carriers. Services generally meet customer expectations. The principal variables are price, geographic reach of the carrier’s network, customer perceptions, and carrier responsiveness to shifting customer requirements.

In addition to Telecom Services, carriers offer managed services that may also be provided by  third parties. Managed services include application routing (SD-WAN), monitoring and managing customer routers, and security, such as VPNs and firewalls. Managed services may be acquired with telecom services[2]. Conferencing services, such as Microsoft Teams and Zoom, are applications enabled by Internet access services and other data services.

Carriers have developed Service Level Agreements (SLAs) for their telecom services. SLAs are routinely elicited for services included in RFPs. We discuss SLAs at greater length in Part 2 of this series.

Apart from a handful of tariffed services, rates for Telecom Services are market-based, determined principally by the efficacy of the procurement process, the customer’s service mix and projected expenditures, and the extent of perceived competition. Many agreements provide for competitive pricing reviews that occur at defined intervals during the term of the agreement. Customers often retain consultants for these pricing reviews.

The efficacy of pricing reviews is one reason telecom services agreements may remain in effect for 10 years, through multiple amendments adding services and changing rates. Another is the challenges of transitioning services from one carrier to another, particularly for enterprises having hundreds of locations throughout the United States or in multiple countries.

There are two categories of rates and charges in Telecom Services Agreements: 1) one-time, non-recurring charges, principally service provisioning charges, and 2) recurring monthly rates, either fixed monthly or variable, usage-based (voice services) rates. Customers typically prefer that charges and rates be expressed in fixed dollar amounts as opposed to percentage discounts of rates in providers’ pricing schedules. Service providers regularly require minimum customer expenditure commitments. Customers prefer aggregate expenditure commitments that are either annual or for the term of the agreement, as opposed to service-specific commitments.

Fixed rate pricing and minimum commitments are discussed further in Part 2 of this series.

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[1] In terms of regulation, Internet access services are classified as “information services.” In the United States and many developed countries, information services are subject to less regulation than “telecommunications services.”  Another widely used data service, known as MPLS, is sometimes treated as information services. However, these services are universally included in telecom services procurements. For enterprise customers, a major distinction between information services and telecommunications services is the extent to which the respective service types are taxed and subject to regulatory surcharges.

[2] Managed services are not addressed in this two-part series.