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Court Opinion - Sorenson Commc'ns v. FCC & USA (D.C. Cir.)

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Released: September 2, 2014

USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 1 of 25

United States Court of Appeals


Argued March 17, 2014 Decided September 2, 2014

No. 13-1215







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.


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 2 of 25


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 for the Court filed by Senior Circuit Judge


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


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 3 of 25


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

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



USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 4 of 25


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


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 5 of 25


(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 month. See

Interstate TRS Fund Performance Status Report, Rolka Loube

Saltzer Associates (TRS Fund Administrator) (June 2014),

(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


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].


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 6 of 25


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.

§ 64.404(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.


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 7 of 25


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. & Speech-to Speech Servs. for

Individuals with Hearing & Speech Disabilities, Order, 25

FCC Rcd. 8689, 8692-93, ¶ 6 (2010) [hereinafter 2010 Rate


The TRS Fund Administrator recommended blending the

projected and historical costs to ease the austerity of this new

methodology, and the Commission ultimately departed

upward even from that recommendation because it would

have entailed a sudden and significant diminution in revenues

for VRS providers. Id. at 8695-96, ¶ 12. For the 2009-2010

year, providers had received $6.70, $6.43, and $6.24 for

minutes in the three tiers respectively; the Administrator’s

proposal for 2010-2011 was $5.78, $6.03, and $3.90, and the

adopted rates were an average of the two, viz., $6.24, $6.23,

and $5.07. Id. at 8694, ¶ 8 tbl.1.

Sorenson petitioned the U.S. Court of Appeals for the

Tenth Circuit for review of the 2010 Rate Order, claiming it

violated both the ADA and the APA. See Sorenson

Commc’ns, Inc. v. FCC, 659 F.3d 1035 (2011). There it

challenged both the tiered-rate structure and the particular

rates, but the Tenth Circuit upheld the 2010 Rate Order in

both respects. Id. at 1038.

Continuing its overhaul effort, in 2011 the Commission

issued a Further Notice of Proposed Rulemaking, in which it


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 8 of 25


called for comments on several proposals, including the

institution of a per-user rate methodology and the elimination

of the tiered-rate structure. 2011 Notice, 26 FCC Rcd. at

17394, ¶ 53, 17396, ¶ 59, 17418, ¶ 141. Sorenson and the

other providers responded with comments on these proposals

and with suggestions of their own.

In 2013 the Commission struck out in a new direction,

announcing its intention to set compensation rates through

competitive bidding among VRS providers. See In re

Structure & Practices of the Video Relay Serv. Program,

Telecomms. Relay Servs. & Speech-to-Speech Servs. for

Individuals with Hearing & Speech Disabilities, Report &

Order & Further Notice of Proposed Rulemaking, 28 FCC

Rcd. 8618, 8661, ¶ 107, 8706-07, ¶ 217 (2013) [hereinafter

2013 Rate Order]. Because three years had elapsed since last

setting VRS rates, however, the Commission also set a new

“transitional rate plan” for 2013-2017 in order to bring per-

minute rates still closer to historical compensable costs. Id. at

8694, ¶ 188, 8702-04, ¶¶ 209, 212.

The plan set the TRS Fund Administrator’s rate

recommendation, which was based upon updated historical

cost data, as the goal at the end of a “glide path.” Id. at 8704,

¶ 212. The rates are to be adjusted downward every six

months, starting at $5.98, $4.82, and $4.82 in 2013 and

ending at $4.06, $4.06, and $3.49 in 2017. See id. at 8705,

¶ 215 tbl.2. Additionally, the plan adopted a new tier

structure in order better to reflect evidence of the minimum

efficient scale for providing VRS. See id. at 8698-702,

¶¶ 197-208. Tier II minutes now start at 500,000 and Tier III

minutes start at 1,000,000. It also reduced the difference in

the per-minute rates between tiers. Id. at 8702, ¶ 208 tbl.1.


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 9 of 25


Sorenson petitioned this court for review of the 2013

Rate Order. As in its Tenth Circuit case against the 2010 Rate

Order, it challenges both the tiered-rate structure and the rates


II. Analysis

We address first the preclusive effect of the Tenth

Circuit’s resolution of Sorenson’s challenges to the 2010 Rate

Order. We then turn to the merits of Sorenson’s challenges

unique to the 2013 Rate Order.

A. Issue Preclusion

The Commission asks us to dismiss Sorenson’s entire

petition for review on the ground it is precluded by the Tenth

Circuit’s decision denying the Company’s challenge to the

2010 Rate Order, which raised the same issues with respect to

the same ratemaking methodology as does the present

petition. According to the Commission, it is immaterial that

the present challenge is to a distinct rate order, whereas

Sorenson argues the doctrine of issue preclusion is entirely

inapplicable to the rates adopted in the 2013 Rate Order.

The doctrine of issue preclusion bars “‘successive

litigation of an issue of fact or law actually litigated and

resolved in a valid court determination essential to the prior

judgment,’ even if the issue recurs in the context of a different

claim.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (quoting

New Hampshire v. Maine, 532 U.S. 742, 748-49 (2001)). As

applied to a challenge to agency action, this court has

consistently held a petitioner may not relitigate an agency’s

“standards and procedures ... prior to each application”

thereof. W. Coal Traffic League v. ICC, 735 F.2d 1408, 1410

(1984); accord Nat'l Classification Comm. v. United States,


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 10 of 25


765 F.2d 164, 169-70 (1985). Therefore, in order to avoid

issue preclusion, a petitioner bringing a successive challenge

to the application of an established ratemaking methodology

that the agency did not reconsider (or change) must show

circumstances have changed in a way that required the agency

to reconsider (or to change) it. Cf. Tesoro Alaska Petroleum

Co. v. FERC, 234 F.3d 1286, 1290 (D.C. Cir. 2000) (in an

adjudicatory proceeding, agency may preclude repeat

argument that a rate is unreasonable unless the challenger

presents “new evidence” or demonstrates “changed

circumstances”); W. Coal Traffic League, 735 F.2d at 1410

(where rulemaking is “standard-setting, not standard-

implementing, in character,” issue preclusion will not bar a

challenge to an agency’s “renewed consideration” of an

existing standard it ultimately decides to retain). This

application of the doctrine is consistent with Commissioner v.

Sunnen, 333 U.S. 591 (1948), where the Supreme Court

explained that a party could be collaterally estopped from

relitigating the judicial determination of a tax issue it had

raised and lost with respect to a prior tax year, but warned that

“where the situation is vitally altered between the time of the

first judgment and the second, the prior determination is not

conclusive.” Id. at 599-600.

1. Compensable expenses

Pursuant to these principles, we hold Sorenson’s

challenge to the Commission’s list of compensable expenses

is precluded. More specifically, Sorenson argues the rates

should be calculated to reimburse its costs for providing users

with video equipment, training users, porting phone numbers,

and “raising and servicing [debt] capital.” With regard to all

these expenses, however, Sorenson is merely attempting to

relitigate an application of the standard it challenged in its

petition for review of the 2010 Rate Order. See Sorenson,


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 11 of 25


659 F.3d at 1046 (“In [Sorenson’s] view, [the

Administrator’s] proposed rates are badly flawed because

they do not reflect Sorenson's actual costs of providing

services”); 2013 Rate Order, 28 FCC Rcd. at 8695-98,

¶¶ 191-96 (approving the same compensable costs as had the

previous order and addressing questions raised about the

categories in the 2011 Notice).

The Tenth Circuit rejected Sorenson’s challenge to the

Commission's current list of compensable costs, holding the

agency had neither violated the ADA nor failed the arbitrary-

and-capricious test of the APA. 659 F.3d at 1043-45; id. at

1046-47. Sorenson points to no new evidence or changed

circumstances suggesting the Commission was required to

expand its list of compensable costs.

Sorenson does argue two features of the 2013 Rate Order

make the Commission’s application of the list of compensable

costs different from its application in the 2010 Rate Order,

thus suggesting the Tenth Circuit did not actually decide the

issues Sorenson is raising now. First, the 2013 Rate Order

includes a provision directing and funding a neutral third

party to develop a “VRS access technology reference

platform” that will operate as a software application and be

“useable on commonly available off the shelf equipment and

operating systems.” 2013 Rate Order, 28 FCC Rcd. at 8644-

45, ¶¶ 53-55. According to Sorenson, this provision suggests

the Commission has a new interpretation of its statutory

mandate that makes giving video equipment to users free of

charge a necessary cost. But see id. at 8696, ¶ 193 (reiterating

the agency’s consistent position, see, e.g., 2006 MO&O, 21

FCC Rcd. at 8071, ¶ 17, that providers may be compensated

only for “the providers’ expenses in making the service

available and not the customer’s costs of receiving the



USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 12 of 25


On the contrary, developing a common platform for off-

the-shelf equipment and operating systems will make

provider-funded video equipment even less relevant to the

provision of VRS and will give users an experience more

closely akin to that of hearing telecommunications customers,

who buy their equipment off the shelf. See 2011 Notice, FCC

Rcd. at 17380, ¶ 19 (“Indeed, currently available commercial

video technology can provide closer functional equivalence,

may be less costly, and is likely to improve at a faster pace

than the custom devices supplied exclusively by VRS

providers”). Therefore, the Tenth Circuit’s determination the

statute does not require that “VRS users receive free

equipment,” only that they “pay no higher rates for calls than

others pay for traditional phone services,” is preclusive.

Sorenson, 659 F.3d at 1044.

Second, Sorenson points out that the 2013 Rate Order

sets rates for four years (until 2017), whereas the 2010 Rate

Order set rates for one year (although the Commission later

renewed those rates for two more years, i.e., until 2013).

Therefore, Sorenson argues, the Tenth Circuit could not have

resolved any issue with regard to a four-year rate plan because

the rates it reviewed were “interim” in nature and the Tenth

Circuit upheld the rates on the premise that the Commission

soon would revisit its ratemaking methodology.

Sorenson’s focus upon the respective timeframes of the

2010 and 2013 Rate Orders is misplaced. Because the agency

is transitioning to a new ratemaking methodology, the 2013

Rate Order is “interim” in the precise way the 2010 Rate

Order was when the Tenth Circuit reviewed it. See Sorenson,

659 F.3d at 1046 n.6 (relying upon the Commission’s

“intention that the new rates be temporary while it totally

reevaluates VRS compensation”). Nor has anything of

significance changed over the years between the two Orders;


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 13 of 25


both adopt per-minute rates based upon the same long-

standing list of compensable costs. Therefore, Sorenson’s

challenge to the compensable expenses is precluded by our

sister circuit’s holding that “the categories of compensable

costs in [the] proposed rates are the same categories that were

compensable when the agency reimbursed on the basis of

providers’ projected costs. … Particularly given this

consistent position on allowable costs, the Commission

provided a sufficient explanation for declining to change the

categories of allowed costs during the interim period.”

Sorenson, 659 F.3d at 1046-47.

2. Other issues

Contrary to the Commission’s contention, none of

Sorenson’s four other challenges to the 2013 Rate Order is

precluded. First, Sorenson challenges the levels at which the

Commission set rates of return on labor and on capital

investments. Although these levels are the same in the 2013

and 2010 Rate Orders, perusal of its briefs in the earlier case

makes clear that Sorenson did not challenge those rates before

the Tenth Circuit and so they have not been “actually litigated

and resolved” by a court.

Sorenson’s other three challenges concern features

unique to the 2013 Rate Order and therefore could not have

been resolved in the Tenth Circuit case. Sorenson challenges

the “end result” of the Order, Fed. Power Comm'n v. Hope

Natural Gas Co., 320 U.S. 591, 603 (1944) (first adopting the

“end result” criterion), claiming it will cause VRS providers

to go out of business and hence will disrupt service to

hearing- and speech-impaired individuals. This alleged

problem clearly is unique to the 2013 Rate Order; the Tenth

Circuit specifically said Sorenson, in its challenge to the 2010

Rate Order, did “not contend that under the interim VRS rates


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 14 of 25


it, or any other provider, will be unable to serve any customer

who requests service.” 659 F.3d at 1043. Likewise, Sorenson

is not precluded from arguing the rate is too low to cover

providers’ costs of complying with the requirement that they

answer 85% of calls within 30 seconds, measured daily,

because that speed of answer was newly imposed by the 2013

Rate Order. Cf. id. (“Sorenson does not claim that it will be

unable to satisfy the mandatory 80/120 speed-of-answer

requirement under the interim rates”).

Finally, Sorenson challenges the new tiered-rate structure

in the 2013 Rate Order. The Tenth Circuit, although it upheld

the tiered-rate structure in the 2010 Rate Order, id. at 1048-

50, could not have resolved Sorenson’s challenge to the

tiered-rate structure in the 2013 Rate Order because the

Commission adopted a new “configuration” for the tiers,

raising the cut-offs and reducing the differences between tiers,

as a step toward realization of its plan to institute competitive

bidding among firms in the future. See 2013 Rate Order, 28

FCC Rcd. at 8698-702, ¶¶ 197-208. Moreover, Sorenson

argues the tiered rates are arbitrary and capricious in light of

“new evidence” and a “changed circumstance,” respectively:

The Commission maintained a tiered-rate structure even as it

acknowledged new evidence about minimum efficient scale

and concluded that tiered rates were inefficient.

We turn next to address the merits of the four above-

mentioned issues.

B. Rate of Return

Sorenson argues the Commission’s interim ratemaking

methodology “virtually guarantees that providers will be

unable to earn a reasonable rate of return” because it allows

for an 11.25% rate of return on physical capital but no return


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 15 of 25


on labor, which is “the primary thing [providers] sell.”

According to Sorenson, this limitation, which originated with

monopoly telephone companies, is inappropriate and hence

arbitrary and capricious as applied to the labor- rather than

capital-intensive VRS industry. The reasonableness of the

rates, it maintains, should be judged on the profit margin as a

percentage of its total cost, which it shows is likely to be less

than 2% under the agency’s interim methodology.

1. Denial of a return on labor costs

As the Commission has explained more than once, a

provider of VRS is entitled to compensation only for the

reasonable costs of providing VRS. 2013 Rate Order, 28

FCC Rcd. at 8692, ¶ 181; see also 47 U.S.C. § 225(d)(3)(B)

(the TRS Fund shall reimburse only the “costs caused by

interstate telecommunications relay services”); In re

Telecomms. Relay Servs. & Speech-to-Speech Servs. for

Individuals with Hearing & Speech Disabilities, Report &

Order, Order on Reconsideration, and Further Notice of

Proposed Rulemaking, 19 FCC Rcd. 12475, 12543-44, ¶ 181

(2004) [hereinafter 2004 Order] (reasonable costs are ‘‘those

direct and indirect costs necessary to provide the service’’).

Therefore, the Commission acts directly in accordance with

its statutory mandate by setting rates to compensate providers

for their actual labor costs. Wages are the costs of hiring

labor, just as interest and dividends are the cost of hiring

capital. A “return” on labor costs in addition to revenues

sufficient to cover the wages themselves would in effect

increase the Company’s compensation above what is

necessary for the provision of VRS. See 2007 Order, 22 FCC

Rcd. at 20161, ¶ 49 (“[T]he ‘reasonable’ costs of providing

service for which providers are entitled to compensation do

not include profit or a mark-up on expenses”). Therefore,

Sorenson has not met its burden of showing the agency’s


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 16 of 25


decision to provide for recovery of labor costs as an expense

was arbitrary or capricious. See generally 1 ALFRED E. KAHN,


INSTITUTIONS 26-54 (1970) (discussing the proper

compensation for operating costs versus capital outlays).

2. Sufficiency of the return on capital

Sorenson next argues that it was arbitrary and capricious

for the Commission to set the rate of return on capital at

11.25%, which rate it borrowed 20 years ago from its

regulation of monopoly telephone companies. Although there

are, of course, many differences between the traditional

telephone business and VRS, that alone is not cause to vacate

the rate of return. “Even assuming [the agency] made

missteps ... , the burden is on petitioners to demonstrate that

[the agency’s] ultimate conclusions are unreasonable.” Nat’l

Petrochemical & Refiners Ass’n v. EPA, 287 F.3d 1130, 1146

(D.C. Cir. 2002).

Sorenson advances two specific reasons for deeming the

11.25% rate of return unreasonable: (1) when spread over all

costs, the rate yields a gross profit margin of less than 2%,

and (2) the rate is too low to attract necessary capital to the

VRS business. The first argument has no merit whatsoever;

the second is simply unproven.

As we explained in relation to labor costs, and as the

Commission has been explaining since its 2004 Order, 19

FCC Rcd. at 12543-44, ¶¶ 178-81, the agency is not required

to compensate providers for anything more than the

reasonable costs of providing VRS, which include the cost of

hiring the necessary capital. A provider’s accounting profit

margin as a percentage of its total costs is of no moment



USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 17 of 25


In contrast, if Sorenson is correct that the 11.25% rate of

return is too low to attract the capital necessary to operate a

VRS business, then it should prevail in its quest for a higher

rate. Cf. Jersey Cent. Power & Light Co. v. FERC, 810 F.2d

1168, 1178 (D.C. Cir. 1987) (en banc) (“[T]he reviewing

court ‘must determine’ whether the Commission’s rate order

may reasonably be expected to ‘maintain financial integrity’

and ‘attract necessary capital.’” (quoting In re Permian Basin

Area Rate Cases, 390 U.S. 747, 792 (1968))). Sorenson

raised this issue before the agency by arguing VRS presents a

“significantly different risk profile to the capital markets”

than does a conventional telephone company. It pointed out

the VRS industry is competitive rather than monopolistic, the

firms are smaller, and the regulatory risk is greater because

VRS providers receive nearly all their revenue not from a

large number of customers but from a single source, viz., the

TRS Fund.

Although these differences do suggest a telephone

company’s rate of return is not an obvious proxy for

reimbursing a provider of VRS, we cannot conclude the

Commission’s admittedly flawed


basis for selecting a rate

leads to an arbitrary and capricious result because there is no

evidence in the record to suggest Sorenson or any other

provider actually has had trouble raising the necessary capital

under the long-standing 11.25% rate regime. Because the

Commission is required to raise the allowable rate of return

only if presented with evidence the current rate is insufficient

to attract capital, Sorenson did not carry its burden of proof


The Commission acknowledges the rate of return is based upon a

flawed analogy; in its view, however, the rate is too high because

capital is less expensive than it was 20 years ago. See FCC Br. 40

(citing proceedings to lower the authorized rate of return as part of

a comprehensive reform of the Universal Service Fund).


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 18 of 25


before the agency. Cf. Tesoro, 234 F.3d at 1290 (suggesting a

ratemaking agency is required to revisit whether its existing

ratemaking methodology is reasonable only when presented

with new evidence or changed circumstances). Therefore, we

defer to the Commission’s judgment that its long-standing

11.25% rate of return provides an adequate, and thus

reasonable, approach to setting per-minute rates while

transitioning to a new methodology.

C. End Result of the Rates

Sorenson next challenges the 2013 Rate Order as

arbitrary and capricious because the Commission did not

respond to its evidence that the end result of the rates would

be to “drive every provider out of business or into

bankruptcy,” degrading service and violating the statutory

mandate requiring service be made “available, to the extent

possible,” 47 U.S.C. § 225(b)(1). Sorenson’s challenge to the

end result of the rates is distinct from its challenge to the

component parts of the agency’s ratemaking methodology,

see Jersey Cent., 810 F.2d at 1177 (“In examining the end

result of the rate order, ... a court cannot affirm simply

because each of the component decisions of that order, taken

in isolation, was permissible; it must be the case ‘that they do

not together produce arbitrary or unreasonable

consequences’” (quoting and adding emphasis to Permian

Basin, 390 U.S. at 800)); Sorenson, however, fails to establish

the end result of this Rate Order is arbitrary or unreasonable.

It is not unreasonable for the Commission to allow a provider

to go bankrupt if that provider has incurred costs far in excess

of what is necessary.

Sorenson points out that comments before the agency by

all the major providers indicated “no provider could offer

service at the rates proposed by the Administrator,” but the


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 19 of 25


comments to which it refers are inapposite to Sorenson’s

claim because they addressed the rates proposed by the



not the higher rates and “glide path” actually

adopted by the Commission. Perhaps that is why the other

providers, which did not incur the same level of non-

compensable costs, are not petitioning for review of the 2013

Rate Order. In any event, the Commission explained why it

would not cover all of a provider’s actual costs even if the

result were to bankrupt the company. In the Order under

review it reasoned that it would be “irresponsible and contrary

to our mandate to ensure the efficient provision of TRS ... to

simply reimburse VRS providers for all capital costs they

have chosen to incur – such as high levels of debt – where

there is no reason to believe that those costs are necessary to

the provision of reimbursable services.” 2013 Rate Order, 28

FCC Rcd. at 8697, ¶195. The agency was even more explicit

about the prospect of bankruptcy in the Notice that preceded

the Order:


See, e.g., Comments of CSDRVS, LLC, Docket Nos. 10-51 & 03-

123, 2-3 (May 31, 2013) (J.A. 825-26) (discussing “The RLSA

Rate Proposal”); Comments of Purple Commc’ns., Inc., Docket

Nos. 10-51 & 03-123, 12 (Nov. 14, 2012) (J.A. 624) (discussing

“TRS Fund Administrator’s Rate Proposal”); Comments of Convo

Commc’ns., Inc., Docket Nos. 10-51 & 03-123, 5-6 (Nov. 14,

2012) (J.A. 552-53) (discussing “The VRS Rates Proposed by

RLSA”); Ex Parte Notice of CSDVRS, LLC, Docket Nos. 10-51 &

30-123 (Oct. 25, 2012) (objecting to “compensation rates if they are

at all similar to what Rolka Loube Saltzer Associates (“RLSA”) has

proposed); Comments of Hancock, Jahn, Lee & Puckett, LLC d/b/a

Communication Axcess Ability Group (CAAG), Docket Nos. 10-

51 & 03-123, 5-7 (Nov. 15, 2012) (discussing “RLSA’s Rate



USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 20 of 25


If ... some providers are not able to manage their

businesses, gain scale, or support their existing capital

structures during a transition period, they will likely have

to change their current business plans. ... We ... will not

act to preserve any particular competitor. We do not

believe that any provider has an inherent entitlement to

receive compensation from the Fund, and so do not

regard as the goal the protection of VRS providers who

are high cost and/or uncompetitive.

2011 Notice, 26 FCC Rcd. at 17399, ¶ 66.

Sorenson’s costs were particularly high for two reasons.

First, it was saddled with the debt it had incurred to finance a

leveraged buyout. (A private equity firm, having acquired the

Company, then caused it to incur substantial debt in order to

fund a dividend to its new owner.) See In re Telecomms.

Relay Servs. & Speech-to-Speech Servs. for Individuals with

Hearing & Speech Disabilities, Order Denying Stay Motion,

25 FCC Rcd. 9115, 9121, ¶ 21 (2010). In addition, Sorenson

purchased and then gave users videophones free of charge in

order to encourage their use of its service, but the cost of that

equipment was not and never had been deemed compensable

by the Commission. See id. at 9120, ¶ 16. The reasons for

Sorenson’s financial hardship, therefore, are precisely the

reasons the Commission had rightly warned were insufficient

justification for raising rates. Moreover, Sorenson is wrong

to equate bankruptcy with an inability to provide reasonable

service; the Commission did not have before it any evidence

that Sorenson’s service would be degraded if its debt

obligations were reduced or restructured as equity in a

bankruptcy proceeding. Nor does Sorenson give us any

reason to believe insolvency would cause a provider to exit

the market so long as the reasonable costs of continuing to


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 21 of 25


provide service, including an appropriate return on equity and

wages sufficient to attract labor, remain fully recoverable.

D. Speed-of-Answer Requirement

Sorenson’s penultimate challenge is to the new speed-of-

answer requirement, with which it claims it cannot comply at

the per-minute rates set by the Order. In response to the

Commission’s call for comments about whether to tighten this

requirement, see 2011 Notice, 26 FCC Rcd. at 17405, ¶ 87

(“[S]hould the speed of answer requirements set forth in [47

C.F.R. §] 64.604(b)(2) be modified?”), Sorenson explained

that a faster speed of answer meant a higher cost of service.

Reply Comments of Sorenson, Commc’ns., Inc., Docket Nos.

10-51 & 03-123, 49 (Mar. 30, 2012) (J.A. 410) (“speed-of-

answer is directly affected by compensation levels”).

Because the Commission did not specify the metric it was

considering, however, Sorenson did not have occasion to state

whether or by how much its labor cost would increase if it

were required to answer 85% of all calls within 30 seconds,

measured daily (as the Commission went on to require) rather

than 80% of all calls within 120 seconds, measured monthly

(as it had been required to and was doing).

The Commission adopted this more demanding speed-of-

answer requirement based in part upon the explicit premise

that it would not increase labor costs over the historical costs

upon which the rates in the 2013 Rate Order are based,

contrary to the general relationship suggested by Sorenson

and without citing any evidence to dispel that suggestion. See

2013 Rate Order, 28 FCC Rcd. at 8671-72, ¶¶ 137 & 139

(“[T]his action will set a new standard for VRS provider

performance without additional cost to providers or the TRS

Fund”). Even if the Commission was correct in saying “[t]he

record indicates that VRS providers already achieve a speed


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 22 of 25


of answer of 30 seconds for the majority of VRS calls,” id. at

8671, ¶ 137 – an assertion for which we have found no

support – that says nothing about the cost of achieving the 30-

second speed of answer 85% of the time, measured daily.

Indeed, counsel for the Commission conceded at oral

argument that, to the extent it adopted the new standard on the

premise that providers were already meeting that standard

measured daily, the agency was mistaken. Oral Arg. R.


The Commission argues this challenge to the speed-of-

answer requirement is not ripe for judicial review because

Sorenson “never presented [it] to the Commission.” We have

held, however, an issue is ripe for review pursuant to section

405(a) of the Communications Act of 1934, 47 U.S.C.

§ 405(a), if the Commission had an “opportunity to pass”

upon the question of fact or law raised in the petition; the

party need not have raised the precise argument before the

agency. See Time Warner Entm’t Co. v. FCC, 144 F.3d 75,

79 (D.C. Cir. 1998). Because the Commission had before it

comments that suggested costs would go up under an

enhanced metric for speed of answer, and because it reached

the opposite conclusion on that very issue, the Commission

had and indeed took the opportunity to pass upon the

question. Therefore, Sorenson’s challenge is ripe for judicial


Turning to the substance of that challenge, we need

hardly do more than note that the Commission is, by its own

interpretation of the ADA, required to reimburse providers for

all costs necessarily incurred to meet the mandatory minimum

standards established by the agency, see 2004 Order, 19 FCC

Rcd. at 12543-44, ¶ 181, of which speed-of-answer is one, see

47 C.F.R. § 64.604(b)(2)(iii). By adopting the new speed-of-

answer metric without evidence of the cost to comply with it,


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 23 of 25


the Commission acted arbitrarily and capriciously. See

Permian Basin, 390 U.S. at 792 (“[E]ach of the order’s

essential elements [must be] supported by substantial

evidence”). Moreover, because the only evidence before the

Commission was Sorenson’s submission indicating costs go

up when standards of service go up, the new metric fails the

“requirement of reasoned decisionmaking.” Allentown Mack

Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998);

accord Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto

Ins. Co., 463 U.S. 29, 43 (1983) (a decision is arbitrary and

capricious if the agency “offered an explanation for its

decision that runs counter to the evidence before the agency”).

Sorenson asks us to remedy this error by vacating the

new rates in the 2013 Rate Order. We think it more

appropriate for two reasons instead to vacate the new speed-

of-answer requirement. First, it is the less disruptive course,

more precisely tailored to the problem with the Order. Cf.

Owner-Operator Indep. Drivers Ass’n v. Fed. Motor Carrier

Safety Admin., 494 F.3d 188, 212 (D.C. Cir. 2007) (vacating

only the offending parts of a rule despite petitioner’s request

for vacatur of the whole). Second, we think the Commission,

in expressing its understanding that it could adopt the new

requirement without adding to costs, implied that its priority

was to keep rates down, not to force the quality of service up;

i.e., it wanted what it thought was a free lunch, leaving us in

doubt whether it wanted the lunch if it was not free. On

remand, the Commission is free, of course, to renew its

consideration of the tradeoff: It may adhere to the status quo

ante, reinstate the requirement we vacate today, or impose a

different standard, as long as it bases its decision upon

evidence of the required labor costs and adjusts the rates in

the 2013 Rate Order to reflect any increase over the historical

costs upon which they were based.


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 24 of 25


E. Tiered-Rate Structure

Finally, Sorenson contends the tiered-rate structure is

arbitrary and capricious for two distinct reasons. First, it

argues, having tiered rates is inherently contrary to the

Commission’s stated position that they are inefficient and

should be eliminated. 2013 Rate Order, 28 FCC Rcd. at

8698, ¶ 198 (the TRS Fund should not “support indefinitely

VRS operations that are substantially less efficient”); see also

2011 Notice, 26 FCC Rcd. at 17418, ¶ 141 (the “tiered rate

structure supports an unnecessarily inefficient market

structure, and apparently provides insufficient incentive for

VRS providers to achieve minimal efficient scale”). As we

see it, however, the decision to retain the tiers while

transitioning to a competitive-bidding scheme is not

inconsistent with the Commission’s stated position. The

agency made clear in the 2013 Rate Order that it still plans to

eliminate the per-minute rate methodology and that its

critique of tiered rates guided its planning for the interim.

2013 Rate Order, 28 FCC Rcd. at 8702, ¶ 205. It raised the

cut-offs between the tiers immediately and will reduce over

time the gap between the highest and lowest tiered rates,

which adjustments increase the incentive to achieve minimum

efficient scale, consistent with the concerns it expressed in the

2011 Notice. See id. at 8698, ¶ 198.

Second, Sorenson challenges the specific cut-off levels

demarcating the new tiers, arguing they are not optimal for

achieving the Commission’s stated goal of supporting smaller

providers until they grow to an efficient scale and are able to

compete effectively. At its core, this objection is no more

than a quibble over the precise cut-off that would be most

efficient in the short term, and is certainly not significant

enough to impugn the agency’s transitional methodology,

which is explicitly aimed at achieving efficiency in the long


USCA Case #13-1215 Document #1510158 Filed: 09/02/2014 Page 25 of 25


run. See id. at 8699, ¶ 200 (“We conclude that it is worth

tolerating some degree of additional inefficiency in the short

term, in order to maximize the opportunity for successful

participation of multiple efficient providers in the future, in

the more competition-friendly environment that we expect to

result from our structural reforms”). As we have noted before

with regard to ratemaking, “[t]he relevant question is whether

the agency’s numbers are within a zone of reasonableness, not

whether its numbers are precisely right.” WorldCom, Inc. v.

FCC, 238 F.3d 449, 462 (D.C. Cir. 2001) (quotation marks

omitted). Because the Commission relied upon evidence in

the record that supports its conclusions about minimum

efficient scale, see, e.g., 2013 Rate Order, 28 FCC Rcd. at

8699-700, ¶¶ 202-03, we are satisfied the cut-offs are within

the zone of reasonableness and we defer to the agency’s

judgment about how best to achieve a smooth transition to

competitive bidding.

III. Conclusion

For the foregoing reasons, we vacate only the new speed-

of-answer requirement prescribed in ¶¶ 135-39 of the 2013

Rate Order. 28 FCC Rcd. at 8671-72. We remand that

portion of the Order to the Commission to consider whether

an enhanced speed-of-answer requirement will increase

providers’ costs and, if so, whether having faster service is

worth the concomitant increase in rates. Pending further

action by the Commission, this decision will have the effect

of reinstating the requirement that 80% of VRS calls be

answered within 120 seconds, measured on a monthly basis.

See id. at 8671, ¶ 135.

So ordered.

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