GTL v. FCC-ICS, Securus Brief, telephone rates, 2016
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USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 1 of 13 INITIAL VERSION IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT No. 15-1461, and consolidated cases GLOBAL TEL*LINK, SECURUS TECHNOLOGIES, INC., CENTURYLINK PUBLIC COMMUNICATIONS, INC., TELMATE, LLC, PAY TEL COMMUNICATIONS, INC., STATE OF OKLAHOMA, and OKLAHOMA SHERIFFS’ ASSOCIATION, Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and UNITED STATES OF AMERICA, Respondents. On Petitions for Review of an Order of the Federal Communications Commission SEPARATE BRIEF OF PETITIONER SECURUS TECHNOLOGIES, INC. PUBLIC VERSION – CONFIDENTIAL MATERIAL REMOVED Stephanie A. Joyce ARENT FOX LLP 1717 K Street, N.W. Washington, D.C. 20006-5344 Tel. (202) 857-6081 Fax (202) 857-6395 Andrew D. Lipman MORGAN, LEWIS & BOCKIUS LLP 2020 K Street, N.W. Washington, D.C. 20006 Tel. (202) 373-6033 Fax (202) 373-6001 Andrew.Lipman@morganlewis.com June 3, 2016 Counsel for Petitioner Securus Technologies, Inc. USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 2 of 13 CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES Securus adopts and incorporates herein by reference the Certificate contained in the Joint ICS Provider Brief to which it is a signatory. CORPORATE DISCLOSURE STATEMENT Pursuant to Federal Rule of Appellate Procedure 26.1 and D.C. Circuit Rule 26.1, Securus states that it is wholly owned by Securus Technologies Holdings, Inc., whose principal investor is Securus Investment Holdings, LLC (“SIH”). SIH is indirectly controlled by ABRY Partners VII, LP (“ABRY”). Neither SIH nor ABRY has stock that is publicly traded. No entity having publicly traded stock owns 10 percent or more of either company. Securus, a Delaware corporation, is a telecommunications service and technology company that provides calling services and call management software to correctional facilities exclusively. i USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 3 of 13 TABLE OF CONTENTS Page CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES ............. i CORPORATE DISCLOSURE STATEMENT ......................................................... i TABLE OF AUTHORITIES ................................................................................... iii GLOSSARY............................................................................................................. iv STATEMENT OF JURISDICTION..........................................................................1 STATEMENT OF THE ISSUES...............................................................................1 STATUTES AND REGULATIONS .........................................................................1 PRELIMINARY STATEMENT ...............................................................................1 STATEMENT OF THE CASE ..................................................................................2 STANDARD OF REVIEW .......................................................................................2 SUMMARY OF ARGUMENT .................................................................................3 STATEMENT OF STANDING ................................................................................3 ARGUMENT .............................................................................................................3 I. THE CAPS FOR AUTOMATED PAYMENT AND LIVE AGENT TRANSACTIONS ARE BELOW CARRIERS’ COSTS ...............................3 II. THE MAXIMUM CHARGES FOR “SINGLE-CALL” SERVICES DO NOT PERMIT PROVIDERS TO RECOVER THEIR COSTS ...............5 CONCLUSION ..........................................................................................................6 CERTIFICATE OF COMPLIANCE ii USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 4 of 13 TABLE OF AUTHORITIES Page CASES City of Brookings Mun. Tel. Co. v. FCC, 822 F.2d 1153 (D.C. Cir. 1987) ............................................................................................... 2 * FPC v. Hope Nat. Gas, Co., 320 U.S. 591 (1944) ................................................. 5 OXY USA, Inc. v. FERC, 64. F.3d 679 (D.C. Cir. 1995) .......................................... 2 STATUTES AND REGULATIONS 5 U.S.C. § 706(2) ....................................................................................................... 2 Authorities principally relied upon are designated by an asterisk (*). iii USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 5 of 13 GLOSSARY Bureau Wireline Competition Bureau FCC or Commission Federal Communications Commission ICS Inmate Calling Services Order WC Docket No. 12-375, Second Report and Order and Further Notice of Proposed Rulemaking, Rates for Interstate Inmate Calling Services, FCC 15-136, 30 FCC Rcd 12763 (2015) Stay Order WC Docket No. 12-375, Order Denying Stay Petitions, DA 16-83 (Wireline Competition Bureau rel. Jan. 22, 2016) iv USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 6 of 13 STATEMENT OF JURISDICTION Securus adopts and incorporates herein the Statement of Jurisdiction in the Joint ICS Provider Brief to which it is a signatory. STATEMENT OF THE ISSUES 1. Whether the Federal Communications Commission exceeded its authority, acted contrary to the record, or was arbitrary and capricious in adopting unprecedented caps on the fees for processing financial transactions such as credit card payments in the Second Inmate Rate Order. 2. Whether the Federal Communications Commission exceeded its authority, acted contrary to the record, or was arbitrary and capricious in adopting unprecedented caps on optional “Single-Call Services” such as Text2Connect and PayNow in the Second Inmate Rate Order. STATUTES AND REGULATIONS Pertinent statutes and regulations have been reproduced in the Addendum to the Joint ICS Provider Brief. STATEMENT OF THE CASE Securus adopts and incorporates herein the Statement of the Case in the Joint ICS Provider Brief to which it is a signatory. USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 7 of 13 STANDARD OF REVIEW This Court will vacate an FCC order that is contrary to law, arbitrary and capricious, unsupported by evidence, or without observance of procedure required by law. 5 U.S.C. § 706(2). In reviewing the caps, the Court will “inquire whether the Commission’s interpretations are ‘amply supported both factually and legally’ and accept them only if they are ‘the result of reasoned and principled decisionmaking that can be ascertained from the record.’” OXY USA, Inc. v. FERC, 64 F.3d 679, 697 (D.C. Cir. 1995) (quoting Tarpon Transmission Co. v. FERC, 860 F.2d 439, 442 (D.C. Cir. 1988)). “Post hoc rationalizations advanced to remedy inadequacies in the agency’s record or its explanation are bootless.” City of Brookings Mun. Tel. Co. v. FCC, 822 F.2d 1153, 1165 (D.C. Cir. 1987). SUMMARY OF ARGUMENT 1. The Commission imposed maximum rates for automated credit/debit card payments and live agent transactions that were considerably below Securus’s demonstrated costs. Its stated reason for disregarding Securus’s costs as an “outlier” is irrational, because Securus was the only party that provided any documentation at all of its itemized costs to provide these specific services. 2. The Commission prohibited providers from adding any markup to thirdparty financial transaction fees incurred in connection with so-called “single call” 2 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 8 of 13 services. Securus demonstrated that it incurred substantial start-up and operating costs specifically to provide single-call services; the Commission’s rule arbitrarily and irrationally prohibits Securus from recovering those costs. STATEMENT OF STANDING Securus adopts and incorporates herein the Statement of Standing in the Joint ICS Provider Brief to which it is a signatory. ARGUMENT I. THE CAPS FOR AUTOMATED PAYMENT AND LIVE AGENT TRANSACTIONS ARE BELOW CARRIERS’ COSTS. The Commission imposed a maximum Automated Payment Fee of $3.00 per use for processing a credit card or debit card payment. Order ¶167; Rules 64.6000(a)(1), 64.6020(b)(1). For processing by a live agent, it set a maximum fee of $5.95 per transaction. Order ¶168; Rules 64.6000(a)(3), 64.6020(b)(3). Securus showed that its cost of processing credit card payments is considerably higher than either of these amounts: • Up to ** CONFIDENTIAL $ ** charged by the vendors that perform credit card processing, plus • Bad debt chargebacks averaging ** CONFIDENTIAL $ ** per transaction, plus • An average of ** CONFIDENTIAL $ ** per transaction for internal labor, specialized software, IT operations expense, testing/QA 3 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 9 of 13 expense, Product Manager expense, network operations expense, accounting expense, reconciliation expense, accounts payable expense, auditor expense, reporting expense, SG&A, and overhead attributable to transaction processing.1 The Commission dismissed Securus’s cost evidence as an “outlier” and asserted that other providers considered the proposed rate caps to be reasonable. Order ¶167 (JA-____.) Even assuming arguendo that Securus’ costs were above industry averages, that would not prove the rates are sufficient to permit reasonably efficient providers to recover their costs. But, more importantly, Securus was the only party to submit a detailed analysis of costs incurred to process credit card transactions, including costs of bad debt and fraudulent transactions. It is arbitrary and capricious for an agency to reject the only data point before it as an “outlier.” In addition to ignoring Securus’s costs, the Bureau later justified its arbitrary caps by asserting that Securus enables credit card payments in Alabama where “similar rate caps” are in effect. Stay Order ¶43 (JA-____). But Alabama’s ICS regulations are not in effect—they were stayed pending appeal, as Securus explained to the Commission. WC Docket No. 12-375, Securus Reply Comments at 4-5 (filed Jan. 27, 2015) (JA-___.) 1 Declaration of Dennis Rose ¶3 (Jan. 9, 2015) (JA___). 4 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 10 of 13 It is a fundamental principle that regulated rates must permit a return on investment “sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.” FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944). Rate caps that are below the direct cost of service, by definition, cannot provide any return on investment and therefore cannot be just and reasonable. The Commission has no meaningful explanation for its decision to ignore Securus’s cost evidence and instead adopt rate proposals having no cost justification. The FCC never attempts to show Securus’s itemized costs are not bona fide costs of service, so it pretends these costs do not exist. This Court should vacate the automated payment and live agent fee caps as arbitrary and capricious. II. THE MAXIMUM CHARGES FOR “SINGLE-CALL” SERVICES DO NOT PERMIT PROVIDERS TO RECOVER THEIR COSTS. Rule 64.6020(b) requires carriers to charge no more than the per-minute cap for premium billing options, which the Order and rules refer to as “single-call and related services,” plus a pass-through without markup of third-party transaction fees. Order ¶¶182-189; Rule 64.6000(a)(2), 64.6020(b)(2). These services are described in the Joint ICS Provider Brief, section IV.B. Securus offers two optional services that fall under “single-call services”. Text2Connect enables an inmate to place a collect call to a wireless phone; it is a 5 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 11 of 13 crucial innovation in ICS which was not possible a few years ago. PayNow enables an inmate to place a call to a person with whom Securus does not have an established billing relationship, and allows the recipient to charge the call to a credit or debit card in real time. Both optional services rely on a third-party billing vendor. Both services require double consent by the paying party. Securus invested approximately ** CONFIDENTIAL $ ** to develop the software and billing arrangements necessary to offer Text2Connect and PayNow.2 Rule 64.6020(b) prevents Securus from recovering these external costs as well as the internal operating costs that it incurs on an incremental basis. It is therefore arbitrary and capricious for the same reasons discussed in the preceding section. CONCLUSION The caps for credit card transactions, 47 C.F.R. §64.6020(b)(1) and (b)(3), and the caps for Single-Call services, id. §64.6020(b)(2), should be vacated. Dated: June 3, 2016 Respectfully submitted, /s/ Andrew D. Lipman Andrew D. Lipman MORGAN, LEWIS & BOCKIUS LLP 2020 K Street, N.W. Washington, D.C. 20006 (202) 373-6033 /s/ Stephanie A. Joyce Stephanie A. Joyce ARENT FOX LLP 1717 K Street, N.W. Washington, D.C. 20006-5344 (202) 857-6081 Counsel for Petitioner Securus Technologies, Inc. 2 Rose Declaration ¶¶4-6 (JA___-___). 6 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 12 of 13 CERTIFICATE OF COMPLIANCE Pursuant to Federal Rule of Appellate Procedure 32(a)(7)(C) and D.C. Circuit Rule 32(a), and the Court’s April 18, 2016, briefing order, the undersigned certifies that this brief complies with the applicable type-volume limitations. This brief was prepared using a proportionally spaced type (Times New Roman, 14 point). Exclusive of the portions exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii) and D.C. Circuit Rule 32(a)(1), this brief contains 1,119 words; together with the Joint Brief for the ICS Carrier Petitioners the total number of words does not exceed 15,500 in compliance with the Court’s April 18 Order (Doc. 1609084). This certificate was prepared in reliance on the word-count function of the word-processing system (Microsoft Word 2013) used to prepare this brief. /s/ Stephanie A. Joyce Stephanie A. Joyce June 3, 2016 USCA Case #15-1461 Document #1616683 Filed: 06/03/2016 Page 13 of 13 CERTIFICATE OF SERVICE I hereby certify that, on June 3, 2016, I filed the Non-Public Version of the Separate Brief of Petitioner Securus Technologies, Inc. with the Clerk of the Court for the United States Court of Appeals for the District of Columbia Circuit and served it by hand on the following persons: Sarah Citrin Federal Communications Commission 445 12th Street, S.W. Washington, DC 20554 Daniel Edward Haar United States Department of Justice Antitrust Division, Appellate Section 950 Pennsylvania Avenue, NW Washington, DC 20530-0001 I also certify that on this day I filed the Public Version of this document via ECF and all parties were served via ECF and via First Class Mail. /s/ Stephanie A. Joyce Stephanie A. Joyce