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In a first impression case in the 2nd Circuit, a judge with the U.S. District Court of the Northern District of New York has ruled that the federal judiciary has the power to review an arbitral decision by New York’s Public Service Commission in a telecommunications dispute. U.S. District Judge Lawrence E. Kahn’s holding in MCI Telecommunications Corp. v. New York Telephone Co., 97-CV-1600, follows the reasoning of at least 14 other district courts and three of four federal circuits. It rejects a Feb. 14 decision handed down by the 4th U.S. Circuit Court of Appeals. The 2nd Circuit has not yet addressed the issue, although Kahn’s decision will most likely present an opportunity to do so. Kahn found that New York State waived its sovereign immunity by accepting and performing its assigned role under the Telecommunications Act of 1996, 47 U.S.C. 252. He said the State Public Service Commission’s participation in an arbitration process established under the act “effectuates a non-verbal voluntary waiver of the state commission’s Eleventh Amendment immunity” under the U.S. Supreme Court’s 1999 holding in College Savings Bank v. Florida Post Secondary Educational Expense Board, 527 U.S. 666. The decision arises from a dispute over the fee that MCI Telecommunications should pay for using Bell Atlantic (now Verizon) equipment to provide local telephone service, and myriad related issues. Its genesis is the Telecommunications Act of 1996, which Congress passed in part to stimulate competition by breaking the monopoly that telephone companies enjoyed in local service by virtue of exclusive franchise agreements. Under the act, “local exchange carriers” (LECs), like Bell Atlantic, are required to share their networking equipment with “competitor local exchange carriers” (CLECs), like MCI. If the LEC and the CLEC cannot come to terms, the act allows either to petition the state commission that regulates local phone service, if the state agrees to assume that role. That commission, which in New York is the PSC, then arbitrates the dispute. The act specifically affords either party the right to challenge the arbitral decision in federal district court. Since the act was passed, more than a dozen courts have considered whether a regulatory commission waived its sovereign immunity by arbitrating a dispute. In many of the cases, including this one, the commission claimed that since the Telecommunications Act was passed under the powers delineated to Congress under the Commerce Act, Congress cannot abrogate a commission’s sovereign immunity. Judge Kahn adopted the analysis of nearly every other court that has considered the issue. “The underlying rationale for each of these opinions is that the Act does not mandate that a state commission participate in the arbitration process,” Kahn wrote. The basis for those rulings was generally the College Savings Bank decision, where the U.S. Supreme Court held that a state does not constructively waive its sovereign immunity by its “mere presence in a field subject to congressional regulation.” It said that a waiver occurs only where Congress clearly puts the state on notice that its conduct may subject it to federal suits, where a state can opt out of the activity at issue and where the state affirmatively elects to participate. Under that analysis, several courts, including Kahn’s, have found that a state regulatory commission that opts to act as arbitrator in matters arising from the Telecommunications Act has waived immunity. Only the 4th Circuit, in its recent decision in Bell Atlantic Maryland Inc. v. MCI WorldCom Inc., 99-2459, held otherwise. It said that Congress was not “unmistakably clear and unequivocal in its intent” to condition participation in the act’s regulatory process on a waiver of immunity. But Kahn said that a reading of College Savings Bank and the Eleventh Amendment “eviscerates Congress’ ability to cope with the delicate and complex task of promoting increased competition in the local telephone service market.” By choosing to participate, Kahn said, the PSC subjected itself to the rules established under the act, including federal court oversight. He said the state could have declined to take part in the process, in which case the Federal Communications Commission would have assumed its role in arbitrating disagreements between LECs and CLECs. “Congress clearly and unambiguously put the Public Service Commission on notice that participation in the Act’s arbitration scheme subjected it to federal suit,” Kahn said. “The Public Service Commission could have refused to participate in the Act without otherwise excluding itself from conduct lawfully within its powers.” Appearing were Michael Whiteman of Whiteman, Osterman & Hanna in Albany for MCI; John T. Mitchell of Tobin and Dempf in Albany for New York Telephone, doing business as Bell-Atlantic New York; and Jonathan D. Feinberg for the Public Service Commission.

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