Unholy Contract  - The Legacy and Abuse of the Filed Rate Doctrine

By Neil Ende

Posted: 05/1999

Unholy Contract
The Legacy and Abuse of the Filed Rate Doctrine
By Neil S. Ende

In America, the contract
is a fundamental and indispensable part of our culture and business life. Virtually no
significant business transaction is consummated without the execution of a contract. The
enforceability, indeed the "sanctity" of the contract, is at the very heart of
the capitalist system.

In the telecommunications world, however, the contract has long had a diminished and
subservient role. Under Section 203 of the Communications Act of 1934 as amended, 47
U.S.C. 203, all common carriers are required to file tariffs showing "all
charges" for the "interstate and foreign wire or radio communication
services" that they provide as well as "the classifications, practices, and
regulations affecting such charges." In addition, Section 203 declares it unlawful
for any carrier to "demand, collect or receive a greater or less or different
compensation" for such communication services.

The requirement that carriers file tariffs and provide service pursuant to those
tariffs generally is referred to as the Filed Rate Doctrine (also referred to as the Filed
Tariff Doctrine). In a 1915 case (Louisville & Nashville Rail Co. vs. Maxwell),
the Supreme Court explained the operation and purpose of the Filed Rate Doctrine as
follows: "The rate of the carrier duly filed is the only lawful charge. Deviation
from it is not permitted upon any pretext. [Customers] are charged with notice of it, and
they as well as the carrier must abide by it, unless it is found by the Commission to be
unreasonable. Ignorance or misquotation of rates is not an excuse for charging either less
or more than the rate filed. … [The Filed Rate Doctrine] has been adopted by Congress in
the regulation of interstate commerce in order to prevent discrimination."

While it reads like innocuous legalese, the Filed Rate Doctrine is a ticking time bomb
that can destroy a reseller’s business at any time and without notice–even if it has
binding written contracts with its carriers that lock in a contract or a tariffed rate.
Here’s the problem. As the U.S. Supreme Court has explained, carriers cannot charge rates
other than those set forth in their tariffs. Moreover, because the tariffs are publicly
filed, a reseller, as the customer, is deemed as a matter of law to have complete
knowledge of all rates, terms and conditions set forth in those tariffs even though most
tariffs filed by major carriers may contain tens of thousands of pages of detailed and
often arcane terms and conditions.

Thus, if a carrier offers a reseller a rate that is not found in its tariffs, that
carrier cannot lawfully provide service at that rate. Indeed, as recently as this past
summer, in AT&T vs. Central Office Telephone Inc., the Supreme Court reaffirmed
that "even if a carrier intentionally misrepresents its rates and a customer relies
on the misrepresentation, the carrier cannot be held to the promised rate if it conflicts
with the published tariff." The customer is required, as a matter of law, to pay the
tariffed rate even though the customer was induced into taking the service by fraudulent
means.

As unbelievable as this seems when stated in the abstract, it is even more troubling
when viewed against real-world facts. For example, let’s assume the following scenario: A
carrier promises a reseller a rate of 5 cents per minute for domestic switched
terminations nationwide and executes a seemingly binding agreement that sets forth that
rate. In return for this rate, a reseller commits to purchase 1 million minutes per month
for a three-year period. A reseller then enters into binding agreements with third parties
to resell the service for 6 cents per minute. Then, either through negligence or
fraudulent intent, it turns out that the underlying carrier’s tariffs do not contain a
5-cent rate for the described service, only a 10-cent rate. The result is that the carrier
is required by law to charge the reseller the 10-cent rate, even though this means the
reseller’s resale rate to third parties will be below cost. An even worse outcome is
possible if a reseller remains liable to the carrier for the full three-year, 36
million-minute purchase commitment.

Moreover, because the resale customer is deemed to have complete and ongoing knowledge
of all aspects of the carrier’s tariff, it also may, depending on the specific
circumstances, be obligated to pay the higher rate where the carrier’s tariff had a
particular rate on the day the agreement was executed, but where the carrier unilaterally
modified its tariff to increase the rate at a later date. This means it is not sufficient
merely for a reseller to check the carrier’s tariff prior to executing an agreement. Since
carriers can modify their domestic tariffs on one day’s notice, daily review is required
to ensure that the promised rate continues in effect. Thus, in certain circumstances, even
daily review will only provide knowledge of the rate increase or change in terms or
conditions, not the ability to demand continued application of the promised rate, term or
condition.

When confronted by these facts, most resellers, and even most "telecommunications
counsel," argue that the law cannot possibly sanction this result, particularly where
it is the byproduct of intentional misconduct by a carrier. When they are assured that the
law, in fact, sanctions this result, most counsel argue that the courts will certainly
invoke considerations of equity to protect the rights of the resellers. Again, however,
this is not the case. Indeed, the Supreme Court has repeatedly rejected equitable defenses
asserted by resellers to the application of the Filed Rate Doctrine as it did in the 1990
case Maislin Industries vs. Primary Steel: "We have never accepted the
argument that such ‘equities’ are relevant to the application of [the Filed Rate
Doctrine]. Indeed, strict adherence to the filed rate has never been justified on the
grounds that the carrier is equitably entitled to that rate, but rather that such
adherence, despite the harsh consequences in some circumstances, is necessary to the
enforcement of the Act."

To make matters worse, the application of the Filed Rate Doctrine is not limited to the
carrier’s rate alone, but frequently also applies to the terms and conditions of service
found in the carrier’s tariffs. (Thus, the term Filed Tariff Doctrine.) These terms and
conditions address such critical matters as deposit requirements, quality of service (QoS)
issues, liability for fraud and litigation or arbitration of disputes. (Tariffed terms
relating to litigation and/or arbitration rights can be particularly egregious as they
significantly can limit a reseller’s legal rights should they need to assert a claim.
Careful attention should be paid to such terms, whether they appear in a tariff or a
carrier agreement.) As with the carrier rate, resellers may be bound to these additional
terms and conditions whether they have actual knowledge of the term or condition or what
they require.

Given the consequences of inaction, it is critical that a reseller take appropriate
steps to protect itself against the harsh application of the Filed Rate Doctrine. For a
reseller, the Filed Rate Doctrine often is a terminal illness–once subject to it, there
is little that can be done to eradicate the disease if a carrier increases the rate. There
are, however, a number of strategies that can be employed by experienced
telecommunications counsel to discourage misconduct by a carrier, to protect a reseller’s
business and customer base and to obtain damages where such misconduct cannot be deterred.

First, a reseller should read its agreements carefully or have them reviewed by
experienced telecommunications counsel. Second, if a reseller is taking service under
tariff, it should demand to be provided with a copy of all applicable tariff provisions
before signing. Third, a reseller should insist on prior notification of changes in tariff
provisions. Fourth, a reseller should insist on the right to cancel the agreement without
liability upon the filing of tariff revisions affecting the applicable rate or other
critical terms and conditions. The list goes on and on and varies depending on the terms
and circumstances of each service arrangement.

Other preventative measures include entering into agreements pursuant to Section 211 of
the Communi-cations Act, which specifically allows direct agreements between carriers.
(Contrary to popular belief, it is not sufficient merely to state in an agreement that the
rates set forth therein supersede the tariff; generally they do not.) Properly drafted,
these agreements can set forth all rates, terms and conditions under which
telecommunications services are being provided, thereby limiting or eliminating the risks
associated with services taken under tariff. Agree-ments under Section 211 also can be
drafted to incorporate certain tariff provisions without subjecting a reseller’s business
to all terms and/or conditions found in the tariff. Again, careful drafting and attention
to detail can result in an agreement that provides adequate protection for carrier and
reseller alike without imposing the uncertainties and risks associated with tariffed
service arrangements on either party.

The bottom line is that a reseller needs to be vigilant. It should insist on
comprehensive, carefully drafted agreements that properly address the applicability of the
carrier’s tariffs; specify all rates, terms and conditions applicable to the service
arrangement; and define with certainty the circumstances under which changes can be made.
A reseller that takes its agreements seriously is far less likely to be victimized by
unscrupulous carriers and is more likely to respond immediately and forcefully should the
need arise.

Neil S. Ende is founder and partner of Technology Law Group LLC, a Washington-based
communications law firm. He can be reached by phone at +1 202 895 1707 and by e-mail at [email protected].