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«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»

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In the 2001 decision of Arsberry v. Illinois, Judge Posner analyzed and dismissed antitrust claims against prison payphone rates.120 Judge Posner based his decision on the belief that it was impossible for the telephone companies to horizontally collude.121 After Arsberry, prisoner advocates abandoned collusion arguments and focused instead on barriers to entry claims, which require a different economic analysis under the Sherman Act.122 Mirroring Judge Posner’s Arsberry holding, in Miranda v. Michigan the Eastern District Court of Michigan—like many courts after it—found that long-distance telephone carriers were immune from antitrust liability arising out of their exclusive dealing agreements with states when contracting for prisoner call services.123 The court believed that state law gave prisId.

117 Id. at 8.

118 Id. at 10.

119 Holloway v. Magness, 2011 WL 204891 at 10 (quoting Walton v. N.Y. State Dep’t of Corr.

Servs., 921 N.E.2d 145, 155 (N.Y. 2009)).

120 Arsberry v. Illinois, 244 F.3d 558, 565–66 (7th Cir. 2001).

121 Id. at 566.

122 Section 2 of the Sherman Act makes it illegal to “monopolize, or attempt to monopolize, or

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ons authority to create anticompetitive rules that limit supply.124 The court held that state immunities covered telecommunications companies.125 An underlying rationale of courts is that prison payphone monopolies are state-sponsored and thus fall under the Parker Immunity Doctrine. Under Parker v. Brown and subsequent cases, local government entities and the private entities they contract with are exempt from federal antitrust laws if the anticompetitive actions are clearly articulated, affirmatively indicated as state policy, and actively overseen by the state.126 State governments limit competition via laws and regulations that set prices, create barriers to entry, and limit outputs.127 In Parker, the Supreme Court reasoned that, if this immunity did not extend to private actors, “a state would be unable to implement programs that restrain competition among private parties” because “[a] plaintiff could frustrate any such program merely by filing suit against the regulated private parties, rather than the state officials who implement the plan.”128 The contract bidding, monetary commissions, and resulting prison payphone monopolies fall under Parker Immunity.

Thus, lawsuits alleging Sherman Act violations fail under the state-immunity doctrine.

However, the Parker Immunity Doctrine does not exempt state and private agents from federal oversight when congressional legislation is enacted to preempt state laws.129 The Telecommunications Act of 1996 granted the FCC regulatory power over telecommunications providers operating as tariff aggregators—companies that provide telephones “to the public or to transient users of [a] premises for interstate calling.”130 Therefore, the FCC may decide any form of applicable regulation regardless of Parker Immunity.

For interstate calling, the Filed Rate Doctrine, which mandates that regulated telecommunications carriers file rates with the FCC, also prevents suits against prison payphone providers but allow for direct FCC regulation.131 The Second Circuit posits that “legislatively appointed regulatory bodies have institutional competence to address rate-making issues... [while] the interference of courts in the rate-making process would 124 Id.

125 Id.

126 Keith A. Rowley, Immunity from Regulatory Price Squeeze Claims: From Keogh, Parker, and Noerr to Town of Concord and Beyond, 70 TEX. L. REV. 399, 416–18 (1991).


128 S. Motor Carriers Rate Conference, Inc. v. United States, 471 U.S. 48, 56–57 (1985).

129 Parker v. Brown, 317 U.S. 341, 350 (1943) (“Occupation of a legislative ‘field’ by Congress in the exercise of a granted power is a familiar example of its constitutional power to suspend state laws.”).

130 47 U.S.C. § 226(a)(2), (h)(4)(A) (2012).

131 Miranda v. Michigan, 141 F. Supp. 2d 747, 757-58 (E.D. Mich. 2001); Arsberry v. Illinois, 117 F. Supp. 2d 743, 744–45 (N.D. Ill. 2000).

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subvert the authority of rate-setting bodies and undermine the regulatory regime.”132 As a result, even if Sherman Act allegations fail in court, the FCC may still regulate prison payphone providers.

This case history suggests that inmates will almost always be unsuccessful when suing prison payphone providers on First Amendment and antitrust theories.133 However, while Parker Immunity protects payphone providers from direct antitrust suits, the Filed Rate Doctrine grants the FCC discretion to regulate telecommunications providers.134 Through the Telecommunications Act, the FCC is legally competent to set prison payphone price caps on otherwise protected providers.

C. The FCC Has the Power to Regulate Pricing via 47 U.S.C. § 201

In 1998, the FCC chose not to impose benchmark rates on inmate payphone providers because it was concerned that regulation would stifle competition.135 However, because competition over consumer rates did not develop as expected,136 the FCC recently set general price caps and restricted funding of state commissions through payphone pricing.137 In Verizon v. Trinko, the Supreme Court found that antitrust claims were unsuitable mechanisms for arguing telecommunication policy.138 Instead, the Court held that the FCC, armed with the Telecommunications Act of 1996, was a more appropriate forum for debating regulation of telecommunications markets.139 In 1999, the Supreme Court ruled that deference must be given to the FCC’s interpretation of the Telecommunications Act.140 Accordingly, the FCC has original jurisdiction to regulate telecommunications industries and is not tied to the fate of previous antitrust claims.141 The Supreme Court and Eighth Circuit have also held that Congress gave the FCC general jurisdiction to create and implement preemptive reguFax Telecommunicaciones Inc. v. AT&T, 138 F.3d 479, 489 (2d Cir. 1998) (internal citations omitted).

133 Arsberry, 244 F.3d at 565–66; Miranda, 141 F. Supp. 2d at 750.

134 Miranda, 141 F. Supp. 2d at 757–58.

135 Billed Party Preference for InterLATA 0+ Calls, Second Report and Order and Order on Reconsideration, 13 F.C.C.R. 6122 (1998) [hereinafter 0+ Second Report].

136 See 2002 Order and NPRM, supra note 4, at 6.

137 Aug. 9 FCC Press Release, supra note 13 at 1–2.

138 See Verizon Commc’ns Inc. v. Trinko, 540 U.S. 398, 406–07 (2004).

139 See id.

140 AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 397 (1999) (citing Chevron v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 842–43 (1984) (indicating that deference is due to the regulating agency when interpreting the legislative statute granting the agency power to regulate)).



2014] CALLING FROM PRISON 531 lation over local competition.142 In Iowa Utilities Board v. FCC, the Eighth Circuit relied heavily on § 201(b) of the Telecommunications Act, which grants the FCC rulemaking authority to include the regulation of local competitors.143 In 1999, the Supreme Court also relied on § 201(b) in AT&T Corp. v. Iowa Utilities Board, where it ruled that Congress had implicitly given general jurisdiction to the FCC.144 These cases abolished the traditional separation of interstate and intrastate regulation and urged the FCC to work cooperatively with states on policies relating to local telecom competition.145 As confirmed by both Iowa Utilities Board cases, the FCC has exclusive power to regulate excessive telephone rates under 47 U.S.C. § 201(b), which mandates that “practices, classifications, and regulations for and in connection with such [interstate wire] communications service, shall be just and reasonable, and any such charge, practice, classification, or regulation that is unjust or unreasonable is hereby declared to be unlawful.”146 Under § 201(b), the FCC may regulate common carriers if rates are deemed unjust and unreasonable. In the past, the FCC did not extend typical carrier regulation to prisoner payphone providers due to exceptional security and penological concerns.147 The FCC first considered rate capping prisoner phone services in 1996 but found that the complex security requirements resulted in marketspecific facilities and costs.148 Hence, the FCC found that inmate phone calls necessarily cost more than calls made from outside the prison system.149 However, the FCC also stated that “the recipients of collect calls from inmates... require additional safeguards to avoid being charged excessive rates from a monopoly provider.”150 For example, the FCC requires that prisoner payphone providers inform call recipients of their right to demand pricing quotes before being charged.151 However, FCC price cap authority is limited by 47 U.S.C. § 276, which grants the agency authority to only promulgate regulations that “establish a per call compensation plan to ensure that all payphone service providers are fairly compensated for each and every completed intrastate 142 Id. at 86.

143 See Iowa Utils. Bd. v. FCC, 120 F.3d 753, 804–06 (8th Cir. 1997).

144 AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 367 (1999).

145 NUECHTERLEIN & WEISER, supra note 141, at 86.

146 47 U.S.C. § 201(b) (2012).

147 1995 NPRM and Notice, supra note 50, at 1534.

148 Miranda v. Michigan, 141 F. Supp. 2d 747, 759–60 (E.D. Mich. 2001).

149 Id. at 760.

150 0+ Second Report, supra note 135, at 6123.

151 Hang up on High Public Pay Phone Rates, FCC, http://www.fcc.gov/guides/hang-high-publicpay-phone-rates (last visited Sept. 13, 2013). Consumers can receive these quotes by pressing no more than two digits or staying on the line. Id.

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and interstate call using their payphone.”152 The FCC must examine its price caps to ensure that service providers in the most costly facilities are still adequately compensated.


FCC pricing regulation ensures that rates provided in prison phone contracts are constrained close to the costs of implementing and maintaining the telephone systems. Cost regulation is necessary in the inmate payphone industry because payphone services have no close, legal substitutes, inmate demand is inherently inelastic, and the inmates’ position as third-party beneficiaries incentivizes higher monetary commissions instead of lower end-user prices.153 Price regulation is also necessary to curb the use of illegal and potentially harmful substitutes. Inmate petitioners believe that lower payphone costs will incentivize purchasers of smuggled cell phones to use legitimate communication instead.154 In addition, call diversion by inmates who seek lower cost alternatives will shift back to legal payphone purchases as rates become more affordable. Inmates using these substitutes for illegal purposes are not affected by cheaper pricing of legitimate options. Under ideal FCC rate regulation, only inmates participating in criminal enterprises within the prison would be incentivized to continue using call diversion and smuggled cell phones. Thus, under ideal FCC rate regulation, penal institutions and state legislatures could increase punishments for illegal communication without overcriminalizing individuals who are simply attempting to affordably communicate with their families.

While the FCC’s August 9th, 2013 rate caps closely parallel attempted legislation and the Wright petition, they may undercompensate service providers of small, costly facilities because the order assumes that the efficiencies and economies of scale found in larger facilities are present in all facilities. These rate caps may unduly burden payphone providers of small, inefficient prison facilities that cannot take advantage of the relative efficiencies present in larger prison facilities.

Additionally, the FCC chose to prohibit monetary commissions.155 However, this blanket prohibition will reduce the effectiveness of beneficial, prisoner-related projects funded through the commissions and may stifle innovation of new projects aimed at reducing prisoner recidivism.

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The FCC should review its price-cap order and instead utilize an open, tiered rate structure. Such a system would allow phone providers to take advantage of varying efficiencies and economies of scale while reducing the FCC’s administrative burdens.

A. The FCC’s Current Rate Caps Are Untenable The FCC’s rate caps may fail to provide adequate cost recovery as mandated by 47 U.S.C. § 276.156 Section 276(b)(1)(A) requires that the FCC regulate payphone services so that per-call compensation plans adequately compensate for each call’s cost.157 The FCC’s nationwide price caps could result in losses from calls originating in small, high-cost facilities that mandate higher security requirements.158 The FCC has stated that prices partially vary due to costs of different security standards.159 Forcing payphone providers to suffer shortfalls from facilities that mandate costly security procedures would violate 47 U.S.C.

§ 276. Though the FCC has not defined § 276’s “fair compensation” for these services, the FCC’s current rate caps may ultimately prove unfair.160 Securus, one of the largest inmate payphone providers, contends that the initial setup of a call is the most expensive step because the service provider must make up for principal costs of the service, “including software development, database management, [and] high-speed data connectivity...

.”161 Including software development costs in initial call setup fees is logical due to the variety and divergence of state security concerns and requirements. Consequently, price caps that do not allow connection costs must account for these initial costs by ensuring that the per-minute benchmarks are set slightly higher than the marginal cost of delivery once the system is installed. Thus, even where the FCC’s price caps cover basic marginal costs of the calls, they may still undercompensate the service provider.

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