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ALJ/MCK/avs DRAFT Agenda ID #3081

1/22/2004 Item 6

Decision DRAFT DECISION OF ALJ McKENZIE (Mailed 12/9/2003)

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

DSLExtreme.com, Inc. and Sonic.net, Inc.

                  Complainants,

              vs.

Pacific Bell Telephone Company (U 1001 C), SBC Advanced Solutions, Inc. (U 6346 C); and Verizon California Inc. (U 10020 C),

                  Defendants.

Case 03-01-007

(Filed January 10, 2003)

ORDER GRANTING DEFENDANTS' MOTION TO
DISMISS THE AMENDED COMPLAINT

TABLE OF CONTENTS

Title Page

ORDER GRANTING DEFENDANTS' MOTION TO DISMISS THE AMENDED COMPLAINT 22

I. Factual Background 22

II. Issues at the TRO Hearing 1010

III. The Allegations of the Amended Complaint 1818

IV. Defendants' Motions to Dismiss 2424

V. Discussion 2525

Title Page

VI. Comments on Draft Decision 5151

VII. Assignment of Proceeding 5151

Findings of Fact 5151

Conclusions of Law 6060

O R D E R 6464

ORDER GRANTING DEFENDANTS' MOTION TO
DISMISS THE AMENDED COMPLAINT

In this decision, we dismiss the Amended Complaint that the complainants, two Internet Service Providers (ISPs), submitted on February 19, 2003. As explained below, the Amended Complaint was filed with the permission of the assigned Administrative Law Judge (ALJ) following a January 30, 2003 hearing on complainants' request for a temporary restraining order (TRO). The ALJ denied the TRO, but not before allowing the complainants to reformulate the theory under which they were pursuing the TRO and the injunctive relief they were seeking from defendants. Thus, the Amended Complaint here represents complainants' third attempt to state causes of action that would entitle them to relief.

For many of the same reasons that the ALJ denied the TRO, we conclude that complainants have either failed to state a cause of action, or that judgment against them should be granted as a matter of law. Under these circumstances, it is not appropriate to allow complainants to attempt to amend their complaint again, or to let them pursue broad discovery in the hope that they can eventually uncover facts that would enable them to state a claim. Instead, we will dismiss the Amended Complaint with prejudice.

I. Factual Background

This case arises out of the December 2002 decision of DIRECTV Broadband, Inc. (DIRECTV), a subsidiary of Hughes Electronics, to stop providing Direct Subscriber Line (DSL) service to its customers. DSL is a form of high-speed Internet service that allows users to access the Internet at much higher speeds than can be achieved through either a computer modem or dial-up service over telephone lines. The DSL market in California (and elsewhere) has seen healthy growth since the late 1990s.

When DIRECTV decided to exit the DSL business, it wanted to ensure that its retail customers would be able to make the transition to a new ISP with a minimum of inconvenience. To achieve this, DIRECTV negotiated arrangements with defendants SBC Advanced Solutions, Inc. (SBC ASI) and Verizon Advanced Data Inc. (VADI), both of which provide DSL transport service, whereby the ISP service offered by affiliates of these two companies, SBC Yahoo! DSL (SBC Yahoo) and Verizon Online DSL (Verizon Online), respectively, would be advertised as the "preferred products" for DIRECTV customers seeking a new ISP within the geographic areas where SBC ASI or VADI offered the underlying DSL transport.

A press release announcing the preferred product arrangement with SBC Yahoo was issued jointly by DIRECTV and SBC Internet Services (SBCIS) on December 27, 2002; it is attached to both the January 10, 2003 complaint and to the February 19 Amended Complaint as Exhibit 2. The press release stated that DIRECTV would "exclusively recommend to its customers in the SBC operating area that they transition to SBC Yahoo! DSL service," (emphasis added), and urged such customers to telephone or consult the two companies' websites for further details.

A similar joint press release was issued by DIRECTV and Verizon Online on December 30, 2002. This press release (which is attached to both the January 10 complaint and the Amended Complaint as Exhibit 3) stated that DIRECTV would recommend Verizon Online's DSL service to customers "in Verizon regions" (i.e., areas where VADI provided the underlying DSL transport), but made no mention of an exclusive arrangement. Interested customers were urged to telephone Verizon Online or to consult DIRECTV's website.

The initial complaint and motion requesting a TRO were filed on January 10, 2003, about two weeks after issuance of the press releases. The complainants were (1) Sonic.net, Inc. (Sonic), a Northern California ISP that is unaffiliated with SBC but which purchases DSL transport from SBC ASI and offers DSL service that competes with SBC Yahoo, and (2) DSLExtreme.com, Inc. (DSLExtreme), a Southern California ISP that is unaffiliated with either the SBC or Verizon companies, but which purchases DSL transport from both SBC ASI and VADI and offers DSL service that competes with both SBC Yahoo and Verizon Online.

In their pleadings, complainants alleged that the defendants were either (1) offering their affiliated ISPs unlawful preferential service by eliminating significant downtime for these affiliates in the DSL transitioning process, or (2) misleading retail customers into believing that such downtime could be avoided or reduced if the customer chose either SBC Yahoo or Verizon Online. Complainants argued that a TRO was necessary because DIRECTV had guaranteed to keep its DSL service running only through January 16, 2003, and that without immediate relief, both DIRECTV customers seeking a new ISP and ISPs unaffiliated with SBC or Verizon would be irreparably harmed. As relief, complainants sought an order requiring Pacific Bell Telephone Company, SBC ASI and Verizon California Inc. (Verizon) to "maintain DSL Transport connectivity for all [DIRECTV] subscribers until March 14, 2003," as well as an order that would either (1) prohibit the defendants from discriminating in favor of their affiliated ISPs with respect to downtime and other aspects of the ISP transitioning process, or (2) require the defendants to issue corrected advertisements making clear that retail customers who chose ISPs unaffiliated with SBC or Verizon would not be disadvantaged with respect to downtime.

Responses to the TRO motion were filed by Verizon on January 15, 2003, and by SBC ASI on January 16.1 In its papers, Verizon argued strongly that the standards used by the Commission for issuing a TRO had not been met,2 because complainants were unlikely to prevail on the merits, and because the relief they were seeking would actually harm DIRECTV customers seeking to transition to a new ISP. First, Verizon argued that it was under a duty not to discriminate against unaffiliated ISPs, that it had not discriminated, and that it had actually implemented a procedure whereby customers migrating from DIRECTV would suffer only a few minutes of downtime whether they chose Verizon Online or an ISP unaffiliated with Verizon. Second, Verizon argued that the advertisements at issue did not state, or even remotely imply, that customers choosing a non-affiliated ISP would suffer greater service disruptions or additional downtime than customers choosing Verizon Online, and that when these advertisements were read in context, the Commission could properly conclude as a matter of law that they were not misleading.3 Third, Verizon argued that the advertisements of Verizon Online were beyond the Commission's jurisdiction, since the Commission does not regulate the activities of retail ISPs. Finally, Verizon argued that granting the requested TRO would have the perverse effect of harming the very customers that complainants claimed they wanted to protect:

"Even though Verizon has implemented a process to minimize disruptions for [DIRECTV] customers migrating to an unaffiliated ISP, the process still involves disconnecting DSL transport service, albeit for a few minutes, to switch the customer to the new ISP. Accordingly, the proposed temporary injunction [prohibiting any disconnection of DSL transport to DIRECTV customers until March 14, 2003] would literally preclude any [DIRECTV] customer in Verizon's territory from moving to another ISP. Moreover, because[DIRECTV] is, by Complainants' own admission, beyond the jurisdiction of the Commission and may terminate its services before the injunction is lifted,[4] the inability to transition customers to new ISPs may leave subscribers with a live DSL transport connection but no ISP services. Customers would then be left with a `dead' DSL line that has no capability to access the Internet or to send or receive email." (January 15 Verizon Response, p. 4.)

In its January 16 papers, SBC ASI made arguments similar to Verizon's. In particular, SBC ASI emphasized that the practical effect of the TRO sought by complainants would be to prohibit it from processing connect orders from new ISPs chosen by former DIRECTV customers, since such new connection orders could not be processed until disconnection orders from these customers had been handled. In the event DIRECTV chose to shut down its network prior to expiration of the TRO, SBC ASI continued, "the end use customers of [DIRECTV] would in effect be stranded without any opportunity to obtain high speed Internet service from any other ISP." (January 16 SBC ASI Response, p. 8.)5

In addition to pointing out the technical capriciousness of the injunction complainants were seeking, SBC ASI asserted that it had not discriminated among its affiliated and non-affiliated ISPs in providing DSL Transport service, and that, whichever ISP provider they chose, all retail customers would experience 7 to 9 days of downtime in order to complete the processing of a disconnect order from DIRECTV, followed by a new connect order from the successor ISP. SBC ASI also argued that none of the advertisements at issue suggested anything different, and that because DIRECTV had recently modified its website to make clear that DIRECTV would keep its network up and running until at least January 31 (two weeks longer than previously announced), there was no need for a TRO.

The ALJ held a conference call with all the parties on January 17, 2003. During the conference call, complainants conceded that they had not understood the technical implications of their proposed injunction, and agreed that in view of DIRECTV's announcement that its network would remain in operation until at least January 31, 2003, emergency relief was not necessary. The ALJ set January 24 as the date for a TRO hearing in the event one was necessary, and ruled that complainants would have until mid-day on January 23 to submit reply papers. The ALJ also instructed complainants to advise him by the close of business on January 22 whether a TRO hearing would still be necessary.

On January 22, complainants advised the ALJ that they would no longer be seeking a TRO against VADI and its Verizon affiliates, but that they still wished to pursue such relief against SBC ASI, SBC California and their affiliates. The ALJ reiterated that complainants should file their reply papers on January 23.

On that date, complainants submitted papers in which they substantially changed the nature of the relief they were seeking. Acknowledging that they had been unaware of the technical considerations raised by defendants about disconnect and new connect orders, complainants conceded that their "original request regarding maintaining DSL Transport connectivity is obviously no longer needed." (Complainants' January 23 Response, p. 1.) However, they continued, immediate injunctive relief was still necessary to prevent deceptive marketing by SBC California and SBC ASI. Complainants claimed that by refusing to inform DIRECTV's customers that the company's network would remain up and running for some time, these defendants were inducing a sense of panic in DIRECTV's customers, while at the same time sending them misleading advertisements. Complainants also claimed that in at least one instance, an SBC ASI technician had orally disparaged complainants' service to a retail customer. In view of this situation, complainants sought the following relief in their modified TRO request:


"(1) An order enjoining SBC California from marketing via telephone, mail, or email to former DirecTV DSL subscribers who have chosen to migrate their DSL services to Complainants;


"(2) An order enjoining SBC ASI's technicians from disparaging the services of Complainants;


"(3) An order requiring SBC ASI and/or SBC California to notify all California DirecTV subscribers that SBC ASI has an agreement with DirecTV to maintain DSL Transport connectivity through February 28th and will seek to transition customers to the Internet service provider of their choice with a maximum of five days downtime." (Complainants' January 23 Response, p. 3.)

Following receipt of complainants' new papers, another conference call was held. The ALJ agreed that in view of the changes in relief complainants were seeking, the TRO hearing should be postponed until January 30, and he gave defendants until January 27 to file a set of papers responding to complainants' new allegations. On January 27, both SBC ASI and SBC California filed formal responses to the amended TRO request, as well as written testimony concerning the issues raised by the amended TRO request.

1 In its response, Verizon pointed out that based on the relief complainants claimed to be seeking, they had named the wrong affiliate as a defendant. At the time the filings in this case were made, wholesale DSL transport in California was provided by VADI, which was "created as a separate wholesale data affiliate in compliance with the conditions imposed by the FCC in approving the merger of GTE Corporation and Bell Atlantic." (January 16 Response, p. 2, n. 2.) In the February 19 Amended Complaint, only VADI among the Verizon affiliates is named as a defendant. It should be noted that in D.03-06-044, the Commission granted VADI's application to transfer its advanced data service assets including DSL and reintegrate with Verizon. D.03-06-044 also held that the competitive issues raised by the protestants would most likely be considered in the Commission's line-sharing proceeding. 2 In D.94-04-082, Westcom Long Distance, Inc. v. Pacific Bell, et al., 54 CPUC2d 244, 259, the Commission gave the following description of the tests that a party seeking a TRO must meet:
"[T]hat the requesting party is likely to prevail on the merits; (2) that the requesting party will suffer irreparable injury without the order; (3) that no substantial harm to other interested parties will occur; and (4) that the public interest will not be harmed. We note that all four criteria must be met before the Commission will issue a TRO or a preliminary injunction."
3 Verizon pointed to the following passage on DIRECTV's website as an example of how the advertising directed at DIRECTV customers seeking a new ISP could not reasonably be read as suggesting that the preferred providers would offer less downtime or better service than unaffiliated ISPs:
"If you are a Verizon local telephone customer and wish to switch your DSL service to Verizon Online or another [ISP] that uses Verizon as its underlying DSL provider, DO NOT disconnect your DSL service from DIRECTV Broadband, as this will result in loss of service. Contact the ISP you have selected, who will work to transfer your DSL service with minimal disruption." (January 15, 2003 Declaration of Thomas Wolthoff, Exhibit D, p. 2; emphasis added.)
4 Elsewhere in its response, Verizon noted that it had agreed to keep DIRECTV's DSL lines in service until February 28, 2003. Thus, Verizon argued, hasty disconnections would not be the result of action by VADI, and there would be enough time to prepare and submit responsive pleadings without the necessity of a TRO. (Verizon Response, pp. 13-14.) 5 Elsewhere in its response, SBC ASI gave the following description of the combination of DSL transport and ISP services needed to provide high speed Internet access to retail customers:
"Wholesale DSL Transport is a high speed virtual path between the end user's premise and the ISP's connection point with the ASI network. ISPs use this transport in combination with the ISP's servers, routers, and network connections to provide their subscribers with content, e-mail capabilities, access to the Internet, web hosting, and other enhanced services." (SBC ASI January 16 Response, p. 4.)

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