Keeping Tabs on the Ninth Circuit
March 10, 2023 - This Week at the Ninth

This Week At The Ninth: Sham Phone Operations and E-Cigarettes

old style phone

This week, the Court addresses the FCC’s adjudicatory authority and considers the scope of specific personal jurisdiction in product-liability suits.

The Court holds that the Federal Communications Commission (“FCC”) did not exceed its authority in finding that a telephone company acted unlawfully by restructuring its business operations to continue imposing charges that were otherwise prohibited by the agency’s rules.

The panel: Judges Paez, Bade, and Collins (D. Ariz.), with Judge Paez writing the opinion.

Key highlight: “It is well established that the FCC has broad discretion to administer the Communications Act through rulemaking and adjudication. While the FCC, unlike a court, can make new law protectively through the exercise of its rule-making powers, adjudication is just as necessary as not every principle can or should be cast immediately into the mold of a general rule. Adjudication empowers agencies to solve problems despite the absence of a relevant general rule to deal with the problems on a case-to-case basis. . . . The FCC’s determination here is no exception.” (Internal quotation marks, citations, and alterations omitted.)

Background: “Access stimulation” occurs when local telephone companies artificially inflate call traffic connected over their local networks to collect higher fees from long-distance carriers. Over the past decade, the FCC has issued rules that define access stimulation and restrict the rates carriers may charge in connection with it. The most recent of those rules is the 2019 Access Arbitrage Order, which declares that imposing costs on long-distance carriers for access stimulation traffic is “unjust and unreasonable” under § 201(b) of the Communications Act of 1934. Following the Access Arbitrage Order, local exchange carrier Wide Voice remodeled its call path in a way that allowed it to bill long-distance carriers higher fees without technically breaching the Access Arbitrage Order.

AT&T and Verizon, two long-distance carriers, filed a complaint with the FCC challenging Wide Voice’s business practices. The FCC found that Wide Voice, with its closely related companies HD Carrier and Free Conferencing, “entered into a sham arrangement to rearrange traffic flows for the purpose of enabling Wide Voice to continue imposing access charges, which it would otherwise be unable to charge under the Access Arbitrage Order.” The FCC concluded this conduct was “unjust and unreasonable” under § 201(b). The FCC did not, however, address whether Wide Voice had violated the Access Arbitrage Order. 

Result: The Ninth Circuit denied Wide Voice’s petition for review, rejecting each of Wide Voice’s challenges to the FCC’s decision.

First, the Court held that the FCC did not exceed its statutory authority when it found Wide Voice’s conduct “unjust and unreasonable” under § 201(b) even absent an explicit violation of an FCC rule. The Court explained: “Adjudication empowers agencies to solve problems despite the absence of a relevant general rule.” Indeed, “Congress delegated the FCC authority to fill gaps in interpreting § 201(b) that it could not otherwise anticipate or address” through the rule-making process. Moreover, it “would belie common sense” to conclude, as Wide Voice contended, that the FCC had to establish a new rule expressly prohibiting the evasion of its existing rules in order to find a § 201(b) violation. The Court also deferred to the FCC’s longstanding “reli[ance] on § 201(b) in adjudications to address unjust and unreasonable practices without finding an explicit rule violation.”

Second, the Court held the FCC did not act arbitrarily and capriciously by using the term “sham” to characterize Wide Voice’s business operation. Wide Voice argued that under FCC precedent, a “sham” must involve the creation of new entities without proper business purposes—and that the FCC acted contrary to that precedent by finding a sham here absent those facts. While “unexplained inconsistency” in agency actions could support the conclusion that agency action is arbitrary and capricious, the Court saw no such inconsistency here. The FCC’s prior decisions on “shams” focused not exclusively on the creation of new entities, but on “carriers’ efforts to circumvent the rules through artificial means” more generally. 

Third, the Court rejected Wide Voice’s challenge to the findings underlying the FCC’s § 201(b) determination: namely, that Wide Voice, HD Carrier, and Free Conferencing were a common enterprise, and that those entities restructured their call traffic to evade the relevant rules. Both these findings were “rationally connected to substantial evidence in the record.”

Finally, the Court held that the FCC afforded Wide Voice adequate due process. Wide Voice argued that it did not have fair notice its conduct was unlawful because “it neither had reason to believe that the FCC could make a § 201(b) finding without a rule violation nor any notice that its actions could constitute a ‘sham’ practice in light of the FCC’s precedent.” The Court disagreed with both theories. The Court reiterated that the FCC has an established precent of finding § 201(b) violations without a rule violation and of finding sham operations when carriers circumvent its rules. Moreover, the Court noted, Wide Voice’s good-faith argument was unpersuasive, particularly given that Wide Voice had been involved in the rulemaking process that resulted in the Access Arbitrage Order.

The Court holds that a product-liability claim stemming from one type of battery does not “relate to” sales of other types of batteries for purposes of establishing specific personal jurisdiction.

The panel: Judges O’Scannlain, Miller, and Lee, with Judge O’Scannlain writing the opinion.

Key highlight: “Yamashita also has not shown relatedness. . . . Regarding the port contacts, Yamashita suggests that his injury related to various shipments—shipments of batteries in that Yamashita was injured by a battery, and shipments of raw materials ‘to the extent these types of products go into lithium-ion battery production.’ This is implausible. Ford found specific jurisdiction because Ford sold the relevant models to consumers in the forum states, not because it shipped raw materials, or even completed cars, through those states.”

Background: Plaintiff Matt Yamashita, a Hawaii resident, brought suit against LG Chem (LGC) and LG Chem America (LGCA) after the battery in his e-cigarette allegedly exploded in his mouth. LGC is a South Korean company that manufacturers batteries. LGCA, its American subsidiary, is based in Delaware and Georgia and distributes batteries. The district court dismissed the complaint for lack of personal jurisdiction, rejecting Yamashita’s request for jurisdictional discovery.

Result: The Ninth Circuit affirmed. The Court quickly rejected Yamashita’s argument that either LGC or LGCA were subject to general personal jurisdiction in Hawaii, explaining that neither was incorporated or had its principal place of business in the state. Rather, the Court held, the only possible basis for exercising jurisdiction over either defendant was specific personal jurisdiction. 

To establish specific personal jurisdiction, Yamashita had to show, among other things, that LGC or LGCA had “take[n] some act by which it purposefully avails itself of the privilege of conducting activities within the forum State” and that Yamashita’s claims “arise out of or relate to the defendant’s contacts with the forum.” Focusing on the first requirement, the Court explained that LGC and LGCA could not have purposefully availed themselves of Hawaii simply by placing products that ultimately reached Hawaii in the stream of commerce. Instead, they must have also taken some action to purposefully direct their products to the state. Here, the Court concluded, two of defendants’ actions satisfied this test: LGC and LGCA made battery shipments through the ports of Hawaii, and LGC was involved in the sale of residential solar batteries in Hawaii. The Court rejected Yamashita’s arguments that either the sale of consumer products containing LGC batteries or battery sales through third-party websites qualified as purposeful availment in Hawaii, as neither defendant had taken the necessary steps to direct those sales toward the forum state.

Having reached these conclusions, the Court then held that Yamashita’s claims did not “arise out of or relate to” the defendants’ forum-directed contacts. First, the Court explained, Yamashita’s claims did not “arise out of” the defendants’ Hawaii contacts, as neither the shipments through Hawaii ports nor the residential solar battery sales were but-for causes of the battery in Yamashita’s e-cigarette being sold in Hawaii and causing his injury. Second, the Court held that Yamashita’s claims also did not “relate to” those forum-directed contacts. The Court distinguished the Supreme Court’s recent decision in Ford Motor Co. v. Montana Eighth Judicial District Court, which had held that a plaintiff’s claims related to Ford’s Montana-directed activities even if Ford had not sold the actual car that caused the plaintiff’s injury directly to Montana. The Ninth Circuit explained that “Ford found specific jurisdiction because Ford sold the relevant models to consumers in the forum states, not because it shipped raw materials, or even completed cars, through those states.” Here, by contrast, Yamashita had not established any connection between the battery that had caused his alleged injury and the types of batteries shipped through Hawaii ports or sold for residential solar use. 

Finally, the Court also held that the district court had not abused its discretion in denying Yamashita’s request for jurisdictional discovery. The Court reasoned that Yamashita had not established that any of the evidence he sought (which included possible contracts between defendants and third-party battery distributors) could plausibly allow him to establish personal jurisdiction, especially in light of the defendants’ sworn allegations denying such contacts.