The Latest on State Cable Bill Prorating Requirements

There have been two recent developments of note regarding legal challenges to state-level requirements that cable operators prorate customers' last-month bills – obligations that, as I argued in "State Cable Bills Prorating Requirements Clearly Are Preempted," an April 2021 Perspectives from FSF Scholars, constitute a form of rate regulation preempted by the 1984 Cable Act, not an otherwise permissible customer service standard or consumer protection law.

Both Maine and New Jersey require that cable operators – but not any of the countless other distributors of video programming, whether facilities-based (such as the two Direct Broadcast Satellite operators, DIRECTV and DISH Network, or telco TV providers, like Verizon FiOS) or streamed over the Internet (Netflix, Hulu, Amazon Prime Video, Disney+, and so on) – bill canceling customers on a per-day basis during their final month of service.

In "Maine Cable Law, Ignoring Competition, Is 'Unambiguously Preempted'," an October 2020 Perspectives, I reported that the U.S. District Court for the District of Maine had found the Maine statute to be "unambiguously preempted." The Court of Appeals for the First Circuit, however, reversed that decision on January 4, 2022. For more information, please see "First Circuit Wrongly Concludes Maine's Prorated Billing Requirement Is Not Unlawful."

And last week, on January 9, 2023, the U.S. Supreme Court announced that it had denied Charter Communications' petition for certiorari.

New Jersey's "virtually identical" rule likewise, and for similar reasons, was deemed preempted by the Superior Court of New Jersey, Appellate Division, in an October 15, 2021, unpublished opinion. I discussed this decision in "NJ State Court Concurs: Requirement to Prorate Cable Bills Equals Preempted Rate Regulation," a contemporaneous post to the Free State Foundation blog.

The New Jersey Board of Public Utilities and Division of Rate Counsel appealed to the New Jersey Supreme Court, which held oral arguments on Tuesday (subscription required). Should the lower court decision be reversed, this case potentially could make its way to the Supreme Court.

A decision is expected as early as late next month.

District Court Rules That Rights-of-Way Fees on Broadband Networks Are Preempted

On June 29, a U.S. District Court determined that a 2016 city ordinance that imposed a fee for all utility services provided over the city's rights-of-way (ROW) is preempted by Section 522(7)(C) of the Communications Act, as interpreted by FCC orders. At issue in Comcast of Oregon II v. City of Beaverton, was the preemptive effect of the FCC's 2019 order that interprets the Cable Act provisions that place limits on the ability of local franchising authorities (LFAs) to impose fees on broadband services. 

The Commission's 2019 order was upheld, for the most part, by the Sixth Circuit Court of Appeals in City of Eugene v. FCC (2021). The order contains several provisions that prohibit LFAs from collecting fees from a cable operator's provision of non-cable services such as broadband Internet access services. One such provision states: "LFAs may not lawfully impose fees for the provision of information services (such as broadband Internet access) via a franchised cable system." The prohibition on LFAs regulating non-cable services provided via cable networks is known as the "mixed-use" rule. The rule is based on Section 544(b)(1) of the Cable Act, which states that an LFA "in its request for proposals for a franchise… may establish requirements for facilities and equipment, but may not… establish requirements for video programming or other information services[.]"

The District Court determined that the City of Beaverton's 2016 ordinance "imposes a fee on Comcast's provision of broadband service, which the [2019 order] as upheld by the Sixth Circuit directly prohibits. The City's fee, therefore, is preempted under 47 U.S.C. § 556(c)." Also, the District Court rejected the City of Beaverton's argument the 2016 ordinance does not constitute a preempted fee on broadband services because the fee applies generally to all utilities using public rights of way. As the District Court recognized, the Sixth Circuit foreclosed LFA's from avoiding the Cable Act restrictions by using police powers or other sources of governmental authority to indirectly impose fees on non-cable services like broadband. The District Court wrote: "The City may not 'end-run' § 544(b)(1) by also applying the fee to other utilities that also use public rights-of-way."

 

The opinion in Comcast of Oregon II v. City of Beaverton addresses other issues, with a lengthy analysis accompanying the court's retroactive application of the 2019 order. In any event, what is most important is that the decision provides practical enforcement of the Commission's policy of prohibiting cost and other regulatory barriers to broadband Internet access services. The Commission's 2019 order rightly disallows the imposition of fees that would divert cable operator resources from next-generation broadband network upgrades and would put cable operators at a competitive disadvantage in the broadband services market. 

 

In December 2018, Free State Foundation President Randolph May and I filed reply comments with the FCC in the proceeding for its 2019 order. 

Supreme Court Should Leave Alone a Sound Ruling on Cable Franchise Fee Limits

The Supreme Court should promptly deny certiorari in City of Eugene v. FCC, a case that has been pending before the court since November 4, 2021. The cert petition, filed by numerous localities, argues for a non-textual reading of the Communications Act and invents a non-existent preemption issue, all to impose excess fees on information services provided over cable systems. But the text of the Act prohibits such fees.

In City of Eugene, a unanimous Sixth Circuit panel correctly interpreted the Communications Act as expressly preempting imposition of franchise fees by states and local governments on non-cable services provided over cable systems. The lower court upheld most of the FCC's 2019 order that clarified limits on local governments' authority to impose such fees. Free State Foundation Director of Policy Studies Seth Cooper briefed the court's "sensible" opinion shortly after its publication, and also observed that the mostly-affirmed 2019 order stopped localities from imposing fees "beyond the statute's limits, potentially draining cable operator investment in their broadband Internet networks."

To review, Section 541 of the Cable Act of 1984 – which is incorporated into the Communications Act – requires cable providers to receive authorization from a local franchising authority (LFA) before providing cable service in the LFA's jurisdiction. In exchange for granting this franchise, LFAs can subject franchisees to franchise fees, which Section 542(g)(1) defines as "any tax, fee, or assessment of any kind imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such." But Section 542(b) caps franchise fees at "five percent of a cable operator’s gross revenues for cable services for any 12-month period." And critically, Section 544(b)(1) expressly prohibits regulation of non-cable services in franchise agreements: an LFA "in its request for proposals for a franchise… may establish requirements for facilities and equipment, but may not… establish requirements for video programming or other information services[.]"

The Sixth Circuit upheld most of the FCC's 2019 order that preempted the City of Eugene's 7% tax on cable broadband revenues. In an opinion by Judge Raymond Kethledge, the court upheld the FCC's "mixed use rule," which prohibited LFAs from taxing broadband Internet access service in franchise agreements, pursuant to the Section 544(b)(1)'s prohibition on "establish[ing] requirements for video programming or other information services." Because the Restoring Internet Freedom Order classified broadband Internet access service as an information service, it obviously fit under the prohibition. The Sixth Circuit also determined that it didn't matter that Eugene taxed broadband by city ordinance instead of through its franchise authority—either way, it acted as an LFA subject to the Communications Act. Lastly, because Eugene's broadband tax was in direct conflict with the prohibition on LFAs regulating information services, the lower court concluded that the tax was expressly preempted by the Communications Act.

Eugene and numerous localities now argue that the Sixth Circuit decision conflicts with Oregon Supreme Court precedent and presents a novel implied preemption issue. However, as NCTA notes in its Brief in Opposition, the Oregon Supreme Court interpreted the relevant portion of the Communications Act years prior to the FCC's 2019 order, meaning the record considered by the Oregon Supreme Court lacked the Commission's interpretations – unlike the Sixth Circuit's decision that benefited from a full record and the position of the relevant expert agency. And because the Sixth Circuit opinion relied on express preemption, there is no issue regarding implied preemption in this case. These two reasons support denial of Eugene's cert petition.

Policy reasons further support denial. When Congress passed the Cable Act of 1984, it sought to eliminate competitive distortions in the market that arose from excess demands and taxes on cable providers. Cable providers often paid multiple fees for access to a single right-of-way prior to the Cable Act. Cable companies likely passed the cost of these excesses to consumer in the form of higher prices. The FCC's interpretation of the LFA-related statutory provisions, which the Sixth Circuit upheld, serves the law's purpose of "minimiz[ing] unnecessary regulation that would impose an undue economic burden on cable systems."

Free State Foundation Scholars have long supported the FCC's 2019 order precisely because it minimizes unnecessary regulation on cable systems. The Free State Foundation filed reply comments in the proceeding that led to the Commission's order. And blog posts were written in defense of the 2019 order in July 2019, May 2019, and September 2018.

The Supreme Court should deny Eugene's cert petition. Congress expressly prohibited the sorts of fees on information services offered over cable systems that Eugene seeks to impose. And the Sixth Circuit rightly upheld the FCC's rules doing just that.

NJ State Court Concurs: Requirement to Prorate Cable Bills Equals Preempted Rate Regulation

Last week, a New Jersey state appellate court, wisely siding with two federal district courts, held that requiring cable operators to prorate last-month bills constitutes a form of rate regulation that is preempted by federal law.

Section 623(a)(2) of the 1984 Cable Act unambiguously states that, upon a determination by the FCC that a cable operator is subject to effective competition, "the rates for the provision of cable service by such system shall not be subject to regulation." Section 636(c), meanwhile, expressly preempts any provision of law that is inconsistent with Section 623(a)(2) (as well as with Section 623(a)(1), which states that "[n]o Federal Agency or State may regulate the rates for the provision of cable service except to the extent provided under this section.").

Nevertheless, and as I wrote in an April 2021 Perspectives from FSF Scholars, "State Cable Bills Prorating Requirements Clearly Are Preempted," two states – Maine and New Jersey – have attempted to require cable operators, and cable operators alone, to charge customers for service on a per-day basis.

Fortunately, in both cases a federal district court intervened.

In March 2020, Maine passed Public Law Ch. 657, "An Act To Require a Cable System Operator To Provide a Pro Rata Credit When Service Is Cancelled by a Subscriber." It states that a cable operator "shall grant a subscriber a pro rata credit or rebate for the days of the monthly billing period after the cancellation of service if that subscriber requests cancellation of service 3 or more working days before the end of the monthly billing period."

In an October 2020 opinion, the U.S. District Court of Maine held that obligation to be "unambiguously preempted" by the 1984 Cable Act. Specifically, the court concluded that a mandate to prorate last-month bills effectively requires cable operators to bill on a per-day basis, and therefore is a form of rate regulation preempted by Section 623(a)(1) – not a consumer protection law or customer service standard for which Section 632 creates an exception to the general rule.

For additional information on that decision, please read "Maine Cable Law, Ignoring Competition, Is 'Unambiguously Preempted'," a Perspectives from FSF Scholars published later that same month.

In March 2021, the District Court of New Jersey considered a challenge by Altice to Section 14:18-3.8 of the New Jersey Board of Public Utilities' (BPU) rules, a provision that that court found to be "virtually identical" to Maine Public Law Ch. 657. In an opinion that quoted extensively from the Maine District Court's decision, it not surprisingly reached the identical conclusion.

In addition to filing suit in federal district court, Altice also appealed the cease-and-desist order issued by the New Jersey BPU to the Superior Court of New Jersey, Appellate Division. On October 15, 2021, in an unpublished opinion, that court embraced the reasoning of the New Jersey District Court (and, by extension, the Maine District Court) and invalidated the BPU's cease-and desist order.

Notably, in both of these instances the prorated billing requirement applies exclusively to cable systems. Rival Multichannel Video Programming Distributors (MVPDs), including satellite operators, telco TV providers, and "virtual" MVPDs that distribute content over the Internet, a growing category that includes YouTube TV, Sling TV, and Hulu + Live TV, are free to bill on a monthly basis – a practice that many in fact have embraced.

As such, these court decisions, at the federal and now state levels, don't merely affirm the intent of Congress. They also serve to remove arbitrary barriers that impact only one segment of the video distribution marketplace.

Given the ever-growing prominence of streaming services (Netflix, Hulu, Amazon Prime Video, Disney+, Apple TV+, HBO MAX, and countless others), it is appropriate that regulations premised upon (at best) outdated assumptions be eliminated at every opportunity.

Maine's Attorney General Gives Up Cable Billing Law Fight for Now, Appeal May Follow

A recent federal court decision held Maine's law restricting how cable operators bill their customers to be "unambiguously preempted" by the 1984 Cable Act. State Attorney General Aaron Frey in response has agreed to stand down at the district court level, but an appeal is expected.

As I described in a June post to the Free State Foundation's blog, earlier this year Maine enacted misguided legislation requiring cable operators, but not other providers of video content, to provide refunds to subscribers who cancel their service in the middle of a monthly billing cycle. Charter Communications, Inc. and its local subsidiary ("Charter") challenged that law before the United States District Court of Maine.

As I noted in a recent Perspectives from FSF Scholars, on October 7, the United District Court of Maine agreed that the law indeed does regulate "rates for the provision of cable service" – and therefore is "unambiguously preempted" by Sections 623(a)(2) and 636(c) of the 1984 Cable Act.

Rather than continue to fight this out before the district court, Maine's Attorney General and Charter together filed a Joint Motion to Grant Summary Judgment to Plaintiffs and Enter Final Judgment. On November 2, the court granted that motion.

The state AG has preserved his right to appeal the district court's decision, and such a challenge is expected. Until then, however, the law will not be enforced.

Without question this is the right outcome. Nearly four decades ago, Congress made clear its intention that competition, rather than regulation, should keep cable rates in check. In 2020, robust rivalries in the video distribution marketplace effectively perform that role.

By contrast, legislation targeting cable operators but not their rivals – Direct Broadcast Satellite (DBS) operators, telco TV providers, Internet-based streaming services, multicasting broadcasters, and others – only interferes with the pro-consumer operation of marketplace forces.