Supreme Court Ends Legal Challenge to Limits on Cable Franchising Authorities

On February 22, the Supreme Court denied a petition for certiorari in City of Eugene v. FCC. The Supreme Court's denial of the petition leaves standing a decision by the Sixth Circuit Court of Appeals that upheld most of a 2019 order by the Commission that clarified limits on local franchising authorities (LFAs) with respect to cable infrastructure. This is welcome news because the Commission's 2019 order is an important reform that helps keep state and local governments from regulating broadband Internet access services.   

As explained in my blog post from June 2021, the Sixth Circuit upheld the Commission's "mixed use rule" – which clarifies that LFA's may not use their cable franchising authority to regulate non-cable services such as broadband Internet access services. Also, the Sixth Circuit upheld the Commission's determination that in-kind obligations imposed by LFAs on cable operators count toward Section 622(b)'s limit on how much LFAs can charge cable operators. Under Section 622(b), LFA's can charge cable operators no more than an amount equal to 5% of their gross revenues during any 12-month period.

 

Additionally, Free State Foundation Legal Fellow Andrew Magloughlin wrote a blog post on January 12 of this year about the certiorari petition in City of Eugene v. FCC and offered solid reasons why the Supreme Court should deny it. 

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.

Sixth Circuit Upholds Key Aspects of FCC's Order on Cable LFA Limits

On May 26, the U.S. Court of Appeals for the Sixth Circuit upheld most of the FCC's 2019 order that adopted reforms on cable infrastructure and local franchising authorities (LFAs). The Commission's order hold LFAs accountable to the law and helps to ensure that cable operators' investment in broadband Internet services are not thwarted by locally-imposed restrictions and costs.  

Section 621(a)(1) of the Communications Act recognizes that LFAs may require cable TV service operators to obtain franchises, but the law subjects LFAs to limits. For example, Section 622(b) limits the amount that LFAs can require cable operators to pay in order to receive franchises to 5% of their cable service gross revenues during any 12-month period. Yet some LFAs have imposed financially costly in-kind obligations on cable operators and effectively exceeded the 5% cap. The Sixth Circuit upheld the FCC's determination in its 2019 order that in-kind contributions count toward the 5% cap.

 

Additionally, Section 624(b) provides LFAs "may not ... establish requirements for video programming or other information services." But some LFAs have imposed costs that appear to go beyond the statute's limits, potentially draining cable operator investment in their broadband Internet networks. And uncertainty existed as to whether LFAs could leverage their cable franchising authority to regulate cable broadband Internet services. Importantly, the Sixth Circuit upheld the Commission's "mixed use" rule -- which clarifies that LFA's may not use their cable franchising authority to regulate non-cable services. The 2019 order determined that that the City of Eugene was prohibited from imposing fees on cable operator revenues from their broadband Internet access services. The Sixth Circuit upheld this determination.

 

Although not every aspect of the FCC's 2019 order was upheld, on the whole the Sixth Circuit's decision in City of Eugene v. FCC appears sensible. In December 2018, Free State Foundation President Randolph May and I filed reply comments with the FCC regarding cable infrastructure and LFAs. And for more, see my July 2019 blog post on this topic.  

Media Bureau Grants Relief from Cable Rate Regulation in Light of Streaming Competition

The FCC's Media Bureau on December 7 adopted and released a Memorandum Opinion and Order exempting Comcast and Cox Communications from local cable rate regulation in 85 Massachusetts communities. That decision once again recognized that the AT&T TV NOW streaming service provides "effective competition" in accordance with the so-called "LEC" test set forth in Section 623(l)(1)(D) of the Communications Act.

Local franchising authorities (LFAs) are permitted to regulate the rate a cable operator charges for the basic service tier in a given area only until the FCC concludes that that cable operator is subject to "effective competition." Subsection (l) of Section 623 defines "effective competition" in a number of ways, one of which is as follows:

a local exchange carrier or its affiliate ... offers video programming services directly to subscribers by any means (other than direct-to-home satellite services) in the franchise area of an unaffiliated cable operator which is providing cable service in that franchise area, but only if the video programming services so offered in that area are comparable to the video programming services provided by the unaffiliated cable operator in that area.

In an October 2019 Memorandum Opinion and Order, the Commission for the first time acknowledged that the AT&T TV NOW service satisfies the four prongs of "LEC" test.

Free State Foundation scholar Seth L. Cooper approvingly anticipated that decision in a Perspectives from FSF Scholars, "FCC Action Would Finally Eliminate Local Cable Rate Regulation," published shortly before the agency acted on the petition filed by Charter Communications. When that item was placed on circulation, FSF President Randolph J. May issued a Media Advisory expressing his approval of that proposed decision. Click here and here for additional commentary.

In a Perspectives from FSF Scholars posted to the Free State Foundation website earlier today, I describe how recent subscriber growth by virtual Multichannel Video Programming Distributors (vMVPDs) provides still more evidence that, in 2020, video distribution unquestionably is defined by robust and full competition, This decision by the Media Bureau to eliminate legacy rate regulation in Massachusetts reflects that reality, but the Commission can and should do more to remove outdated rules and unleash the power of an unfettered competitive marketplace.