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.

FCC Proposes to Keep Localities from Exceeding Taxing and Regulatory Limits

On August 1, the FCC will hold a vote on its proposed order to clarify the legal limits on the power of states and local franchising authorities (LFAs) to impose fees on cable operators and to regulate non-cable services. The Commission deserves credit for its proposed order, which is solidly backed by the Communications Act. The Commission's action will keep states and LFAs from weighing down cable operators with multiple, unjustified taxes and charges. And its proposed order also will ensure that broadband Internet services and other information services will be free from state and local state regulatory restrictions. 

To briefly recap, Section 621(a)(1) of the Communications Act recognizes that LFAs may require cable TV service operators to obtain franchises, but subject to limits.Section 622(b), for instance, caps franchise fees on cable operators at 5% of its cable service gross revenues during any 12-month period. And under Section 624(b), LFAs "may not ... establish requirements for video programming or other information services." However, some LFAs have imposed costs that appear to exceed those statutory limits, potentially diverting cable operator resources away from investment in next-generation broadband Internet services. And some uncertainty surrounded whether LFAs might exceed their cable franchising authority to regulate broadband Internet services.   

The Commission's proposed order implements the statutory limits on LFAs in four key respects:

1. By including "in-kind" contributions charged by LFAs in exchange for video franchises within the 5% cap on franchise fees;
2. By concluding that the regulatory jurisdiction of LFAs over video franchising cannot be used to regulate most non-cable services provided over "mixed-use" cable networks, including broadband Internet access services;
3. By preempting any LFA-imposed fees or taxes on cable operators that exceed the Section 622(b) cap as well as any franchising requirements for providing non-cable services through cable networks; and
4. By applying limits regarding LFAactions at the state level and to state regulatory requirements on local franchising.

Free State Foundation President Randolph May and I have previously written about the Commission's Section 621 proceeding and its proposed order in reply comments submitted to the FCC, which the agency cites in its draft order, and also in a pair of blog posts. We urged the Commission to shore up its "in-kind" contribution and "mixed-use" rules and to expressly apply limits on LFAs to the state-level franchising authorities. 

The Commission's proposed Section 621 order is important, and it is commendable. It is faithful to the law, it will keep LFA and state-level franchising actions within proper boundaries, and it's hospitable to encouraging investment and deployment of next-generation broadband services. 

The FCC Should Curb Cap-Busting Fees Levied on Cable Operators

The FCC is considering a proposal to clarify the legal limits on the amount of local franchising fees that can be charged to cable operators. Some local governments have evaded the limits by charging fees for access to public rights-of-way on top of the five percent franchise fee they are permitted to charge cable operators.

The Commission should stop such wrongful duplication of fees – which ultimately redound to the detriment of residential and business consumers in the locality.

The Commission should declare that rights-of-way fees are within the scope of the Cable Act's five percent cap on franchising fees that may be imposed on cable operators. This is important because cable operators are also broadband Internet service providers. Limiting excessive cable franchise fees will free up financial resources for investment in deployment of next-generation networks. 

Section 621 of the Cable Act recognizes state or local franchising authorities (LFAs) may charge cable operators a franchising fee for constructing and operating a cable system. But Section 621 also includes limits that state and LFAs must follow. The statute caps the franchising fee at five percent of the cable operator's annual gross revenue. (Prior blog posts as well as the Free State Foundation's reply comments in the cable LFA reform proceeding explain why the Commission should adopt its proposed "mixed-use" and "in-kind" contribution rules.) 

In addition to adopting its proposed rules clarifying Section 621, the Commission should ensure that LFAs do not stack public rights-of-way fees on top of five percent franchising fees, thereby evading the statutory cap. Inherent in the concept of cable franchises is the authority to access public rights-of-way for distributing video content to subscribers within franchise territories. This is evident from the text of Section 621(a)(2): "Any franchise shall be construed to authorize the construction of a cable system over public rights-of-way, and through easements, which is within the area to be served by the cable system and which have been dedicated for compatible uses" (emphasis added). 

To be sure, states and local governments possess authority to charge fees or taxes on service providers that access public rights-of-ways. And the Cable Act Section 622(g)(2)(A) excludes from the definition of a "franchise fee" "any tax, fee, or assessment of general applicability." But the Cable Act recognizes broad franchising authority and the exceptions should be construed narrowly – particularly when it would avoid an absurd result such as duplications of fees. There is an overlap between cable franchise fees and public rights-of-way fees. An April 19 ex parte filing by NCTA, for example, cites California's simultaneous taxing of cable operators right to access public rights-of-way and imposing of five percent franchise fees for that same right. States and LFAs ought to be prohibited from imposing two or more sets of fees, however they denominate the ways, as a means of evading the franchise fee limits set by Congress. 

The Commission should declare that fees or taxes for public rights-of-way access by cable operators must be included within the scope of the total franchise fee amount – and therefore subject to the five percent statutory cap. This commonsense interpretation of Section 621 would prevent the statutory cap on franchise fees from being undermined. 

The Commission previously has highlighted its actions "reducing regulatory barriers to the deployment of wireline and wireless infrastructure." Fees that exceed the statutory cap constitute a regulatory barrier to broadband infrastructure deployment. If the Commission curbs duplicate fee charges, this will allow cable operators to use the freed-up funds for deployment of next-generation broadband networks.