Century Federal, Inc. v. City of Palo Alto, Cal.

• Decision Date: 15 February 1984
• Docket Number: No. C-83-4231 EFL.,C-83-4231 EFL.
• Citation: 579 F. Supp. 1553
• Court: U.S. District Court — Northern District of California
• Parties: CENTURY FEDERAL, INC., a California corporation, Plaintiff, v. CITY OF PALO ALTO, CALIFORNIA, a municipal corporation; City of Palo Alto Utilities, a municipal utility; City of Menlo Park, California, a municipal corporation; and Town of Atherton, California, a municipal corporation, Defendants.

579 F. Supp. 1553

CENTURY FEDERAL, INC., a California corporation, Plaintiff, v. CITY OF PALO ALTO, CALIFORNIA, a municipal corporation; City of Palo Alto Utilities, a municipal utility; City of Menlo Park, California, a municipal corporation; and Town of Atherton, California, a municipal corporation, Defendants.

No. C-83-4231 EFL.

United States District Court, N.D. California.

February 15, 1984.

Michael Small, Seattle, Wash., and Nicholas P. Miller, Kermit W. Almstedt, Preston, Thorgrimson, Ellis & Holman, Washington, D.C., for plaintiff.

Diane M. Lee, City Atty., Palo Alto, Cal., and Harold R. Farrow, Farrow, Schildhause, Wilson & Rains, Oakland, Cal., John D. Jorgenson, City Atty., Menlo Park, Cal., Robin Faisant, County Atty., Palo Alto, Cal., for defendants.

OPINION AND ORDER

LYNCH, District Judge.

This matter is before the Court on the defendants' motion to dismiss the complaint. The plaintiff asserts antitrust and First Amendment claims as well as a state free expression claim and state law claims for interference with a right to use dedicated utility poles. Upon considering the briefs and argument of counsel, the Court hereby grants defendants' motion to dismiss as to the antitrust claims and denies the motion as to the free expression and dedication claims.¹

I. FACTS²

The plaintiff is an aspiring cable television (hereinafter "CTV") operator. The defendants (hereinafter "the Cities") are three municipalities and a utility company owned by one of the Cities. Plaintiff attempted to enter the CTV business in each of the Cities but was refused a business license and was told that it must participate in a franchisee selection process conducted by the City of Palo Alto on behalf of all of the Cities. Plaintiff also sought permission to use utility poles owned by the Pacific Telephone and Telegraph Company, the Pacific Gas and Electric Company, and the defendant City of Palo Alto Utilities, but was refused "pole attachment services" because it had no CTV operating franchise. Although plaintiff alleges that Pacific Telephone and Telegraph Company and the Pacific Gas and Electric Company are in conspiracy with the defendants, plaintiff has neither developed this allegation nor sued the two companies.

The franchisee selection process conducted by the Cities has two parts. First, the Cities issued a Request for Proposals (hereinafter "RFP"). This document specifies the minimum requirements that an applicant must meet in order to be considered for a franchise.³ The RFP also requests certain technical, construction, ownership, and financial information concerning the applicant and its proposed system. The Cities will then evaluate the applicants in a number of categories, including services and rates, technical/construction, financial, local commitment, and ownership/structure.

The second phase of the selection process involves negotiations with one or more of the most qualified applicants. The Cities may award franchises to one or to several bidders, as they see fit, or they may negotiate for municipal participation in the ownership of the system. Plaintiff alleges that this second phase is designed to wring further concessions out of the remaining applicants.

Rather than participate in the franchising process, plaintiff brought this lawsuit, which challenges not just particular aspects of the process, but the very concept of municipal CTV franchising. Plaintiff seeks damages as well as declaratory and injunctive relief. Plaintiff argues that it has a First Amendment right to be a CTV operator and that the franchising process impermissibly burdens that right. Plaintiff also argues that the franchising process is anticompetitive and that market forces, not municipal governments, should decide who can set up a CTV system.

II. THE ANTITRUST CLAIMS

The Cities assert that their franchising process is protected from antitrust scrutiny under the state action exemption first applied in Parker v. Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed. 315 (1943). The Cities also argue that their conduct constitutes neither a Sherman Act section 2 violation nor a section 1 conspiracy, that the issues are not ripe, and that plaintiff lacks constitutional and antitrust standing. As we conclude that defendants' conduct is protected as state action, we do not reach their substantive antitrust arguments.⁴

A. The State Action Exemption — Preliminary Considerations

The state action "exemption" is a doctrine of federalism;⁵ it is premised on the proposition that a state should be free to replace competition with regulation or public ownership without incurring antitrust liability. In Parker, the plaintiffs challenged a California statute under which state officials maintained prices and restricted competition among raisin growers. The Supreme Court found that the program was not subject to the antitrust laws because "nothing in the language of the Sherman Act or in its history ... suggests that its purpose was to restrain a state or its officers from activities directed by its legislature." Id. 317 U.S. at 350-51, 63 S.Ct. at 313-14. The Court emphasized the sovereignty of the states and refused to infer that Congress intended to nullify a state's control over its officers and agents.

A city, however, is not a sovereign body and cannot be the source of a Parker exemption. City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 98 S.Ct. 1123, 55 L.Ed.2d 364 (1978) (plurality opinion of Brennan, J.).⁶City of Lafayette involved a challenge to allegedly anticompetitive conduct by two municipal utilities. In affirming the circuit court's remand of the case, the Supreme Court stated that the conduct of the cities would be exempt only if engaged in pursuant to state policy to displace competition with regulation or monopoly public service. Moreover, the test of the adequacy of the state mandate for anticompetitive conduct by the city is not whether the city can point to a specific, detailed legislative authorization, but whether it is shown "from the authority given a governmental entity to operate in a particular area, that the legislature contemplated the kind of action complained of." Id. 435 U.S. at 415, 98 S.Ct. at 1138.

In California Liquor Dealers' Ass'n. v. Midcal Aluminum, Inc., 445 U.S. 97, 100 S.Ct. 937, 63 L.Ed.2d 233 (1980), the Court crystallized a two-part test from its earlier opinions in City of Lafayette and Bates v. Arizona State Bar, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977). "First, the challenged restraint must be `one clearly articulated and affirmatively expressed as state policy'; second, the policy must be `actively supervised' by the state itself." Midcal, 445 U.S. at 105, 100 S.Ct. at 943 (quoting City of Lafayette, 435 U.S. at 410, 98 S.Ct. at 1135 (plurality opinion of Brennan, J.)). Midcal involved California's statutory plan for wine pricing, which required the filing of fair trade contracts or price schedules with the state. Wholesalers who departed from the listed prices were penalized by the state. The program passed the first part of the test because it was embodied in a statute. However, the program was impaled on the second prong, requiring active supervision by the state, because the state did not establish or review the price schedules themselves.

The crucial issues in the instant case concern the interpretation and application of the Midcal test to allegedly anticompetitive conduct by a municipality. First, is the clear articulation part of the Midcal test satisfied when the state authorizes a municipality to act anticompetitively, or must the state compel such anticompetitive action? Second, does the active supervision part of the Midcal test apply at all when the challenged activity is conducted by a municipality rather than by private parties?

B. Midcal's "Clear Articulation" Test

1. California's Statutory Scheme

The Court finds that sections 53066 and 53066.1 of the California Government Code authorize franchising such as that conducted by the Cities despite any anticompetitive effects.⁷ Those statutes do not, however, require or compel such allegedly anticompetitive procedures. The plain language of section 53066 is thoroughly permissive; a city may, under a local public interest standard, award a franchise to any one party or to many parties, and it may consider any relevant factor. Plaintiff contends that the Cities must give a franchise or license to any party seeking one; the statute does not require a city to do this or in any other way to safeguard free competition. Indeed, the word "franchise" connotes a certain degree of exclusivity, and the right of a city to deny a franchise was necessarily upheld in Monarch Cablevision, Inc. v. City Council of Pacific Grove, 239 Cal.App.2d 206, 48 Cal.Rptr. 550 (1966).

At oral argument, plaintiff contended that despite the plain language of section 53066, the California legislature did not delegate franchising authority with an intent to displace competition. After reviewing the lengthy excerpts of legislative history presented by the parties, the Court concludes that the legislature did intend to displace competition when it enacted section 53066.

It is true that the legislative history never refers specifically to the displacement of competition. Nevertheless, the legislature must have considered that granting municipalities the authority to award franchises on virtually any basis that they deem advisable would necessarily displace the competitive free-for-all argued for by the plaintiff. Indeed, one purpose of the bill was to make it clear that a city was not required to award a franchise to the highest bidder. Danielson and Wheeler, The Status of the Cable Antenna Television Industry in California and a Proposal for State Regulation, 2 Pacific L.J. 528, 551-54 (1971). Moreover, the enactment of section 53066.1 was a step toward competition in CTV ratesetting; this was necessary because rates had been...