City of Chicago v. Comcast Cable Holdings

• Decision Date: 01 October 2004
• Docket Number: No. 03-3815.,03-3815.
• Parties: CITY OF CHICAGO, Plaintiff-Appellant, v. COMCAST CABLE HOLDINGS, L.L.C., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

384 F.3d 901

CITY OF CHICAGO, Plaintiff-Appellant, v. COMCAST CABLE HOLDINGS, L.L.C., et al., Defendants-Appellees.

No. 03-3815.

United States Court of Appeals, Seventh Circuit.

Argued September 14, 2004.

Decided October 1, 2004.

Appeal from the United States District Court for the Northern District of Illinois, David H. Coar, J Benna R. Solomom (argued), Jane E. Notz, Office of the Corporation Counsel, Chicago, IL, for Plaintiff-Appellant.

Charles A. Rohe, Swidler Berlin Shereff Friedman, Washington, DC, D. Craig Martin, Kalamazoo, MI, Robert G. Scott (argued), Cole, Raywid & Braverman, Washington, DC, for Defendants-Appellees.

Michael S. Schooler, National Cable Television Asso., Washington, DC, for Amicus Curiae.

Before EASTERBROOK, MANION, and DIANE P. WOOD, Circuit Judges.

EASTERBROOK, Circuit Judge.

Cable TV operators in Chicago have signed contracts promising to pay the City 5% of their gross revenues from any service, including what the parties call "cable modem service," furnished over the franchised cable. (We put the phrase in quotations because no modem is involved. A modem converts between analog and digital signals, while the service at issue here is digital throughout. But we follow common usage in applying the phrase "cable modem" to a broadband Internet service provided over a cable that also carries television signals.) In 2002 the Federal Communications Commission concluded that cable-modem service is an information rather than a telecommunication product. See Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 17 F.C.C.R. 4798 ¶¶ 7, 33-59 (Mar. 15, 2002). Chicago's cable operators then stopped remitting payments based on cable-modem services. They rely on 47 U.S.C. § 542(b), which provides that "the franchise fees paid by a cable operator with respect to any cable system shall not exceed 5 percent of such cable operator's gross revenues derived in such period from the operation of the cable system to provide cable services." If cable-modem service is not a programming service, the reasoning goes, then receipts from the cable operators' role as Internet service providers cannot be included among "gross revenues derived in such period from the operation of the cable system to provide cable services" (emphasis added). If the fee on revenues from TV service already is at the statutory cap of 5% (as it is in Chicago), then cities that collect fees based on gross revenue from other services would receive income exceeding 5% of the allowable revenue base.

Chicago accepts the FCC's understanding of the difference between data and telecom services (but see Brand X Internet Services v. FCC, 345 F.3d 1120 (9th Cir.2003), cert. pending, No. 04-281 (filed Aug. 27, 2004)) but disagrees with the operators' reading of § 542(b). Although the parties acknowledge that "cable services" in § 542(b) means programming services, see 47 U.S.C. § 522(6), and thus excludes cable-modem service, see AT&T Corp. v. Portland, 216 F.3d 871 (9th Cir.2000), they differ on the consequences of this definition. Chicago contends that other products are outside the statute's domain, so that governments may impose unlimited fees (under tax statutes, contracts, or both) on all revenue from other uses of the cable. As the cable operators understand the statute, however, once a city requires a franchise fee "with respect to any cable system," the total payments with respect to that system can't exceed 5% of its programming revenue, no matter how the city tries to apportion the required payments.

Unable to persuade the cable operators to resume payments, Chicago filed this suit seeking a declaratory judgment that the operators must comply in full with the contracts and ordinances. The suit was filed in the Circuit Court of Cook County. Invoking 28 U.S.C. §§ 1331 and 1441(b), defendants removed the proceeding to federal court. They asserted that the City's action arises under federal law either because the demand for payment rests on 47 U.S.C. § 542(a) — which reads: "Subject to the limitation of subsection (b), any cable operator may be required under the terms of any franchise to pay a franchise fee" — or because the meaning and effect of § 542(b) will be the only issue contested in the litigation. The district court denied the City's motion to remand, concluding that federal adjudication is appropriate because the City's complaint "implicates ... provisions of the Communications Act" and the FCC's order. Chicago v. AT & T Broadband, Inc., 2003 WL 1888839, (N.D.Ill. Apr. 14, 2003), 2003 U.S. Dist. LEXIS 6268 at *9. A few months later the district judge held that § 542(b) preempts any state and city statutes and excuses the cable operators from making the payments called for in the franchise contracts on account of cable-modem service. Chicago v. AT & T Broadband, Inc., 2003 WL 22057905, (N.D.Ill. Sept. 4, 2003), 2003 U.S. Dist. LEXIS 15453. We need not consider that aspect of the disposition, because the suit does not arise under federal law and therefore belongs in state court.

Under the venerable well-pleaded-complaint doctrine, "whether a case is one arising under the Constitution or a law or treaty of the United States ... must be determined from what necessarily appears in the plaintiff's statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation or avoidance of defenses which it is thought the defendant may interpose." Taylor v. Anderson, 234 U.S. 74, 75-76, 34 S.Ct. 724, 58 L.Ed. 1218 (1914). See also, e.g., Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 830-32, 122 S.Ct. 1889, 153 L.Ed.2d 13 (2002); Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 9-12, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983); Blackburn v. Sundstrand Corp., 115 F.3d 493 (7th Cir.1997); Rice v. Panchal, 65 F.3d 637 (7th Cir.1995). So the federal defense in § 542(b) does not supply jurisdiction if the claim itself rests on state or local law — which it does. Both an ordinance enacted under Chicago's home-rule power and a series of contracts supply the basis of Chicago's complaint. The American Law Institute once favored federal-defense removal, see Study of the Division of Jurisdiction Between State and Federal Courts § 1312(a)(2) (1969), but in the face of strong criticism, e.g., Henry J. Friendly, Federal Jurisdiction: A General View 124 (1973), abandoned that position, see Federal Judicial Code Revision Project § 1441 (T.D. 3 1999). Congress never embraced it; both § 1331 and § 1441 have not been materially changed since the Supreme Court first articulated the well-pleaded-complaint doctrine.

That the federal defense will be the only contested issue does not matter. Two decisions illustrate this point. A railroad that had settled a tort claim in exchange for a lifetime pass later refused to honor that pass, contending that a federal statute enacted in the interim forbade the provision of free transportation. The pass holder sued in federal court, contending that the only issue requiring resolution was the interpretation of this statute — for, on the plaintiff's view, the pass was not "free" but had the same value as the tort claim that had been surrendered. That view of what issues controlled the case proved to be correct; the railroad did not contest the pass's validity as a matter of contract. The Supreme Court never reached the merits, however, holding that a contract claim does not arise under federal law even when the only contested issue is the effect on that obligation of a federal statute. Louisville & Nashville R.R. v. Mottley, 211 U.S. 149, 29 S.Ct. 42, 53 L.Ed. 126 (1908). The Court adhered to that position in Gully v. First National Bank, 299 U.S. 109, 57 S.Ct. 96, 81 L.Ed. 70 (1936), in which a state tax collector sued in state court on a contract by which one bank promised to pay the tax obligations of another as part of an acquisition. The bank removed to federal court, contending that the promise amounted to a tax on shares of the bank, which under federal law states are forbidden to levy. Once again the only contested issue in the litigation was the effect of this federal statute; once again the Court held that the claim arose...