City of Chicago v. Comcast Cable Holdings

• Decision Date: 20 November 2008
• Docket Number: No. 105349.,No. 105348.,No. 105342.,105342.,105348.,105349.
• Citation: 231 Ill.2d 399,900 N.E.2d 256
• Parties: The CITY OF CHICAGO, Appellee, v. COMCAST CABLE HOLDINGS, L.L.C., et al., Appellants.
• Court: Illinois Supreme Court

900 N.E.2d 256

231 Ill.2d 399

The CITY OF CHICAGO, Appellee, v. COMCAST CABLE HOLDINGS, L.L.C., et al., Appellants.

No. 105342.

No. 105348.

No. 105349.

Supreme Court of Illinois.

November 20, 2008.

Kevin M. Forde and Joanne R. Driscoll, Chicago, for appellant Wideopenwest Illinois, Inc.

Thomas F. Geselbracht, of DLA Piper US LLP, Chicago, and Jean L. Kiddoo, Russell M. Blau, of Bingham McCutchen LLP, Washington, D.C., for appellant RCN Cable TV of Chicago, Inc.

Gino L. DeVito, Daniel I. Konieczny and Amy C. Crawford, of Tabet DiVito & Rothstein LLC, Chicago, for appellants Comcast Cable Holdings L.L.C., et al.

Mara S. Georges, Corporation Counsel, Chicago (Benna Ruth Solomon, Myriam Zreczny Kasper and Christopher Grunewald, of counsel), for appellee.

OPINION

Justice KILBRIDE delivered the judgment of the court, with opinion:

The City of Chicago filed a complaint against the defendants, all operators of local cable television systems, in a dispute over cable franchise fees, seeking declaratory relief. Specifically, the City alleged the defendants violated their cable franchise renewal agreements by discontinuing payment of a portion of a 5% franchise fee required by the agreements. In a joint motion to dismiss, the defendants argued that the contractual fee provision was preempted by section 542(b) of the Cable Communications Policy Act of 1984 (Communications Act) (47 U.S.C. § 547 (2000)), as interpreted by the Federal Communications Commission (FCC). The trial court granted the defendants' motion to dismiss. The appellate court reversed and remanded the cause for further proceedings, concluding there was no clear showing of preemption. 375 Ill.App.3d 595, 313 Ill.Dec. 385, 872 N.E.2d 368.

We allowed and consolidated the defendants' petitions for leave to appeal. The central issue is whether the contractual franchise fee provision imposing a 5% fee on defendants' gross cable modem service revenues is preempted by section 542(b) of the Communications Act. If it is preempted, we must consider whether the City has an alternative right to impose that fee under its home-rule authority, as granted by state law. After examining both issues, we reverse the appellate court judgment and affirm the circuit court's dismissal of the City's complaint.

FACTS

In September 2002, the City of Chicago filed a complaint in the circuit court of Cook County against seven defendants providing local services over a cable system. The seven defendants were Comcast Cable Holdings, L.L.C., Comcast of Chicago, Inc., Comcast of Illinois III, Inc., Comcast of South Chicago, Inc., Comcast of Florida/Illinois/Michigan, Inc., RCN Cable TV of Chicago, Inc., and Wideopenwest Illinois, Inc. The complaint sought a declaratory judgment as well as any other just and appropriate relief, including injunctive or equitable relief. The complaint alleged that in March 2002, each of the defendants violated its franchise renewal agreement with the City by refusing to pay the portion of the franchise fee based on the annual gross revenue derived from its provision of cable modem service. Cable modern service uses cable system facilities and equipment to provide Internet access and services to subscribers. In re Inquiry Concerning High-Speed Access to the Internet Over Cable & Other Facilities, 17 F.C.C.R. 4798, 4821, 2002 WL 407567, ¶ 38 (F.C.C. March 15, 2002) (FCC Ruling). Previously, each defendant had paid the entire fee requested by the City under section 4.1 of the agreement.

A March 15, 2002, FCC ruling classifying cable modem service as an information service rather than a cable service prompted the defendants' refusal to pay that portion of the franchise fee. See FCC Ruling, 17 F.C.C.R. at 4819, 2002 WL 407567, ¶ 33. They argued that the FCC Ruling excluded revenue from cable modem services from the calculation of the gross revenues used to set the 5% franchise fee ceiling. FCC Ruling, 17 F.C.C.R. at 4851, 2002 WL 407567, ¶ 105. The defendants allege that the ruling preempted that portion of the franchise fee provision in their renewal agreements with the City, thus eliminating their payment obligation. Because the relevant provisions in each of the franchise renewal agreements are identical, we will refer to them in the singular form throughout our discussion.

The defendants removed the cause of action to federal court and filed a joint motion to dismiss, alleging that the disputed portion of the franchise fee was preempted by the Communications Act (47 U.S.C. §§ 521 through 573 (2000)) and the Internet Tax Freedom Act (47 U.S.C. § 151 note (2000)). The federal district court granted the defendants' motion to dismiss (City of Chicago v. AT & T Broadband, Inc., No. 02-C-7517, 2003 WL 22057905 (N.D.Ill. September 4, 2003)), and the City appealed. The Seventh Circuit Court of Appeals vacated the federal district court judgment and remanded the cause to the Cook County circuit court, citing lack of federal jurisdiction, without ruling on the merits of the motion to dismiss. City of Chicago v. Comcast Cable Holdings, L.L.C., 384 F.3d 901 (7th Cir. 2004).

In the Cook County circuit court, the defendants again filed a joint motion to dismiss, and the trial court granted the motion, finding that section 542 of the Communications Act preempted the portion of the franchise agreement calculating franchise fees based on gross revenues from cable modem services. The City appealed, and the appellate court reversed the trial court's dismissal order, denying the petition for rehearing filed by Comcast. 375 Ill.App.3d 595, 313 Ill.Dec. 385, 872 N.E.2d 368. In approving the agreement's use of cable modem service revenues in the calculation of the franchise fee, the appellate court found that the City's home-rule authority was not preempted by section 542 and concluded that the franchise agreement did not violate the Internet Tax Freedom Act. 375 Ill.App.3d 595, 313 Ill.Dec. 385, 872 N.E.2d 368. The defendants filed petitions for leave to appeal under Supreme Court Rule 315 (210 Ill.2d R. 315), and this court allowed and consolidated the petitions.

ANALYSIS

I. Section 542(b) Preemption

At the heart of the parties' dispute is whether section 542(b) of the Communications Act (47 U.S.C. § 542(b) (2000)) preempts the City's franchise fee because it relies, in part, on revenues from cable modem services. Under the FCC's 2002 ruling, franchise fees may be based only on gross revenues from cable services, excluding cable modem service revenues from its calculation.

While preemption may not be presumed, three distinct types of preemption are recognized: (1) express preemption, shown by a clear expression of congressional intent to preempt state law; (2) field preemption, shown by comprehensive legislation demonstrating a clear congressional intent to occupy the entire regulatory field; and (3) conflict preemption, shown by a conflict between state and federal law. Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541, 121 S.Ct. 2404, 2414, 150 L.Ed.2d 532, 550 (2001). Because federal preemption presents a question of law, it is subject to de novo review. Kinkel v. Cingular Wireless, LLC, 223 Ill.2d 1, 15, 306 Ill.Dec. 157, 857 N.E.2d 250 (2006). Similarly, appellate review of an order granting a motion to dismiss is de novo. Karas v. Strevell, 227 Ill.2d 440, 451, 318 Ill.Dec. 567, 884 N.E.2d 122 (2008).

Here, the defendants argue that the portion of the franchise fee based on revenues from cable modem services is subject to a finding of both express and conflict preemption. The "ultimate touchstone" of our preemption analysis must be the intent of Congress. Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 2617, 120 L.Ed.2d 407, 422 (1992). To aid in determining that intent, we examine the legal developments leading to the FCC's 2002 declaratory ruling underlying the defendants' decision to terminate their payment of the disputed fees.

A. The Development of Section 542(b)

In 1972, the FCC capped local cable franchise fees due to concerns that:

"many local authorities appear to have extracted high franchise fees more for revenue-raising than for regulatory purposes. Most fees are about five or six percent, but some have been known to run as high as 36 percent. The ultimate effect of any revenue-raising fee is to levy an indirect and regressive tax on cable subscribers." In re Amendment of Part 74, Subpart K, of the Commission's Rules and Regulations Relative to Community Antenna Television Systems, Cable Television Report & Order, 36 F.C.C.2d 143, 1972 WL 26659, at ¶¶ 171, 185 (FCC February 3, 1972) (Community Antenna Television Systems).

The FCC set the franchise fee cap at 5% and preempted provisions in franchise agreements imposing higher fees. Community Antenna Television Systems, 36 F.C.C.2d 143, 1972 WL 26659, at ¶ 186.

In 1985, Congress codified the FCC's regulatory scheme in Title VI of the earlier Federal Communications Act of 1934. See Communications Act, Pub.L. No. 98-549, 98 Stat. 2779 (October 30, 1984) (effective 60 days after enactment, 98 Stat. 2806). These enactments included a franchise fee cap in section 542(b), providing that:

"For any twelve-month period, the franchise fees paid by a cable operator with respect to any cable system shall not exceed five percent of such cable operator's gross revenues derived in such period from the operation of the cable system." 47 U.S.C. § 542(b) (Supp.1984).

By codifying the FCC's regulatory scheme, Congress adopted the FCC's underlying purpose and rationale, in the absence of any contrary showing. Thus, the changes expressed congressional concern over the misuse of franchise fees for revenue-raising purposes because excessive fees effectively created a regressive, indirect tax on subscribers. Community Antenna Television Systems, 36 F.C.C.2d 143, 1972 WL 26659, at ¶¶ 171, 185.

Congress again amended the Communications Act in 1996, encouraging cable operators to employ...