Diginet, Inc. v. Western Union ATS, Inc.

• Decision Date: 17 March 1992
• Docket Number: No. 91-1658,91-1658
• Parties: DIGINET, INCORPORATED, Plaintiff, v. WESTERN UNION ATS, INCORPORATED, Defendant, Third-Party-Defendant-Appellant, v. CITY OF CHICAGO, Defendant, Third-Party-Plaintiff-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1388

958 F.2d 1388

DIGINET, INCORPORATED, Plaintiff, v. WESTERN UNION ATS, INCORPORATED, Defendant, Third-Party-Defendant-Appellant, v. CITY OF CHICAGO, Defendant, Third-Party-Plaintiff-Appellee.

No. 91-1658.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 21, 1992.

Decided March 9, 1992.

Rehearing and Rehearing En Banc

Denied March 17, 1992.

Don Sampen, Jacob J. Meister, Chicago, Ill., for Diginet, Inc.

Thomas F. Geselbracht (argued), John E. Mitchell, Peter S. Lubin, Rudnick & Wolfe, Chicago, Ill., Patricia N. Young, Washington, D.C., for Western Union ATS, Inc.

Ruth M. Moscovitch, Asst. Corp. Counsel, Office of the Corp. Counsel, Appeals Div., Lawrence Rosenthal, Deputy Corp. Counsel (argued), Emily Nicklin, Bennett W. Lasko, Stuart D. Fullerton, Office of the Corp. Counsel, Lynn K. Mitchell, Kelly R. Welsh, Asst. Corp. Counsel, Benna R. Solomon, Office of the Corp. Counsel, Appeals Div., Chicago, Ill., for City of Chicago.

Howard J. Trienens, Gerald A. Ambrose (argued), Sidley & Austin, Chicago, Ill., for American Tel. & Tel. Co. and AT & T Communications, Inc.

Before POSNER, EASTERBROOK, and RIPPLE, Circuit Judges.

POSNER, Circuit Judge.

This appeal from the grant of a preliminary injunction to a city that wants to tax a telecommunications company raises difficult questions concerning res judicata, equitable remedies, municipal powers, certification of questions of state law by federal courts to state courts, and management of complex litigation.

Beginning in 1981, Western Union, in an effort to diversify away from its moribund telegram business, built a fiber optic network in major cities, including Chicago. All sixteen miles of the network in Chicago were laid in underground ducts that, like the city streets, are "public ways" owned by the City--they are the same ducts that carry conventional telephone lines, coaxial cables for cable television, and other electrical wires. Western Union's fiber optic network, called "ATS" (short for "Advanced Transmission Systems"), was to be used to connect high-volume telephone customers directly with long-distance carriers such as AT & T and MCI, bypassing the local telephone exchanges. Such a service is not subject to common carrier regulation by either the Federal Communications Commission or its state counterpart, the Illinois Commerce Commission. It is a free-market service.

Western Union was violating no law in installing its fiber optic cables in the ducts and had obtained the necessary permits from the Department of Public Works of the City of Chicago. Higher officials of the City, however, when they discovered the installation in 1986, decided not to permit Western Union to activate the network unless Western Union agreed to pay the city a franchise fee of 3 percent of the network's revenues or so much per foot--whichever would generate more revenue for the City. To back up this demand, the City has since passed an ordinance forbidding the installation or maintenance of any subsurface cables without municipal authorization. Chi.Munic.Code § 10-28-010. There is no pretense that the franchise fee is necessary to offset such costs as the fiber optic network may impose on the city; so far as appears, it imposes no costs, congestion or otherwise. The purpose of the fee is to raise revenue for the city, which is why we are calling the fee a tax. While claiming that Western Union could not operate the fiber optic network without obtaining a municipal franchise agreement conditioned on paying the tax, the City took no steps to prevent Western Union from putting the network into service, and it did so.

With matters at an impasse, in 1988 Western Union brought suit in an Illinois state court to enjoin the City from attempting to condition permission to operate the network on the payment of a tax. Western Union Corp. v. Parrish, No. 88 Ch. 9963 (Ill.Cir.Ct.). It based the suit on the Illinois Telephone and Telegraph Act, Ill.Rev.Stat. ch. 134, pp 1-21, which in p 20 authorizes a telephone company upon ten days' written notice to install its lines in public ways (though whether this provision applies to cities is in dispute, as we shall see), and on the absence of express authority for Illinois municipalities to tax users of public ways. The trial judge entered a temporary injunction against the City; he called it a temporary restraining order, but as it continued well beyond the ten or at most (save perhaps in exceptional circumstances) twenty days that such an order when made by a federal court is permitted to remain in effect, it quickly became what federal judges would call a temporary or preliminary injunction. Fed.R.Civ.P. 65(b); Sampson v. Murray, 415 U.S. 61, 85-88, 94 S.Ct. 937, 950-52, 39 L.Ed.2d 166 (1974); 11 Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2953 (1973). In 1990, with the "temporary restraining order" still in force, the trial on the merits completed, and the case awaiting decision by the judge, Western Union sold the entire ATS system to MCI, which formed a subsidiary to own the system, Western Union ATS, Inc. In the sale agreement Western Union warranted that it was in compliance with all laws, regulations, decrees, etc. connected with the ATS systems, but it excepted from this warranty the dispute with Chicago that was the subject of the Parrish litigation.

Naturally, after selling the ATS system to MCI, Western Union lost interest in the Parrish suit and decided to abandon it. To its motion to dismiss the suit the City responded with a motion to add Western Union ATS (that is, MCI's subsidiary, which in the remainder of this opinion we shall call simply "ATS") as a plaintiff. ATS's lawyer was present at the hearing on Western Union's motion to dismiss but said nothing, his client not having filed an appearance in the litigation. After the City's lawyer told the judge that "there is no dispute in this litigation as between ATS and either the City or ... anybody else," even though the City knew that ATS was operating the fiber optic network and wanted to expand it, the judge asked the City's lawyer whether he wanted an order prohibiting ATS from expanding. He replied: "No, not at this point. We are negotiating with them, but, no, we are not seeking an order." The judge denied the motion to add ATS as a plaintiff and dismissed Western Union's suit with prejudice. But the negotiations between the City and ATS went nowhere.

One of ATS's customers, Diginet, Inc., had leased some of the circuits in the ATS network in Chicago. The City notified Diginet that ATS had no authority to make such a lease. On the strength of this notice, Diginet withheld lease payments that it owed ATS, which in turn threatened to cancel the lease, precipitating this diversity suit by Diginet against ATS and the City for a declaration of its rights vis-a-vis the two defendants. That dispute remains unresolved. But the City filed a cross-claim against ATS under Fed.R.Civ.P. 14(a), and asked for a preliminary injunction against ATS's expanding its network in Chicago without obtaining a municipal franchise. The district judge granted the injunction, 759 F.Supp. 1285 (N.D.Ill.1991), and ATS appeals under 28 U.S.C. § 1292(a)(1).

The right to a preliminary injunction depends on a comparison of the likely harms to the parties (and to others as well, if others' rights or interests are affected) if such interim relief is granted or denied and on a tentative evaluation of the merits. The relevant harms are the irreparable ones, because a harm that will be cured by the entry of the final judgment supplies no reason for interim relief. Harms and merits are related inversely from the standpoint of whether to grant a preliminary injunction. The greater the harm to the plaintiff if the injunction is denied, the less of a showing that his case has merit need he make to get the injunction; the less the harm, the stronger the required showing of merit. And conversely for the defendant: the greater the harm to him if the injunction is granted, the less of a case on the merits need he make to defeat the plaintiff's motion. American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589, 593-94 (7th Cir.1986); Kowalski v. Chicago Tribune Co., 854 F.2d 168, 170 (7th Cir.1988); Ping v. National Education Ass'n, 870 F.2d 1369, 1371-72 (7th Cir.1989).

The weighing of these factors is for the district judge in the first instance, subject to light review by us, Fleet Wholesale Supply Co. v. Remington Arms Co., 846 F.2d 1095, 1097 (7th Cir.1988), but in this case the judge focused on the merits to the neglect of the balance of harms, and as a result overlooked the fact that the City had made no showing that it would sustain any harm if a preliminary injunction were denied. It is not as if the City wants to keep ATS from expanding its optic fiber network. All it wants is tax revenues, and as the tax it wishes to impose is proportioned to the size and revenue of the network, the bigger and more lucrative that network is the higher the City's tax revenues will be. ATS has conceded, moreover, that if it loses this lawsuit it will owe the City the tax on any new lines from the time they are built.

There is no argument that this expansion would crowd out other users of the underground ducts or impose any other form of cost either on them or on the City itself. The district judge did express some concern on this score, but the City has abandoned the point in this court. It does claim to want a franchise agreement that will require "the purchase of sufficient insurance by a fiber optic company in case of damage due to the occupation of the public ways, annual inspection rights by the City and financial and engineering audits if needed," but it doesn't need a franchise agreement or any other form of agreement in order to impose these and other reasonable regulatory controls on users of the public ways. Remember that the Department of...