Spectrum Ne., LLC v. City of Rochester

• Decision Date: 15 March 2022
• Docket Number: 21-CV-6453-FPG
• Court: U.S. District Court — Western District of New York
• Parties: SPECTRUM NORTHEAST, LLC, Plaintiff, v. CITY OF ROCHESTER, Defendant.

SPECTRUM NORTHEAST, LLC, Plaintiff, v. CITY OF ROCHESTER, Defendant.

No. 21-CV-6453-FPG

United States District Court, W.D. New York

March 15, 2022

DECISION AND ORDER

HON FRANK P. GERACI, JR. UNITED STATES DISTRICT JUDGE

INTRODUCTION

Plaintiff Spectrum Northeast, LLC (“Charter”) brings this action against Defendant City of Rochester (“the City”), alleging that the City has compelled Charter to pay certain fees related to its cable-television franchise in violation of federal law. See ECF No. 1. Currently before the Court is the City's motion to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). ECF No. 8. Charter opposes the motion, ECF No. 10, and the City has filed its reply. ECF No. 11. For the reasons that follow the City's motion is DENIED.

BACKGROUND

Historically cable television has been subject to overlapping regulatory authorities. Although “[t]he Communications Act of 1934 grant[ed] the FCC broad authority to regulate all aspects of interstate communication by wire or radio, ” municipalities-known as “franchising authorities” in this context-long “exercised authority in regulating cable for the benefit of the residents in their communities.” ACLU v. FCC, 823 F.2d 1554, 1558 (D.C. Cir. 1987). Municipalities decided whether to grant a “franchise, ” which authorized “a particular company to provide cable service to a specified portion of the community.” Id. “In exchange for a cable franchise, cable operators were required to assume various responsibilities in the public interest.

Typically, franchise agreements obligated cable operators to pay a specified ‘franchise fee,' and to market their services in accordance with rates established by the municipality.” Id.

In 1984, Congress enacted the Cable Communications Policy Act which sought to better allocate federal, state, and local responsibilities in the area. Pub. L. No. 98-549, 98 Stat 2779. As is relevant here, the 1984 Act imposed a “uniform, federal standard on the level of franchise fees.” ACLU, 823 F.2d at 1559. Specifically, “[f]or any twelve-month period, 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.” 47 U.S.C. § 542(b). A “franchise fee” is defined broadly to include “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.” Id. § 542(g)(1).

The statute contains five exceptions to that broad definition. See Id. § 542(g)(2)(A)-(E). Among the exceptions are (1) for any franchise in effect on October 30, 1984, “payments which are required by the franchise to be made by the cable operator during the term of such franchise for, or in support of the use of, public, educational, or governmental [(“PEG”)] access facilities; and (2) for any franchise granted after 1984, “capital costs which are required by the franchise to be incurred by the cable operator for [PEG] access facilities.” Id. § 542(g)(2)(B), (C) (emphasis added). The importance of PEG facilities and operations was emphasized in the legislative history of the 1984 Act. H.R. Rep. No. 98-934, at 30 (1984), reprinted in 1984 U.S.C.C.A.N. 4655, 4667. Nevertheless, Congress required that taxes, fees, and assessments made by cable operators in support of PEG facilities be counted towards the statutory cap unless they were for capital costs or were voluntary payments not required by the franchise itself. See Id. at 65.

In 2005, the FCC initiated a rulemaking process to determine whether local franchising authorities' processes “unreasonably impede[d] the achievement of the interrelated federal goals of enhanced cable competition and accelerated broadband deployment and, if so, how the Commission should act to address that problem.” 20 FCC Rcd. 18581, 18582 (Nov. 18, 2005). After reviewing a “voluminous record generated by the rulemaking proceeding, ” the FCC “ascertained the need for new rules to ensure that the local franchising process operated in a fully competitive fashion, free of barriers to entry.” All. for Cmty. Media v. FCC, 529 F.3d 763, 770 (6th Cir. 2008) (internal quotation marks). In March 2007, the FCC released its order, which sought to address the problems with the processes employed by local (i.e., county and municipal) franchising authorities. See 22 FCC Rcd. 5101 (Mar. 5, 2007) [hereinafter “the First Order”]. It did so by adopting rules related to 47 U.S.C. § 541(a)(1), which prohibits a franchising authority from “unreasonably refus[ing] to award an additional competitive franchise” to a new cable entrant.

Among the problems the FCC learned through the rulemaking process was that local franchising authorities often made unreasonable demands for payments which were not to be counted towards the statutory franchise-fee cap, including demands related to support for PEG facilities and operations. 22 FCC Rcd. at 5122-24. The FCC determined that a local franchising authority's “refusal to award an additional competitive franchise because of an applicant's refusal to accede to [franchise-fee] demands that are deemed impermissible [] shall be considered to be unreasonable” under Section 541(a)(1). Id. at 5145.

The FCC noted that the “general law with respect to franchise fees should be relatively well known, ” but it decided to “restate the basic propositions [in the First Order] in [an] effort to avoid misunderstandings that can lead to delay in the franchising process as well as unreasonable refusals to award competitive franchises.” Id. The FCC clarified that payments towards capital costs for PEG facilities are not “franchise fees” subject to the 5% statutory cap. Id. at 5150-51. Those costs “are distinct from payments in support of the use of PEG access facilities. PEG support payments may include, but are not limited to, salaries and training. Payments made in support of PEG access facilities are considered franchise fees and are subject to the 5 percent cap.” Id. at 5151. This interpretation is consistent with the negative implication of Section 542(g)(2)(B)-(C). See Cable TV Fund 14-A, Ltd. v. City of Naperville, No. 96-C-5962, 1997 WL 433628, at *12 n.23 (N.D. Ill. July 28, 1997) (“The fact that Congress elected to use differing terminology in defining what constitutes a franchise fee for post and pre-October 30, 1984 franchises indicates Congress' intent to draw a clear distinction between ‘payments . . . for, or in support of the use of, PEG access facilities' and ‘capital costs . . . for PEG access facilities.'”). While the FCC did not believe that it was unreasonable to require applicants to provide financial support to PEG operations and facilities, it concluded that “required PEG support costs are subject to the franchise fee cap.” 22 FCC Rcd. at 5153; see also Id. at 5152 (noting that “non-capital costs of [PEG] requirements” must be “offset from the cable operator's franchise fee payments”).

The First Order preempted any local laws, regulations, and franchise agreements that conflicted with the First Order and were not “specifically authorized by state law.” 22 FCC Rcd. at 5156-57. This included any local laws or franchise agreements that “authorize or require a local franchising authority to collect franchise fees in excess of the fees authorized by law.” Id. at 5162. The FCC did not extend the First Order to state-level regulation, because it “lack[ed] a sufficient record to evaluate whether and how such state laws may lead to unreasonable refusals to award additional competitive franchises.” Id. at 5156. In June 2008, the Sixth Circuit upheld the First Order against various challenges. See All. for Cmty. Media, 529 F.3d at 766-67, 787.

After issuing the First Order, the FCC initiated another rulemaking process, asking for comment on the issue of whether the First Order's rules and guidance should apply to existing franchisees. 22 FCC Rcd. at 5164. In November 2007, it issued an order on its findings. 22 FCC Rcd. 19633 (Nov. 6, 2007) [hereinafter “the Second Order”]. The Second Order “extend[ed] a number of the rules promulgated [in the First Order] to incumbents as well as new entrants, ” including those pertaining to payments made to support the operation of PEG facilities. Id. at 19633, 19638. The FCC reasoned that Section 542 “does not distinguish between incumbent providers and new entrants, ” and “[a]s a result, to the extent that a franchise-fee requirement is found to be impermissible under Section 622, that statutory interpretation applies to both incumbent operators and new entrants.” Id. at 19637-38. Indeed, the FCC observed that the requirements related to franchise fees were not “entirely new pronouncements” but simply recognition of “the state of existing law on point.” Id. at 19638 n.30. Thus, “the finding . . . that the non-capital costs of PEG requirements must be offset from the cable operator's franchise fee payments is applicable to incumbents because it was based upon [the] statutory interpretation of [the 1984 Act].” Id. at 19639.

In 2017, the Sixth Circuit vacated certain determinations in the Second Order related to in-kind exactions required by franchise agreements. See Montgomery Cty., Md. v FCC, 863 F.3d 485 (6th Cir. 2017). Additional rulemaking proceedings occurred in response. In August 2019, the FCC issued an order adopting more rules and guidance. 34 FCC Rcd. 6844 (Aug. 2, 2019) [hereinafter “the Third Order”]. The FCC concluded “that cable-related, ‘in-kind' contributions required by a cable franchise agreement are franchise fees subject to the statutory five percent cap on franchise...