Brian T. Grogan
(612)
347-0340
E-Mail:
GroganB@moss-barnett.com
Timothy L. Gustin
(612)
347-0409
E-Mail: GustinT@moss-barnett.com
Communications Law Update
To: Moss & Barnett Clients and Interested Parties
From: Brian T. Grogan and Timothy L. Gustin
Date: December 17, 1999
Two recent court decisions may support the argument that cable television operators can use public rights-of-way and yet avoid local franchising requirements. The decisions in the City of Austin v. Southwestern Bell Video Services, Inc., No. 98-50874 (5th Cir. Oct. 14, 1999) and City of Chicago v. FCC, No. 98-2729 (7th Cir. Dec. 7, 1999) present troubling interpretations of what constitutes a "cable operator" providing "cable service" over a "cable system." Both cases involve companies which provide video services to multiple dwelling units (MDUs), such as apartment buildings and condominiums, and lease cable facilities located in the public rights-of-way to provide a connection between MDUs. Historically, municipalities have applied a simple rule of thumb to determine whether a franchise should be required: if a company installs lines which cross a public right-of-way to provide cable service, a franchise should then be required. In light of these recent decisions, this rule may no longer be quite that simple, and the result may be detrimental to a municipality’s franchising authority.
On October 14, 1999, the United States Court of Appeals for the Fifth Circuit affirmed a lower court's decision that Southwestern Bell Video Services (SBVS) did not need a franchise to provide cable services. SBVS distributed video programming to MDUs by leasing facilities from its affiliate, Southwestern Bell Telephone Company (SBTC). Both SBVS and SBTC are wholly owned subsidiaries of SBC Communications, Inc. The court found that SBVS can qualify as a "cable operator" only if it met one of two tests. First, under the "ownership" test, SBVS qualifies as a cable operator if it is a person or member of a group of persons who either
"directly or through one or more affiliates owns a significant interest" in a cable system. 47 U.S.C. § 522(5). Second, under the "control" test, SBVS is a cable operator if it "controls" or is responsible for, through any arrangement, the management and operation of the "cable system." 47 U.S.C. § 522(5)(B).
The Fifth Circuit held that SBVS "owns" and "controls" only some of the components of a "cable system," including satellite dishes, a tower, an antenna, and “headend,” which, according to the decision, collectively do not amount to a "significant interest" in a cable system. As a result, the Fifth Circuit did not even consider whether SBVS was actually “using” any of the city’s rights-of-way. SBVS was therefore permitted to provide cable service without a franchise, thereby avoiding local regulation including payment of a franchise fee.
On December 7, 1999, the United States Court of Appeals for the Seventh Circuit affirmed an FCC decision, producing a similar result to that in SBVS. Entertainment Connections, Inc. (ECI) is the operator of a satellite master antenna television system (SMATV) which receives satellite signals and then distributes them throughout an MDU. ECI had about 1600 subscribers in 12 large apartment buildings of at least 100 residents each. ECI began its operations by placing SMATV facilities on top of each building it served. Under this method of operation, no local franchise was required because the signal was never sent over public rights-of-way. Then in 1996, ECI changed its method of operation by leasing Ameritech’s fiber optic and coaxial cables located in the public rights-of-way and transmitting video signals from a single location to the other buildings.
The FCC had held that ECI was not a “cable operator” because it does not provide service over a “cable system.” In other words, ECI’s use of Ameritech’s fiber distinguished ECI from traditional cable operators which provide service over their own fiber. The FCC based its conclusion on the following factors:
1. There was absolute separation of ownership between ECI and Ameritech and there was nothing more than the carrier-user relationship between them;
2. ECI's facilities were located entirely on private property (i.e., the building rooftop);
3. Ameritech provided service to ECI pursuant to the tariffed common carrier service;
4. Ameritech had no editorial control over the content of ECI's programming;
5. The facilities primarily used by Ameritech to provide service to ECI were not constructed at ECI's request.
6. There was capacity to serve several other programming providers; and
7. ECI had committed to make its internal drops to each subscriber available to other programming providers.
The Seventh Circuit held that “it is not unreasonable to conclude that when considered with all the factors relied upon, if the components of the operation are completely under separate ownership and control, there is no entity which owns a significant interest in the system or who controls, manages, or operates the system as a whole.” Therefore, the court held that because ECI leased its distribution lines from the local telephone company, ECI was not in any way "using" the public rights-of-way to provide cable services.
Taken together, the ECI and SBVS decisions may allow cable operators to develop business strategies to provide cable services throughout a community while completely avoiding the need to obtain local cable television franchises. Under these decisions, a cable operator would simply lease distribution facilities in the public rights-of-way from either an affiliated or unaffiliated entity. This operating strategy may result in a significant loss of franchise fee revenue for municipalities and could trigger “level playing field” requirements in existing cable television franchises. Such level playing field provisions could require a reduction in regulation of a municipality’s traditional cable operator. It is important to note, however, that neither the SBVS or ECI decision addressed the issue of whether a franchise could be required under local or state law, but rather address the issues only under federal law.
Cable television operators nationwide are beginning to provide access to the Internet over their cable wires. Subscribers lease or buy “cable modems” that connect to the computer and allow access to the Internet via cable, as opposed to local phone lines. Cable modem service is often much faster than connections via phone lines and is a very attractive service offering. Typically, the cable operator has an affiliation with an Internet service provider (ISP), such as Road Runner or @Home, which subscribers use to obtain access to the Internet. There has been considerable debate over whether cable television operators must allow unaffiliated ISPs, such as America Online, “open access” to their cable modem platforms. Intending to provide more competition and choice for subscribers, some local franchising authorities have taken an aggressive approach by conditioning franchise renewals or transfers on open access requirements. All who have done so have thus far found themselves in court.
One case that has gained national attention on this issue is AT&T Corp. v. City of Portland, 43 F. Supp. 2d 1146 (D. Org. 1999). In this case the City of Portland and Multnomah County, Oregon, in reviewing the proposed transfer of control of TCI to AT&T, passed a resolution requiring AT&T to allow unaffiliated ISPs to connect their equipment directly to AT&T’s cable modem platform, bypassing @Home, its proprietary cable ISP. AT&T refused the open access requirement, which essentially led to a denial of the proposed transfer. AT&T and TCI sued the City and County in federal district court, where the City and County received a favorable decision. AT&T has since appealed, and a decision from the Ninth Circuit Court of Appeals is expected sometime in February of 2000.
Faced with ongoing criticism, AT&T recently announced its commitment to provide open access to its cable and fixed wireless systems and afford subscribers a choice of ISPs. This will become effective next year for subscribers served by AT&T’s fixed wireless systems and in mid-2002 for subscribers of AT&T’s broadband cable systems, after AT&T’s exclusivity contract with cable ISP, @Home, expires. Whether others will follow AT&T’s lead is unknown.
Many cable
operators argue that it is bad policy to mandate access to new technologies and
infrastructures that are privately owned and financed. The Federal Communications Commission has so
far maintained a hands-off approach, intending to have competition control.
Local governments have pointed out that without regulation, cable providers may
be able to monopolize the Internet, and subscribers will not be able to select
their ISP of choice. We will provide an
update on the status of the Portland decision and any further
developments on this issue in the months to come.
A recent decision by the South Carolina Supreme Court supports a municipality’s right to impose a franchise fee on a telecommunications provider for use of the public rights-of-way. Bell South Telecommunications v. City of Orangeberg, No. 25009, 1999 W.L. 1037160, S.C., (Nov. 8, 1999). The City of Orangeberg adopted an ordinance imposing a franchise fee based on a percentage of the gross receipts of the telecommunications provider. The percentage was in excess of the city's administrative cost and therefore challenged by the Bell South as unlawful under the "barriers to entry" provision of the Telecommunications Act of 1996. 47 U.S.C. § 253(c). The court held that "a franchise fee equal to the percentage of revenue generated is not inherently unfair or unreasonable as a measure of the franchise’s value as a business asset to the franchisee."
The South Carolina decision was in direct conflict with an earlier case in Maryland which held that what constitutes "fair and reasonable compensation under federal law is limited to the recovery of actual costs associated with the use of the rights-of-way.” Bell Atlantic v. Prince Georges County, 49 F. Supp. 2d 805 (D. Md. 1999).
Look for our April 2000 Communications Law Update, which will be dedicated to the continuing trend on cable system consolidation and the impact these transfers have on the franchise renewal process.
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For further information on Moss & Barnett’s cable communications
practice, please see the firm’s website at www.moss-barnett.com.
Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss &
Barnett. Brian represents entities
throughout the country on franchise renewals, transfers of ownership,
telecommunications planning, right-of-way issues, First Amendment issues,
litigation and other related communication matters. Brian is a frequent presenter at state and
national conferences regarding communications law. He is a member of the American Bar
Association (Forum Committee on Communications Law), National Association of
Telecommunications Officers and Advisors, International Municipal Lawyers
Association, and is Chair of the Communications Law Section of the Minnesota
State Bar Association.
Timothy L. Gustin is an associate with the Minneapolis law firm of Moss & Barnett
and practices in the areas of cable communications, telecommunications, and
real estate. He represents entities on
cable television franchise renewals, transfers of ownership, right-of-way
regulation, wireless tower siting and zoning, and various telecommunications
issues. Tim is involved in the
preparation of cable communication franchises, regulatory ordinances,
resolutions, transfer reports, and related documents. He is a member of the American Bar
Association and is the Secretary of the Communications Law Section of the
Minnesota State Bar Association.
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The materials in this Communications Law Update have been
complied from a variety of sources and address only a portion of the relevant
issues contained within hundreds of pages of regulations and decisions. We have not addressed many important points
which may apply to your situation. You
should consult with legal counsel before taking any action on matters covered
by this Communications Law Update.
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