Newsletter April 1996

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: July 17, 2000

NINTH CIRCUIT RULES THAT

CABLE MODEM SERVICE IS A TELECOMMUNICATIONS SERVICE

On June 22, 2000 the United States Court of Appeals for the Ninth Circuit reversed the judgment of the District Court by holding that a franchising authority may not regulate cable broadband Internet access because the transmission of Internet service to subscribers over cable broadband facilities is a “telecommunications service” and not a “cable service” under the Communications Act of 1934, as amended by the Telecommunications Act of 1996 (“Communications Act”).[1]

At the heart of the appeal, the Ninth Circuit addressed the question of whether a local cable franchising authority may condition a transfer of a cable franchise upon the cable operator’s grant of unrestricted access to its cable broadband transmission facilities for Internet service providers (“ISPs”) not affiliated with the operator’s proprietary service.

The case began with the proposed merger between AT&T, one of the nation’s largest long distance carriers, and Tele-communications, Inc. (“TCI”), one of the nation’s largest cable television operators. On December 17, 1998, the City of Portland and Multnomah County, Oregon (collectively, “Portland”) approved the proposed transfer of the local cable television franchise to AT&T subject to an open access condition which would allow subscribers to purchase cable broadband access separately from unaffiliated ISPs. Portland argued that without such a provision, subscribers would have no choice over the terms of Internet service such as content and bandwidth restrictions. The service to be offered by AT&T was known as “@Home,” which bundles its cable conduit with Excite, an ISP, under an exclusive contract.

AT&T refused Portland’s condition which resulted in a denial of the request for the transfer of the cable television franchise. At such time, AT&T brought an action charging that the open access condition violated the Communications Act, among other claims. The District Court rejected all of AT&T’s claims and granted summary judgment to Portland.[2] In the Ninth Circuit decision, the court grappled with the question of whether @Home is a “cable service” to be governed by a local cable television franchise or a “telecommunications service” governed by the common carrier provisions of the Communications Act, of which local governments have no control. The Ninth Circuit held that AT&T’s provision of @Home constitutes a “telecommunications service,” concluding that:

1. AT&T need not obtain a franchise to offer cable broadband[3];

2. Portland may not impose any requirement that has “the purpose or effect of prohibiting, limiting, restricting or conditioning” AT&T’s provision of cable broadband[4];

3. Portland may not order AT&T to discontinue cable broadband[5]; and

4. Portland may not require AT&T to provide cable broadband as a condition of the franchise transfer[6].

In summary, the Ninth Circuit concluded that “Portland may not regulate AT&T’s provision of @Home in its capacity as a franchising authority, and the open access condition contained in the franchise transfer agreement is void.”

The Ninth Circuit decision has far reaching implications as it not only calls into question what conditions a franchising authority may impose on cable operators when faced with a request for a franchise transfer, but more importantly calls into question whether a franchising authority has any regulatory control over the provision of cable broadband Internet access. The concern among many franchising authorities is that the Federal Communications Commission (“FCC”) will use the Ninth Circuit’s decision as support to institute a national policy with respect to cable broadband Internet access via cable modems. The U.S. Internet Industry Association has asked the FCC to take “immediate” action on the issue of competitive access to cable modem platforms. FCC Chairman, William Kennard, said the FCC would launch a proceeding to address the implications of the Portland decision but did not set a timetable or parameters for the proceeding.

Many cable industry observers have argued that cable operators will discontinue the payment of franchise fees on revenues derived from cable modem services, which would result in a loss of millions of dollars of franchise fee revenue to franchising authorities across the country. However, the initial reaction of many large multiple-system operators has so far been one of caution. Most operators are waiting to first determine whether the case will be appealed to the United States Supreme Court and what reaction the FCC may have to the Ninth Circuit’s decision. At the present time, most municipalities outside of the Ninth Circuit’s jurisdiction report that the cable operators are continuing to collect and remit franchise fees on their cable modem revenues.

Although the Portland decision, at first blush, appears to be a loss for local franchising authorities and cable subscribers, both may win in the end. Some industry observers predict that because cable modem service has been deemed a “telecommunications service,” competitive local exchange carriers will request access to the incumbents’ cable modems, seeking interconnection of the network elements, as required by the common carrier requirements of Section 251 of the Communications Act. Subscribers would then have the choice of competing ISPs.

The Portland decision will no doubt have an impact on virtually all future cable system transfers and franchise renewals. Particularly, the case will affect the extent to which franchising authorities can regulate the services provided by cable operators and in defining the term “gross revenues,” which dictates the amount of franchise fees to be paid by cable operators.

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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 the past 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.

For further information on Moss & Barnett’s cable communications practice, please see the firm’s website at www.moss-barnett.com.

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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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[1] AT&T Corp. v. City of Portland, No. 99-35609 (9^th Cir., June 22, 2000).

[2] AT&T Corp. v. City of Portland, 43 F. Supp. 2d 1146 (D. Or. 1999).