Brian T. Grogan

(612) 347-0340

E-Mail: GroganB@moss-barnett.com

Web site: www.municipalcommunicationslaw.com

COMMUNICATIONS LAW UPDATE

To: Moss & Barnett Clients and Interested Parties

From: Brian T. Grogan, Esq.

Date: October 8, 2003

1. CABLE MODEM SERVICE NOT A “CABLE SERVICE”

The United States Court of Appeals for the Ninth Circuit has held that cable modem service is not a “cable service” but instead part “telecommunications service” and part “information service.” Brand X Internet Services v. Federal Communications Commission, No. 02-70518 (9th Cir. October 6, 2003).

Background of Case

When Congress adopted the Telecommunications Act of 1996 it sought to provide a “pro-competitive, de-regulatory national policy framework” designed to promote the deployment of advanced telecommunications and information technologies to all Americans by opening all telecommunications markets to competition.” H.R. Conf. Rep. No. 104-458, at 113 (1996). As result, the Act maintained significant common carrier obligations on providers of “telecommunications services” but left providers of “information services” subject to much less stringent regulation. The Act raised the question of whether new broadband Internet technologies, such as cable modem service, qualified as telecommunications services, information services, cable services or a combination of these.

The FCC did not initially take a position on the regulatory classification of cable modem service. The Ninth Circuit was the first to tackle the issue in AT&T v. City of Portland, 216 F.3d 871 (9th Cir. 2000) where the court held that cable modem service did not qualify as a “cable service” but rather contained both information service and telecommunications service components.

Thereafter, the FCC on September 28, 2000 issued a Notice of Inquiry, In The Matter of Inquiry Concerning High-Speed Access to the Internet over Cable and Other Facilities. 15 F.C.C.R. 19287. (NOI) In the NOI the FCC sought to determine the regulatory treatment to be accorded to cable modem service. After reviewing over 250 comments the FCC, on March 15, 2002, issued a Declaratory Ruling in which it concluded that “cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service.” As a result of the FCC’s Declaratory Ruling operators providing cable modem service were no longer subject to regulation as a cable service provider under Title VI of the Act nor as a telecommunications service provider (i.e. common carrier) under Title II of the Act but rather as a provider of information service under the less stringent provisions of Title I of the Act.

Multiple parties sought review of the Declaratory Ruling and all of the related petitions were transferred to the Ninth Circuit for consideration. The fact that the Ninth Circuit received the case is significant because the Ninth Circuit had previously ruled on the issue in the Portland case. Typically, when reviewing an agency’s interpretation of a statute the court will apply a two-step formula set forth by the Supreme Court. The reviewing court must look first to the language of the statute and if the intent of Congress is clear the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If the statute is silent or ambiguous, “the question for the court is whether the agency’s answer is based on a permissible construction of the statute.” Where the agency’s interpretation of the statute is reasonable, the court must defer.

What is the Difference Between a Cable, Telephone and Information Service?

In its analysis the Ninth Circuit utilized the following federal definitions.

“Cable service” is “(A) the one-way transmission to subscribers of (i) video programming, or (ii) other programming service and (B) subscriber interaction, if any, which is required for the selection or use of such video programming or other programming service.” 47 U.S.C. § 522(6).

“Telecommunications service” is “the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used.” 47 U.S.C. § 153(46).

“Information services” is “the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, but does not include any use of any such capability for the management, control or operation of a telecommunications system or the management of the telecommunications service.” 47 U.S.C. § 153(20).

The Ninth Circuit’s Analysis

Because the Ninth Circuit had previously ruled on the matter the court looked to its decision in Portland for guidance. In Portland the Ninth Circuit held that “the essence of cable service [as defined in the Act]…. is one-way transmission of programming to subscribers generally,” and concluded that “the definition does not fit” cable modem service, whose salient characteristics are “not one-way and general, but interactive and individual.” Having determined that a cable operator may provide cable broadband Internet access without a cable service franchise the court in Portland then sought to determine how the Act defines cable modem service. In Portland the Ninth Circuit held that cable modem service consists of two elements: a pipeline and the Internet service transmitted through that pipeline. It further held that a cable modem service provider controls all of the transmission facilities between its subscribers and the Internet. Thus to the extent a cable modem service provider is a conventional ISP its activities are that of an information service. However, to the extent a cable operator provides its subscribers Internet transmission over its cable broadband facility, it is providing a telecommunications service as defined in the Act.

As a result of the Portland decision the Ninth Circuit, in the present case, held that because the FCC’s Declaratory Ruling “agreed with our conclusion that cable broadband service is not “cable service,” but disagreed with our conclusion that it is in part “telecommunications service,” we must affirm in part, vacate in part, and remand for further proceedings not inconsistent with this opinion.” Thus the FCC is instructed to review its rules to classify cable modem service as not only an “information service” but also a “telecommunications service.”

What Now?

FCC Chairman, Michael Powell, has already issued a statement indicating that the FCC plans to appeal the ruling. For now it appears franchising authorities will be unable to mandate the payment of cable service franchise fees on cable modem revenues. However, if the decision stands, issues regarding common carrier regulation of cable modem service, including open access for competing ISPs, will be debated in states across the country.

2. CITIES RECEIVE CLARIFICATION REGARDING CONDUCT OF FORMAL RENEWAL PROCESS.

On September 29, 2003, the United States District Court issued an order denying Comcast’s motion for a preliminary injunction in a proceeding involving the city of San Jose, California. Comcast of California II, L.L.C. v. City of San Jose, California, NO. 5:03-cv-02532-RS (N.D. Cal. Sept. 29, 2003). The case involves a formal franchise renewal proceeding between San Jose and Comcast and the rules for the conduct of this hearing.

The Cable Act at 47 U.S.C. § 546 requires a franchising authority to conduct an administrative proceeding if it preliminarily denies an operator’s formal renewal proposal. In this case the city adopted a resolution of preliminary denial which authorized the city manager to commence a formal administrative hearing. The city selected and appointed a hearing officer and established rules and procedures for the conduct of the administrative hearing. The city’s rules provided that the hearing officer would conduct the evidentiary phase of the administrative hearing and would then make a recommendation to the city council. Comcast argued that the procedure was improper because only the city council, as franchising authority, should conduct the hearing.

Unable to convince the city to change its rules, Comcast filed a complaint seeking declaratory and injunctive relief. Comcast argued to the court that the rules which the city intended to utilize were illegal because they 1) fail to provide adequate notice to Comcast of the city’s claims which support its preliminary denial of the renewal application; 2) are not grounded in any state or federal law; 3) improperly delegate authority to a hearing officer; 4) fail to establish a process which affords Comcast an opportunity to participate in a hearing before the city council; and, 5) fail to delineate the claims, evidence, and defenses which Comcast will be permitted to present at the hearing. Comcast also argued that its free speech and due process rights were violated as a result of the hearing procedure.

In its decision the court carefully reviewed the requirements of Section 546 finding that the section requires the cable operator shall be afforded: 1) adequate notice; 2) fair opportunity for full participation, including the right to introduce evidence, to require the production of evidence and to question witnesses; and, 3) a transcript shall be made of the proceeding. The court held that Comcast could not show that it had been adversely affected by the city’s failure to follow the procedural requirements of the statute. The court found that “although Comcast is correct that it may loose its monetary investment, an event which will only occur if Comcast is ultimately denied renewal, Comcast has no entitlement to renewal. Therefore, its business decision to invest money into a San Jose cable system is just that – a business decision made by Comcast. Such decision cannot be used against the City to establish adverse impact.”

With respect to Comcast’s First Amendment argument the court held that the renewal requirements requested by the city were content-neutral, served the important government interests identified in the “needs and analysis report” provided to Comcast and appear to be narrowly tailored to achieve those needs. Moreover, with respect to Comcast’s due process arguments the court found that Comcast “is being provided with notice and an opportunity to be heard, both by a hearing officer and the city council, prior either to the acceptance or denial of its application for franchise renewal.”

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Brian T. Grogan is a shareholder with the Minneapolis law firm of Moss & Barnett practicing in the areas of telecommunications and cable television law. Brian represents entities throughout the country on franchise renewals, transfers of ownership, competitive franchising, rate regulation and effective competition proceedings, telecommunications planning, right-of-way management, first amendment issues, tower siting, leasing and zoning, litigation and other related communication matters. He is a frequent presenter at state and national conferences regarding communications law and 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 (Contracts, Franchises and Technology Section), and is past chair of the Communications Law Section of the Minnesota State Bar Association.

Brian Grogan at Moss & Barnett, 4800 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402, phone: (612) 347-0340 or via email at groganb@moss-barnett.com.

Web site: Please visit www.municipalcommunicationslaw.com for additional updates on communications law issues of interest to municipalities.

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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 that may apply to your situation. You should consult with legal counsel before taking any action on matters covered by this Communications Law Update.