CABLE WARS: THE CITIES STRIKE BACK

CABLE REGULATION: MUNICIPALITY PERSPECTIVE

A. CASE LAW UPDATE

1. Supreme Court Denies Cert. in Landmark Transfer Case - On Monday, January 12, 2004, the Supreme Court denied the Cert. Petition in Charter Communications, Inc. v. County of Santa Cruz, 2004 WL 47372. As a result, the Ninth Circuit’s decision in this cable franchise transfer case will stand. Below is a description of the case.

Santa Cruz Case

On September 20, 2002, a three judge panel of the Ninth Circuit Court of Appeals overturned the leading case regarding cable television transfers of ownership. Charter Communications, Inc. v. County of Santa Cruz, 304 F.3d 927 (9th Cir. 2002). The Ninth Circuit decision vacates the district court opinion, Charter Comms. Inc. v. County of Santa Cruz, 133 F.Supp.2d 1184, 1187-1200 (N.D. Cal. 2001), which had been widely cited by the entire cable industry for the proposition that transfer approval cannot be unreasonably conditioned by a franchising authority. The industry had also cited the district court decision for the proposition that a cable operator cannot be compelled to reimburse the costs and expenses associated with a transfer review (see www.municipalcommunicationslaw.com - click Presentations - then click Key Legal Decisions Regarding Franchise Renewals and Transfers - for a complete discussion of the district court decision).

The Ninth Circuit panel focused on one key issue in reviewing the district court decision. Was the County’s denial of consent unreasonable? The court held that “when reviewing disputes emerging from [a] franchise agreement, a court must determine whether the county could have deemed it reasonable to deny consent; this is a much more forgiving standard than whether the district court judge would have denied consent himself if he were acting as the County’s agent.”

The Ninth Circuit held that it was reviewing a discretionary decision of the County Board of Supervisors, a legislative body. The court noted that review of a transfer of control is a “legislative act” entitled to deferential treatment by the court. Thus, whether the County denied consent reasonably is a question “governed not by a preponderance of evidence standard, but rather a substantial evidence test.” Under such a deferential standard, the “County’s denial of consent should be upheld as long as there is substantial evidence for any one sufficient reason for denial.”

The Ninth Circuit found that the ability of the cable operator to adequately service the franchise throughout its term is a legitimate concern. It was not unreasonable for the County to be concerned about Paul Allen’s (the key individual behind Charter) true net worth and about the relationship of that wealth to the viability of the enterprise. The court also held that district court erred by failing to give deference to the County’s articulated concern for keeping stable the subscriber rates in the future. It was not unreasonable for the County to be worried about the long-term viability of the Allen purchase and its effects on the County’s responsibility to assure a stable cable franchise for its citizens.

The Court also held that “even if we thought the County had acted unreasonably, our view would be deferential not only because precedent so commands, but also because methods exist to promote self-correction in the future: citizens can vote out their local representatives and cable operators can refuse to enter into franchise agreements with notoriously difficult local franchising authorities.”

Therefore, the Ninth Circuit held that “since the County’s judgment was reasonable, it necessarily follows that its decision to deny the transfer on the basis of that judgment was supported by a legitimate governmental interest.” Charter voluntarily entered into an agreement under which the County had to approve any transfer of the franchise and thus, to that extent, waived its right to claim that a denial of the transfer violated its First Amendment rights. The Ninth Circuit cited multiple decisions arguing that First Amendment rights may be waived upon clear and convincing evidence that the waiver is “knowing, voluntary and intelligent.”

As a result of the Ninth Circuit’s decision, the district court’s decision, including a companion case mandating the reimbursement of attorney’s fees to Charter, were vacated.

2. Ninth Circuit Rules That Cable Modem Service is 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, 345 F.3d 1120 (9th Cir. 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.”

Related Case

In Time Warner Cable v. City of Rochester, No. 6:03-CV-06257-DGL (W.D. N.Y.) the court, on December 22, 2003, granted Time Warner’s Motion for Summary Judgment enjoining Rochester and other New York towns from collecting franchise fees on anything other than Time Warner’s provision of “cable service” which does not include cable modem service. A similar case occurred between Jefferson Parish and Cox Communications in Louisiana, although the case was dismissed on November 21, 2003. This case also involved the Parish’s attempt to impose franchise fees on cable modem service. Locally, a case involving the city of St. Paul and Comcast Communications was recently settled. The case resulted from the City’s challenge of Comcast’s failure to remit franchise fees on cable modem service. The settlement of this case involved a number of issues including the City agreeing not to pursue cable modem franchise fees for several years, but thereafter reserving its right to pursue such a collection should it be permissible under applicable laws. To date there are no reported cases of cities successfully collecting franchise fees on cable modem service in the country.

3. Cities Could be Liable for Damages and Attorney’s Fees for Denials of Permits for Placement of New Antennas - On January 23, 2004, the Ninth Circuit issued a ruling in Abrams v. City of Rancho Palos Verdes, 2004 WL 65151 that municipalities may be held liable under 42 U.S.C. § 1983 for violating § 704, the Telecommunications Act of 1996 (47 U.S.C. § 332). In this case the city denied the repeated requests of Abrams to erect a transmission tower in his back yard.

The Ninth Circuit decision is in direct conflict with recent decisions of the Third and Seventh Circuits which concluded that § 1983 remedies were not available for violations of § 332 of the Telecommunications Act. In particular, the Ninth Circuit held that 1983 remedies are available because 1) §332’s remedial scheme was not sufficiently comprehensive to imply congressional intent to preclude §1983 relief, and 2) the savings clause in the Telecommunications Act §601 demonstrates congress’ affirmative intent to preserve §1983 remedies. The case is troubling for municipalities which could now be subject to damages and attorney’s fees for denials of permits for placement of new antennas.

4. 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.”

B. CHAPTER 238 AMENDMENTS

On May 29, 2004, Governor Pawlenty signed legislation that for the first time in nearly two (2) decades amends Minnesota Statutes Chapter 238 regarding cable communications systems. Many of the changes simply eliminated outdated statutory language which no longer was consistent with federal law or the rapidly advancing industry. Outlined below please find a brief synopsis of the key changes to Chapter 238 along with a brief analysis regarding the potential impact these changes may have on local regulatory authority over cable television operations.

Section 238.01

Declaration of Legislative Findings and Intent

The original rationale regarding why Minnesota adopted a Cable Act has been eliminated in its entirety.

Section 238.02 Definitions

Subd. 2 Cable Communications Company

The definition of “cable communications company” has been eliminated in its entirety. All references are changed to “cable communications system.”

Section 238.02

Subd. 17-19 Class A, B and C Cable Systems

The definitions for these sections were eliminated as the statute no longer distinguishes between smaller cable systems serving fewer than 1,000 subscribers and larger systems serving more than 3,500 subscribers. These classifications were previously used to distinguish between certain PEG access obligations applicable to various systems throughout the state.

Section 238.08 Franchise Requirement

Subd. 3 Municipal Operation

A minor modification was made clarifying that a municipality has the right to operate a cable system unless otherwise prohibited by applicable law. Presently, there are no federal law restrictions on municipal ownership.

Section 238.081 Franchise Procedure

Subd. 1 Publication of Notice

Clarification was provided that the franchise procedure is only applicable to an “initial” request for a cable television franchise as opposed to franchise renewal which is governed by federal law at 47 U.S.C. § 546.

This subsection was also amended to clarify that once an applicant submits a proposal to a municipality, the municipality and applicant may negotiate in good faith the terms of a franchise.

Finally, this section was modified to clarify that franchising authorities are not prohibited from recovering from an applicant the entire reasonable and necessary costs of processing a cable communications franchise.

Section 238.083 Sale or Transfer of Franchise

Subd. 2 Written Approval of Franchise Authority

Language was eliminated from this provision which previously required a city to take action within thirty (30) days of a request for approval of a cable system transfer. This section also previously required the conduct of a public hearing with published notice if the city believed that a transfer may adversely affect subscribers. Those provisions were eliminated to ensure consistency with federal law regarding transfers of ownership. As a result municipalities may now review a proposed transfer of ownership under federal procedural rules which generally require action within one hundred twenty (120) days of receipt of a complete and accurate request for transfer approval (i.e. FCC Form 329).

Section 238.084

Required Content of Franchise Ordinance

This section of state law provides provisions which must be contained within a cable communications franchise. Several of the provisions were antiquated and referenced technology that is no longer utilized in the cable industry or construction standards and practices that are no longer applicable.

Among the more important amendments in this section is clarification that for competing franchises construction must commence no later than two hundred forty (240) days after the franchise is granted and construction must commence at a reasonable rate of not less than fifty (50) plant miles per year. Construction of the entire franchise area must be substantially completed within five (5) years of the date the franchise is granted. This issue is of particular concern for smaller communities around the state which are entertaining applications from competing cable television operators for the provision of cable service.

As previously discussed, all reference to Class A, B and C cable systems has been eliminated from the statute meaning that PEG access services in all Minnesota cities are now governed by a single provision. In particular, the provision requires that a franchising authority “may” require a franchisee to provide separate public, educational and governmental access channels on a first-come, first-served nondiscriminatory basis. The provision also provides that a franchising authority may specify minimum equipment that the franchisee shall make available for public use. Channel 6 remains a designated set-aside channel for uniform regional channel usage throughout the Twin Cities Metropolitan Area.

Section 238.35 Use of Existing Easement; Restrictions

Subd. 4(b) Restrictions on Use

Clarification was provided that cable operators must restore property and landscaping within thirty (30) days of completing installation of cables unless otherwise specified in a local right-of-way ordinance adopted by the city.

There was another key piece of legislation debated during this legislative session regarding an amendment to the state level playing field statute. The present law (Section 238.08) requires that a municipality may grant an additional franchise on terms and conditions no more favorable or less burdensome than those in the existing franchise pertaining to: 1) the area served; 2) public, educational, or governmental access requirements; or 3) franchise fees. Competing cable television operators are particularly concerned with the requirement that they must serve an entire franchise area. In many cases, competing operators may be telephone companies desiring to serve only a portion of the jurisdiction where their existing telephone facilities are in place.

The problems with offering a limited area franchise often arise regarding local PEG access requirements, institutional network requirements, service to public buildings, schools and related matters. The cable industry, comprised primarily of incumbent cable operators, has long argued that competition should be for the exact same franchise area with the exact same commitments provided to the city. Competing operators have argued that they should be permitted to serve a limited franchise area and contribute proportionately to the franchise obligations. While legislation did not move forward this year many anticipate that this matter will be heavily debated next year and could possibly lead to a further examination of all of the provisions contained within Chapter 238.

C. FCC ISSUES TENTH REPORT ON COMPETITION

On January 28, 2004, the FCC released its 10th Annual Report on Competition in Video Markets. Among the key findings, the FCC concluded that subscribership to multichannel video programming distributors (MVPDs) increased by 4.74% to just over 94 million. Of those 94 million subscribers, 70.5 million are subscribers to traditional cable television systems (CATV) while over 20.4 million subscribe to direct broadcast satellite (DBS) services. CATV subscribership was up 2.46% over the past year reversing a trend of near flat subscriber growth in recent years. In contrast, DBS subscribership increased audience by over 2 million subscribers (11.6%) in 2003.

Overall, the audience share of viewership for cable channels increased while the audience share for broadcast networks decreased. In 2003, broadcast television enjoyed a prime time audience share of 49% compared with a 74% share in 1993. Satellite delivered programming also increased in 2003 with 339 channels now available up from 308 in 2002. From 1993 to 2003 the Consumer Price Index increased by 25.5%. During that same time period cable rates increased 53.1% (5.1% increase in cable rates in 2003).

The concentration and consolidation of subscribers among the top cable operators also continues. The four largest MVPDs now control nearly 56% of all subscribers in the country while the top 10 MVPDs control 82% of subscribers. 51.3 million subscribers are served by 109 large regional clusters which serve 100,000 or more subscribers each. There are now 29 regional clusters in the United States with more than 500,000 subscribers serving a total of more than 31 million subscribers. In communities where two wired cable companies compete head to head prices are on average 15% lower than in communities with a single cable provider and satellite competition.

~ END OF PAPER ~

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, telecommunications planning, right-of-way management, first amendment issues, tower siting, leasing and zoning, litigation and other related communication matters.

CABLE COMMUNICATIONS UPDATE

2004 Regional Communications Law Forum