United States: Franchise Fees And The FCC's Mixed-Use Rule – Oregon Federal Decision For Comcast May Have Wide Impact

For decades, cities and municipalities have counted on steady revenue from the franchise fees they charge cable companies for use of the public rights-of-way (ROWs). Such fees are imposed by local franchising authorities (LFAs). Under the federal Cable Act, these fees could be as high as 5% of a cable operator's gross revenues from providing cable TV service. 47 U.S.C. § 542(b).

As the television industry has migrated toward streaming platforms, cable TV revenues have been affected, leading local governments to seek new sources of income from entities using the public ROW. One effort has been to try to impose local fees on streaming platforms, like Netflix or Hulu, that send video using broadband service provided over wires in the public ROW. That has been largely unsuccessful, as discussed here.

Another effort has been to try to impose cable franchise fees, or their equivalent, on the revenue cable operators derive from providing non-cable services, such as broadband internet service, over wires in the public ROW. That effort has run into the FCC's "mixed-use rule." That rule, revised and reviewed over the course of three FCC decisions and three challenges to those decisions in the Sixth Circuit, prohibits LFAs from imposing franchise requirements or franchise fees on cable operators for the revenues they derive from providing non-cable services. See 47 C.F.R. § 76.43.

The latest chapter in this saga – and an important one – came in a recent Oregon federal district court decision. Comcast of Oregon II, Inc. v. City of Beaverton, No. 3:20-cv-1225, 2022 WL 2341961 (D. Or., June 29, 2022). That case involved Comcast's challenge to a local ordinance from Beaverton, Oregon. The ordinance imposed a fee, 5% of gross revenue, on all "utility" services provided over the public ROW, with utility service defined to include broadband service. Comcast argued, among other things, that the fee was preempted by the mixed-use rule.

The Hobbs Act and Binding Effect of FCC Decisions on Non-Hobbs Act Courts

Most significantly from an administrative law standpoint, the Court, per Judge Michael Simon, held that under the Hobbs Act, 28 U.S.C. § 2342, it was required to follow the FCC's most recent order on the mixed-use rule (the "Third Order"), which had been affirmed by the Sixth Circuit on direct review. The Third Order stated that 47 U.S.C. § 544(b)(1), part of the Cable Act, prohibits LFAs from regulating "information services" as part of regulating the franchise issued to a cable system, and thus barred LFAs from imposing fees on cable operators for providing broadband service (which is currently classified as an information service). On direct review pursuant to the Hobbs Act, the Sixth Circuit affirmed the Third Order on that ground. City of Eugene v. FCC, 998 F.3d 701, 711, 715 (6th Cir. 2021). The Sixth Circuit explained that LFAs "cannot require payment of an information-services fee as a condition of obtain a [cable] franchise," and thus cannot "end-run" that prohibition by imposing the same kind of fee pursuant to their police power. Id.

The City of Beaverton argued the Oregon district court was not bound by the FCC and Sixth Circuit rulings. But the Court disagreed. Judge Simon first explained that under the Hobbs Act, federal courts of appeal have "exclusive jurisdiction to enjoin, set aside, suspend (in whole or in part), or to determine the validity" of all final FCC orders. 28 U.S.C. § 2342. The court of appeals designated to hear the petition then becomes "the sole forum for addressing . . . the validity of the FCC's rules." MCI Telecomms. Corp. v. U.S. W. Commc'ns, 204 F.3d 1262, 1267 (9th Cir. 2000) (quoting GTE S., Inc. v. Morrison, 199 F.3d 733, 743 (4th Cir. 1999)). The designated court of appeals' determination binds all other circuits. See Peck v. Cingular Wireless, LLC, 535 F.3d 1053, 1057 (9th Cir. 2008). The rationale is that if the Hobbs Act court's decision were not binding, the validity of an FCC rule or decision could be subjected to endless collateral attacks and relitigation of the same issues. Pacific Bell Tel. Co. v. Cal. Pub. Utils. Comm'n, 621 F.3d 836, 843 n.10 (9th Cir. 2010).

Against this background, the Court then relied on the Ninth Circuit's decision in US West Communications, Inc. v. Hamilton, 224 F.3d 1049 (9th Cir. 2000). In Hamilton, "the Ninth Circuit explained that under the Hobbs Act, it was 'not at liberty to review' the FCC's interpretation of the Cable Act. Id. at 1055. Instead, the court was obliged 'to apply [the FCC decision] as it is written and to uphold the provisions of the parties' agreements" that complied with ... the FCC's order but conflicted with both the district court and Ninth Circuit's interpretation of the Cable Act." 2022 WL 2341961, at *5-*8,

As an aside, the Court also noted (at *9) that in PDR Network, LLC v. Carlton & Harris Chiropractic, Inc., 139 S. Ct. 2015 (2019), the Supreme Court had granted certiorari to answer the question "whether the Hobbs Act's vesting of 'exclusive jurisdiction' in the courts of appeals to 'enjoin, set aside, suspend,' or 'determine the validity' of FCC 'final orders' means that a district court must adopt, and consequently follow" an FCC order interpreting a statute it enforces. Id. at 2053. But the Supreme Court declined to answer that question, instead remanding for consideration of other questions. Id. at 2056. This could affect the posturing of issues and significance of this case in the inevitable appeal to the Ninth Circuit.

Impact of the Classification of Broadband Service on Power to Impose Local Fees

The other significant aspect of the decision for cable/telecom providers is the holding that even though broadband service was classified as a telecommunications service prior to June of 2018 – meaning 47 U.S.C. § 544(b)(1)'s bar on LFAs imposing fees on information services would not apply during that period – that did not make Beaverton's fee ordinance lawful prior to June 2018, at least as applied to Comcast. Although it analyzed all the arguments, at bottom the Court relied on the fact that the FCC grounded the mixed-use rule, at least as to common carriers like Comcast (that is, cable operators that also provided telecommunications service as common carriers), on 47 U.S.C. § 522(7), which allows LFAs to regulate common carriers only the extent they provide cable services (and thus not as to non-cable services like broadband). 2022 WL 2341961, at *13-*15. Thus, as to cable operators that were also common carriers, whether broadband is classified as an information service or telecommunications service did not matter, because in either case LFAs could not impose franchise fees on non-cable services.

Appeal Seems Inevitable

As noted, the battles over the mixed-use rule and long-running and high-stakes, and the Ninth Circuit will almost certainly be asked to review this decision, especially in light of LFAs across the country seeking to impose similar fees on broadband service. Stay tuned.

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