Sixth Circuit Says FCC Rule That Most In-Kind Contributions Are Franchise Fees – Media, Telecommunications, Computers, Entertainment


United States: Sixth Circuit upholds FCC rule that most in-kind contributions are franchise fees

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On May 26, 2021, a Sixth Circuit panel dismissed challenges by many municipalities to a 2019 Federal Communications Commission (FCC) order that most “in-kind” (non-monetary) contributions required by franchisees of cable are considered franchise fees subject to the 5% cap of the federal cable law.

In City of Eugune c. FCC, the three-judge panel found that the FCC Third report and order (Third Order) has widely adopted an appropriate legal interpretation of Section 621 of the Cable Act (47 USC § 541 et seq..) with regard to abuses in kind. The Court, however, allowed the motions in part on one aspect of the Third Order relating to the standard for determining the monetary value of in-kind contributions.

The Third Order of the FCC

Building on a series of previous orders interpreting Section 621 of the Cable Act, the FCC’s Third Order of August 2019 adopted new rules that further clarify what constitutes a “franchise fee” submitted. the 5% franchise royalty cap of the law (47 USC § 542 (b)), and also where federal law takes precedence over state and local cable operators’ requirements. Among others, the Third Order:

  • Considered that most of the cable-related abuses in kind demanded by local franchise authorities (LFAs) are indeed “franchise fees” which, along with monetary fees, are capped at 5% of a cable operator’s gross annual revenues from the operation of the cable system of the provider providing cable services;
  • Adopted the “mixed use” rule which prohibits LFAs from using their franchising authority to regulate the provision of most non-wired services (such as broadband Internet access service, certain corporate data services, WiFi and VoIP service), even when provided through “mixed-use systems over a cable system with cable service;
  • Considered that the cable law prevails over any national or local regulation of the non-wired service of a cable operator which is incompatible with section 621; and
  • Extended its decision on LFA actions to State, rather than just local, franchise authorities.

Various municipalities and franchising authorities alleged that the third-party FCC misinterpreted the cable law and was arbitrary and capricious under federal administrative procedure law. The city of Eugene, Oregon, also argued that the FCC incorrectly applied its mixed-use rule to a city-imposed charge on broadband service provided by a cable operator.

The Sixth Circuit Decision

The Sixth Circuit panel dismissed nearly all of the petitioners’ challenges and asserted that “non-monetary cable-related abuses (including I-Net abuses) that the law simply allows a franchise authority to impose are charges. deductible under Section 542 (g) and therefore count towards the five percent cap. The Court ruled that the FCC had “fully explained the legal bases of this interpretation” and that the applicants’ arguments were “without foundation” and “without foundation”.

The Court further rejected the applicants’ invocation of a “trust interest” in in-kind contributions. The Sixth Circuit panel explained that as early as 2007, when the FCC issued its second order, the Commission put forward much of the same interpretation of franchise fees (with respect to non-monetary cable abuses), so than “[f]fourteen years later, no one can claim an unfair surprise. “The Court therefore clarified that the 5% ceiling of the cable law” is a ceiling below which franchisors must “consider” the usefulness of each cost that they choose to impose on cable operators and ( by post) subscribers. “

The Sixth Circuit, however, observed that the petitioners “have a point” regarding the standard that non-monetary cable abuses should be assigned a monetary value for the purpose of counting them in the 5% cap on cable charges. franchise. In the third order, the FCC said these abuses were to be assigned their “market value” for the purposes of the 5% cap, which the Commission said was easily verifiable using the cable operators’ rate cards. . The FCC had estimated that, without these abuses, LFAs would have no choice but to pay market rate for the services they need from a cable operator or other provider.

But the Sixth Circuit found that the FCC had “its mixed payers” because cable operators – not LFAs – “pay” franchise fees. The Court ruled that the “replacement cost of an LFA is therefore irrelevant. And a cable operator does not” pay “for the hypothetical profit it would have made if it had sold its services to a paying customer” . Because the Cable Act “provides no reason to treat cash and non-cash abuses differently,” the court ruled that cable-related abuses in cash “should be given equal value to the marginal cost of cable. -operator to provide them ”.

Regarding the FCC’s “mixed-use rule”, the Sixth Circuit estimated that Eugene’s 7% broadband service charge was do not a franchise fee subject to the 5% cap, as it was not imposed on the basis of the provision of the cable service by an operator. But the court ruled that the charges were inconsistent with, and therefore preempted by, 47 USC § 544 (b) (1), which precludes LFAs from establishing requirements for information services. as a condition to get a franchise. The Court ruled that Eugene “circumvented this limitation by imposing the same
[broadband] of a cable company by means of the police power of the City.

Next steps

LFA petitioners will likely come to in bench review of parts of the panel ruling. If they do, the motion would be due by July 12, 2021. If the Court dismisses a request for a rehearing, the parties would then have 90 days from the dismissal of the motion to request a review before the Supreme Court of Justice. United States.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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