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Iowa State Court Limits Cable Franchise Fees to Costs of Regulation

May 10, 2007         

An Iowa District Court has held that two Iowa cities may only collect franchise fees on cable service in an amount sufficient to cover their administrative expenses in exercising their police power pursuant to Iowa Code § 364.3(4).  In Curtis v. City of Bettendorf, Iowa, Law No. 107001 (Iowa District Court for Scott County, 2007) and Howard v. City of Davenport, Iowa, Law No. 107000 (Iowa District Court for Scott County, 2007), the Court, quoting existing Iowa Supreme Court precedent that struck down a five percent municipal franchise fee on gas and electric service, stated that “[i]f a fee exceeds the amount necessary to inspect, supervise, or otherwise regulate the activity, it is nothing more than a tax levy, which the legislature has strictly prohibited.”  Moreover, the Court specifically rejected the City’s argument that a cable franchise fee was a charge in the nature of rent or compensation for use of the public right of way. 

The Court held that subscribers who paid the fee through cable operators had standing to bring an action against the cities that ultimately received the money.  The Court rejected a claim that Section 542 of the Cable Act authorized a five percent franchise fee and preempted the state limitation (citing a determination by the United States District Court for the Southern District of Iowa in these and other similar cases prior to removal to state court).  Moreover, the Court rejected the cities’ argument that they had immunity from suit under Section 555A(a) of the Cable Act.  The Court also refused to recognize the cities’ laches defense, whereby the cities claimed that they had come to rely on the franchise fee payments after having received them for thirty years.  Finally, the Court rejected application of the voluntary payment doctrine finding that withholding payment of a franchise fee from a cable company is not realistic.

The amount that the cities of Bettendorf and Davenport could have collected and likely what they can collect in the future as franchise fees will be determined at trial.  The Court recognized a five year statute of limitations, thus requiring refunds in excess fees paid for five years from the date of the lawsuit.  Press reports indicate that the cities collected about $7.1 million during the time period at issue.  Amounts collected in excess of what was reasonably related to the City’s actual administrative expense will have to be refunded to customers. 

The decision has major implications for Iowa cities.  The Court certified the case as a class action, thus converting the individual suit to an action on behalf of all who paid franchise fees to the City during the five years prior to the lawsuit.  Though an appeal of the decision is possible, the Court grounded its decision in Iowa Supreme Court precedent, making it more difficult to overturn.  The decision may influence courts with similar claims pending against other Iowa cities, including Des Moines, Cedar Rapids, Dubuque, Sioux City and Waterloo, Iowa.  

In addition to its impact within Iowa, the rationale of this decision might also be applied in states with similar statutory limitations on taxing power.  Section 364.3(4) of the Iowa Code is a fairly straight-forward prohibition on imposition by local governments of taxes not expressly authorized by state law.  Thus, parties may attempt similar suits in other jurisdictions seeking courts to establish the precedent that the collection of franchise fees in excess of the cost of regulation constitutes a tax.

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