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Illinois State Court Requires Payment of Franchise Fee on Cable Modem Services

August 28, 2007

The Illinois Court of Appeals, reversing the trial court, held that franchises held by Comcast and RCN from the City of Chicago require the payment of franchise fees on cable modem service revenue.  In City of Chicago v. Comcast Cable Holdings, LLC, et al., the Court refused to find preemption by the Cable Act or violation of the Internet Tax Freedom Act.

The Court began by finding that the words of the franchise and ordinance required payment of a franchise fee on cable modem service revenue.  The franchises, originally granted in 1985, were renewed in 2000 with substantively identical terms to the original agreements.  Paragraph 4.1 of each franchise agreement required the operators to “pay a franchise fee in the amount of 5% of its gross revenues during the period of the Agreement.”  The Chicago Cable Ordinance also required the operators to pay “a franchise fee of five percent (5%) of the annual gross revenues received by the [franchisee]. . .”  The Ordinance defined “gross revenues” as “all revenue derived directly or indirectly from the operation or use of all or part of a cable television system . . . including  . . . revenue from regular subscriber service fees [and] auxiliary service fees.” The Court found that a franchise fee on cable modem service was agreed to by the operators as part of a valid contract in exchange for the use of the City’s rights-of-way.

The Court, citing the words used by the FCC in its 2002 cable modem Declaratory Ruling, found no preemption of the franchise provisions in Section 622 of the Act.  In that Order, the FCC stated: “revenue from cable modem service would not be included in the calculation of gross revenues from which the franchise fee ceiling is determined.”  The Court interpreted this to mean that the 5% cap on franchise fees only applies to cable service revenue and that the 5% limit does not apply to revenue from non-cable services such as cable modem service.  Absent clear intent to preempt, the Court reasoned that not only can the City impose a franchise fee on cable modem services, federal law imposes no limit as to the amount of such fee.  The Court dismissed as “unavailing” the fact that four federal district courts had held that the “plain language” of Section 622(b) precluded municipal imposition of franchise fees on revenue derived from cable modem service, concluding that none of those decisions had “ruled on the interplay between the FCC Declaratory Ruling and the Communications Act and entered a definitive order resolving the applicability of franchise fees to cable modem service.”

Finally, because the Internet Tax Freedom Act exempts certain fees imposed for a specific privilege, service or benefit conferred, the Court held that a franchise fee on cable modem service was not precluded because the fee was imposed in return for the privilege of constructing facilities that occupy public rights-of-way.

This case hinges on the contractual right that a municipality has to impose franchise fees as set forth in the franchise.  Franchise language that mirrors federal law (limiting franchise fees to gross revenues from the provision of cable service) would likely have resulted in a different outcome.  Nevertheless, we fully expect that many municipalities, even outside Illinois, will review existing franchises for broad gross receipts language and demand payment of back franchise fees on non-cable services such as cable modem service or VoIP.  Moreover, we expect municipalities to make demands for payment of such fees as part of renewal franchises. 
           
This state court decision is unlikely to be the final word on this matter in Illinois, as it could be appealed to the Illinois Supreme Court, and the future impact will likely be affected by the recently-enacted Illinois state-issued franchising law.  In other jurisdictions, similar issues are addressed in pending cases, such as City of Minneapolis v. Time Warner Cable, where a decision favorable to the cable operator is on appeal to the Eighth Circuit.  In addition, this case did not address (and the parties apparently did not raise) whether, in light of the Supreme Court’s finding that information services include a telecommunications component, any franchise fees imposed on cable modem service would be subject to the requirement in Section 253(c) that any compensation for use of the public rights-of-way be fair and reasonable.

We would be pleased to respond to any questions regarding this matter.

 

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