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Court of Appeals Upholds FCC Franchising Reform Rules

June 30, 2008
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The United States Court of Appeals for the Sixth Circuit has unanimously upheld the “franchising reform” rules adopted by the FCC in late 2006.  The Court rejected arguments made by local franchising authorities (“LFAs”) and incumbent cable operators that the FCC exceeded its authority and acted contrary to law in adopting rules specifying what constitutes an “unreasonable” denial of a competitive franchise. 

Background.  Section 621(a)(1) of the Communications Act, as amended by the 1984 and 1992 Cable Acts, prohibits LFAs from “unreasonably refus[ing] to award” competitive franchises.  The statutory provision goes on to provide that any applicant for a competitive franchise whose application has been denied by an LFA may bring an action in federal court for review of that decision.

            In 2006, responding to allegations by Verizon, AT&T and other overbuilders that LFAs were refusing to act on competitive franchise applications in a timely manner and were creating barriers to entry by demanding unreasonable franchise terms and conditions, the FCC commenced a rulemaking proceeding to create a factual record and to adopt rules defining what constitutes an unreasonable refusal to award a competitive franchise.  This proceeding culminated in the adoption, by 3-2 vote, of a set of federal rules governing local consideration of competitive franchise applications.

            Specifically, the FCC found that the following actions constituted an unreasonable denial of a competitive franchise: (1) an LFA’s failure to make a decision within 90 days on an application for a competitive franchise from an applicant, such as a telephone company, that already is authorized to use the LFA’s rights-of-ways, or within 180 days for other applicants; (2) an LFA’s insistence on unreasonable “build-out” requirements; (3) an LFA’s refusal to count certain required fees, payments and consideration paid by the applicant against the statutory five percent franchise fee cap; and (4) an LFA’s imposition of unreasonable public, educational, and governmental (“PEG”) access obligations on a competitive franchise applicant.  The FCC provided that these rules would only apply to competitive applicants (although a subsequent rulemaking extended some of them to incumbents) and exempted state-level franchising decisions and franchising decisions “specifically authorized by state law.” 

            The FCC’s decision was challenged both by various LFAs and their representatives and by incumbent cable operators.  These challengers argued that the FCC lacked the statutory authority to adopt rules implementing Section 621(a)(1) and, in any event, the rules adopted by the FCC were arbitrary and capricious.  Several telephone companies and their representatives intervened on behalf of the FCC to defend the rules.


Decision.  The court first found that the FCC has the requisite authority to adopt rules implementing Section 621(a)(1) notwithstanding the absence of any reference to the FCC in that provision and the express referral of disputes under that provision to federal court.  According to the court, Section 201(b) of the Communications Act gives the FCC broad authority to adopt rules as necessary in the public interest to carry out the provisions of the Act.  The court noted that the absence of any direct reference to the FCC in Section 621(a)(1) means only that the provision did not mandate that the FCC adopt rules, not that the FCC was denied the authority to do so.  The court also concluded that the grant of authority to the courts to decide disputes arising under Section 621 was not “exclusive” and did not preclude the FCC from creating rules to guide the courts.

The remainder of the court’s opinion was devoted to an analysis of the substance of the rules under the “Chevron” standard, which requires that a court engaged in the review of an administrative rulemaking decision determine whether the statutory provision at issue is ambiguous and, if so, whether the agency’s rules constitute a permissible construction of the statute at issue.  Finding that the “unreasonably refused to award” standard in Section 621(a)(1) was ambiguous, the court then upheld each of the rules adopted by the FCC as a reasonable application of that standard. 

Specifically, the court found that the “shot clock” imposed on LFAs for acting on franchise applications was consistent with other time limits imposed in the Cable Act (and rejected arguments that the specific adoption of time limits elsewhere in the Act should be treated as evidence that Congress did not intend for the local franchising process to be time-limited).   The court similarly found that a statutory provision giving LFAs authority to impose build-out requirements, provided that the franchisee is afforded “reasonable time” to complete the build-out, did not create a presumption of reasonableness for LFA-imposed build out requirements and thus the FCC was free to adopt rules restricting local build out obligations.  The court also deferred to the FCC’s interpretation of what types of payments fall within the five percent franchise fee limitation, including the agency’s finding that the exemption from the franchise fee limit for PEG-related capital costs covers equipment only if such equipment relates to the construction (rather than the operation) of the PEG facilities.  Finally, the court rejected claims that the FCC’s decision was “arbitrary and capricious,” finding that the agency had a “more than adequate” factual record to support its conclusions.

While the cable industry joined with local governments in challenging the FCC’s franchising reform rules, the practical impact of the decision may not be as significant as the industry once feared.  This is because the rules do not apply to state-wide franchising laws and the number of states adopting such laws continues to increase.  In addition, the FCC has extended a number of these rules (such as the franchise fee rules) to incumbent operators and this decision suggests that those rules, which have been challenged by the LFAs but are supported by cable, may be upheld.  The most troubling aspect of the decision may be that the broad reading of the FCC’s rulemaking authority under Section 201 may be used to defend other rulemaking actions taken by the FCC that the cable industry is currently challenging.

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