News

Seventh Circuit: Modem-Fee Case to State Court

10/05/2004 3:37 AM Eastern

In a victory for local regulators, a Federal Appeals Court panel in Chicago ruled Friday that cable-modem litigation between the city of Chicago, Comcast Corp. and other cable companies belongs in state court as a contract dispute.

The decision reversed a decision by a lower federal court in September 2003 that the case belonged in federal court and that Chicago was barred from collecting cable-modem franchise fees.

The lower court barred Chicago’s fee collection on the basis that the Federal Communications Commission had classified cable’s high-speed-data product as an interstate information service. Federal law authorizes cities to collect fees on cable services, and not information services, and the fees are capped at 5% of gross revenue.

The Oct. 1 decision -- a setback for the cable companies -- was handed down by a three-judge panel of the U.S Court of Appeals for the Seventh Circuit comprised of Circuit Judges Frank H. Easterbrook, Daniel A. Manion and Diane P. Wood. Easterbrook wrote the seven-page ruling.

Easterbrook’s decision said federal cable law “leaves to state law most questions about the regulation and taxation of cable-TV franchises.”

In demonstrating state flexibility in this area, Easterbrook said a city could not insist on collecting the maximum 5% permitted in federal law if the state had passed a law capping cable-franchise fees at 3%

By returning the case to state court, the Seventh Circuit panel did not give Chicago the green light to collect cable-modem franchise fees. The city still has to persuade a state court that its cable-franchise agreement requires Comcast to pay the fees despite the FCC’s classification of cable-modem service as an interstate information service.

“This is a procedural decision that does not address the merits of the case, and we will pursue it further in state court,” Comcast spokesman Tim Fitzpatrick said.

After the FCC’s cable-modem-classification ruling in March 2002, cable operators stopping paying cable-modem franchise fees. Some MSOs said they had to cease payments because they feared class-action suits brought by subscribers.

Cable’s popular broadband product, with more than 17 million subscribers, is starting to cost cities big money. In connection with a separate cable-modem case, cities told the U.S. Supreme Court that their inability to collect cable-modem franchise fees was denying them nearly $500 million per year.

Meanwhile, cable continues to pay franchise fees on video-programming revenue, which netted cites about $2.4 billion in 2003, according to the National Cable & Telecommunications Association.

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