News

Court OKs Franchise Pass-Through

4/06/2003 8:00 PM Eastern

Cities are likely to seek help from Congress in the wake of a franchise-fee defeat in U.S. appeals court two weeks ago.

In the decision, the court held that cities could not prevent cable operators from recovering the entire amount of a franchise fee from subscribers.

Cities wanted to shield subscribers from paying fees on advertising, home-shopping or leased-access revenue.

The National Association of Telecommunications Officers and Advisors, which lost the franchise-fee case, indicated its only realistic option was to seek new federal legislation.

Pasadena case

"The court has provided Congress with a blueprint on how to fix what is clearly an offensive practice of having subscribers cross-subsidize cable's advertising rates," NATOA executive director Libby Beaty said in a statement.

The unanimous decision was handed down March 27 by a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit, upholding an October 2001 FCC decision involving a franchise-fee dispute between Charter Communications Inc. and Pasadena, Calif.

At issue in the case was whether the FCC acted properly by ruling that franchise fees imposed on advertising, home-shopping splits, launch support and leased-access revenue could be recovered from subscribers.

Local governments argued that subscribers should pay fees based only on charges that appear on their bill.

In a 15-page opinion, Judge Emilio M. Garza said the FCC did not act in an arbitrary and capricious manner in allowing operators to pass through the entire amount of the franchise fee. Because Congress was less than clear on the treatment of franchise-fee pass-throughs, Garza noted, federal courts were required to defer to the FCC as long as the agency's ruling was a reasonable interpretation of the statute.

Federal cable law, Garza wrote, "does not indicate an unambiguous intent on the part of Congress to prevent operators from passing the entire franchise fee through to subscribers."

Garza, born in San Antonio, Texas, and appointed to the 5th Circuit by the first President Bush, has been mentioned in major publications as a potential Supreme Court nominee.

National Cable & Telecommunications Association senior vice president of law and regulatory policy Dan Brenner hailed the ruling.

"The FCC had interpreted the Cable Act's franchise-fee provision in a way consistent with the precise words Congress used and it allowed operators to set forth the amount municipalities collect clearly to customers. We're pleased that the court upheld FCC's straightforward approach and welcome the national uniformity it provides," Brenner said in a statement.

NATOA joined the Texas Coalition of Cities for Utility Issues. The two have the option of seeking rehearing by the 5th Circuit or appealing to the U.S. Supreme Court.

Coalition chairman Don Knight blasted Garza's ruling.

"The effect of the FCC rules and now this decision by the 5th Circuit is that cable subscribers will be paying cable operators to watch commercials on cable television," Knight said in a statement.

The cable industry's defense of a complete franchise fee pass through was based on both legal and public-policy considerations. MSOs argued that cities wrongly favored franchise-fee policies designed to hide cable's true tax burden from subscribers.

A hot potato

"The dirty little secret is that we don't keep that money. All we are doing is getting it from the subscribers and giving it to the city, and [cities] don't want to be politically accountable for it," said John Seiver, an attorney with Cole, Raywid & Braverman, who represented Charter and the NCTA in the case.

The FCC has observed that the controversy would go away if cities and MSOs could agree not to collect franchise fees on nonsubscriber revenue, the court noted. But Seiver said cities continue to search for new revenue sources.

"If it weren't that big before, it has gotten bigger because everybody has seen that it's a way to enhance the treasury of local government," Seiver said.

According to the NCTA, cable operators pay $2 billion each year in franchise fees. Federal law caps franchise fees at 5 percent of gross revenue.

In a March 2002 decision, many cable operators stopped paying franchise fees on cable modem revenue after the FCC held that high-speed data over cable was an interstate information service as defined in federal law.

Cable operators feared class-action lawsuits if they continued to collect and remit franchise fees on a service that's not legally classified as a cable service.

The FCC's ruling in pending before the U.S. Court of Appeals for the 9th Circuit. Oral arguments in Seattle are scheduled for May 8.

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