Chicago Sues Over Modem Fees

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City officials here have filed suit in an Illinois court to compel Chicago's three cable operators to pay franchise fees on cable-modem revenues.

Operators stopped paying the fees in March, after the Federal Communications Commission ruled that high-speed data offerings are an interstate information service, and not a cable service.

Chicago's suit — filed in Cook County Circuit Court on Sept. 18 against AT&T Broadband, RCN Corp. and WideOpenWest LLC — seeks a declaratory ruling to uphold contract law.

The three Chicago operators "voluntarily" entered into agreements that demand 5 percent of gross revenues, said assistant corporation council Jack Pace.

The cable operators — including AT&T, which serves several Chicago franchise areas — have told city regulators they believe subscribers will file class-action lawsuits against them if they assess a "cable" fee on a non-cable service. City officials disagree.

"Our agreements reach cable-modem services by their terms," he said. "They agreed to pay, regardless of the FCC and whether they call it an information service."

Chicago's suit demonstrates municipal frustration at what some regulators have called a "litany of FCC miscalculations."

Regulators also fear that questions the FCC has posed in the notice of inquiry it's now holding to further define cable-modem service offer hints that it will again rule against localities.

Chicago's cable agreements do not include language that's specific to modem fees, said Pace, who added that other cities could also sue under contract law.

And some municipalities may do so. Joe Van Eaton, a Washington, D.C.-based cable lawyer, said several communities he advises are examining the judicial remedy.

The FCC's declaratory ruling did not specifically tell operators they could stop paying, he said. Not only did MSOs drop the fees, they have also refused to put the money they would have paid the cities in escrow.

Some operators have hinted that consumers could be hit with a huge, one-time fee pass-through if governments are successful in challenging the franchise-fee non-payment, Van Eaton added.

"This might be the beginning of a slew of suits," added attorney Ken Fellman, who's also mayor of Arvada, Colo.

Any city that has contract language mentioning modem service would be wise to enforce contract law, Fellman said. But none of his clients have strong language on the issue, and they're unwilling to go forward with a legal challenge, he said.

Municipal advisers predict three possible outcomes in the modem fee debate: The operators could win, and never again pay data-related fees; the cities could win; or there could be a thorny outcome in which the fees are ruled out, and MSOs may even seek reimbursement for the fees they have already have paid.

The latter might trigger a scenario in which cities demand the renegotiation of local contracts, attorneys said.

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