Modem-Fee Dispute Back to State Court

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In a victory for local regulators, a U.S. Appeals Court panel in Chicago has ruled 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 last year’s rulings by a lower federal court that the case belonged in U.S. 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-service revenue, not information service revenue, with a locality’s total take capped at 5% of gross revenue.

SETBACK FOR CABLE

The Oct. 1 decision — a setback for the cable industry, which had won similar cases in two different federal courts — came from a three-judge panel of the 7th U.S Circuit Court of Appeals, 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,” despite Comcast’s claims that “federal law so completely dominates this field that it is impossible to frame any claim under state law.”

In illustrating his point about state flexibility in framing contracts with cable companies, 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 7th Circuit panel did not give Chicago the green light to collect cable-modem franchise fees.

The city still has to persuade a state court 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 companies stopped paying cable-modem franchise fees.

CITIES OUT $500M

Some MSOs claimed 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.

The dispute between Chicago and the cable companies may have to await Supreme Court review of Brand X Internet Services vs. FCC, a case involving the classification of cable modem service under federal law.

Cities around the country have asked the high-court to classify cable modem service as a cable service, a position that was rejected by the FCC and the 9th U.S. Circuit Court of Appeals.

Before the FCC and the courts stepped in, cities and MSOs were in agreement that cable-modem service was a cable service. That was a compromise both like: cities got their franchise fees and cable companies didn’t have to worry that cities would require open access obligations.

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