On May 26, 2021, the U.S. Court of Appeals for the 6th Circuit affirmed most aspects of the Federal Communications Commission's (FCC) 2019 ruling that nearly all non-cash (or "in-kind") assessments required by cable franchises constitute franchise fees subject to the 5 percent cap under the Communications Act.

The decision in City of Eugene v. FCC also upheld most other elements of the Commission's Third Report and Order (Third Order) interpreting Section 621 of the Act (47 U.S.C. § 541), most notably that the Act preempts a tax on broadband internet access service imposed by the City of Eugene, Ore. The court struck down the Commission's ruling that in-kind franchise requirements should be valued for purposes of calculating franchise fees at market value, holding that the operator's cost is the appropriate measure.

This is the court's third decision reviewing a series of FCC orders interpreting Section 621 to limit local franchising authority (LFA) regulation of both new franchisees and incumbent cable operators. In its 2008 decision in Alliance for Community Media v. FCC, the court upheld the Commission's initial order that held various local regulations, actions, and demands are unlawful refusals to grant an additional franchise under Section 621.

Then in 2017, the court's order in Montgomery County v. FCC vacated parts of the Commission's second order and its reconsideration thereof that had extended its "mixed-use" rule to incumbent operators, as well as the Commission's decision that "franchise fees" under Section 622 included all in-kind payments required under a franchise, even if they were related to the provision of cable service. On remand, the Commission issued its Third Order, which reinstated the same rules, only this time with detailed analysis intended to satisfy the court's concerns.

The court's latest decision resolves numerous challenges to the Third Order but did not remand any issue to the FCC. Thus, unless one or more petitioners seeks panel or en banc rehearing, or seeks certiorari in the U.S. Supreme Court, this decision should end nearly 15 years of FCC proceedings defining the limits of state and local cable franchising under Section 621.

In-Kind, Cable Related Franchise Requirements That Are Franchise Fees

On remand from Montgomery County, the Commission's Third Order once again concluded that a "franchise fee" as defined by the Act includes "any non-monetary contributions related to the provision of cable services provided by cable operators as a condition or requirement of a local franchise agreement" unless they are expressly excluded by the statute.

In the City of Eugene decision, the court agreed with the FCC's determination after remand and issuing the Third Report that whether a franchise obligation for in-kind benefits is a franchise fee depends on whether the requirement is mandated by the Act or within the discretion of the LFA to include in a franchise. Franchise requirements mandated by the Act are not franchise fees, while in-kind cable-related obligations imposed at the discretion of the LFA constitute franchise fees.

Provisions that constitute franchise fees include the value of channel capacity set aside for public, educational and governmental (PEG) use, channel capacity on institutional networks (I-Nets), and free cable service to public buildings. Cable-related in-kind obligations required by the Act itself—and therefore outside of the definition of franchise fees—include the cost of meeting buildout obligations and customer service requirements, as well as capital costs of meeting PEG access facility requirements.

The court, however, agreed with the petitioners that in calculating the franchise fee, the proper valuation for such in-kind cable-related obligations is the operator's marginal cost, rather than the market value of what is provided. The Commission had reasoned that market value was the appropriate measure because it "is easy to ascertain" using, for example, rate cards for cable services, and because absent the franchise, the LFA would have to pay market rates.

The court rejected the Commission's decision, explaining that nothing in the Act "supports the notion that franchise fees can be a source of profit for cable operators." On the other hand, the court explained, cable operators incur out-of-pocket costs to satisfy required in-kind cable-related services under a franchise and are entitled to recover only the marginal cost of meeting those requirements.

Mixed-Use Networks and City of Eugene Fees on Broadband Internet Services

In its 2017 Montgomery County decision, the court vacated the Commission's determination in the second order that the "mixed-use" rule extends to incumbent cable operators who are not also common carriers under the Act for lack of an adequate statutory justification. On remand, the Commission reaffirmed that holding and expressly preempted the imposition by LFAs of additional telecommunications or information service fees on cable operators. Most specifically, the Commission preempted the Oregon Supreme Court's decision in City of Eugene v. Comcast, which allowed the City to impose a separate "telecommunications" license fee on revenues derived from the provision of broadband services over a franchised cable system.

The court held that the City of Eugene's license fee on broadband services was not a "franchise fee" on cable operators subject to the statutory cap in Section 542(b), taking issue with the FCC's analysis of the definition of "cable operator" and the meaning of the phrase "solely because of [its] status as such" in Section 542(g)(1). Nonetheless, the court affirmed the Commission's determination that the terms of the Act itself preempt the City of Eugene's license fee on broadband services.

The court agreed with the Commission that "Congress undisputedly contemplated that cable operators would use their facilities to provide both cable and non-cable services." Although cable operators were expected to use their systems to provide non-cable services, an LFA "cannot require payment of an information-services fee as a condition of obtaining a franchise under § 541(b)(1)" of the Act.

The court concluded that the City of Eugene "circumvented that limitation when it imposed that same fee" by means of the City's police power. The court explained that "the City's imposition of a 'license fee' equal to seven percent of the operator's revenues from broadband services is merely the exercise of its franchise power by another name."

The court therefore affirmed the FCC's determination that the City of Eugene's license fee on broadband services is preempted by the Act. However, the court expressly stated that its opinion does not address whether under Title VI a state or local government (as opposed to a franchising authority) may, despite Title VI's limits on franchisor regulation of a cable operator's telecommunications services, impose a fee on telecommunications services provided by cable operators, stating that the question was neither fully briefed nor clearly presented on the facts in the case.