Telecommunications Franchise Fees and Other Provisions Struck Down by U.S. Court of Appeals in White Plains Litigation

In a long-awaited decision, the United States Court of Appeals for the 2nd Circuit ruled yesterday in TC Systems, Inc. v. City of White Plains that the City of White Plains, N.Y., violated Section 253 of the federal Communications Act by requiring TCG, a competitive local exchange company (CLEC), to pay franchise fees and other forms of compensation as part of a telecommunications franchise while excusing the incumbent LEC (ILEC) Verizon from any comparable requirements. The court likewise ruled that the city's telecommunications franchise and regulatory ordinance violated Section 253 through various information and record-keeping requirements, restrictions on transfers of the franchise, and a waiver of any right to challenge the franchise ordinance. The case is the most extensive analysis to date by a U.S. Court of Appeals of the limitations imposed by Section 253 on municipal demands for compensation from telecommunications providers.

The court specifically ruled that the city's imposition of fees on TCG but not on Verizon was not "competitively neutral and non-discriminatory," as required by Section 253. "Allowing White Plains to strengthen the competitive position of the incumbent service provider would run directly contrary to the pro-competitive goals" of the 1996 Act. A provision that required TCG, and not Verizon, to provide the city with free conduit in the future was likewise ruled to be invalid.

The court explicitly rejected the decision of the 6th Circuit in TCG Detroit v. City of Dearborn, which had ruled that a city was permitted to impose franchise fees only on the CLEC if state law precluded the city from collecting a similar fee from the ILEC. The 2nd Circuit explained that the 6th Circuit "misses the point that fees that exempt one competitor are inherently not 'competitively neutral,' regardless of how that competitor uses its resulting market advantage." Thus, "because the Sixth Circuit allowed Dearborn to give the advantage to the incumbent . . . we think TCG Detroit was wrongly decided."

The case does not reach the question of whether all franchise fees based on a percentage of revenue are prohibited by Section 253. However, the court stated that in order for fees to be competitively neutral and nondiscriminatory, municipalities must set fees "taking into account different costs incurred by different uses of the rights-of-way," as well as "the scale of the use of rights-of-way," so long as "the effect is a rough parity between competitors." No municipality, however, may exempt one competitor completely from ongoing franchise fees if others must pay. Moreover, the court’s focus on “costs incurred” and “the scale of the use” strongly suggests that percentage of revenue-based fees would not be permissible.

The district court had allowed the city to excuse Verizon from any ongoing franchise fee obligations because Verizon's predecessors had provided the city with free conduit and the use of other conduit over the course of many decades. This is similar to arguments many local governments have made in defense of their failure to subject ILECs to the same demands as new entrants. The 2nd Circuit squarely rejected this rationale, because "Verizon has already reaped the benefit of those bargains," and because "whether fees are competitively neutral should be determined based on future costs of providing services . . . because that is the playing field on which the competition will take place." The court reasoned that the city could not lawfully demand fees or similar benefits from TCG unless it demanded "comparable benefits from Verizon, taking into account relevant differences in scale of operations and costs incurred."

According to the court, the city effectively prohibited TCG's provision of telecommunications services, in violation of Section 253, through its asserted power to reject any application on any "public interest factors" that the city deemed pertinent. Moreover, based on a record of delay extending for at least one year, the court found that "extensive delays in processing TCG's request for a franchise have prohibited TCG from providing service for the duration of the delays." This provision should prove useful to providers that are frustrated by interminable bureaucratic delays in getting consent from local governments to build competitive facilities.

The court also ruled that the following non-fee provisions of the city's telecommunications ordinance and franchise were unenforceable under Section 253 either on the same basis as the fees, or on the general grounds that they exceed the scope of the city's power to manage its rights of way:

• Requirements for disclosures about the nature of telecommunications services to be provided, sources of financing, and qualifications to receive a franchise;
• Provisions allowing the city to consider an unlimited range of "public interest" factors in deciding whether to grant a franchise;
• Restrictions on TCG's network construction on private property;
• Requirements to keep financial records and to allow the city to inspect records;
• A required parent guarantee for performance under the franchise;
• A provision that required the city to be treated as a "most favored vendee";
• A provision that required TCG to agree not to challenge the provisions of the franchise in court, which the 2nd Circuit described as "a transparent attempt to circumvent § 253"; and
• A restriction on the transfer of the franchise. In this regard, the court explained that "because White Plains cannot legitimately turn away 'any' provider of telecommunications services . . . a provision of sweeping breadth whose main purpose is to force each new telecommunications provider to receive White Plains' blessing before offering services, even if its services represent no change from the services offered and burdens imposed by a prior franchisee, is invalid."

It is unknown whether the city will seek rehearing or seek Supreme Court review. Please contact us if you have any questions concerning the application of this case or Section 253 to specific situations.