District Court Holds Town of Colonie, N.Y., Imposed Barriers to Entry in Violation of Section 253 of 1996 Telecom Act

On May 16, 2003, in TC Systems, Inc. v. Town of Colonie, the federal district court for the Northern District of New York granted summary judgment in favor of TC Systems, Inc. and Teleport Communications New York (both subsidiaries of AT&T) against the Town of Colonie, NY, striking down various requirements of the Town’s telecommunications right-of-way ordinance and franchise, including a 5% of gross revenues fee, as barriers to entry in violation of Section 253 of the 1996 Telecommunications Act.

In a case presenting facts essentially identical to those addressed by the Second Circuit in TCG New York v. City of White Plains (See our advisory dated Sept. 13, 2002), TC Systems and Teleport filed an action against the Town of Colonie challenging its telecommunications right-of-way ordinance and the franchise agreement required by the ordinance. In what has become all too typical, the Town’s ordinance and proposed franchise required providers to apply for the Town’s approval under a scheme granting the Town unfettered discretion over who could and could not provide telecommunications service in the Town. In addition, the franchise sought to impose an annual franchise fee of 5% on AT&T’s gross revenues, in addition to requiring payment of in-kind compensation. As a final point, the franchise prohibited the provider from identifying the fees paid to Colonie on any subscriber bills, in an attempt to insulate the Town from political accountability.

While the ordinance on its face applied to all telecommunications providers, since its adoption in 1998, the Town had never enforced the ordinance on the incumbent local exchange carrier, Verizon. Although the Town argued that it was “enforcing” the ordinance and had the discretion to choose when or if to litigate against Verizon, the court rejected the argument as untenable, citing the fact that the Town continued to grant Verizon permits to work in the public rights-of-way and had never required a franchise as a precondition for permits or occupancy, while at the same time imposing the franchise and ordinance as barriers to AT&T’s entry.

In striking down the material terms of the ordinance and franchise, the district court followed the binding precedent of the Second Circuit in White Plains as well as the decision of the Ninth Circuit in City of Auburn v. Qwest. First, the court rejected the Town’s argument that the matter was not “ripe” because AT&T had not yet entered into a franchise agreement. The court recognized that the Town’s proposed franchise was a standard agreement, the material terms of which had been imposed unaltered in the few instances where companies had acceded to the Town’s requirements.

The court then turned its attention to whether the ordinance and franchise violated Section 253(a). It followed the standard set forth in White Plains of whether “the ordinance materially inhibits or limits the ability of any competitor or potential competitor to compete in a fair and balanced legal and regulatory environment.” Applying that standard, the court found that numerous provisions of the Town’s ordinance and franchise violated Section 253, particularly those provisions granting the Town unfettered discretion and the effective right to prohibit entities from providing telecommunications services.

The court also addressed whether the Town’s ordinance and franchise were within the authority to “manage” the public rights-of-way under Section 253(c). The court reiterated that management of the rights-of-way means “control over the right-of-way itself, not control over companies with facilities in the right-of-way,” and that “local regulations which seek to regulate a town’s rights-of-way are permissible, while local regulations that seek to regulate the provision of telecommunications services or the telecommunications providers themselves, are impermissible.” Applying those standards and following White Plains and Auburn, the court held numerous challenged provisions to be unrelated to the Town’s management of the rights-of-way and thus outside of any authority reserved to the Town under Section 253(c):

• Provisions granting the right to consider such factors as the Town deems appropriate or within the public interest;
• Provisions permitting the Town to grant or deny access;
• Provisions requiring information regarding the types of telecommunications services to be provided;
• Provisions requiring information regarding legal, technical, and financial qualifications;
• Franchise provisions requiring notice before additional services are offered or plant installed;
• Franchise provisions permitting revocation for matters unrelated to the rights-of-way;
• Provisions permitting the Town to establish any rules it determines are within the public interest;
• Requirement of additional franchise authority before providing additional services;
• Requirement that the provider waive its right to challenge the lawfulness of the ordinance and franchise; and
• Reporting requirements not strictly related to rights-of-way management issues.

The court also emphasized that questions concerning the Town’s non-compliance with Section 253 were matters of law, a ruling, along with the ruling by the 9th Circuit in Auburn that should help future courts act in a summary fashion, without the expense of fact discovery.

Finally, the court struck down the Town’s 5% of gross revenue franchise fee and other in-kind compensation requirements on the grounds that they were not competitively neutral and nondiscriminatory, as required by Section 253(c). As noted above, the court rejected as untenable the Town’s assertions that it was enforcing the ordinance against Verizon.

The court’s decision reinforces the limitations on municipal overreaching in the rights-of-way area that have been in place since the passage of the 1996 Act. While the Town’s ability to require a “franchise” was technically upheld, the court’s decision makes clear, consistent with the weight of authority, that such a “franchise” can concern only matters dealing with the management of the physical occupation of the rights-of-way.

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