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DIGINET, INC. v. WESTERN UNION ATS

February 18, 1994

DIGINET, INC., Plaintiff,
v.
WESTERN UNION ATS, INC., a Delaware corporation, and CITY OF CHICAGO, Defendants. CITY OF CHICAGO, an Illinois municipal corporation, Cross-Claimant, v. WESTERN UNION ATS, INC., a Delaware corporation, Cross-Defendant.



The opinion of the court was delivered by: WILLIAM T. HART

 Western Union ATS, Inc. and the City of Chicago dispute whether the City can require ATS to pay a franchise fee to the City before permitting it to install fiber optic cable in ducts under City streets. *fn1" The City would not permit ATS to activate the fiber optic network unless it also agreed to pay a franchise fee of approximately three per cent of the network's revenue or a specific price per foot, whichever is greater. On appeal from a preliminary injunction enjoining ATS from expanding its fiber

 optic network in the City ducts, see Diginet, Inc. v. Western Union ATS, Inc., 759 F. Supp. 1285 (N.D. Ill. 1991), the Seventh Circuit ruled in ATS's favor, vacating the preliminary injunction. See Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388 (7th Cir. 1992) ("Diginet II"). It was held that the franchise fee sought would, under state law, be a tax and that state law did not grant the City the authority to impose this kind of tax. Only a regulatory fee based on the City's costs of regulation could be charged for use of the public way. See id. at 1399-1400. Since similar issues of state law were then pending before the Illinois Supreme Court, the Seventh Circuit remanded the case with directions to stay proceedings until the Illinois Supreme Court ruled in the related case. See id. at 1400.

 
(1) The City of Chicago does not have a right to withhold access to the City streets because of refusal on the part of ATS to pay franchise fees or to negotiate for a franchise requiring the payment of franchise fees.
 
(2) The only charges the City of Chicago may seek to collect from ATS in connection with the installation of fiber optic cables under the streets of the City are for actual regulatory costs for inspection, regulation, administration and repairs associated with tunneling under public streets.

 The final judgment incorporating this declaration and resolving all the claims in the case *fn2" was dated December 16, 1993, but was not entered on the docket until January 5, 1994. *fn3" On December 30, 1993, the City served and filed its motion to vacate which was presented in court on January 3, 1994. Since served and filed before the judgment was even entered, it is clearly a timely motion. See Fed. R. Civ. P. 59(e) ("served not later than 10 days after the entry of the judgment").

 The City now contends for the first time that this court lacks jurisdiction over the dispute between the City and ATS. The City contends that the Tax Injunction Act, 28 U.S.C. § 1341, precludes jurisdiction. That statute provides: "The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such state."

 ATS contends that the City's motion comes too late because the case had previously been appealed. ATS, however, relies on cases involving collateral attacks on adverse judgments. See Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 n.9, 72 L. Ed. 2d 492, 102 S. Ct. 2099 (1982). The present motion is not a collateral attack. Moreover, jurisdictional issues are not waived by failing to raise them early in the litigation. Id. at 702. Jurisdictional issues may be raised for the first time on appeal and must be raised by the court even if not raised by the parties. Id.; Indiana Waste Systems, Inc. v. County of Porter, 787 F. Supp. 859, 864-65 (N.D. Ind. 1992). Although the Tax Injunction Act is primarily for the state entity's protection, see Franchise Tax Board of California v. Alcan Aluminium Ltd., 493 U.S. 331, 338, 107 L. Ed. 2d 696, 110 S. Ct. 661 (1990) (quoting Rosewell v. LaSalle National Bank, 450 U.S. 503, 522, 67 L. Ed. 2d 464, 101 S. Ct. 1221 (1981)), the state entity cannot waive this jurisdictional issue. Illinois Central R.R. Co. v. Howlett, 525 F.2d 178, 180 (7th Cir. 1975), cert. denied, 424 U.S. 976, 47 L. Ed. 2d 746, 96 S. Ct. 1482 (1976); Trailer Marine Transport Corp. v. Rivera Vazquez, 977 F.2d 1, 5 (1st Cir. 1992); Hardwick v. Cuomo, 891 F.2d 1097, 1103-04 (3d Cir. 1989); C.A. Wright, A. Miller, & E. Cooper, Federal Practice & Procedure § 4237 at 642 (2d ed. 1988). Therefore, even assuming there was no jurisdiction over the City's cross-claim against ATS, the City's initiation of that cross-claim would not act as a waiver of the Tax Injunction Act jurisdictional prohibition. *fn4" Keleher v. New England Telephone & Telegraph Co., 947 F.2d 547, 549-50 & n.2 (2d Cir. 1991). Contra State of Arizona v. Atchison, Topeka & Santa Fe R.R. Co., 656 F.2d 398, 402 (9th Cir. 1981).

 First, it must be determined whether the franchise fee involved in this case is a tax. Federal law controls as to the definition of what is a tax to which the Tax Injunction Act applies. Trailer Marine, 977 F.2d at 5; Robinson Protective Alarm Co. v. City of Philadelphia, 581 F.2d 371, 374-75 (3d Cir. 1978); Levine v. Supreme Court of Wisconsin, 679 F. Supp. 1478, 1488 (W.D. Wis.), rev'd on other grounds sub nom., Levine v. Heffernan, 864 F.2d 457 (7th Cir. 1988), cert. denied, 493 U.S. 873, 107 L. Ed. 2d 157, 110 S. Ct. 204 (1989). State law determinations as to whether a fee is a tax may still be pertinent or instructive. See Trailer Marine, 977 F.2d at 5. In this case, there is no basis of distinction between the state law determination in Diginet II and the determination to be made under federal law. The Seventh Circuit's determination in Diginet II that the franchise fee is a tax is controlling.

 The franchise fee was to be charged as either a percentage of ATS's revenues or at a rate per foot of cable. The fees were to be paid into the City's general revenues. A characteristic of a tax is that it is imposed for revenue-raising purposes. Schneider Transport, Inc. v. Cattanach, 657 F.2d 128, 132 (7th Cir. 1981), cert. denied, 455 U.S. 909, 71 L. Ed. 2d 448, 102 S. Ct. 1257 (1982); Travelers Insurance Co. v. Cuomo, 14 F.3d 708, 1993 U.S. App. LEXIS 27746, 1993 WL 558414 *4 (2d Cir. Oct. 25, 1993). Utility franchise fees based on a percentage of revenues have been held to be taxes. See Keleher, 947 F.2d at 548-49 (2 1/2% of gross revenues of any utility company using and occupying city streets); Robinson Protective, 581 F.2d at 372, 376 (5% of gross earnings for central alarm station companies to use underground wires to transmit their signals); Yakima Valley Cablevision, Inc. v. Federal Communications Commission, 254 U.S. App. D.C. 28, 794 F.2d 737, 740-41, 744 & n.24 (D.C. Cir. 1986) (cable franchise fees of 3-5% of gross revenues). Compare San Juan Cellular Telephone Co. v. Public Service Commission of Puerto Rico, 967 F.2d 683, 684, 686 (1st Dist. 1992) (3% periodic fee on cellular telephone service provider's gross revenue was a regulatory fee, not a tax, because assessed by the regulatory agency, placed in a special fund, and used to defray expenses of regulation). Fees per unit of product have also been found to be taxes. See Indiana Waste, 787 F. Supp. at 865 (to retain permit to operate a landfill, the operator was required to pay an annual fee of $ .20 per cubic yard of waste disposed in the landfill). Mere regulatory fees that pay for the cost of regulation are not taxes. Government Suppliers Consolidating Services, Inc. v. Bayh, 975 F.2d 1267, 1271 n.2 (7th Cir. 1992), cert. denied, 122 L. Ed. 2d 131, 113 S. Ct. 977 (1993); San Juan Cellular, 967 F.2d at 686-87. As Diginet II makes clear, however, the franchise fee is not merely a regulatory fee. If it were only a regulatory fee, it would not have been held to be a tax which state law did not authorize the City to impose. See Diginet II, 958 F.2d at 1399. There is nothing in this case to support that the franchise fee would go only or primarily for the cost of regulation and not into the general coffers of the City. The franchise fee in this case is a tax.

 The next question is whether this case involves the enjoining, suspending or restraining of the assessment, levy or collection of the franchise fee. The City's cross-claim against ATS contains four counts. *fn5" The first paragraph of the complaint summarizes the relief sought:

 
Cross-plaintiff City of Chicago seeks a declaration that defendant Western Union ATS, Inc. may not construct and operate a fiber optic network in the City's public ways without obtaining authority from the City to occupy the public way, and without also paying fair and reasonable compensation to the City for its profit-making use of the public ways [Count I]. In addition, the City seeks to enjoin Western Union ATS from constructing or operating its fiber optic network in the public way until it obtains the permission of the City and agrees to pay fair and reasonable compensation [Count II]. Finally, the City seeks damages in the amount of fair and reasonable compensation for Western Union ATS's past occupation of the public way without permission from the City [Counts IV & V]. *fn6"

 Standing in isolation, "fair and reasonable compensation" would also encompass a regulatory fee, if that were the only fee to be collected. The cross-claim, however, defines the fair and reasonable compensation sought by the City as being the franchise fee of approximately (a) 3% of gross billings or (b) annual payment of $ 3.54 per linear foot downtown plus $ 1.77 per linear foot for other parts of the city, whichever is greater. Cross-claim PP 15-16. Throughout this litigation, the City has only sought the franchise fee. Although it is alleged in the cross-claim that ATS refused to pay any fee, in this litigation ATS has consistently represented that it is willing to pay a regulatory fee. The City has never made any claim or presented any evidence as to what an appropriate ...


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