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City of Chicago v. Comcast Cable Holdings

August 23, 2007


Appeal from the Circuit Court of Cook County. Honorable Peter Flynn, Judge Presiding.

The opinion of the court was delivered by: Justice Campbell

Published opinion


Plaintiff, the City of Chicago (City), appeals from an order of the circuit court of Cook County dismissing its action to recover certain cable franchise fees from defendants, multiple companies that provide Internet and cable service in Chicago, including Comcast,*fn1 RCN Cable TV of Chicago, Inc. (RCN), and Wideopenwest Illinois, Inc. (WOW) (defendants).*fn2 The trial court determined that the City is preempted under federal law from recovering a cable franchise fee from defendants in the amount of 5% of defendants' annual gross revenues. On appeal, the City contends that: (1) the franchise agreements between the City and defendants for payment of franchise fees on revenues derived from cable modem service are valid contracts under state law; and (2) neither the Federal Communications Act nor the federal Internet Tax Freedom Act preempts the state franchise agreement provisions that require payment of franchise fees on revenue derived from cable modem service. For the following reasons, we reverse the judgment of the trial court, vacate its order, and remand this matter to the trial court for further action as necessary consistent with the specific matters addressed in this opinion.


In this case, we must determine whether cable companies that provide cable television and cable modem (Internet) services to customers in the City of Chicago must pay a 5% franchise fee to the City in order to provide each service, as contemplated by "Franchise Renewal Agreement" contracts. Below, we set forth both a brief history of the regulation of cable television and Internet services and the procedural history relevant to this case.

I. History of Cable Television Franchise Fees

A brief history of the revenues associated with cable television provides a clearer understanding of the genesis of the dispute between the City and the defendant cable operators.

Cable operators began to offer cable television to cities and municipalities in the 1960s. Some cities, acting as local franchising authorities (LFAs), began to impose franchise fees upon the cable operators. In 1972, the Federal Communications Commission (FCC) issued an order to "clarify the respective federal, state, and local regulatory roles" of the cable operators and the municipalities, and capped the LFA franchise fees. In re Amendment of Part 74, Subpart K, of the Commission's Rules and Regulations Relative to Community Antenna Television Systems, Cable Television Report & Order, 36 F.C.C.2d 143, par. 171 (F.C.C. February 3, 1972) (Community Antenna Television Systems). The FCC explained its rationale for capping the LFA franchise fees as follows:

"[M]any local authorities appear to have extracted high franchise fees more for revenue-raising than for regulatory purposes. Most fees are about five or six percent, but some have been known to run as high as 36 percent. The ultimate effect of any revenue-raising fee is to levy an indirect and regressive tax on cable subscribers." Community Antenna Television Systems, 36 F.C.C.2d 143, at par. 185.

The FCC placed a 5% cap on the franchise fees cities and other local governments were allowed to collect and preempted franchise agreement clauses imposing fees above the 5% cap. Community Antenna Television Systems, 36 F.C.C.2d 143, at par. 186.

In 1985, Congress codified the FCC's regulatory scheme in Title VI of the Federal Communications Act of 1934 (Communications Act). See Cable Communications Policy Act of 1984, Pub. L. No. 98-549, 98 Stat. 2779 (October 30, 1984) (effective 60 days after enactment, 98 Stat. 2806). Congress amended the Communications Act to place a ceiling on franchise fees. Section 542(b) capped franchise fees by providing: "For any twelve-month period, the franchise fees paid by a cable operator with respect to any cable system shall not exceed five percent of such cable operator's gross revenues derived in such period from the operation of the cable system." 47 U.S.C. §542(b) (Supp. 1984).

In 1996, Congress again amended the Communications Act and encouraged cable operators to provide services beyond traditional cable television services. The 5% cap on franchise fees remained intact but the 1996 Act limited the collection of franchise fees to a "cable operator's gross revenues derived * * * from the operation of the cable system to provide cable services." Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996) (1996 Act).

In 1998, cable operators began to offer "cable modem service" (Internet) to customers. By upgrading their systems to include fiber optic cable, Internet servers and other equipment, cable operators could provide high speed Internet access that was much faster than dial-up service. See In re Inquiry Concerning High-Speed Access to the Internet Over Cable & Other Facilities, Notice of Inquiry, 15 F.C.C. R. 19287, par. 6 (September 28, 2000). In response, LFAs began requesting 5% payment on revenues derived from cable modem services.

On March 15, 2002, the FCC issued a ruling determining that "cable modem service as currently provided is an interstate information service, not a cable service." In re Inquiry Concerning High-Speed Access to the Internet Over Cable & Other Facilities, 17 F.C.C.R. 4798, 4819 at par. 33 (F.C.C., March 15, 2002) (FCC Declaratory Ruling). The FCC further held that "[g]iven that we have found cable modem service to be an information service, revenue from cable modem service would not be included in the calculation of gross revenues from which the franchise fee ceiling is determined." FCC Declaratory Ruling, 17 F.C.C.R. 4851, at par.105.

II. Franchise Renewal Agreements

In 1985, each cable operator defendant in this case, either directly or through a predecessor, entered into a 15-year franchise agreement (Agreement or Agreements) with the City to provide cable television services. The Agreements give each defendant the right to extend, install, maintain, and operate a cable system within a specified franchise area in the City, incorporating sections 4-280-170 (A) and (B) of the Chicago Cable Ordinance. Chicago Municipal Code §§ 4-280-170(A), (B) (amended December 9, 1992) (Cable Ordinance).

Section 4-280-030 (A) sets forth the definitions of terms incorporated into the Agreements and defines the various types of services provided by cable operators. "Auxiliary services" is defined as:

"any communications services in addition to 'regular subscriber services' including, but not limited to * * * data or other electronic transmission services * * * interactive two-way services and any other service utilizing any facility or equipment of a cable television system operating pursuant to a franchise granted under this chapter." Chicago Municipal Code §4-280-030(A) (2003).

Paragraph 4.1 of each Agreement provided that in exchange for access to public rights-ofway, each defendant will pay a franchise fee in the amount of 5% of its gross revenues during the period of the Agreement:

"Pursuant to Sections 4-280-170(A) and (B) of the Cable Ordinance, the [franchisee] shall pay to the City a franchise fee of five percent (5%) of the annual gross revenues received by the [franchisee] during the period of its operation under this Agreement."

The Agreement does not contain a definition of "annual gross revenues," but provides that "[t]he terms * * * set forth in this Section 4 are pursuant to the terms * * * set forth in Sections 4-280-050 (C) and 4-280-170 of the Cable Ordinance as interpreted and applied in accordance with Section 542 of the Communications Act." Section 4-280-030(N) defines "gross revenues" as "all revenue derived directly or indirectly from the operation or use of all or part of a cable television system *** including *** revenue from regular subscriber service fees, [and] auxiliary service fees." Chicago Municipal Code §4-280-030(N) (2001).

Paragraph 4.6 of each Agreement provides that "[p]ayment by the Grantee to the City of the franchise fee and other fees set forth herein shall not be considered in the nature of a tax."

On March 29, 2000, each defendant signed a Franchise Renewal Agreement (Renewal Agreement) for a 15-year term. The terms of each Renewal Agreement were substantively identical to the terms of the original Agreements.

On March 15, 2002, as noted above, the FCC issued a declaratory ruling stating that "cable modem service" is not the same as "cable television service."

In March 2002, defendants informed the City that they planned to stop paying franchise fees on revenue from cable modem service pursuant to the aforementioned FCC declaratory ruling. Beginning in April 2002, each defendant ceased payment of the 5% franchise fees on that portion of its revenues. The City informed defendants that they were required to pay franchise fees on revenue from cable modem service under the Renewal Agreement. Defendants disagreed and refused to comply with the City's demands to pay the fees.

On September18, 2002, the City filed an action against defendants in the chancery division of the circuit court of Cook County. City of Chicago v. AT& T Broadband, Inc., No. 02 CH 17039 (Comcast I).*fn3 On defendants' motion, the case was removed to federal district court on October 29, 2002. Defendants moved to dismiss the City's complaint citing section 542 of the Communications Act. 47 U.S.C. §542 (1984). Defendants asserted that in light of the FCC declaratory ruling, federal law preempted the City from collecting franchise fees on cable modem service.

On September 4, 2003, the district court granted defendants' motion to dismiss. City of Chicago v. AT&T Broadband, Inc., No. 02-C-7517 (N.D. Ill. September 4, 2003) (Comcast II). On October 23, 2003, the City appealed to ...

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