Offset for In-Kind Services Limited to Marginal Costs, not Market Value

Today, a federal appeals court partially upheld the Federal Communications Commission’s most recent interpretation of the Cable Act’s limits on local franchise authority, but reversed the FCC on a key point that will mitigate the negative financial impact of the decision on state and local governments and curtailed a portion of the FCC’s effort to preempt local governments. U.S. Sixth Circuit Court of Appeals Judge Raymond Kethledge issued the decision in the closely watched City of Eugene et al. v. Federal Communications Commission case.

The court affirmed the FCC’s definition of franchise fees, which concluded that the value of franchise obligations such as institutional networks counts against the Cable Act’s 5 percent cap on cable franchise fees. The court justified this ruling because it found the franchise fee logically extends to obligations that are discretionary on the part of the local franchise authority but does not extend to cable build out, which the court found to be mandated by the Act.

In an important reversal of the FCC, however, the court found that any franchise obligation counted against the franchise fee should be valued at marginal cost, not at fair market value.

The court’s ruling was mixed on the FCC’s Mixed Use Rule — which, as codified, significantly constrains all local authority over “any services other than cable services,” (47 C.F.R. §76.43). The court agreed with the localities’ challenge “[t]o a significant extent,” because “the Act nowhere states or implies that franchisors may regulate cable operators only as ‘expressly permitted in the Act.’” Nonetheless, the court affirmed the FCC’s decision to preempt the City of Eugene’s 7 percent broadband fee, finding the City’s authorization of a cable system included “the right to use that system to provide information services,” and that the City “surrendered its right to exclude the cable operator from the City’s rights-of-way” once it granted the cable franchise.

The court affirmed the FCC’s application of its cable franchise rules to states that act as franchise authorities and rejected localities’ challenge to the legal standard that determines whether PEG renewals are sufficient under the Cable Act. It also rejected localities’ reliance interests on previous long-standing FCC interpretations of these rules.

Note: Best Best & Krieger LLP represented a coalition of local government parties before the Sixth Circuit.

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