Opinion ID: 202245
Heading Depth: 2
Heading Rank: 2

Heading: Preemption by the TCA

Text: 17 We have acknowledged, without resolving, the difficult question of whether any section of the TCA provides a private cause of action. See Cablevision of Boston, Inc. v. Public Improvement Comm'n, 184 F.3d 88, 99 (1st Cir.1999) (It is not clear... whether Congress intended FCC preemption to be the sole means of enforcing § 253(a) and (b), or, if a private cause of action does exist to enforce either of these subsections, whether the FCC is intended to have primary jurisdiction or whether the proper cause of action for a § 253(c) claim [assuming a private cause of action exists] is created by § 253(c) itself or arises from some other source.). Other circuits have addressed this issue. See BellSouth Telecomms., Inc., 252 F.3d at 1191 (holding that a private cause of action in federal district court exists under § 253 to seek preemption of a state or local statute, ordinance, or other regulation only when that statute, ordinance, or regulation purports to address the management of the public rights-of-way, thereby potentially implicating subsection (c)); TCG Detroit v. City of Dearborn, 206 F.3d 618, 624 (6th Cir.2000) (holding that § 253(c) of the Act authorizes a private right of action in federal court for telecommunications providers aggrieved by a municipality's allegedly discriminatory or allegedly unfair and unreasonable rates). We do not need to resolve this issue in this case, however, because PRTC brought this action to challenge Ordinance No. 40 under the Supremacy Clause. See City of Santa Fe, 380 F.3d at 1266 (A party may bring a claim under the Supremacy Clause that a local enactment is preempted even if the federal law at issue does not create a private right of action.); see also Wright Elec., Inc. v. Minn. State Bd. of Elec., 322 F.3d 1025, 1028 (8th Cir.2003); Western Air Lines, Inc. v. Port Authority of New York & New Jersey, 817 F.2d 222, 225 (2d Cir.1987). We proceed on that basis. 18 Congress enacted the TCA to ensure that telecommunications providers have competitive access to state and local telecommunications markets. See Cablevision of Boston, Inc., 184 F.3d at 97-98. At the same time, Congress recognized the continuing need for state and local governments to regulate telecommunications providers on grounds such as consumer protection and public safety and to manage and demand compensation for the use of their rights of way. Id. at 98. The provisions of § 253 balance these interests, providing in relevant part: 19 (a) In general 20 No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. 21 (b) State regulatory authority 22 Nothing in this section shall affect the ability of a State to impose, on a competitively neutral basis and consistent with section 254 of this section, requirements necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services, and safeguard the rights of consumers. 23 (c) State and local government authority Nothing in this section affects the authority of a State or local government to manage the public rights of way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights of way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government. 24 (d) Preemption 25 If, after notice and an opportunity for public comment, the [Federal Communications Commission] determines that a State or local government has permitted or imposed any statute, regulation, or legal requirement that violates subsection (a) or (b) of this section, the Commission shall preempt the enforcement of such statute, regulation, or legal requirement to the extent necessary to correct such violation or inconsistency. 26 47 U.S.C. § 253. The parties in this case focus on the impact of subsection (a), which limits the authority of state and local governments to regulate telecommunications providers, and subsection (c), a safe harbor provision that, notwithstanding the limits imposed by § 253(a), permits state and local governments to enforce regulations that require fair and reasonable compensation for the use of public rights of way. Specifically, the appellants argue that the district court erred in concluding that Ordinance No. 40 violates § 253(a) and is not saved by the safe harbor of § 253(c). We discuss these two sections of § 253 in turn.
27 It is well-established that § 253(a) authorizes preemption of state and local laws and regulations expressly or effectively prohibiting the ability of any entity to provide telecommunications services. Nixon v. Mo. Mun. League, 541 U.S. 125, 128, 124 S.Ct. 1555, 158 L.Ed.2d 291 (2004) (internal quotation marks omitted); see also City of Santa Fe, 380 F.3d at 1269 ([Section] 253(a) contains a clear expression by Congress of an intent to preempt local ordinances which prohibit the provision of telecommunications services.); N.J. Payphone Ass'n, 299 F.3d at 242 (Section 253 expressly preempts state or local statutes, regulations, or other requirements that prohibit or have the effect of prohibiting market entry.). Thus, under the Supremacy Clause, 6 any state or local law that is inconsistent with the requirements of § 253(a) will be null and void, unless it falls under one of the safe harbor provisions in § 253. See City of Sante Fe, 380 F.3d at 1269. 28 The appellants argue that the district court erred in finding that Ordinance No. 40 violates § 253(a). First, the appellants challenge the district court's conclusion that the cost estimates provided by PRTC are undisputed facts. Second, they argue that, even if the estimates are undisputed, the district court should not have considered them in its § 253(a) analysis because the estimates are based on the speculative premise that all municipalities throughout Puerto Rico will adopt similar ordinances. Finally, the appellants argue that, even if the estimates are proper considerations for the district court's § 253(a) analysis, the district court nonetheless erred in concluding that PRTC has demonstrated that Ordinance No. 40 violates S 253(a). These arguments are unavailing. 29
30 The district court did not err by considering PRTC's estimates to be undisputed facts in analyzing the summary judgment motion. Through deposition transcripts and other documents submitted with its motion for summary judgment, PRTC presented the following facts relevant to the § 253(a) analysis, which the appellants now challenge: 1) PRTC's annual profit from the most recent fiscal year was about $70 million; 2) if every municipality in the Commonwealth were to impose ordinances with a 5% fee, the fees would cost PRTC approximately $60 million a year, ten times the $6 million that PRTC currently pays in municipal license taxes; and 3) the total amount of recurring taxes that PRTC already pays to municipalities (which includes municipal license taxes, real property taxes, and personal property taxes, but excludes construction excise taxes) is approximately $58 million annually. The district court noted that the [d]efendants have not controverted PRTC's numbers for purposes of summary judgment. 31 We agree. The appellants did not provide evidence of alternative estimates, challenge PRTC's method of estimating the impact of the ordinance fee, or offer an alternative basis for calculating the financial effect of the fee. Instead, the appellants merely argue in their briefs that PRTC's estimates are incorrect, without any evidence to support their claim. Thus, the appellants' arguments amount to conclusory and unsubstantiated denials of the facts set forth by PRTC. We therefore cannot conclude that the district court erred in finding PRTC's estimates to be undisputed. See Magee v. United States, 121 F.3d 1, 3 (1st Cir.1997) (Neither party may rely on conclusory allegations or unsubstantiated denials, but must identify specific facts derived from the pleadings, depositions, answers to interrogatories, admissions and affidavits to demonstrate either the existence or absence of an issue of fact.). 32
33 PRTC provides telecommunications services throughout Puerto Rico. PRTC does not — and previously had never been required to — track its gross revenues and profit on a municipality-by-municipality basis; indeed, part of its objection to the ordinance stems from the financial burden that changes to its accounting and records systems would entail. 7 PRTC does have information on its gross revenues and profit from its services throughout Puerto Rico as a whole. Thus, in arguing that Ordinance No. 40 violates § 253(a), PRTC relies on its estimates of the aggregate cost to PRTC if all municipalities impose a 5% gross revenue fee. 34 PRTC advances two arguments to explain why the district court properly considered these estimates as part of its § 253(a) analysis. First, PRTC argues that the estimates reflect the legitimate concern that other municipalities are or will be adopting similar gross revenue fee requirements. In its brief, PRTC cites three other municipalities in Puerto Rico that have already enacted ordinances that apply similar gross revenue fees to telecommunications providers. The appellants acknowledged this fact during oral argument. Given the interconnected nature of utility services across communities and the strain that the enactment of gross revenue fees in multiple municipalities would have on PRTC's provision of services, the Commonwealth-wide estimates are relevant to determining how the ordinance affects PRTC's ability ... to provide any interstate or intrastate telecommunications service. 47 U.S.C. § 253(a). 35 PRTC does not, however, rest its case solely on the notion that all other municipalities will follow the Municipality of Guayanilla's lead by enacting gross revenue fees. It also argues that the Commonwealth-wide estimates serve as an indicator of how Ordinance No. 40 will affect the profitability of PRTC's operations within the Municipality itself. Extrapolating from its Commonwealth-wide profit margin and the impact that a Commonwealth-wide 5% gross revenue fee would have on its overall profits (an 86% decline), PRTC argues that a similarly significant decline in the profitability of its operations within the Municipality would occur under Ordinance No. 40 alone. Indeed, PRTC argues that the Commonwealth-wide figures may even underestimate Ordinance No. 40's effect. As PRTC explains, [g]iven that Guayanilla is a relatively small, rural municipality and that it generally costs more to provide services in rural or less heavily populated areas than it does in large urban centers, PRTC's profit margin on services that it sells within the Municipality is likely lower than the company's overall, island-wide margins. Accordingly, the cumulative figures submitted by PRT [i.e., an 86% reduction in profits] may well understate the impact of the Municipality's 5% fee on PRT's operations in the Municipality. 36 Taken in this sense, PRTC's estimates are an appropriate basis for analysis in this case. The estimates, which are uncontroverted, represent the best information readily available to either party by which to measure the impact of Ordinance No. 40 on PRTC's operations. The district court did not err by considering them as part of its analysis. 37
38 Section 253(a) preempts laws that may prohibit or have the effect of prohibiting the provision of telecommunications services. 47 U.S.C. § 253(a). As the Federal Communications Commission (FCC) 8 has explained, in determining whether an ordinance has the effect of prohibiting the provision of telecommunications services, it `considers 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.' TCG N.Y., Inc. v. City of White Plains, 305 F.3d 67, 76 (2d Cir.2002) (quoting Cal. Payphone Ass'n, 12 F.C.C.R. 14191 (1997)). Courts have also noted that a prohibition does not need to be complete or `insurmountable' to run afoul of § 253(a). Id.; see also City of Sante Fe, 380 F.3d at 1269 ([A] regulation need not erect an absolute barrier to entry in order to be found prohibitive.). Applying these considerations to the facts, we conclude that PRTC has established that Ordinance No. 40 violates § 253(a). 39 The ordinance imposes a 5% gross revenue fee. PRTC presently pays a 0.5% municipal license tax on its gross revenues for doing business within the Municipality 9 and argues that Ordinance No. 40 will significantly increase its costs and reduce the profitability of its operations. While PRTC does not, as we previously noted, track its gross revenue and profits on a municipality-by-municipality basis, its Commonwealth-wide calculations demonstrate that the imposition of 5% gross revenue fees across all municipalities would present an additional cost of $60 million annually — ten times the $6 million that PRTC already pays in municipal license taxes and more than double the amount that PRTC pays to municipalities for a variety of taxes and fees combined. According to PRTC's calculations, the surge in costs would reduce PRTC's annual Commonwealth-wide profit by 86%. 40 We agree with PRTC that these figures indicate that Ordinance No. 40 will negatively affect PRTC's profitability. The impact of a Commonwealth-wide 5% gross revenue fee on PRTC's overall profitability would be significant, and, as PRTC argues, it is reasonable to conclude that the effect of Ordinance No. 40 on the profitability of its operations within the Municipality would be similarly, or perhaps even more, substantial. Moreover, as PRTC also notes, the multiple gross revenue fees it faces in other municipalities further strain its ability to provide telecommunications services. Thus, there is no reason to doubt that the ordinance's 5% gross revenue fee would constitute a substantial increase in costs for PRTC in a regulatory environment that is becoming increasingly costly due to the enactment of gross revenue fees by other municipalities. 41 The ordinance's certification requirements also present another set of costs for PRTC. PRTC would have to change its accounting and records procedures to calculate how much of its gross revenues comes from outgoing calls, originating in the Municipality, using public rights of way. PRTC's current accounting practices do not differentiate how much income is generated from outgoing calls in the Municipality, as opposed to incoming calls, or how many of those outgoing calls use the Municipality's public rights of way, as opposed to private easements. Some features of PRTC's services make these calculations particularly difficult. For example, PRTC would have to devise a method for determining what portion of revenue generated from its unlimited local telephone service — which charges a flat fee for outgoing and incoming calls — would constitute revenue from outgoing calls alone. 42 Together, the ordinance's gross revenue fee and certification requirements place a significant burden on PRTC. We agree with the district court that PRTC has established that Ordinance No. 40 materially inhibits or limits the ability of PRTC to compete in a fair and balanced legal and regulatory environment. TCG N.Y., Inc., 305 F.3d at 76 (internal quotation marks and citation omitted); see also City of Sante Fe, 380 F.3d at 1270-71 (concluding that costs imposed by a local ordinance, which would nearly quadruple [the telecommunications provider's] cost of doing business, were sufficient to show that the [ordinance's] rental provisions are prohibitive because they create a massive increase in cost). Thus, we affirm the district court's holding that Ordinance No. 40 violates § 253(a). We must now consider whether the ordinance falls under the safe harbor of § 253(c).
43 Section 253(c) provides that [n]othing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government. 47 U.S.C. § 253(c). We have explained that this subsection take[s] the form of [a] savings clause[], preserving certain state or local laws that might otherwise be preempted under § 253(a). Cablevision of Boston, Inc., 184 F.3d at 98. However, we have noted that § 253(c) could be interpreted in two ways: 44 One explanation is that Congress intended § 253(c) ... to be a savings clause only. Under this interpretation, § 253(c) could only be used defensively, in the context of a § 253(a) challenge; the statute would simply not apply to local regulations that are not competitively neutral and nondiscriminatory but nonetheless do not constitute prohibitions on entry. 45 Alternatively, the exclusion of § 253(c) from § 253(d) [which provides for FCC preemption] might reflect Congress's selection of a forum for § 253(c) claims, limiting jurisdiction to federal or state courts instead of forcing municipalities with limited resources to defend rights-of-way regulations and fee structures before the FCC in Washington, D.C.... If this interpretation were correct, it would become necessary to decide whether the proper cause of action for a § 253(c) claim is created by § 253(c) itself or arises from some other source. 46 Id. at 99 (citations omitted). 10 Under the first interpretation of § 253(c), a telecommunications provider could not challenge an ordinance or regulation directly on the basis of § 253(c). Id. The telecommunications provider would have to establish that the ordinance or regulation violates § 253(a), and then the burden would shift to the state or local government to establish that the safe harbor provision of § 253(c) applies. Under the second interpretation, § 253(c) could operate as an independent source of claim as well as a safe harbor provision. Id. If a telecommunications provider brought an action challenging an ordinance directly under § 253(c), it would have the burden of establishing that the ordinance violated § 253(c). 47 The appellants raise two arguments regarding the application of § 253(c) in this case. First, they argue that, insofar as PRTC has not established that the ordinance violates § 253(a), the district court improperly placed the burden of proof for demonstrating that the fee was fair and reasonable compensation on the appellants. Second, they argue that, assuming they do have the burden of establishing that the ordinance's 5% gross revenue fee on outgoing calls does fall under the safe harbor provision of § 253(c), they have met their burden. Both of these arguments are unpersuasive. 48
49 Citing Cablevision of Boston, Inc., the appellants argue that, [t]o the extent § 253(c) is viewed as ... imposing an independent negative restriction on local authorities' choices regarding the management of their rights-of-way, the burden of proof to establish that the Municipality's § 253(c) fee is not fair and reasonable lies with[] PRTC. Thus, the appellants argue that the district court erred by placing the burden on them. 50 The appellants' argument is predicated on its assertion that the district court erred in concluding that the ordinance violates § 253(a). If the appellants were correct on this point, we would have to consider whether PRTC could challenge the ordinance as being preempted directly under § 253(c). However, because we affirm the district court's holding that PRTC has established that Ordinance No. 40 violates § 253(a), we need only consider whether the ordinance meets the § 253(c) safe harbor provision, not whether § 253(c) would provide an independent basis for preemption in this case. See N.J. Payphone Ass'n, 299 F.3d at 241 ([T]here is ... no need to resolve [the scope of preemption under § 253(c)] at this time. As discussed below, the operation of Section 253(a) is sufficient to preempt the Ordinance in this case and it does not fall within the Section 253(c) safe harbor.). In this context, the question of burden becomes more straightforward. We join our sister circuits in holding that, once the party challenging a regulation or ordinance establishes that it violates § 253(a), the burden is properly on the state or local government seeking the safe harbor to establish that § 253(c) applies. See City of Santa Fe, 380 F.3d at 1273 n. 10; N.J. Payphone Ass'n, 299 F.3d at 240; BellSouth Telecommunications, Inc., 252 F.3d at 1192; see also IN RE THE PETITION OF MINNESOTA, 14 F.C.C.R. 21697, 21704 n. 26, 1999 WL 1244016 (1999) (Although the party seeking preemption bears the burden of proof that there is a violation of section 253(a), the burden of proving that a statute, regulation, or legal requirement comes within the exemptions found in sections 253(b) and (c) falls on the party claiming that exception applies.). 51
52 The appellants next argue that they have demonstrated that the ordinance's 5% gross revenue fee on outgoing calls does fall under the safe harbor provision of § 253(c) as securing fair and reasonable compensation. 47 U.S.C. § 253(c). Specifically, the appellants point out that the 5% gross revenue fee applies only to outgoing calls that make use of public rights of way. By crafting the ordinance in this manner, the appellants argue, the Municipality ensures an effective distribution of resources, whereby it collects compensation depending on the use a provider gives to the public rights-of-ways. 53 The TCA does not define the phrase fair and reasonable compensation and the parties disagree over whether a gross revenue fee can ever satisfy this requirement. PRTC argues that the term compensation indicates that any fees imposed by state or local law must be limited to the recovery of costs (for maintenance and repair of public rights of way, such as sidewalk and street repair near telephone poles and equipment), which a gross revenue fee is not tailored to do. The appellants argue that the term compensation encompasses both cost recovery and the notion of rent for the use of public rights of way, and thus a gross revenue fee can be appropriate. The district court, after carefully reviewing decisions interpreting the terms fair and reasonable compensation, concluded that the most favored interpretation requires that the fees charged by a municipality be related to the degree of actual use of the public rights-of-way, but need not be limited to recoupment of the added costs to the municipality resulting from such use. P.R. Tel. Co. I, 283 F.Supp.2d at 543. 54 Among the courts that have reached the issue, we agree that most have not found gross revenue fees or other non-cost based fees to be per se invalid under § 253(c). See, e.g., Qwest Comms. Inc. v. City of Berkeley, 433 F.3d 1253, 1257 (9th Cir. 2006) ([W]e decline to read [past precedent] to mean that all non-cost based fees are automatically preempted, but rather that courts must consider the substance of the particular regulation at issue.); TCG Detroit, 206 F.3d at 624-25 (employing a totality of the circumstances test to conclude that a gross revenue fee was fair and reasonable compensation under § 253(c)); see also City of Sante Fe, 380 F.3d at 1273 (discussing, without deciding, whether an ordinance's compensation scheme had to be limited to cost recovery under § 253(c)); TCG N.Y., Inc., 305 F.3d at 77-78 (discussing, without deciding, whether a gross revenue fee can constitute fair and reasonable compensation under § 253(c)). 55 We need not decide whether fees imposed on telecommunications providers by state and local governments must be limited to cost recovery. We agree with the district court's reasoning that fees should be, at the very least, related to the actual use of rights of way and that the costs [of maintaining those rights of way] are an essential part of the equation. P.R. Tel. Co. II, 354 F.Supp.2d at 114. In this case, the appellants have presented no evidence of the Municipality's costs of maintaining the public rights of way. Section 253(c) requires compensation to be reasonable essentially to prevent monopolistic pricing by towns. Without access to local government rights-of-way, provision of telecommunications service using land lines is generally infeasible, creating the danger that local governments will exact artificially high rates. TCG N.Y., Inc., 305 F.3d at 79. As the district court noted in this case, [a]bsent evidence of costs, the Court cannot determine whether the Ordinance results in fair and reasonable compensation as opposed to monopolistic pricing. P.R. Tel. Co. II, 354 F.Supp.2d at 113. 56 The appellants argue that, despite the lack of information about the costs of maintaining the public rights of way, they have nonetheless ensured that the ordinance's fee is fair and reasonable compensation because the fee applies only to revenue generated from calls that the providers certify are using public rights of way. There are two problems with this argument. First, the appellants concede that the 5% fee applies to the entire revenue derived from calls that use any portion of the rights of way, regardless of whether the call traverses over one inch or 100 feet of the public rights of way. Thus, the fee charged does not directly relate to the extent of actual use of public rights of way. Second, the appellants provide no rationale for why it is fair and reasonable for the Municipality to charge 5%, as opposed to another percentage, of the revenue generated from these calls. The appellants provide no information or estimates regarding the amount of fees that they expect to collect through the ordinance. As the district court noted, it is evident that the Municipality intends to delay justifying its Ordinance until after it begins to receive payments from the different providers. We refuse to uphold the fee on the off chance that it might prove to be fair and reasonable. P.R. Tel. Co. II, 354 F.Supp.2d at 114. 57 The appellants note that the Sixth Circuit approved a 4% gross revenue fee after applying a totality of the circumstances test. TCG Detroit, 206 F.3d at 625. Under the totality of the circumstances test, courts examine the extent of the use contemplated, the amount other telecommunications providers would be willing to pay, and the impact on the profitability of the business to determine whether a fee scheme is fair and reasonable. City of Sante Fe, 380 F.3d at 1272-73 (citing TCG Detroit, 206 F.3d at 625). In articulating this test, the Sixth Circuit approached § 253(c) as providing a direct cause of action for a telecommunications provider to challenge a regulation or ordinance, not as a safe harbor provision for a state or local government to save its regulation or ordinance once preemption under § 253(a) had been established. See TCG Detroit, 206 F.3d at 625. 58 We therefore question the usefulness of the second and third factors of the test in an analysis of § 253(c) as a safe harbor provision following a determination that the regulation or ordinance in question violates § 253(a). As a safe harbor provision, § 253(c) permits state and local governments to seek fair and reasonable compensation ... for the use of public rights-of-way, notwithstanding the limitations on their authority to regulate telecommunications providers as set forth in § 253(a). To give effect to this safe harbor provision, it appears that we must focus our inquiry (regarding what constitutes fair and reasonable compensation) on examining the burdens imposed on the state or local government through the use of its public rights of way, rather than the burdens of the ordinance on the telecommunications providers, which is the focus of the § 253(a) analysis. 59 Thus, both the second and third factors in the totality of the circumstances test appear to miss the mark in the safe harbor context. The second factor (the amount that other telecommunication providers would be willing to pay) tells us more about telecommunications providers' resources and their desire to comply with local regulations than it does about why the fee chosen is fair and reasonable compensation for the state or municipality. The third factor (the impact on the profitability of the telecommunications provider) seems to conflate the concerns of subsection (c) with those of subsection (a). Presumably, if a municipality demonstrated that the fee it imposes reflects the actual cost to the municipality for the use of its rights of way, it would be justified in charging this fee regardless of whether the amount would render the provision of telecommunications services unprofitable for a telecommunications provider. 60 Accordingly, we do not adopt the totality of the circumstances test in the context of a § 253(c) safe harbor analysis that follows a determination of preemption under § 253(a). Nevertheless, we note that even if we were to apply the three factors of the test to this case, Ordinance No. 40 would not fit within § 253(c)'s safe harbor. First, nothing in the record indicates that the ordinance accounts for the actual use of public rights of way. As previously noted, the 5% fee applies to the entire revenue derived from all calls that use any portion of the rights of way, regardless of the actual extent of use. Second, the appellants fail to point to any telecommunications providers who have been willing to pay the requested fee. Third, as we have previously noted, the fee would represent a significant increase in PRTC's costs, undermining the profitability of its operations. Thus, even under the test urged by the appellants, the ordinance fails to satisfy § 253(c).