Opinion ID: 2048638
Heading Depth: 3
Heading Rank: 1

Heading: The Development of Section 542(b)

Text: In 1972, the FCC capped local cable franchise fees due to concerns that: many 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. 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, 1972 WL 26659, at ¶¶ 171, 185 (FCC February 3, 1972) ( Community Antenna Television Systems ). The FCC set the franchise fee cap at 5% and preempted provisions in franchise agreements imposing higher fees. Community Antenna Television Systems, 36 F.C.C.2d 143, 1972 WL 26659, at ¶ 186. In 1985, Congress codified the FCC's regulatory scheme in Title VI of the earlier Federal Communications Act of 1934. See Communications Act, Pub.L. No. 98-549, 98 Stat. 2779 (October 30, 1984) (effective 60 days after enactment, 98 Stat. 2806). These enactments included a franchise fee cap in section 542(b), providing that: 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). By codifying the FCC's regulatory scheme, Congress adopted the FCC's underlying purpose and rationale, in the absence of any contrary showing. Thus, the changes expressed congressional concern over the misuse of franchise fees for revenue-raising purposes because excessive fees effectively created a regressive, indirect tax on subscribers. Community Antenna Television Systems, 36 F.C.C.2d 143, 1972 WL 26659, at ¶¶ 171, 185. Congress again amended the Communications Act in 1996, encouraging cable operators to employ technological advances and provide new services. Although Congress did not alter the amount of the franchise fee cap, it added language limiting the collection of the 5% fees to a cable operator's gross revenues derived    from the operation of the cable system to provide cable services. (Emphasis added.) Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat. 56 (1996). Before the 1996 amendments, the gross revenues from any cable system operation could be used to calculate the franchise fee, capping that fee at 5%. After the amendment, however, the fee could be based on only revenues from cable system operations providing cable services. Thus, the 1996 amendment expressed a congressional intent to limit the scope of the revenues that could be used to calculate franchise fees. After cable modem service became available to provide faster Internet access in 1998, local cable franchising authorities also began imposing the same 5% franchise fees on those revenues. In response, the FCC used its regulatory powers to restrict further the revenues included in calculating the 5% franchise fee ceiling. On March 15, 2002, the FCC interpreted Congress' 1996 amendment to section 542(b) limiting the cable franchise fees to 5% of a cable operator's gross revenues derived    from the cable operation of the cable system to provide cable services. (Emphasis added.) Telecommunications Act of 1996, Pub.L. No. 104-104, 110 Stat. 56 (1996). In its ruling, the FCC stated that  cable modem service as currently provided is an interstate information service, not a cable service.  (Emphases added.) FCC Ruling, 17 F.C.C.R. at 4819, 2002 WL 407567, ¶ 33. The FCC concluded: [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.  (Emphasis added.) FCC Ruling, 17 F.C.C.R. at 4851, 2002 WL 407567, ¶ 105. The United States Supreme Court upheld that ruling as decisive and entitled to deference in National Cable & Telecommunications Ass'n v. Brand X Internet Services, 545 U.S. 967, 999-1000, 125 S.Ct. 2688, 2709-10, 162 L.Ed.2d 820, 849-50 (2005), but did not independently rule on its meaning. The parties in this case do not dispute the validity of the FCC Ruling and do not rely on Brand X in arguing the substantive issues in this appeal. The parties' focus is the FCC's 2002 ruling forming the basis for the defendants' argument that the franchise fee provision in their agreement with the City is preempted by federal law.