Court Opinion

ID: 2997220
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:34:42.680273+00
Date Added: 2024-06-11T11:38:57.470833
License: Public Domain

In the
 United States Court of Appeals
               For the Seventh Circuit
                          ____________

No. 03-3815
CITY OF CHICAGO,
                                               Plaintiff-Appellant,
                                 v.

COMCAST CABLE HOLDINGS, L.L.C., et al.,
                                            Defendants-Appellees.

                          ____________
          Appeal from the United States District Court for
         the Northern District of Illinois, Eastern Division.
              No. 02 C 7517—David H. Coar, Judge.
                          ____________
  ARGUED SEPTEMBER 14, 2004—DECIDED OCTOBER 1, 2004
                    ____________

 Before EASTERBROOK, MANION, and WOOD, Circuit
Judges.
  EASTERBROOK, Circuit Judge. Cable TV operators in
Chicago have signed contracts promising to pay the City 5%
of their gross revenues from any service, including what the
parties call “cable modem service,” furnished over the
franchised cable. (We put the phrase in quotations because
no modem is involved. A modem converts between analog
and digital signals, while the service at issue here is digital
throughout. But we follow common usage in applying the
phrase “cable modem” to a broadband Internet service pro-
vided over a cable that also carries television signals.) In
2002 the Federal Communications Commission concluded
2                                                No. 03-3815

that cable-modem service is an information rather than a
telecommunication product. See Inquiry Concerning High-
Speed Access to the Internet Over Cable and Other Facilities,
17 F.C.C.R. 4798 ¶¶ 7, 33-59 (Mar. 15, 2002). Chicago’s
cable operators then stopped remitting payments based on
cable-modem services. They rely on 47 U.S.C. §542(b),
which provides that “the franchise fees paid by a cable op-
erator with respect to any cable system shall not exceed 5
percent of such cable operator’s gross revenues derived in
such period from the operation of the cable system to provide
cable services.” If cable-modem service is not a program-
ming service, the reasoning goes, then receipts from the
cable operators’ role as Internet service providers cannot be
included among “gross revenues derived in such period from
the operation of the cable system to provide cable services”
(emphasis added). If the fee on revenues from TV service
already is at the statutory cap of 5% (as it is in Chicago),
then cities that collect fees based on gross revenue from
other services would receive income exceeding 5% of the
allowable revenue base.
  Chicago accepts the FCC’s understanding of the difference
between data and telecom services (but see Brand X Internet
Services v. FCC, 345 F.3d 1120 (9th Cir. 2003), cert. pending,
No. 04-281 (filed Aug. 27, 2004)) but disagrees with the oper-
ators’ reading of §542(b). Although the parties acknowledge
that “cable services” in §542(b) means programming services,
see 47 U.S.C. §522(6), and thus excludes cable-modem ser-
vice, see AT&T Corp. v. Portland, 216 F.3d 871 (9th Cir.
2000), they differ on the consequences of this definition.
Chicago contends that other products are outside the statute’s
domain, so that governments may impose unlimited fees
(under tax statutes, contracts, or both) on all revenue from
other uses of the cable. As the cable operators understand
the statute, however, once a city requires a franchise fee
“with respect to any cable system,” the total payments with
No. 03-3815                                                    3

respect to that system can’t exceed 5% of its programming
revenue, no matter how the city tries to apportion the
required payments.
   Unable to persuade the cable operators to resume payments,
Chicago filed this suit seeking a declaratory judgment that
the operators must comply in full with the contracts and
ordinances. The suit was filed in the Circuit Court of Cook
County. Invoking 28 U.S.C. §§ 1331 and 1441(b), defendants
removed the proceeding to federal court. They asserted that
the City’s action arises under federal law either because the
demand for payment rests on 47 U.S.C. §542(a)—which
reads: “Subject to the limitation of subsection (b), any cable
operator may be required under the terms of any franchise
to pay a franchise fee”—or because the meaning and effect of
§542(b) will be the only issue contested in the litigation. The
district court denied the City’s motion to remand, concluding
that federal adjudication is appropriate because the City’s
complaint “implicates . . . provisions of the Communications
Act” and the FCC’s order. Chicago v. AT&T Broadband,
Inc., 2003 U.S. Dist. LEXIS 6268 at *9 (N.D. Ill. Apr. 14, 2003).
A few months later the district judge held that §542(b)
preempts any state and city statutes and excuses the cable
operators from making the payments called for in the fran-
chise contracts on account of cable-modem service. Chicago
v. AT&T Broadband, Inc., 2003 U.S. Dist. LEXIS 15453 (N.D.
Ill. Sept. 4, 2003). We need not consider that aspect of the
disposition, because the suit does not arise under federal
law and therefore belongs in state court.
   Under the venerable well-pleaded-complaint doctrine,
“whether a case is one arising under the Constitution or a
law or treaty of the United States . . . must be determined
from what necessarily appears in the plaintiff’s statement
of his own claim in the bill or declaration, unaided by any-
thing alleged in anticipation or avoidance of defenses which it
is thought the defendant may interpose.” Taylor v. Anderson,
234 U.S. 74, 75-76 (1914). See also, e.g., Holmes Group, Inc.
4                                                No. 03-3815

v. Vornado Air Circulation Systems, Inc., 535 U.S. 826, 830-
32 (2002); Franchise Tax Board v. Construction Laborers
Vacation Trust, 463 U.S. 1, 9-12 (1983); Blackburn v.
Sundstrand Corp., 115 F.3d 493 (7th Cir. 1997); Rice v.
Panchal, 65 F.3d 637 (7th Cir. 1995). So the federal defense
in §542(b) does not supply jurisdiction if the claim itself
rests on state or local law—which it does. Both an ordi-
nance enacted under Chicago’s home-rule power and a
series of contracts supply the basis of Chicago’s complaint.
The American Law Institute once favored federal-defense
removal, see Study of the Division of Jurisdiction Between
State and Federal Courts §1312(a)(2) (1969), but in the face
of strong criticism, e.g., Henry J. Friendly, Federal Jurisdic-
tion: A General View 124 (1973), abandoned that position,
see Federal Judicial Code Revision Project §1441 (T.D. 3
1999). Congress never embraced it; both §1331 and §1441
have not been materially changed since the Supreme Court
first articulated the well-pleaded-complaint doctrine.
  That the federal defense will be the only contested issue
does not matter. Two decisions illustrate this point. A rail-
road that had settled a tort claim in exchange for a lifetime
pass later refused to honor that pass, contending that a
federal statute enacted in the interim forbade the provision of
free transportation. The pass holder sued in federal court,
contending that the only issue requiring resolution was the
interpretation of this statute—for, on the plaintiff’s view,
the pass was not “free” but had the same value as the tort
claim that had been surrendered. That view of what issues
controlled the case proved to be correct; the railroad did not
contest the pass’s validity as a matter of contract. The
Supreme Court never reached the merits, however, holding
that a contract claim does not arise under federal law even
when the only contested issue is the effect on that obligation
of a federal statute. Louisville & Nashville R.R. v. Mottley,
211 U.S. 149 (1908). The Court adhered to that position in
Gully v. First National Bank, 299 U.S. 109 (1936), in which
No. 03-3815                                                 5

a state tax collector sued in state court on a contract by
which one bank promised to pay the tax obligations of
another as part of an acquisition. The bank removed to
federal court, contending that the promise amounted to a
tax on shares of the bank, which under federal law states
are forbidden to levy. Once again the only contested issue
in the litigation was the effect of this federal statute; once
again the Court held that the claim arose under the contract
(or perhaps under the state tax law), and that a potential
federal defense did not convert the suit to one arising under
federal law. Just so here: it is scarcely possible to see any
gap between these proceedings and either Mottley or Gully.
  The contracts between Chicago and the cable operators
recognize that the payments are subject to any limits im-
posed by federal law. This does not mean, however, that the
claim is itself based on federal law; stating the obvious
(given the Supremacy Clause, what other option do the parties
have?) does not affect the source of law under which a claim
arises. That’s the point of the language in Taylor from which
we quoted above. Mentioning a federal issue in a contract,
or for that matter a complaint, does not determine the
source of the claim itself. Think of the Federal Arbitration
Act, 9 U.S.C. §§ 1-16, which authorizes parties to prescribe
arbitration as a means to resolve disputes growing out of
interstate transactions, precludes any state interference
with these agreements except to the extent the general law
of contract would regulate any other agreement, and provides
in §9 and §10 detailed criteria for confirming or vacating
awards. Many arbitration agreements refer to this federal
statute, and whether they refer to it or not any dispute about
arbitrability or the validity of an award must be resolved
under the Arbitration Act’s terms. Yet even this is not enough
to create federal jurisdiction, because the claim that the
plaintiff seeks to vindicate still arises under the contract,
and thus under state law. See Southland Corp. v. Keating,
465 U.S. 1, 15 n.9 (1984); Moses H. Cone Memorial Hospital v.
6                                                No. 03-3815

Mercury Construction Corp., 460 U.S. 1, 25 n.32 (1983);
Minor v. Prudential Securities, Inc., 94 F.3d 1103 (7th Cir.
1996). Like the Federal Arbitration Act, the Federal
Communications Act regulates transactions without creat-
ing the claim sought to be vindicated. Chicago’s financial
demand rests on state law (including the state law of
contract); §542(b) sets a cap on payments without creating
a federal floor under them (cities could agree to accept less
than 5%); and if one reads §542(a) as creating federal sup-
port for a fee on telecom services, as the Arbitration Act
creates federal support for arbitration, the plaintiff as
master of its complaint may foreswear reliance on that
entitlement and rest on state law, as Chicago has done.
   Defendants say that this is not so, because (in their view)
federal law so completely dominates this field that it is
impossible to frame any claim under state law. This appeal
to the misleadingly named complete-preemption doctrine is
unavailing. (The name is misleading because the doctrine
is unrelated to preemption but deals with occupation of the
field, as with labor relations and some aspects of pension
law. See Metropolitan Life Insurance Co. v. Taylor, 481 U.S.
58 (1987); Avco Corp. v. Machinists Union, 390 U.S. 557
(1968); Bartholet v. Reishauer A.G. (Zürich), 953 F.2d 1073
(7th Cir. 1992).) Section 542(a) does not suggest that only
federal law could support a claim. Unlike, say, the National
Bank Act, which knocks out all state regulation of national
banks’ interest charges, so that any claim must rest on
federal law alone, see Beneficial National Bank v. Anderson,
539 U.S. 1 (2003), the Federal Communications Act leaves to
state law most questions about the regulation and taxation
of cable TV franchises. Section 542(a) does not purport to
override state law, let alone to deny states all power in the
field. So if, for example, Illinois law capped fees at 3%,
Chicago could not rely on §542(a) to charge 5%. Cf. Nixon v.
Missouri Municipal League, 124 S. Ct. 1555 (2004) (holding
that another provision of federal telecommunications law
No. 03-3815                                                7

does not permit a municipality to disregard state controls on
its conduct). All §542(b) does is limit authority that has
some other source. If §542(b) makes the City’s claim a
federal one, then any statute preempting state law would
allow removal, and decisions such as Mottley, Gully, and
Franchise Tax Board would be overthrown.
  The judgment is vacated, and the district court is in-
structed to remand this litigation to state court.

A true Copy:
      Teste:

                        ________________________________
                        Clerk of the United States Court of
                          Appeals for the Seventh Circuit

                   USCA-02-C-0072—10-1-04