Telecommunications Franchise Requirements Struck Down
Franchise Fees Limited to Municipal Costs

By Jim Doherty, Legal Consultant
Municipal Research & Services Center

In a sweeping decision issued April 24, 2001, the United States Court of Appeals for the 9th Circuit affirmed that Section 253 of the Communications Act severely limits the power of local governments to franchise or regulate the business of telecommunications providers, and preempts local requirements for the payment of any compensation that is unrelated to the government's costs of managing its public rights-of-way.

In City of Auburn v. Qwest Corp., Qwest challenged the requirements contained in telecommunications ordinances adopted by several Washington municipalities, including the cities of Auburn, Olympia, and Tacoma, on the grounds they violated state and federal limitations on municipal franchising of telecommunications providers. In the ordinances, which are typical of those advanced by municipal consultants nationwide, the municipalities sought to require telecommunications providers to pay an application fee of up to $5,000, file an application containing detailed information unrelated to the rights-of-way, obtain a franchise, negotiate certain terms of the franchise with the cities, undertake extensive reporting and approval processes for transfers of ownership and stock, provide the municipalities with network capacity, and offer the municipalities favorable rates.

The 9th Circuit's opinion provides the most authoritative statement to date regarding the limitations on municipal telecommunications franchising. The court held that Section 253 of the Communications Act is a "virtually absolute" preemption on municipal franchise requirements. Section 253's "purpose is clear - certain aspects of telecommunications regulation are uniquely the province of the federal government and Congress has narrowly circumscribed the role of state and local governments in this arena." Accordingly, the court found that Section 253(c) "saves" only those municipal requirements that are "directly related to management of the rights of way."

Following the analysis contained in recent opinions of several lower courts, the 9th Circuit struck down many of the municipalities' application and substantive requirements such as:

• a lengthy and detailed application form, requiring disclosure of matters such as:
  maps
  corporate policies
  documentation of licenses
  financial, technical, and legal qualifications
  a description of all services provided currently or in the future
  and "[s]uch other and further information as may be requested by the City"

  application fees ranging from an undetermined amount to $2,500 and $5,000;

  a requirement for a public hearing on the application;

  discretionary factors that have nothing to do with the management or use of the right-of-way;

  regulations governing the transferability of ownership, and even stock sales

  municipal reservation of discretion to grant, deny, or revoke the franchises, described by the court as "the ultimate cudgel";

  reporting requirements regarding matters not directly related to management of the rights-of-way;

  "most favored community" status regarding rates, terms, and conditions of service.

The court rejected the cities' claim that these and other requirements were related to the rights-of-way, stating that the cities' argument was a "semantic two-step" under which "the safe harbor provisions would swallow whole the broad congressional preemption."

On the critical issue of fees, the court concluded that Section 253 of the Act requires that non-tax franchise fees be limited to the municipalities' actual costs incurred in managing the rights-of-way. In addition, the court held that Section 253 prohibits municipalities from requiring providers to give free fiber and conduit capacity. This holding puts the 9th Circuit in conflict with the 6th Circuit's opinion in TCG Detroit v. City of Dearborn (March 7, 2000), the only other federal court of appeals decision that has considered the limits imposed by Section 253 on local telecommunications fees.

The court also held that the ordinances violated Washington state law, which limits municipalities to granting "master permits" and exempts from even master permit requirements telecommunications providers, such as Qwest, holding state-wide franchises. Because the application and substantive requirements were so intertwined with portions of the ordinances that were not preempted, the court held that even the valid portions could not survive. Thus, the ordinances were struck down in their entirety.

[The above case summary was first published on the Web site maintained by the Cole, Raywid & Braverman LLP law firm (offices in D.C. and in California). That law firm advises telecommunications companies, so they represent clients with interests adverse to local governments. Their case summary is typical for how the industry interprets this decision. It is reprinted here with permission.]

Advice to Washington counties and cities: have your legal counsel review your telecommunications ordinances to see if any provisions violate the 9th Circuit's interpretation of the federal Telecommunications Act. Cities and counties can still require the payment of fees that cover the regulatory costs, and can still coordinate the installation of telecommunications facilities in the rights-of-way. Standard indemnification and bonding provisions are also clearly allowed.

The 9th Circuit decision contains broad language that will be fleshed out over time as additional cases work their way through the courts. The telecommunications industry is making huge investments in infrastructure, so there is a lot at stake, and there will be further litigation concerning local government requirements that are perceived by the industry to be an impediment to their fast and cost-effective build-out of wired and wireless facilities.

Keep in mind that though the installation of fiber in public rights-of-way has been troublesome in metropolitan areas, there are many rural communities that would love to have multiple providers of advanced telecommunications facilities knocking on their door. Rural communities often have a very different perspective on this issue.

For additional information concerning telecommunications issues, visit the MRSC telecommunications page on our Web site: http://www.mrsc.org/Subjects/Telecomm/tcapage.htm.