City of Chicago v. Comcast Cable Holdings, L.L.C. ( 2008 )

Docket Nos. 105342, 105348, 105349 cons.
IN THE
SUPREME COURT
OF
THE STATE OF ILLINOIS
THE CITY OF CHICAGO, Appellee, v. COMCAST CABLE
HOLDINGS, L.L.C., et al., Appellants.
Opinion filed November 20, 2008.
JUSTICE KILBRIDE delivered the judgment of the court, with
opinion.
Chief Justice Fitzgerald and Justices Freeman, Thomas, Garman,
Karmeier, and Burke concurred in the judgment and opinion.
OPINION
The City of Chicago filed a complaint against the defendants, all
operators of local cable television systems, in a dispute over cable
franchise fees, seeking declaratory relief. Specifically, the City
alleged the defendants violated their cable franchise renewal
agreements by discontinuing payment of a portion of a 5% franchise
fee required by the agreements. In a joint motion to dismiss, the
defendants argued that the contractual fee provision was preempted
by section 542(b) of the Cable Communications Policy Act of 1984
(Communications Act) (47 U.S.C. §547 (2000)), as interpreted by the
Federal Communications Commission (FCC). The trial court granted
the defendants’ motion to dismiss. The appellate court reversed and
remanded the cause for further proceedings, concluding there was no
clear showing of preemption. 375 Ill. App. 3d 595.
We allowed and consolidated the defendants’ petitions for leave
to appeal. The central issue is whether the contractual franchise fee
provision imposing a 5% fee on defendants’ gross cable modem
service revenues is preempted by section 542(b) of the
Communications Act. If it is preempted, we must consider whether
the City has an alternative right to impose that fee under its home-rule
authority, as granted by state law. After examining both issues, we
reverse the appellate court judgment and affirm the circuit court’s
dismissal of the City’s complaint.
FACTS
In September 2002, the City of Chicago filed a complaint in the
circuit court of Cook County against seven defendants providing local
services over a cable system. The seven defendants were Comcast
Cable Holdings, L.L.C., Comcast of Chicago, Inc., Comcast of
Illinois III, Inc., Comcast of South Chicago, Inc., Comcast of
Florida/Illinois/Michigan, Inc., RCN Cable TV of Chicago, Inc., and
Wideopenwest Illinois, Inc. The complaint sought a declaratory
judgment as well as any other just and appropriate relief, including
injunctive or equitable relief. The complaint alleged that in March
2002, each of the defendants violated its franchise renewal agreement
with the City by refusing to pay the portion of the franchise fee based
on the annual gross revenue derived from its provision of cable
modem service. Cable modem service uses cable system facilities and
equipment to provide Internet access and services to subscribers. In
re Inquiry Concerning High-Speed Access to the Internet Over Cable
& Other Facilities, 17 F.C.C.R. 4798, 4821, ¶38 (FCC March 15,
2002) (FCC Ruling). Previously, each defendant had paid the entire
fee requested by the City under section 4.1 of the agreement.
A March 15, 2002, FCC ruling classifying cable modem service
as an information service rather than a cable service prompted the
defendants’ refusal to pay that portion of the franchise fee. See FCC
Ruling, 17 F.C.C.R. at 4819, ¶33. They argued that the FCC Ruling
excluded revenue from cable modem services from the calculation of
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the gross revenues used to set the 5% franchise fee ceiling. FCC
Ruling, 17 F.C.C.R. at 4851, ¶105. The defendants allege that the
ruling preempted that portion of the franchise fee provision in their
renewal agreements with the City, thus eliminating their payment
obligation. Because the relevant provisions in each of the franchise
renewal agreements are identical, we will refer to them in the singular
form throughout our discussion.
The defendants removed the cause of action to federal court and
filed a joint motion to dismiss, alleging that the disputed portion of
the franchise fee was preempted by the Communications Act (47
U.S.C. §§521 through 573 (2000)) and the Internet Tax Freedom Act
(47 U.S.C. §151 note (2000)). The federal district court granted the
defendants’ motion to dismiss (City of Chicago v. AT&T Broadband,
Inc., No. 02–C–7517 (N.D. Ill. September 4, 2003)), and the City
appealed. The Seventh Circuit Court of Appeals vacated the federal
district court judgment and remanded the cause to the Cook County
circuit court, citing lack of federal jurisdiction, without ruling on the
merits of the motion to dismiss. City of Chicago v. Comcast Cable
Holdings, L.L.C., 384 F.3d 901 (7th Cir. 2004).
In the Cook County circuit court, the defendants again filed a joint
motion to dismiss, and the trial court granted the motion, finding that
section 542 of the Communications Act preempted the portion of the
franchise agreement calculating franchise fees based on gross
revenues from cable modem services. The City appealed, and the
appellate court reversed the trial court’s dismissal order, denying the
petition for rehearing filed by Comcast. 375 Ill. App. 3d 595. In
approving the agreement’s use of cable modem service revenues in
the calculation of the franchise fee, the appellate court found that the
City’s home-rule authority was not preempted by section 542 and
concluded that the franchise agreement did not violate the Internet
Tax Freedom Act. 375 Ill. App. 3d 595. The defendants filed petitions
for leave to appeal under Supreme Court Rule 315 (210 Ill. 2d R.
315), and this court allowed and consolidated the petitions.
ANALYSIS
I. Section 542(b) Preemption
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At the heart of the parties’ dispute is whether section 542(b) of
the Communications Act (47 U.S.C. §542(b) (2000)) preempts the
City’s franchise fee because it relies, in part, on revenues from cable
modem services. Under the FCC’s 2002 ruling, franchise fees may be
based only on gross revenues from cable services, excluding cable
modem service revenues from its calculation.
While preemption may not be presumed, three distinct types of
preemption are recognized: (1) express preemption, shown by a clear
expression of congressional intent to preempt state law; (2) field
preemption, shown by comprehensive legislation demonstrating a
clear congressional intent to occupy the entire regulatory field; and
(3) conflict preemption, shown by a conflict between state and federal
law. Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541, 150 L. Ed.
2d 532, 550, 121 S. Ct. 2404, 2414 (2001). Because federal
preemption presents a question of law, it is subject to de novo review.
Kinkel v. Cingular Wireless, LLC, 223 Ill. 2d 1, 15 (2006). Similarly,
appellate review of an order granting a motion to dismiss is de novo.
Karas v. Strevell, 227 Ill. 2d 440, 451 (2008).
Here, the defendants argue that the portion of the franchise fee
based on revenues from cable modem services is subject to a finding
of both express and conflict preemption. The “ultimate touchstone”
of our preemption analysis must be the intent of Congress. Cipollone
v. Liggett Group, Inc., 505 U.S. 504, 516, 120 L. Ed. 2d 407, 422,
112 S. Ct. 2608, 2617 (1992). To aid in determining that intent, we
examine the legal developments leading to the FCC’s 2002
declaratory ruling underlying the defendants’ decision to terminate
their payment of the disputed fees.
A. The Development of Section 542(b)
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
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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, 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, 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, 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
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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, ¶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, ¶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, 162 L.
Ed. 2d 820, 849-50, 125 S. Ct. 2688, 2709-10 (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.
B. Franchise Renewal Agreement Provisions
In its complaint, the City alleges that the defendants violated
section 4.1 of the franchise renewal agreement, entitled “Franchise
Fee.” That section states:
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“[p]ursuant to Section 4–280–170(A) and (B) of the Cable
Ordinance, the [franchisee] shall pay to the City a franchise
fee of five percent (5%) of the annual gross revenues received
by the [franchisee] during the period of its operation under
this Agreement.” (Emphasis added.)
This language expressly requires the franchisee to pay a single
franchise fee of 5% of its yearly gross revenues. The agreement does
not, however, define the key phrase “gross revenues.” Instead, it
states that “all terms, phrases, words or their derivations shall be
defined as set forth in Section 4–280–030 of the Cable Ordinance”
whenever possible, “[u]nless the context clearly indicates that a
different meaning is intended.”
In the Chicago Cable Communications Ordinance, section
4–280–030(N) defines “[g]ross revenues” as “revenue derived
directly or indirectly from the operation or use of all or part of a cable
television system *** including, but not limited to, revenue from
regular subscriber service fees, [and] auxiliary service fees.”
(Emphasis added.) Chicago Municipal Code §4–280–030(N) (2001).
“ ‘Regular subscriber service’ means the distribution to subscribers
of signals over the cable television system on all channels except ***
those intended for reception by equipment other than a television
broadcast receiver.” (Emphasis added.) Chicago Municipal Code
§4–280–030(T) (2001). Because cable modem service is not intended
to be received by a television broadcast receiver, it is not a “regular
subscriber service,” and the parties do not argue that it falls within
that category. Accordingly, fees from cable modem service are not
regular subscriber service revenues included in the franchisee’s
annual gross revenues used to calculate its section 4.1 franchise fees.
Section 4–280–030(N)’s definition of “[g]ross revenues,”
however, also includes revenue from auxiliary services. Chicago
Municipal Code §4–280–030(N) (2001). Section 4–280–030(A) of
the Cable Ordinance defines “[a]uxiliary services” as:
“any communications services in addition to ‘regular
subscriber services’ including, but not limited to *** data or
other electronic transmission services, *** home shopping
services, interactive two-way services and any other service
utilizing any facility or equipment of a cable television system
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operating pursuant to a franchise granted under this chapter.”
(Emphasis added.) Chicago Municipal Code §4–280–030(A)
(2001).
Applying this definition, cable modem service revenues would
constitute “auxiliary service fees” because cable modem service falls
within the Cable Ordinance’s broad classification of an “auxiliary
service” as “any other service” using any cable system facilities or
equipment. Thus, under the terms of the parties’ agreement and the
Cable Ordinance, revenue from cable modem services is included in
the annual gross revenues used to calculate the franchise fees due
under section 4.1.
Two other Cable Ordinance provisions are also relevant to this
dispute. The agreement provides that “[t]he terms and conditions set
forth in *** Section 4 are pursuant to the terms and conditions set
forth in Sections 4–280–050(C) and 4–280–170 of the Cable
Ordinance.” Section 4–280–050(C) discusses the required fees in the
franchise approval process and therefore is not relevant to the issues
presented in this appeal. Chicago Municipal Code §4–280–050(C)
(2001). Section 4–280–170 is relevant, however, because its
paragraph A mandates that a franchisee “pay to the city a franchise
fee of not less than five percent of its annual gross revenues during
the period of its operation under the franchise.” (Emphasis added.)
Chicago Municipal Code §4–280–170(A) (1993). Thus, both the
language of section 4.1 and section 4–280–170(A) of the Cable
Ordinance authorizes the imposition of a 5% single franchise fee.
Section 4 then specifies the details of that one franchise fee. Notably,
the agreement expressly states all terms and conditions in both section
4 and section 4–280–170 are to be understood “as interpreted and
applied in accordance with Section 542 of the Communications Act.”
Therefore, we next examine section 542 and its interaction with
section 4 of the parties’ agreement.
C. The Interplay of Section 4 of the Agreement and Section 542
The language of the section 542 of the Communications Act is at
the core of the parties’ arguments. Section 542 states, in relevant part:
“(a) Payment under terms of franchise
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Subject to the limitation of subsection (b) of this section,
any cable operator may be required under the terms of any
franchise to pay a franchise fee.
(b) Amount of fees per annum
For any twelve-month period, the franchise fees paid by
a cable operator 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.”
“(g) ‘Franchise fee’ defined
For the purposes of this section–
(1) the term ‘franchise fee’ includes any tax, fee, or
assessment of any kind imposed by a franchising authority
or other governmental entity on a cable operator ***,
solely because of their status as such[.]” (Emphases
added.) 47 U.S.C. §§542(a), (b), (g)(1) (2000).
Consistent with the language in section 4.1 of the parties’ agreement
and section 4–280–170(A) of the Cable Ordinance, section 542
permits the imposition of a single franchise fee on a cable operator.
Both section 542(b) and section 4.1 also limit this fee to 5% of the
cable operator’s yearly gross revenues. The Communication Act and
the agreement diverge, however, on the types of “gross revenues”
used to calculate the 5% fee ceiling.
Section 542(b) of the Communications Act limits the franchise
fee to 5% of the cable operator’s gross revenues “derived *** from
the operation of the cable system to provide cable services.” 47
U.S.C. §542(b) (2000). Under the FCC’s March 15, 2002, ruling,
however, “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, ¶105. Stated another way, the FCC’s ruling means that the
franchise fee imposed on cable operators is limited to 5% of their
gross cable service revenues, but may not include gross revenues
from cable modem services. That limitation is in direct conflict with
the City’s attempt to impose a franchise fee on cable modem service
revenues under section 4.1 of the parties’ agreement.
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As noted, the agreement’s definition of the “gross revenues” used
to calculate the franchise fee incorporates revenues from both
“regular subscriber service” and “auxiliary service,” including cable
modem service. The FCC’s 2002 ruling excluding cable modem
revenues from the calculation of gross revenues preempts the
agreement’s inclusion of those revenues in the calculation of the
City’s 5% franchise fee. See FCC Ruling, 17 F.C.C.R. at 4851, ¶105.
See also Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 541, 150 L.
Ed. 2d 532, 550, 121 S. Ct. 2404, 2414 (2001).
Section 556(c) of the Communications Act also supports our legal
conclusion that the franchise fee provisions are preempted. It
expressly states that “any provision of law of any *** franchising
authority, or any provision of any franchise granted by such authority,
which is inconsistent with this chapter shall be deemed to be
preempted and superseded.” 47 U.S.C. §556(c) (2000). Indeed, even
section 29.1 of the parties’ agreement provides that “[t]his Agreement
shall be construed pursuant to the laws of the State of Illinois unless
otherwise preempted by Federal law.” (Emphasis added.) Here, the
disputed portion of the parties’ agreement is preempted.
Despite the differences between the language in portions of the
agreement on franchise fees and the Communications Act, the City
argues that section 542 does not apply to its franchise fee because that
section affects fees imposed “solely because” an operator provides
cable services. See 47 U.S.C. §542(g)(1) (2000). The City asserts that
the disputed fees are imposed because the cable operator provides
“cable modem services,” not “cable services.” See FCC Ruling, 17
F.C.C.R. at 4819, ¶33. Therefore, the fees derived from cable modem
service revenues are not “franchise fees” under the definition in
section 542(g)(1) and cannot be limited by section 542(b)’s 5%
ceiling on franchise fees. Accordingly, the City maintains that section
542 does not apply to the fee imposed by the agreement. Because
section 542 does not apply, it cannot preempt the agreement’s
franchise fee provision.
We reject the City’s contention because it relies on a misstatement
of section 542(g). The City contends section 542 and its fee cap do
not apply because the fees are not imposed “solely because” the cable
operator provides cable services. This argument ignores the plain
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language of the statute, our best indicator of legislative intent
(Hennings v. Chandler, 229 Ill. 2d 18, 24 (2008)). In deciding
preemption questions, the intent of Congress continues to be the
“ultimate touchstone” of our analysis. Cipollone v. Liggett Group,
Inc., 505 U.S. 504, 516, 120 L. Ed. 2d 407, 422, 112 S. Ct. 2608,
2617 (1992).
Under the plain language of section 542(g), the key question is
not whether “cable services” are provided by a cable operator, as the
City contends, but whether the franchise fee is “imposed *** on a
cable operator ***, solely because of their status as such.” (Emphasis
added.) 47 U.S.C. §542(g)(1) (2000). The City’s argument is
unpersuasive because it is not based on the statutory language enacted
by Congress. Instead, the City supports its argument that section 542
does not apply to the fee imposed on cable modem service revenues
by changing the statutory language to require the relevant fee to be
imposed “solely because” the cable operator provides “cable
services.” There is no basis in the statute to support that claim.
Plainly stated, section 542 does not read as argued by the City.
Therefore, we reject the City’s argument that section 542 applies only
to fees imposed solely because the cable operator provides cable
services as inconsistent with the actual language of section 542(g)(1).
Because the City has failed to establish that the plain language of
section 542(g)(1) supports its contention that the disputed fees are not
“franchise fees,” it lacks any basis for the remainder of its argument
addressing the applicability of section 542(b).
The City next relies on the “savings clause” in section 541(d)(2)
of the Communications Act to justify the franchise fee imposed in the
parties’ agreement. Under this section,
“Nothing in this subchapter shall be construed to affect
the authority of any State to regulate any cable operator to the
extent that such operator provides any communication service
other than cable service ***.” (Emphasis added.) 47 U.S.C.
§541(d)(2) (2000).
The City argues that this section permits it to regulate the defendants
with the franchise fee “because they provide a service other than
cable service.”
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Again, the City’s argument lacks roots in the plain language of the
statute. The City does not argue that the defendants provide “any
communication service,” as required by the statute, just that they
provide a noncable service. The City also does not argue that the
cable modem services provided by the defendants are a
“communication service” under the language of its agreement.
Consequently, it provides no basis, statutory or contractual, for this
court to conclude that cable modem service constitutes a
“communication service” within the meaning of section 541(d)(2) of
the parties’ agreement. Indeed, the FCC’s 2002 ruling classified cable
modem service as “an interstate information service,” not as a
“communication service.” See FCC Ruling, 17 F.C.C.R. at 4819, ¶33.
We find the City’s “savings clause” argument unpersuasive.
Next, the City asserts that the federal court decisions cited by the
defendants are unpersuasive and do not address its primary argument,
namely, that section 542 does not apply because the fee imposed does
not fall within section 542(g)(1)’s definition of a “franchise fee.” We
have already rejected the City’s unique substantive argument due to
its failure to comport with the plain language of the statute. We must,
however, consider whether our decision is consistent with the case
law cited by the defendants. See Parish of Jefferson v. Cox
Communications Louisiana, LLC, No. 02–334 (E.D. La. July 3,
2003); Time Warner Cable-Rochester v. City of Rochester, No.
03–CV–6257 (W.D.N.Y. December 12, 2003); City of Minneapolis
v. Time Warner Cable, Inc., No. 05–994 (D. Minn. November 10,
2005). As this court’s decisions have stated, we look to nonbinding
federal law as persuasive authority when construing federal statutes
due to the importance of maintaining uniform interpretations.
Bowman v. American River Transportation Co., 217 Ill. 2d 75, 91
(2005).
In Parish of Jefferson, the federal district court held that the FCC
Ruling was reasonable and, by its terms, preempted any franchise fee
on revenues from cable modem services. The court granted the
defendants’ partial motion to dismiss on preemption grounds because,
under the FCC Ruling, revenues from cable modem services were
excluded from the gross annual revenues used to calculate the 5%
franchise fee ceiling in section 542(b). Parish of Jefferson v. Cox
Communications Louisiana, LLC, No. 02–334.
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The court in Time Warner Cable-Rochester granted the cable
operator’s motion for summary judgment, rejecting the City of
Rochester’s argument that section 542(b)’s fee cap applies to
franchise fees only on cable services, not on cable modem service
revenues. The court noted that Rochester had not cited any supporting
case law and concluded that adopting the city’s position would be
contrary to congressional intent. In examining congressional intent,
the court looked to the relevant legislative history and the FCC’s
policy rationale for implementing a fee cap, namely, to avoid creating
a regressive and indirect tax on cable subscribers. The court also cited
Parish of Jefferson with approval. After noting that the
Communications Act specifically preempts any franchise agreement
provision inconsistent with federal law, the court found the agreement
in that case to be preempted. Time Warner Cable-Rochester, No.
03–CV–6257.
Finally, in Time Warner Cable, the franchise agreement required
the cable operators to pay a “franchise fee of five (5) per cent of the
company’s gross annual revenues,” with “gross annual revenues”
defined as “all revenue derived directly or indirectly *** from or in
connection with the operation of the cable communications system.”
Time Warner Cable, No. 05–994. The cable operators argued that
application of this provision to revenues from cable modem services
was preempted by the Communications Act. Relying on section
542(b), the City of Minneapolis argued that the Communications Act
governed franchise fees on only cable services, while cable modem
services were governed under a separate title.
In rejecting the city’s argument, the court noted that section
542(g)(1) so broadly defined a “franchise fee” that it included “a fee
of virtually any kind targeting cable providers.” Time Warner Cable,
No. 05–994. To adopt Minneapolis’ interpretation would create “an
end run around preemption” that is precluded by the FCC Ruling that
“cable modem service revenues are not to be included in the
assessment of franchise fees.” Time Warner Cable, No. 05–994.
Therefore, the court granted the cable operators’ motion to dismiss
that count of the complaint.
All the federal district courts cited in this appeal have found that,
in accordance with the FCC’s 2002 ruling, section 542 preempts the
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franchise fee provisions that include cable modem service revenues.
Thus, based on our independent analysis, and consistent with the
weight of federal authority, we conclude the FCC’s interpretation of
section 542 preempts the franchise fee provisions in the parties’
agreement. See U.S. Bank National Ass’n v. Clark, 216 Ill. 2d 334,
352 (2005). Accordingly, we need not address the defendants’
alternative argument that the franchise fee violates the Internet Tax
Freedom Act (47 U.S.C. §151 note (2000)).
D. The City’s Home-Rule Argument
Finally, the City asserts that the FCC Ruling can affect only its
federal authority to impose franchise fees derived from cable modem
service revenues and that it may continue to impose those fees under
its independent state law franchising authority and section 541(d)(2)’s
savings clause. We have already rejected the City’s savings clause
argument as unpersuasive and need not further address that issue. As
for its reliance on the state law authority inherent in its home-rule
powers, the City fails to cite any provision in the agreement, except
section 4, permitting the imposition of franchise fees on cable modem
revenues. Next, we examine the language in section 4 to determine
whether it supports the City’s imposition of a fee based on cable
modem service revenues.
Section 4 expressly states the “terms and conditions set forth in
this [section] are pursuant to the terms and conditions set forth in ***
[section] 4–280–170 of the Cable Ordinance as interpreted and
applied in accordance with Section 542 of the Communications Act.”
(Emphasis added.) Section 4–280–170(A) requires the franchisee to
pay “a franchise fee of not less than five percent of its annual gross
revenues.” (Emphasis added.) Chicago Municipal Code
§4–280–170(A) (1993). Similarly, section 4.1 requires the franchisee
to pay “a franchise fee of five percent (5%) of the annual gross
revenues” it receives. (Emphasis added.) Thus, both the language of
section 4.1 and section 4–280–170(A) of the Cable Ordinance
authorize the imposition of a single franchise fee of 5% of the
franchisee’s annual gross revenues. In addition, the agreement
expressly conditions the subject matter of that sole franchise fee on
its interpretation and application in section 542. As we have
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concluded in our discussion of section 542, the franchise fees
imposed cannot be derived from cable modem revenues.
Thus, in the absence of a separate, specifically cited section in the
agreement authorizing the imposition of a 5% fee on a franchisee’s
cable modem service revenues, there is no contractual basis for the
fees sought by the City. Without a contract provision imposing that
separate fee, the City has no authority, home rule or otherwise, to
require the defendants to pay the fee at issue in this appeal.
II. CONCLUSION
We hold that the FCC’s 2002 ruling that “revenue from cable
modem service would not be included in the calculation of gross
revenues from which the franchise fee ceiling is determined” (FCC
Ruling, 17 F.C.C.R. at 4851, ¶105) preempts the portion of the
parties’ agreement the City relies on to impose a 5% franchise fee on
the cable operators’ cable modem service revenues. Accordingly, the
trial court properly granted the defendants’ joint motion to dismiss
based on a finding of preemption, and the appellate court erred in
reversing the dismissal order and remanding the cause for further
proceedings.
Appellate court judgment reversed;
circuit court judgment affirmed.
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