Tcg New York, Inc., Tc Systems, Inc. And Teleport Communications D/B/A Tcny, Plaintiffs-Appellants-Cross-Appellees v. City of White Plains, Defendant-Appellee-Cross-Appellant

Citations: 305 F.3d 67; 2002 U.S. App. LEXIS 18739Docket: 01-7213

Court: Court of Appeals for the Second Circuit; September 12, 2002; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

TCG New York, Inc., TC Systems, Inc., and Teleport Communications, collectively referred to as TCG, initiated legal action against the City of White Plains, claiming that the city's franchising ordinance and proposed franchise agreements contravened § 253 of the Telecommunications Act of 1996, the Fourteenth Amendment, and relevant state law. The Southern District Court of New York, presided over by Judge Barrington D. Parker, Jr., ruled on the matter based on stipulated facts, rendering a mixed decision that favored both TCG and the City. Both parties subsequently appealed the decision. The appeals court affirmed part of the lower court's ruling while reversing another part. TCG, a telecommunications services provider, is a subsidiary of Teleport Communications Group, which is itself a wholly-owned subsidiary of AT&T Corporation. For its operations in White Plains, TCG sought authorization to construct telecommunications facilities and install equipment within the city's public rights-of-way, specifically to build new conduits and to install a fiber optic network using both new and existing conduits.

Negotiations between TCG and the City began in early 1992, but the critical discussions occurred after December 1, 1997, when the City Council enacted an ordinance allowing telecommunications carriers to seek approval for equipment placement in the City’s rights-of-way. TCG submitted an application for a revocable license in April 1998; however, revocable licenses are limited to internal business operations, while franchises permit broader telecommunications service sales. In June 1998, City Corporation Counsel recommended TCG apply for a franchise, providing a competitor's franchise agreement for reference. Following negotiations, TCG applied for a franchise in February 1999, abandoning its revocable license pursuit. TCG filed a lawsuit in June 1999, claiming the Ordinance and proposed franchise agreement infringed on its rights under the Telecommunications Act (TCA), the Fourteenth Amendment, and state law. In August 1999, the City proposed a new franchise agreement. The case examines the legality of both the Ordinance and the revised August Proposal. The TCA prohibits state or local regulations from obstructing telecommunications service provision, while allowing governments to manage public rights-of-way and charge fair compensation, provided it is publicly disclosed. The Ordinance mandates that telecommunications providers obtain a franchise or revocable license to use the City’s rights-of-way and outlines specific application disclosure requirements.

Disclosures mandated by the Ordinance in this action include details about the telecommunications services to be provided by the franchisee, proposed financing for constructing and operating the telecommunications system, and the applicant's qualifications. The Ordinance necessitates franchise agreements to define the offered services, maintain accurate records, and allow the City to inspect records and facilities. Key substantive requirements include the prohibition of franchise transfers without City consent and the inclusion of provisions deemed necessary for the public interest. The Common Council may evaluate the applicant's qualifications and the franchise's alignment with public interest before approval.

TCG challenges not only the Ordinance but also specific terms from the August Proposal, particularly a fee requiring TCG to pay five percent of its annual gross revenues to the City and provide free conduit space if new conduits are constructed. The Proposal also includes a "most favored vendee" clause, mandating TCG to offer the City services on terms as favorable as those provided to any other governmental or non-profit entity in Westchester County. To secure franchise fee payments, provisions require AT&T, TCG's parent company, to guarantee payments in case of default and mandate that financial records be maintained for City inspection.

Furthermore, the August Proposal restricts TCG from transferring ownership of more than twenty percent without City consent and necessitates prior approval for any network installations, including on private property. The City also required provisions that waive TCG's right to legally challenge the Proposal or the Ordinance.

Despite entering into franchise agreements with other providers, the City has not required a formal agreement from Verizon, which has historically provided free conduit space since 1919 without any franchise fee obligation. TCG contended that the Ordinance and the August Proposal violate § 253 by effectively prohibiting its telecommunications service provision, exceeding permissible regulation of public rights-of-way, and imposing unfair compensation requirements. Other constitutional and state law claims raised by TCG were dismissed by the district court and are not subject to appeal.

The district court applied § 253 of the Telecommunications Act (TCA) and determined that the Ordinance effectively prohibited TCG from offering telecommunications services. However, it found that certain aspects of the Ordinance and the August Proposal, including the licensing fee, were preserved under § 253(c)’s savings clause. The court ruled that significant portions of the Ordinance and August Proposal were invalid as they extended beyond managing public rights-of-way and unlawfully regulated telecommunications services. Both parties subsequently appealed the decision.

The court addressed its jurisdiction over TCG's claims, referencing a Sixth Circuit ruling that a federal court lacks subject matter jurisdiction if a statute does not create a private cause of action. TCG's claims under § 253 were acknowledged to imply a private cause of action, a point not contested by White Plains. The court also noted prior Supreme Court rulings indicating that the existence of a federal cause of action is not jurisdictional.

The doctrine of primary jurisdiction was considered, which aims to balance the relationship between courts and administrative agencies, ensuring consistency in regulation and utilizing agency expertise for fact-finding before legal claims are adjudicated. The Federal Communications Commission (FCC) submitted an amicus brief providing insight on jurisdictional questions, suggesting that jurisdiction might be concurrent with district courts under § 253, as the statute lacks exclusive jurisdiction language. However, this does not negate the applicability of the primary jurisdiction doctrine concerning the timing of judicial consideration.

Amicus briefs from an agency can help achieve consistency in law associated with the primary jurisdiction doctrine while mitigating delays typical of dismissals based on this doctrine. The FCC provided opinions on certain issues but refrained from definitive conclusions on others, including whether a gross revenue fee qualifies as "fair and reasonable compensation" and if compensation should be confined to local government costs or use an alternative formula. Although the FCC's input was not comprehensive, it offered valuable insights.

In evaluating primary jurisdiction, the stipulation of facts between parties is crucial. While agencies typically organize facts into a coherent structure, dismissal based on primary jurisdiction is seldom suitable when facts are undisputed. Local ordinance disputes related to § 253 are often straightforward factually, with legal questions posing the greater challenge. The primary concern for determining primary jurisdiction rests on ensuring regulatory consistency and uniformity. Given the limited scope of primary jurisdiction and that all issues presented are legal questions, alongside the FCC's partial views, dismissal on these grounds is not warranted.

Regarding the standard of review, the district court's conclusions are viewed de novo since the parties agreed on the facts. There is contention over whether to defer to FCC judgments under the Chevron framework. TCG, backed by the federal amicus brief, asserts that deference is necessary due to the FCC’s authority over Chapter 5 of Title 47. Conversely, White Plains argues that deference is unwarranted since § 253(d) excludes disputes involving § 253(c) from FCC jurisdiction. § 253(d) stipulates that the FCC must preempt any state or local statute or regulation if it finds a violation of subsections (a) or (b) after public notice and comment.

White Plains contends that the legislative history of 47 U.S.C. § 253(d) indicates it was meant to limit the FCC's jurisdiction regarding the interpretation of § 253(c). The previous version of subsection (d), which mandated the FCC to preempt conflicting local laws, was replaced by the current language. Several factors challenge White Plains's position: 

1. White Plains's argument that § 253(e) serves as a savings clause allowing for certain restrictions contradicts its claim of FCC jurisdiction limitation. The text suggests that the FCC can interpret § 253(e) to assess preemption protections.
   
2. The mandatory language in § 253(d), which requires the FCC to preempt local laws violating §§ 253(a) or (b), implies that the FCC's regulatory authority extends to areas not expressly mandated.

3. Reading § 253(d) as preventing FCC review of § 253(c) interpretations would create an unusual procedural situation where the forum for dispute resolution depends on a defendant's response rather than the original complaint.

While § 253(d) indicates that cases like this should not be dismissed under primary jurisdiction, it does not eliminate the need for FCC deference. The FCC's interpretations of § 253(c) warrant some level of consideration, though not necessarily Chevron deference. White Plains also argues that the statute's clarity negates the need for deference and that relevant FCC decisions are not determinative in this case, a point on which the court agrees without ruling on the statute's clarity.

White Plains's Ordinance has been determined to effectively prohibit telecommunications services provided by TCG, violating 47 U.S.C. § 253(a). The Ordinance allows the Common Council to reject applications based on subjective "public interest factors," which constitutes a form of prohibition. Additionally, delays in processing TCG's franchise request further hinder its ability to provide services, indicating that the Ordinance creates significant obstacles to fair competition.

While the Ordinance as a whole is found to violate § 253(a), a separate analysis under § 253(c) is necessary to assess whether specific provisions can be justified as managing public rights-of-way without infringing on legitimate municipal interests. The August Proposal includes a requirement for TCG to pay five percent of its gross revenues from business in White Plains to the City, raising questions about whether this fee qualifies as "fair and reasonable compensation" under § 253(c). The definition of "fair and reasonable" remains unclear, particularly regarding whether it should be limited to cost recovery or if it can include reasonable rent, as argued by White Plains.

Statutory language regarding "compensation" is not definitive, as it can encompass more than mere costs. The term "compensation" extends to wages, salaries, and rental payments, indicating its flexible usage in different contexts. While "compensatory" damages aim to offset costs incurred due to torts, the term "compensation" can also imply broader interpretations, including capital costs and opportunity costs. This ambiguity suggests that Congress's use of "compensation" may imply the permissibility of gross revenue fees, but does not conclusively resolve the issue. 

Judicial interpretations reveal a split among circuits. The Sixth Circuit upheld a four-percent gross revenue fee, applying a "totality of the circumstances" approach and deeming the fee "fair and reasonable" based on usage, market conditions, and prior agreements. The court distinguished between the "fair and reasonable" compensation standard of § 253 and the "just and reasonable" standard of the Pole Attachment Act, emphasizing that "compensation" differs from mere costs. In contrast, the Ninth Circuit criticized "non-cost-based fees" as "objectionable," but this remark was made in a context that focused on preemption and may not carry significant weight as it was not central to the case's holding.

TCG contends that "fair and reasonable compensation" should be interpreted to include only costs, excluding gross revenue fees, based on previously repudiated dormant Commerce Clause cases, specifically citing *Atl. Pac. Tel. Co. v. City of Philadelphia*. TCG argues that these cases established that reasonable compensation is limited to cost recovery, and despite being overruled, Congress should be presumed to have intended a similar interpretation in the current legal framework. TCG references *Northwest Airlines, Inc. v. County of Kent* to support the notion that overruled Commerce Clause precedents can inform the reasonableness of fees. However, the context of *Northwest Airlines* is distinct, as it involved interpreting a statute intended to supersede prior case law, unlike TCG's request to interpret the 1996 Act based on outdated, irrelevant precedents.

Moreover, the rationale behind § 253(c) regarding "fair and reasonable compensation" differs fundamentally from the dormant Commerce Clause cases, which aimed to prevent disguised taxation. Section 253(c) is designed to prevent monopolistic pricing by local governments, which could impose excessive fees for access to rights-of-way necessary for telecommunications services. 

The court notes that determining whether "reasonable compensation" can include gross revenue fees is complex, but it chooses not to address this issue at this time. Additionally, regarding the treatment of Verizon by White Plains, the court disagrees with the City’s assertion that its differential treatment of Verizon is "competitively neutral and nondiscriminatory" as required by § 253(c), highlighting the city's historical relationship with Verizon and the in-kind compensations provided.

Disparate treatment in fees is not "competitively neutral and nondiscriminatory," as determined by the district court. Fees should be assessed based on future service costs rather than sunk costs, as emphasized in Verizon Communications Inc. v. FCC, where "just and reasonable" rates relate to forward-looking costs. Verizon's sunk costs for conduits in White Plains do not impact future service pricing, and it has already been compensated for those costs through its previous monopoly. Requiring TCG to pay five percent of its gross revenues while exempting Verizon undermines competitive neutrality, allowing Verizon to either lower prices or enhance profit margins at TCG's expense, contradicting the pro-competitive objectives of the Telecommunications Act (TCA). 

The Sixth Circuit's ruling in TCG Detroit v. City of Dearborn is not directly applicable to White Plains, as Dearborn attempted to impose a fee on Ameritech equivalent to what TCG paid, which was invalidated for state law reasons. In contrast, White Plains has not sought to charge Verizon similarly. Furthermore, the Sixth Circuit's conclusion that fees must only be "competitively neutral" to the extent allowed by state law misinterprets § 253, which prohibits non-competitively neutral fees regardless of municipal intent. The court's assertion that TCG did not demonstrate Ameritech's competitive disadvantage overlooks the inherent lack of competitive neutrality when one competitor is exempt from fees.

The provisions of § 253 are flexible and do not mandate equal treatment among telecommunications service providers. An earlier draft of the bill aimed to prohibit local governments from differentiating fees among providers, but this was removed, indicating that franchise fees can vary. Municipalities may account for differing costs and usage scales of rights-of-way and can negotiate in-kind compensation agreements. Most-favored-vendee clauses—requiring providers to offer preferential rates to municipalities—are potentially acceptable, allowing cities to negotiate different terms with various providers as long as there is rough parity among competitors.

However, municipalities cannot impose unequal compensation requirements on service providers. The City of White Plains attempted to extract varied compensation from TCG while exempting Verizon from similar obligations, relying only on past conduit space agreements. For the City to impose fees or benefits on TCG, it must also require comparable arrangements from Verizon, considering their operational differences. Compensation structures must remain competitively neutral and nondiscriminatory.

The five-percent gross revenue fee provisions outlined in the August Proposal are invalid under § 253(c), leading to the reversal of the district court's decision. Provisions requiring financial records and parent guarantees from TCG are moot due to the fee's invalidation. The court also affirms the invalidation of the most-favored-vendee clause, which is deemed non-competitively neutral since Verizon provided no compensation. Lastly, the court will evaluate non-fee-related provisions of the City's plan regarding their compliance with § 253(c) and their purpose in managing public rights-of-way.

The district court invalidated several provisions of the Ordinance related to telecommunications, determining they exceeded the city's authority to manage rights-of-way. Provisions requiring TCG to maintain records and allow inspections were limited to rights-of-way management, which White Plains did not appeal. Various subsections mandating disclosures about telecommunications services, financing, and franchise qualifications were struck down as irrelevant to rights-of-way regulation. Additionally, provisions allowing the Common Council to consider public interest factors in franchise decisions were invalidated for granting excessive discretion contrary to federal law. The court also invalidated sections of the August Proposal that required prior approval for TCG's network locations, as they restricted development on private property. Record-keeping provisions were also invalidated without challenge from White Plains. Sections that attempted to waive TCG's right to contest illegal franchise provisions were deemed unenforceable and improper, circumventing federal law. The district court upheld restrictions on franchise transfers, but this was reversed.

The Ninth Circuit has invalidated provisions that excessively regulate telecommunications rights-of-way, citing that they extend "far beyond" necessary regulations. It acknowledges that a more limited franchise transfer provision could be acceptable if applied neutrally to all franchisees, such as rejecting a transferee based on their ability to pay required fees. However, White Plains' broad provision requiring approval for any new telecommunications provider is invalid, as it imposes undue restrictions regardless of whether the new provider's services differ from existing ones. Consequently, several sections of the Ordinance and the August Proposal are deemed contrary to section 253(a) and not protected by section 253(c). Specifically, the invalidated sections include various subsections from the Ordinance and multiple sections from the August Proposal. Additionally, the August Proposal's Section 16 is rendered moot due to the invalidation of a related five-percent gross revenue fee. The court affirms some aspects while reversing others, awarding costs to TCG.