On July 12, 2017, the U.S. Court of Appeals for the Sixth Circuit vacated two parts of the Federal Communications Commission’s decisions that had limited the ability of local franchising authorities (LFAs) to regulate non-cable services provided over a “mixed use” cable system, and to impose certain in-kind / non-cash assessments on cable operators. The decision in Montgomery County et al. v. FCC remanded the case to the FCC and ordered it to provide adequate reasoning for the vacated decisions. The Sixth Circuit also rejected certain LFA challenges to the FCC’s rules governing cable franchises.

The FCC Franchising Orders. The Court’s decision comes ten years after the FCC first imposed wide-ranging limits on LFA regulation of new, competitive cable franchisees in the so-called 621 Order.

The FCC subsequently issued a Second Report and Order extending many of the same 621 Order limitations to LFA regulation of incumbent cable operators. These limitations included: (1) the prohibition on LFAs regulating non-cable services in a cable franchise, and (2) the determination that in-kind / non-cash franchise obligations must be counted as franchise fees subject to the federal 5 percent fee cap. LFAs petitioned the FCC to reconsider the Second Report and Order. After considerable delay, the FCC finally rejected most of the challenges in its 2015 Reconsideration Order. The Court’s decision addresses both the Second Report and Order and the Reconsideration Order.

Assuming no party seeks rehearing from the Sixth Circuit, the case will be remanded to the FCC for further proceedings on these two issues.

Mixed-Use Networks. In the 621 Order, the FCC determined that LFAs have no authority under Title VI of the Communications Act to regulate the provision of services other than cable services offered over “mixed-use” cable systems by new cable competitors – primarily telephone companies, like Verizon and AT&T. The FCC based that ruling on the definition of a “cable system” in the Communications Act, which specifically excludes “a facility of a common carrier which is subject, in whole or in part, to the provisions of Title II…except that such facility shall be considered a cable system…to the extent [it] . . . is used in the transmission of video programming directly to subscribers…” In the Second Report and Order, the Commission extended this preemptive ruling to the provision of non-cable services over incumbent cable systems.

On appeal, the Sixth Circuit ruled that the FCC had not adequately justified the extension of the “mixed-use” rule to incumbent cable systems. The Court directed the FCC to provide a “valid statutory basis, if there is one, for the rule as so applied.”

This aspect of the decision should not change much as a practical matter, at least for now. The primary non-cable service that cable operators offer today is broadband internet access service (BIAS). Under the FCC’s 2015 Open Internet Order, cable operators providing BIAS are deemed be providing a “telecommunications service” under Title II of the Communications Act, and section 621 of the Act affirmatively prohibits LFA regulation of telecommunications services in a cable franchise (except to the extent they are provided over an institutional network or “I-Net”). Even if the FCC reverts to its former definition of BIAS as an “information service” (not governed by Title II), the Court’s decision simply requires the FCC to revisit its analysis. The FCC could address (in either that proceeding or this remand) the permissible scope of LFA regulation of cable-provided BIAS.

“In-Kind” Cable-Related Exactions. The Sixth Circuit also vacated the FCC’s Reconsideration Order determination that “franchise fees” under section 622 include all “in-kind payments.” The initial 621 Order ruled that in-kind payments unrelated to the provision of cable service must be counted as franchise fees. The Reconsideration Order expressly clarified/expanded that ruling to include all in-kind payments required by a franchise, even if “cable-related.” The Court concluded that the FCC gave “no explanation” as to how the statute supports its interpretation in violation of the Administrative Procedure Act. Accordingly, the Court directed that “on remand, the FCC should determine and explain anew whether, and to what extent, cable-related [non-cash] exactions are ‘franchise fees’ under the Communications Act.”

It is important to note that the Court left intact most of the FCC’s rulings on franchise fee limitations. For example, the Court did not consider or disturb the FCC’s ruling that a variety of franchise-related costs (e.g., application fees, attorneys’ fees and consultants’ fees) must count towards the five-percent federal franchise fee cap and cannot be excluded from that cap as charges “incidental” to the franchising process. More important, the decision does not affect the exclusion of PEG-related capital costs from the 5 percent cap, and the inclusion of PEG-related operating expenses within the 5 percent cap. On remand, the FCC will have the opportunity to justify its decision under the statute that all in-kind payments required by a cable franchise (even if cable-related) are to be counted towards the 5 percent cap as franchise fees.

Challenges Rejected. The Court upheld parts of the FCC’s Second Report and Order, rejecting three additional LFA challenges. First, the Court rejected LFA arguments that because the Commission preempted local “level playing field” laws or franchise provisions, it should also have preempted “most favored nation” (MFN) clauses in local cable franchises to prevent a speculative “downward spiral” in new and renewed agreements. Thus, MFNs in franchise agreements remain effective. Second, the Court affirmed the FCC’s decision that the limitations on franchising authority in the Second Report and Order do not apply to state level cable franchise laws. And finally, the Court rejected LFA arguments that the FCC failed to satisfy the requirements of the Regulatory Flexibility Act.