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City of Eugene v. Comcast of Oregon II, Inc.

Court of Appeals of Oregon

May 21, 2014

CITY OF EUGENE, an Oregon municipal corporation, Plaintiff-Appellant,
v.
COMCAST OF OREGON II, INC., an Oregon corporation, Defendant-Respondent

 Argued and Submitted July 17, 2013

Page 1052

Lane County Circuit Court. 160803280. Karsten H. Rasmussen, Judge.

Susan D. Marmaduke argued the cause for appellant. With her on the briefs were William F. Gary, Sivhwa Go, Jona Maukonen, and Harrang Long Gary Rudnick PC.

Timothy R. Volpert argued the cause for respondent. With him on the briefs was Davis Wright Tremaine LLP.

Before Duncan, Presiding Judge, and Wollheim, Judge, and Schuman, Senior Judge.

OPINION

Page 1053

[263 Or.App. 118] SCHUMAN, S. J.

This case involves a dispute between the City of Eugene and Comcast of Oregon II, Inc. (Comcast) over whether the city can impose certain fees on revenue that Comcast earned by providing broadband Internet service in Eugene. According to the city, Comcast's broadband Internet service is a " telecommunications service" under the city's telecommunications ordinance, and the city is therefore entitled to collect a two-percent registration fee and seven-percent license fee that the ordinance imposes on gross revenues derived from telecommunications services within the city. Comcast, for its part, claims that the definition of " telecommunications services" in the ordinance was never intended to include Internet access services and, further, that the city has discriminated against Comcast by treating it differently from all other Internet access service providers in Eugene. The trial court agreed with Comcast for the most part, ruling that its broadband Internet services were not " telecommunications services" under the ordinance and, alternatively, that the city's enforcement of the ordinance against Comcast would violate the federal Internet Tax Freedom Act (ITFA) and state and federal constitutional protections. For the reasons that follow, we affirm the trial court's judgment with respect to the registration fee, collection of which is barred by the ITFA, but we reverse and remand with respect to collection of the license fee.

I. BACKGROUND

We will reserve some discussion of the facts for a more focused treatment of particular assignments of error, but we provide the following general background to frame the issues on appeal. We take the facts from the trial court's findings, which the parties do not challenge on appeal, and we supplement them with the undisputed regulatory backdrop and procedural history of the case.[1] Because the sequence of events is relevant, we set out the facts in roughly chronological order.

[263 Or.App. 119] A. Regulatory Background

1. Comcast is granted a cable franchise in Eugene.

In 1991, the City of Eugene granted Comcast a nonexclusive franchise to develop, install, and operate a cable communications system in the city's rights-of-way.[2] The franchise called for Comcast to pay the city a fee in the amount of five percent of

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Comcast's revenue from services within the franchise area. Pursuant to the franchise, Comcast provided cable television services in Eugene and paid the city the five-percent franchise fee on revenue derived from those television services.

2. Congress passes the Telecommunications Act.

In 1996, Congress passed the Telecommunications Act, which amended the Communications Act of 1934 (collectively, " the Act" ). The Act imposes common-carrier duties on providers of " telecommunications service," 47 U.S.C. § 153(51),[3] but not on providers of " information service." The Act defines " telecommunications service" as " the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used." 47 U.S.C. § 153(53). It then defines the term " telecommunications" as " the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received." 47 U.S.C. § 153(50). " Information service," by contrast, is defined as " the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications." 47 U.S.C. § 153(24).

[263 Or.App. 120] 3. Eugene adopts its telecommunications ordinance.

That same year, 1996, the Eugene City Council adopted its Telecommunications Vision and Policies. As described in that document, the city envisioned a " coordinated regional information infrastructure that provides accessible and affordable high-speed connectivity for citizens, public institutions, and businesses and is constructed in a manner that best serves the public interest." The city identified, as one of its policies, that " [p]ublic inconvenience and disruption stemming from the installation, maintenance, and operation of telecommunications facilities shall be minimized and fully compensated."

The following year, in April 1997, the city council adopted the ordinance at issue in this case, Ordinance No. 20083 (" the ordinance" or " telecommunications ordinance" ). The ordinance imposes two fees that are relevant here. First, the ordinance requires " operators" -- i.e., those " who provide[] telecommunications services" --to register with the city and pay an annual registration fee of two percent of revenues for those telecommunications services. Eugene City Code (ECC) 3.005; ECC 3.405; ECC 3.415(1). Second, the ordinance requires operators to obtain a license before locating any facility in the city right-of-way to " [c]onstruct a telecommunications facility or provide telecommunications service." ECC 3.410. Operators who are required to obtain a license must pay an annual license fee " in the amount of 7% of the licensee's gross revenues derived from telecommunications activities within the city, to compensate the City for the use of the rights-of-way." ECC 3.415(2). The license fee is separate from, and in addition to, the registration fee.

As described above, both the license fee and registration fee apply to providers of " telecommunications services." The ordinance includes the following definition of that term:

" Telecommunications services. The transmission for hire, of information in electromagnetic frequency, electronic or optical form, including, but not limited to, voice, video, or data, whether or not the transmission medium is owned by the provider itself, and whether or not the transmission medium is wireline or wireless. Telecommunications service includes all forms of telephone services and voice, data [263 Or.App. 121] and video transport, but does not include: (1) cable [television] service; (2) OVS service; (3) private communications system services; (4) over-the-air radio or television broadcasting to the public-at-large from facilities licensed by the Federal Communications Commission or any successor thereto; and (5) direct-to-home

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satellite service within the meaning of Section 602 of the Telecommunications Act of 1996."

ECC 3.005.

Both before and after the ordinance was adopted, there were questions as to whether it was intended to reach Internet service providers (ISPs), which, at that point in time, were predominantly " dial-up" ISPs that depended on local telephone companies to transmit signals. During a public hearing on whether the city council should adopt the ordinance, the general manager of one of those dial-up ISPs, Eugene FreeNet, asked city council members to address whether the proposed amendments would apply to Internet service providers. Randy Kolb, who was the staff lead to the council committee that developed the ordinance, responded at the hearing by stating that Internet service providers would not be affected by the proposed fees. One of the council members then requested that the language of the ordinance be amended to make it clear that Internet service providers would not be affected by the ordinance, but no such amendments were made.[4]

After the ordinance was adopted, a city employee prepared a " white paper" to guide the city's application of the ordinance. The white paper, which was reviewed by the city's legal counsel, stated in its first paragraph that " Internet and radio/television broadcasting are not applicable." (Emphasis in original.)

4. Congress enacts the Internet Tax Freedom Act.

Around the same time that the City of Eugene was adopting its telecommunications ordinance, Congress was [263 Or.App. 122] addressing the specific question of taxation of the Internet. In 1998, one year after the city adopted its telecommunications ordinance, Congress enacted the ITFA, codified in a note following 47 U.S.C. § 151. The ITFA, in oversimplified terms, does two things. First, it prevents state and local governments from imposing " taxes on Internet access, unless such tax was generally imposed and actually enforced prior to October 1, 1998." ITFA § 1101(a)(1). Second, the ITFA prohibits state and local governments from imposing " multiple or discriminatory taxes on electronic commerce." Id. at § 1101(a)(2).

In February 1999, the city's employees, including Kolb and Pam Berrian, who was the city's telecommunications and cable program manager, submitted a report to the Eugene City Council that addressed the status of the telecommunications ordinance and, in particular, mentioned the newly enacted ITFA. The report states that the subject of " Internet taxation" had been capturing attention on several fronts, but that " [t]hat issue will not be discussed here since Ordinance 20083 (the telecommunications ordinance.) is not inclusive of Internet activities."

5. Comcast begins offering broadband Internet service in Eugene.

On October 26, 1999, Comcast began providing cable modem service, a broadband Internet access service, to customers in Eugene. The technical aspects of that service will be discussed later in more detail, but Comcast essentially provides its subscribers with Internet access by delivering Internet Protocol (IP) packets to and from the Internet and by providing an associated set of services, such as assigning IP addresses. Unlike the dial-up ISPs that preceded it, which depended on transmission facilities owned by other providers (such as telephone companies) to deliver IP packets, Comcast owns its own transmission facilities-- i.e., the cable lines that it used to provide cable television under its franchise agreement with the city. Beginning in 1999, when it began providing broadband Internet services, Comcast paid a five-percent fee on those services pursuant to the franchise agreement. That changed in 2002, however, [263 Or.App. 123] as the result of a ruling by the Federal Communications Commission (FCC).

6. The FCC rules that cable modem services are not telecommunications services.

Although Comcast did not begin providing cable modem services in Eugene until 1999,

Page 1056

questions had arisen elsewhere over whether cable modem services were " telecommunications services" or " information services" for purposes of the 1996 Federal Telecommunications Act. In 2002, the FCC issued a declaratory ruling in which it concluded that cable modem services are not " telecommunications services" under the Act. In re Inquiry Concerning High-Speed Access to the Internet Over Cable and Other Facilities, 17 FCC Rcd 4798 (2002). (As we will later discuss, the United States Supreme Court eventually held that the FCC's interpretation of the Telecommunications Act was a reasonable one and was therefore entitled to deference. Nat'l Cable & Telecomms. v. Brand X, 545 U.S. 967, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005).) In the wake of the FCC's 2002 declaratory ruling, Comcast stopped paying any franchise fees to the City of Eugene for cable modem services and, from that point forward, rebuffed the city's assertions that franchise fees were owed on those services.

B. Procedural History

1. The city attempts to enforce its ordinance against Comcast.

Comcast and the city entered into a new franchise agreement, effective November 2007. A few months later, the city filed its complaint in this action to collect fees based on Comcast's cable modem services. However, this time, the city was not seeking to collect under the franchise agreement, but, rather, based on the city's telecommunications ordinance. That is, the city alleged, among other things, that Comcast owed the two-percent registration fees and the seven-percent license fees under the ordinance dating back to 1999, when Comcast began providing cable modem services in Eugene.

[263 Or.App. 124] 2. The trial court rules that cable modem services are " telecommunications services" under the city's ordinance and rejects Comcast's arguments that the registration and license fees are barred as a matter of law by the ITFA.

The parties filed cross-motions for summary judgment with respect to various issues raised by the city's complaint, including whether cable modem services are within the definition of " telecommunications services" in the ordinance. That question, in turn, reduced to whether Comcast engaged in " transmission for hire" --part of the definition of " telecommunications services" --when providing cable modem services. The trial court ruled in the city's favor on that question, applying dictionary definitions of " transmission" and " for hire" to conclude that, by sending and receiving signals for remuneration, Comcast had engaged in " transmission for hire" and, consequently, had provided telecommunications services subject to the ordinance.

Alternatively, Comcast argued that, even if the ordinance were to apply to its cable modem services, then the registration and license fees are barred by the ITFA's tax moratorium and ban on discriminatory taxes; the license fees are franchise fees and therefore preempted by a provision of the federal Cable Act, 42 U.S.C. § 542(b); the franchise agreement excuses Comcast from obtaining a right-of-way and paying the license fees; and the city's selective enforcement of the ordinance violates constitutional protections against discriminatory treatment. The trial court ruled as a matter of law against Comcast on the bulk of those issues, leaving two questions for trial: (1) whether the annual registration fees had been generally collected before October 1, 1998, thereby excepting them from the moratorium on Internet taxes; and (2) whether the city, in enforcing the ordinance against Comcast but not other ISPs, had discriminated against Comcast in violation of state and federal constitutional protections.

3. Comcast offers expert testimony at trial regarding Internet access services.

The parties then proceeded to trial before the court on those two remaining questions. The city offered testimony [263 Or.App. 125] by Kolb and Berrian to explain why the city had attempted to collect registration and license fees from Comcast but not other ISPs. Kolb explained that the city was not interested in " things like modems, which merely translate analog to digital," but rather was " always after the physical lines that existed in the city of Eugene and in the radio communications

Page 1057

that were located in the city of Eugene that carried this traffic. * * * We were interested in the highway."

Among its witnesses, Comcast called Dale Hatfield, an expert in the field of telecommunications. Hatfield explained that Internet access service is provided by using " transmission service," but that Internet access service is not itself transmission service. He used the analogy of train transportation. The " transmission facility," he testified, " would be the rail bed." The transmission service " might be the engine and flatbed cars," and the " Internet packets would be those shipping containers that go onto the flatbed." According to Hatfield, Kolb's description, by way of related analogy, of what the city intended to tax--the highway--was separate and apart from the Internet access service that rides on top of the highway.

4. The trial court reconsiders its ruling and changes course.

After the parties put on their respective cases, Comcast asked the court to reconsider its summary judgment rulings in light of the development of the record at trial. Primarily, Comcast asked the court to reconsider its earlier ruling that cable modem services involved " transmission for hire" under the ordinance. Comcast argued that the court had erred in relying on the ordinary meanings of " transmission" and " for hire," because " transmission for hire" is a term of art in the telecommunications industry, as demonstrated by Hatfield's testimony.

The trial court agreed with Comcast and, over the city's objection, reconsidered its earlier interpretation of the ordinance. This time, rather than look to the ordinary meanings of the terms " transmission" and " for hire," the court looked to Hatfield's testimony and the meaning of " telecommunications" under state and federal laws. The court [263 Or.App. 126] ultimately " adopt[ed] Mr. Hatfield's testimony and conclud[ed] that Internet access is not a transmission for hire in the telecommunications industry, and thus cable modem access is not subject to the Ordinance." The court further reasoned that " telecommunications" should mean the same thing under the ordinance as it does under state and federal laws, notwithstanding the fact that those laws use language different from the ordinance. The court explained:

" This Court is persuaded that telecommunications services in Eugene should be defined in the same way as the Oregon Legislature and Congress define telecommunications services. Although, Eugene's Ordinance defined telecommunications very broadly, this Court does not understand telecommunications to be different in Eugene than it is in the rest of the country. Thus, in Eugene, Comcast is not offering a 'transmission for hire' when it offers Internet access, but is offering the end product of data manipulation."

Although the trial court's ruling regarding application of the ordinance was dispositive, the court nonetheless proceeded to address other issues to avoid the necessity of a remand after appeal. The court declined to reconsider its ruling that the license fee was a tax under the ITFA, but did reconsider the legality of the registration fee under that statute, concluding that it was discriminatory and therefore barred by the ITFA. As for the two issues that had been set for trial, the court ruled that the registration fee had not been generally collected from Internet access providers before October 1, 1998, and was therefore barred by the ITFA for that reason as well. Additionally, the court concluded that, for purposes of the state and federal constitutions, " Comcast has demonstrated an intentional and systematic pattern of discrimination by the City because the City has not collected the registration or ...


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