United States Court of Appeals
For the First Circuit
No. 05-1400
PUERTO RICO TELEPHONE COMPANY, INC.,
Plaintiff, Appellee,
v.
MUNICIPALITY OF GUAYANILLA
and THE HONORABLE EDGARDO ARLEQUÍN VÉLEZ,
MAYOR OF THE MUNICIPALITY OF GUAYANILLA,
Defendants, Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Salvador E. Casellas, U.S. District Judge]
Before
Torruella, Lipez, and Howard,
Circuit Judges.
Alfredo Acevedo Cruz, with whom Law Offices of Pedro E. Ortiz
Álverez, PSC were on brief, for appellants.
Andrew G. McBride, with whom John E. Barry, Joshua S. Turner,
and Wiley Rein & Fielding LLP were on brief, for appellees.
Eyck O. Lugo, with whom Cristina S. Belaval-Burger and
Martínez Odeall & Calabria were on brief, for amicus curiae
Municipality of Caguas.
June 7, 2006
LIPEZ, Circuit Judge. This appeal requires us to apply
§ 253 of the Federal Telecommunications Act ("TCA"), 47 U.S.C.
§ 253, which sets limits on the authority of state and local
governments to regulate telecommunications providers. The
Municipality of Guayanilla ("the Municipality") enacted an
ordinance imposing a 5% gross revenue fee on telecommunications
providers for their use of public rights of way1 within the
Municipality. Puerto Rico Telephone Company ("PRTC") filed suit
against the Municipality and Mayor Edgardo Arlequín-Vélez in
federal district court, seeking a declaratory judgment that the
ordinance is preempted by TCA § 253. PRTC also argued that the
ordinance is preempted by the Puerto Rico Telecommunications Act,
Law No. 213 of September 12, 1996, 27 P.R. Laws Ann. § 265 ("Law
213"). The district court granted PRTC's motion for summary
judgment, holding that the ordinance was preempted by § 253. We
affirm.
I.
On November 1, 2001, Mayor Arlequín-Vélez signed into law
Ordinance No. 14, Series 2001-2002, to "regulate and establish
charges for the use and maintenance of the rights of way of public
properties and utilities of the Municipality of Guayanilla."
1
The typical "use of public rights of way" by telecommunications
providers includes, for example, the placement of utility poles on
public property and the installation of conduits and other
equipment under public streets.
-2-
Ordinance No. 14 required telecommunications providers to pay a
monthly fee, consisting of 5% of their gross revenues earned from
doing business in the Municipality. Under Ordinance No. 14, the 5%
fee appeared to apply to "1) revenue from calls within the
Municipality; 2) revenue from calls originated from a phone within
the Municipality and received elsewhere; and 3) revenue from calls
originated elsewhere and received within the Municipality." P.R.
Tel. Co. v. Municipality of Guayanilla, 283 F. Supp. 2d 534, 545
(D.P.R. 2003) ("P.R. Tel. Co. I").
On June 13, 2002, PRTC was served with a letter from the
Finance Director of the Municipality, asking PRTC to pay the amount
due pursuant to Ordinance No. 14 from November 1, 2001 to date. On
August 6, 2002, PRTC filed an action in federal district court
against the Municipality and Mayor Arlequín-Vélez seeking a
declaratory judgment that the ordinance was preempted by TCA § 253.
PRTC also argued that the ordinance was preempted by Law 213, the
state law counterpart of the TCA.
The Municipality filed a motion to dismiss PRTC's
complaint, arguing that Ordinance No. 14 was permissible under TCA
§ 253 and Law 213 because the 5% gross revenue fee was "fair and
reasonable compensation"2 as a matter of law. The district court
denied the motion, stating that the fee may violate § 253 and Law
2
This language refers to § 253(c) of the TCA, discussed in detail
in Part II.B.2 of this opinion.
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213 and that discovery was necessary because "the parties are yet
to present any concrete evidence on the fairness of the price being
charged." P.R. Tel. Co. I, 283 F. Supp. 2d at 545. The parties
conducted discovery. PRTC filed a motion for reconsideration of
the motion to dismiss, arguing that it was entitled to declaratory
relief. PRTC also filed a motion for summary judgment.
During the pendency of the proceedings, the Municipality
amended Ordinance No. 14 by enacting Ordinance No. 40.3 Under
3
Ordinance No. 40 imposes
a charge of five percent (5%) of the gross
income from any invoicing that the
telecommunications services may have for
telephone calls originating in the
Municipality of Guayanilla and which make use
of the rights of way of said municipality. . .
.
The income subject to the payment of five
percent (5%) . . . shall be calculated from
January 1st through December 31st of every
year. On or before the April 15th subsequent
to said calendar year, the telecommunications
providers must submit to the Municipality of
Guayanilla an annual certification of its
income, which are [sic] subject to the payment
of five percent (5%) . . . . Together with
said certification, the telecommunications
service providers shall submit the
corresponding payment of five percent (5%) . .
. .
The telecommunications service providers shall
submit . . . a certification specifying the
locations where they make use or physical
occupancy exists of the rights of way of the
Municipality of Guayanilla.
Municipality of Guayanilla Ordinance No. 40, Series 2003-2004.
-4-
Ordinance No. 40, the 5% fee on gross revenues applies only to
revenue from calls originating within the Municipality. Ordinance
No. 40 also replaces Ordinance No. 14's monthly reporting
requirement with an annual reporting requirement and requires
telecommunications providers to certify places within the
Municipality where they use or physically occupy rights of way
controlled by the Municipality.
On January 28, 2005, the district court granted summary
judgment in favor of PRTC and denied PRTC's motion to reconsider
the motion to dismiss as moot. Based on its review of the summary
judgment record, the district court concluded that Ordinance No. 40
violates § 253(a) because the estimated cost to PRTC under the
ordinance, particularly if other municipalities adopt similar
ordinances, "may very well result in making the offering of
telecommunications service prohibitive." P.R. Tel. Co. v.
Municipality of Guayanilla, 354 F. Supp. 2d 107, 111 (D.P.R. 2005)
("P.R. Tel. Co. II"). The district court then concluded that the
ordinance was not saved by the safe harbor provision of § 253(c)
because the Municipality did not meet its burden of establishing
that its chosen fee constituted "fair and reasonable compensation."
Id. at 112. The district court entered judgement declaring
Ordinance No. 40 null and void. The Municipality and Mayor
Arlequín-Vélez appeal.
-5-
II.
We review the grant of a summary judgment motion de novo.
Hadfield v. McDonough, 407 F.3d 11, 15 (1st Cir. 2005). Summary
judgment is proper "if the record, read favorably to the non-moving
party, reflects no genuine issues of material fact and the
undisputed facts indicate that the movant is entitled to judgment
as a matter of law." Id.
Appellants raise three main arguments. First, they argue
that the district court erred in determining that PRTC established
that Ordinance No. 40 violates TCA § 253(a). Second, they argue
that the district court improperly placed the burden of
establishing the applicability of the "safe harbor" provision of
§ 253(c) on the appellants. Third, they argue that the district
court misapplied the appropriate test for determining whether
Ordinance No. 40 is "fair and reasonable" under § 253(c).
In response, PRTC argues that the district court
correctly applied the TCA in concluding that federal law preempted
Ordinance No. 40. PRTC also argues that, in the alternative, we
can affirm the judgment based on Law 213's preemption of the
ordinance. See Ingram v. Brink's, Inc., 414 F.3d 222, 228 (1st
Cir. 2005) (explaining that we may affirm a district court's
judgment on the basis of "any ground manifest in the record"
(internal quotation marks and citations omitted)). We examine that
contention first.
-6-
A. Law 213
Courts have applied different principles in approaching
preemption claims based on both the TCA and state law. Citing
constitutional avoidance concerns, some courts have held that they
should first decide whether an ordinance is preempted by state law
before considering whether it is preempted by the TCA. See Qwest
Corp. v. City of Santa Fe, 380 F.3d 1258, 1267 n.7 (10th Cir. 2004)
("Because federal preemption of a state or local law is premised on
the Supremacy Clause of the United States Constitution and because
of the longstanding principle that federal courts should avoid
reaching constitutional questions if there are other grounds upon
which a case can be decided, we first decide whether the ordinances
are preempted by [] state law before considering whether they are
preempted by § 253." (internal quotation marks and citation
omitted)); BellSouth Telecomms., Inc. v. Town of Palm Beach, 252
F.3d 1169, 1176 (11th Cir. 2001) (same); Bell Atl. Md., Inc. v.
Prince George's County, 212 F.3d 863, 866 (4th Cir. 2000) (vacating
and remanding case, concluding that district court committed
reversible error "by deciding the constitutional question of
preemption in advance of considering the state law questions upon
which the case might have been disposed of").
By contrast, one court has stated that the doctrine of
constitutional avoidance is inapplicable to questions of federal
preemption. See N.J. Payphone Ass'n v. Town of W. N.Y., 299 F.3d
-7-
235, 239 n.2 (3d Cir. 2002). Thus, as that court explains, it is
appropriate in some circumstances to decide a case based on federal
preemption notwithstanding state law claims:
[T]he basic question involved in [preemption
claims under the Supremacy Clause] is never
one of interpretation of the Federal
Constitution but inevitably one of comparing
two statutes. For this reason, preemption
questions are treated as "statutory" for
purposes of our practice of deciding statutory
claims first to avoid unnecessary
constitutional adjudications. . . .
While principles of federalism and comity are
to some extent implicated, we are not
convinced that they are better served by
ruling on a state law issue intimately
concerned with local budgeting and the
apportionment of powers between state and
local governments than by interpreting a
federal statute that was expressly intended by
Congress to preempt certain types of local
ordinances touching on issues within its power
to regulate. Therefore, we see no reason to
address the state law issues, which have not
been extensively briefed, in preference to the
TCA claim that is the focus of this appeal.
Id. (internal quotation marks and citations omitted).
This case does not require us to adopt definitively
either of these approaches. Law 213 states that "departments,
agencies, public corporations, municipalities, and political
subdivisions of the Government of Puerto Rico may charge reasonable
fees for the use of their properties, rights of way and easements
pursuant to the regulations of the Puerto Rico Telecommunications
Regulatory Board and the federal laws and regulations applicable."
-8-
27 P.R. Laws Ann. 269g.4 Although the district court observed that
"the Ordinance might be in contravention of Puerto Rico's own
Telecommunications Act, Law 213," P.R. Tel. Co. II, 354 F. Supp.
2d at 115, the district court aptly explained that the state law at
issue
was created precisely in response to the
[TCA]. As such, it is most reasonable to
assume that the allowance of a "reasonable
fee" in Law 213 was intended to go hand in
hand with the equivalent provision in the
[TCA]. Under these circumstances, we
understand that the analysis to be made of the
definition of what is a "reasonable fee" or a
"fair and reasonable compensation" is
identical under both Commonwealth and federal
law. Accordingly, and in the absence of any
Commonwealth precedent interpreting this
particular section of Law 213, we will proceed
to resolve this question on the basis of the
existing federal case law.
P.R. Tel. Co. I, 283 F. Supp. 2d at 539. We find this approach
appropriate. Law 213 appears to permit municipalities to enact
ordinances that will be consistent with the TCA. As the district
court reasoned, it therefore makes sense to resolve this case on
the basis of federal law. We therefore consider whether the TCA
preempts Ordinance No. 40.5
4
Neither party cited any Commonwealth case law interpreting the
term "reasonable fees" in this provision, and the district court
found no such precedents. Furthermore, according to the parties,
the Puerto Rico Telecommunications Regulatory Board has not yet
established regulations pursuant to Law 213.
5
For the first time on appeal, PRTC raises another state law
claim, arguing that the Municipality had no power under
Commonwealth law to assess fees for the use of rights of way at the
-9-
B. Preemption by the TCA
We have acknowledged, without resolving, the difficult
question of whether any section of the TCA provides a private cause
of action. See Cablevision of Boston, Inc. v. Public Improvement
Comm'n, 184 F.3d 88, 99 (1st Cir. 1999) ("It is not clear . . .
whether Congress intended FCC preemption to be the sole means of
enforcing § 253(a) and (b), or, if a private cause of action does
exist to enforce either of these subsections, whether the FCC is
intended to have primary jurisdiction" or "whether the proper cause
of action for a § 253(c) claim [assuming a private cause of action
exists] is created by § 253(c) itself or arises from some other
source."). Other circuits have addressed this issue. See
BellSouth Telecomms., Inc., 252 F.3d at 1191 (holding that "a
private cause of action in federal district court exists under §
253 to seek preemption of a state or local statute, ordinance, or
other regulation only when that statute, ordinance, or regulation
purports to address the management of the public rights-of-way,
thereby potentially implicating subsection (c)"); TCG Detroit v.
City of Dearborn, 206 F.3d 618, 624 (6th Cir. 2000) (holding that
"§ 253(c) of the Act authorizes a private right of action in
time it enacted Ordinance No. 40, citing our decision in Liberty
Cablevision of P.R., Inc. v. Municipality of Caguas, 417 F.3d 216,
223 (1st Cir. 2005). The appellants counter by arguing that Law
213 explicitly gave them the authority to enact the ordinance. In
any event, this issue was not raised before the district court and
we will not consider it on appeal. See P.R. Hosp. Supply, Inc. v.
Boston Sci. Corp., 426 F.3d 503, 505 (1st Cir. 2005).
-10-
federal court for telecommunications providers aggrieved by a
municipality's allegedly discriminatory or allegedly unfair and
unreasonable rates"). We do not need to resolve this issue in this
case, however, because PRTC brought this action to challenge
Ordinance No. 40 under the Supremacy Clause. See City of Santa Fe,
380 F.3d at 1266 ("A party may bring a claim under the Supremacy
Clause that a local enactment is preempted even if the federal law
at issue does not create a private right of action."); see also
Wright Elec., Inc. v. Minn. State Bd. of Elec., 322 F.3d 1025, 1028
(8th Cir. 2003); Western Air Lines, Inc. v. Port Authority of New
York & New Jersey, 817 F.2d 222, 225 (2d Cir. 1987). We proceed on
that basis.
Congress enacted the TCA to ensure that
telecommunications providers have competitive access to state and
local telecommunications markets. See Cablevision of Boston, Inc.,
184 F.3d at 97-98. At the same time, Congress "recognized the
continuing need for state and local governments to regulate
telecommunications providers on grounds such as consumer protection
and public safety" and "to manage and demand compensation for the
use of their rights of way." Id. at 98. The provisions of § 253
balance these interests, providing in relevant part:
(a) In general
No State or local statute or regulation, or
other State or local legal requirement, may
prohibit or have the effect of prohibiting the
ability of any entity to provide any
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interstate or intrastate telecommunications
service.
(b) State regulatory authority
Nothing in this section shall affect the
ability of a State to impose, on a
competitively neutral basis and consistent
with section 254 of this section, requirements
necessary to preserve and advance universal
service, protect the public safety and
welfare, ensure the continued quality of
telecommunications services, and safeguard the
rights of consumers.
(c) State and local government authority
Nothing in this section affects the authority
of a State or local government to manage the
public rights of way or to require fair and
reasonable compensation from
telecommunications providers, on a
competitively neutral and nondiscriminatory
basis, for use of public rights of way on a
nondiscriminatory basis, if the compensation
required is publicly disclosed by such
government.
(d) Preemption
If, after notice and an opportunity for public
comment, the [Federal Communications
Commission] determines that a State or local
government has permitted or imposed any
statute, regulation, or legal requirement that
violates subsection (a) or (b) of this
section, the Commission shall preempt the
enforcement of such statute, regulation, or
legal requirement to the extent necessary to
correct such violation or inconsistency.
47 U.S.C. § 253. The parties in this case focus on the impact of
subsection (a), which limits the authority of state and local
governments to regulate telecommunications providers, and
subsection (c), a "safe harbor" provision that, notwithstanding the
limits imposed by § 253(a), permits state and local governments to
-12-
enforce regulations that require fair and reasonable compensation
for the use of public rights of way. Specifically, the appellants
argue that the district court erred in concluding that Ordinance
No. 40 violates § 253(a) and is not saved by the safe harbor of
§ 253(c). We discuss these two sections of § 253 in turn.
1. Section 253(a)
It is well-established that § 253(a) "authorizes
preemption of state and local laws and regulations expressly or
effectively prohibiting the ability of any entity to provide
telecommunications services." Nixon v. Mo. Mun. League, 541 U.S.
125, 128 (2004) (internal quotation marks omitted); see also City
of Santa Fe, 380 F.3d at 1269 ("[Section] 253(a) contains a clear
expression by Congress of an intent to preempt local ordinances
which prohibit the provision of telecommunications services.");
N.J. Payphone Ass'n, 299 F.3d at 242 ("Section 253 expressly
preempts state or local statutes, regulations, or other
requirements that prohibit or have the effect of prohibiting market
entry."). Thus, under the Supremacy Clause,6 any state or local
6
The Supremacy Clause states:
This Constitution, and the Laws of the United
States which shall be made in Pursuance
thereof; and all Treaties made, or which shall
be made, under the Authority of the United
States, shall be the supreme Law of the Land;
and the Judges in every State shall be bound
thereby, any Thing in the Constitution or Laws
of any State to the Contrary notwithstanding.
U.S. Const. art. VI, cl. 2.
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law that is inconsistent with the requirements of § 253(a) will be
null and void, unless it falls under one of the safe harbor
provisions in § 253. See City of Sante Fe, 380 F.3d at 1269.
The appellants argue that the district court erred in
finding that Ordinance No. 40 violates § 253(a). First, the
appellants challenge the district court's conclusion that the cost
estimates provided by PRTC are undisputed facts. Second, they
argue that, even if the estimates are undisputed, the district
court should not have considered them in its § 253(a) analysis
because the estimates are based on the speculative premise that all
municipalities throughout Puerto Rico will adopt similar
ordinances. Finally, the appellants argue that, even if the
estimates are proper considerations for the district court's
§ 253(a) analysis, the district court nonetheless erred in
concluding that PRTC has demonstrated that Ordinance No. 40
violates S 253(a). These arguments are unavailing.
i. Cost estimates as undisputed facts
The district court did not err by considering PRTC's
estimates to be undisputed facts in analyzing the summary judgment
motion. Through deposition transcripts and other documents
submitted with its motion for summary judgment, PRTC presented the
following facts relevant to the § 253(a) analysis, which the
appellants now challenge: 1) PRTC's annual profit from the most
recent fiscal year was about $70 million; 2) if every municipality
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in the Commonwealth were to impose ordinances with a 5% fee, the
fees would cost PRTC approximately $60 million a year, ten times
the $6 million that PRTC currently pays in municipal license taxes;
and 3) the total amount of recurring taxes that PRTC already pays
to municipalities (which includes municipal license taxes, real
property taxes, and personal property taxes, but excludes
construction excise taxes) is approximately $58 million annually.
The district court noted that the "[d]efendants have not
controverted PRTC's numbers" for purposes of summary judgment.
We agree. The appellants did not provide evidence of
alternative estimates, challenge PRTC's method of estimating the
impact of the ordinance fee, or offer an alternative basis for
calculating the financial effect of the fee. Instead, the
appellants merely argue in their briefs that PRTC's estimates are
incorrect, without any evidence to support their claim. Thus, the
appellants' arguments amount to conclusory and unsubstantiated
denials of the facts set forth by PRTC. We therefore cannot
conclude that the district court erred in finding PRTC's estimates
to be undisputed. See Magee v. United States, 121 F.3d 1, 3 (1st
Cir. 1997) ("Neither party may rely on conclusory allegations or
unsubstantiated denials, but must identify specific facts derived
from the pleadings, depositions, answers to interrogatories,
admissions and affidavits to demonstrate either the existence or
absence of an issue of fact.").
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ii. Costs across all municipalities
PRTC provides telecommunications services throughout
Puerto Rico. PRTC does not –- and previously had never been
required to –- track its gross revenues and profit on a
municipality-by-municipality basis; indeed, part of its objection
to the ordinance stems from the financial burden that changes to
its accounting and records systems would entail.7 PRTC does have
information on its gross revenues and profit from its services
throughout Puerto Rico as a whole. Thus, in arguing that Ordinance
No. 40 violates § 253(a), PRTC relies on its estimates of the
aggregate cost to PRTC if all municipalities impose a 5% gross
revenue fee.
PRTC advances two arguments to explain why the district
court properly considered these estimates as part of its § 253(a)
analysis. First, PRTC argues that the estimates reflect the
legitimate concern that other municipalities are or will be
adopting similar gross revenue fee requirements. In its brief,
PRTC cites three other municipalities in Puerto Rico that have
already enacted ordinances that apply similar gross revenue fees to
telecommunications providers. The appellants acknowledged this
fact during oral argument. Given the interconnected nature of
utility services across communities and the strain that the
7
PRTC tracks its revenue based on "study areas," which are not
based on municipal boundary lines and do not indicate whether the
revenue is generated from outgoing, as opposed to incoming, calls.
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enactment of gross revenue fees in multiple municipalities would
have on PRTC's provision of services, the Commonwealth-wide
estimates are relevant to determining how the ordinance affects
PRTC's "ability . . . to provide any interstate or intrastate
telecommunications service." 47 U.S.C. § 253(a).
PRTC does not, however, rest its case solely on the
notion that all other municipalities will follow the Municipality
of Guyanilla's lead by enacting gross revenue fees. It also argues
that the Commonwealth-wide estimates serve as an indicator of how
Ordinance No. 40 will affect the profitability of PRTC's operations
within the Municipality itself. Extrapolating from its
Commonwealth-wide profit margin and the impact that a Commonwealth-
wide 5% gross revenue fee would have on its overall profits (an 86%
decline), PRTC argues that a similarly significant decline in the
profitability of its operations within the Municipality would occur
under Ordinance No. 40 alone. Indeed, PRTC argues that the
Commonwealth-wide figures may even underestimate Ordinance No. 40's
effect. As PRTC explains, "[g]iven that Guayanilla is a relatively
small, rural municipality" and that it generally "costs more to
provide services in rural or less heavily populated areas than it
does in large urban centers," PRTC's "profit margin on services
that it sells within the Municipality is likely lower than the
company's overall, island-wide margins. Accordingly, the
cumulative figures submitted by PRT [i.e., an 86% reduction in
-17-
profits] may well understate the impact of the Municipality's 5%
fee on PRT's operations" in the Municipality.
Taken in this sense, PRTC's estimates are an appropriate
basis for analysis in this case. The estimates, which are
uncontroverted, represent the best information readily available to
either party by which to measure the impact of Ordinance No. 40 on
PRTC's operations. The district court did not err by considering
them as part of its analysis.
iii. Preemption of Ordinance No. 40 by TCA § 253(a)
Section 253(a) preempts laws that "may prohibit or have
the effect of prohibiting" the provision of telecommunications
services. 47 U.S.C. § 253(a). As the Federal Communications
Commission ("FCC")8 has explained, "in determining whether an
ordinance has the effect of prohibiting the provision of
telecommunications services, it 'considers whether the ordinance
materially inhibits or limits the ability of any competitor or
potential competitor to compete in a fair and balanced legal and
regulatory environment.'" TCG N.Y., Inc. v. City of White Plains,
305 F.3d 67, 76 (2d Cir. 2002) (quoting Cal. Payphone Ass'n, 12
8
The FCC enforces certain provisions of the TCA. See 47 U.S.C. §
253(d) ("If, after notice and an opportunity for public comment,
the [FCC] determines that a State or local government has permitted
or imposed any statute, regulation, or legal requirement that
violates subsection (a) or (b) of this section, the [FCC] shall
preempt the enforcement of such statute, regulation, or legal
requirement to the extent necessary to correct such violation or
inconsistency.").
-18-
F.C.C.R. 14191 (1997)). Courts have also noted that "a prohibition
does not need to be complete or 'insurmountable' to run afoul of
§ 253(a)." Id.; see also City of Sante Fe, 380 F.3d at 1269 ("[A]
regulation need not erect an absolute barrier to entry in order to
be found prohibitive."). Applying these considerations to the
facts, we conclude that PRTC has established that Ordinance No. 40
violates § 253(a).
The ordinance imposes a 5% gross revenue fee. PRTC
presently pays a 0.5% municipal license tax on its gross revenues
for doing business within the Municipality9 and argues that
Ordinance No. 40 will significantly increase its costs and reduce
the profitability of its operations. While PRTC does not, as we
previously noted, track its gross revenue and profits on a
municipality-by-municipality basis, its Commonwealth-wide
calculations demonstrate that the imposition of 5% gross revenue
fees across all municipalities would present an additional cost of
$60 million annually -- ten times the $6 million that PRTC already
pays in municipal license taxes and more than double the amount
that PRTC pays to municipalities for a variety of taxes and fees
9
The municipal license tax is applied to revenue attributable to
the municipality according to a formula specified in Puerto Rico
law. The formula divides the amount of property owned or leased in
a given municipality by the total amount of property that a company
owns or leases in Puerto Rico, and multiplies the resulting
percentage by the company's total gross revenue to determine the
tax base in a given municipality. The municipality then selects
the percentage tax rate.
-19-
combined. According to PRTC's calculations, the surge in costs
would reduce PRTC's annual Commonwealth-wide profit by 86%.
We agree with PRTC that these figures indicate that
Ordinance No. 40 will negatively affect PRTC's profitability. The
impact of a Commonwealth-wide 5% gross revenue fee on PRTC's
overall profitability would be significant, and, as PRTC argues, it
is reasonable to conclude that the effect of Ordinance No. 40 on
the profitability of its operations within the Municipality would
be similarly, or perhaps even more, substantial. Moreover, as PRTC
also notes, the multiple gross revenue fees it faces in other
municipalities further strain its ability to provide
telecommunications services. Thus, there is no reason to doubt
that the ordinance's 5% gross revenue fee would constitute a
substantial increase in costs for PRTC in a regulatory environment
that is becoming increasingly costly due to the enactment of gross
revenue fees by other municipalities.
The ordinance's certification requirements also present
another set of costs for PRTC. PRTC would have to change its
accounting and records procedures to calculate how much of its
gross revenues comes from outgoing calls, originating in the
Municipality, using public rights of way. PRTC's current
accounting practices do not differentiate how much income is
generated from outgoing calls in the Municipality, as opposed to
incoming calls, or how many of those outgoing calls use the
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Municipality's public rights of way, as opposed to private
easements. Some features of PRTC's services make these
calculations particularly difficult. For example, PRTC would have
to devise a method for determining what portion of revenue
generated from its unlimited local telephone service -- which
charges a flat fee for outgoing and incoming calls -- would
constitute revenue from outgoing calls alone.
Together, the ordinance's gross revenue fee and
certification requirements place a significant burden on PRTC. We
agree with the district court that PRTC has established that
Ordinance No. 40 "materially inhibits or limits the ability" of
PRTC "to compete in a fair and balanced legal and regulatory
environment." TCG N.Y., Inc., 305 F.3d at 76 (internal quotation
marks and citation omitted); see also City of Sante Fe, 380 F.3d at
1270-71 (concluding that costs imposed by a local ordinance, which
"would nearly quadruple [the telecommunications provider's] cost of
doing business," were "sufficient to show that the [ordinance's]
rental provisions are prohibitive because they create a massive
increase in cost"). Thus, we affirm the district court's holding
that Ordinance No. 40 violates § 253(a). We must now consider
whether the ordinance falls under the safe harbor of § 253(c).
2. Section 253(c)
Section 253(c) provides that "[n]othing in this section
affects the authority of a State or local government to manage the
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public rights-of-way or to require fair and reasonable compensation
from telecommunications providers, on a competitively neutral and
nondiscriminatory basis, for use of public rights-of-way on a
nondiscriminatory basis, if the compensation required is publicly
disclosed by such government." 47 U.S.C. § 253(c). We have
explained that this subsection "take[s] the form of [a] savings
clause[], preserving certain state or local laws that might
otherwise be preempted under § 253(a)." Cablevision of Boston,
Inc., 184 F.3d at 98. However, we have noted that § 253(c) could
be interpreted in two ways:
One explanation is that Congress intended §
253(c) . . . to be a savings clause only.
Under this interpretation, § 253(c) could only
be used defensively, in the context of a §
253(a) challenge; the statute would simply not
apply to local regulations that are not
competitively neutral and nondiscriminatory
but nonetheless do not constitute prohibitions
on entry.
Alternatively, the exclusion of § 253(c) from
§ 253(d) [which provides for FCC preemption]
might reflect Congress's selection of a forum
for § 253(c) claims, limiting jurisdiction to
federal or state courts instead of forcing
municipalities with limited resources to
defend rights-of-way regulations and fee
structures before the FCC in Washington, D.C.
. . . If this interpretation were correct, it
would become necessary to decide whether the
proper cause of action for a § 253(c) claim is
created by § 253(c) itself or arises from some
other source.
-22-
Id. at 99 (citations omitted).10 Under the first interpretation of
§ 253(c), a telecommunications provider could not challenge an
ordinance or regulation directly on the basis of § 253(c). Id.
The telecommunications provider would have to establish that the
ordinance or regulation violates § 253(a), and then the burden
would shift to the state or local government to establish that the
safe harbor provision of § 253(c) applies. Under the second
interpretation, § 253(c) could operate as an independent source of
claim as well as a safe harbor provision. Id. If a
telecommunications provider brought an action challenging an
ordinance directly under § 253(c), it would have the burden of
establishing that the ordinance violated § 253(c).
10
The Third Circuit has also noted, without resolving, the
difficulties in interpreting § 253(c). See N.J. Payphone Ass'n,
299 F.3d at 241 ("Although Sections 253(b) and (c) are framed as
savings clauses, Section 253(d) speaks of 'violation' of (b)
suggesting that it must impose some sort of substantive limitation
independent of (a). This also raises the possibility that Section
253(c), which is similarly phrased, contains a parallel
limitation."). The Sixth and Eleventh Circuits have come to
differing conclusions on this point. Compare BellSouth Telecomms.,
Inc., 252 F.3d at 1187, 1191 (concluding that "subsection (a)
contains the only substantive limitations on state and local
government regulation of telecommunications, and that subsections
(b) and (c) are 'safe harbors,' functioning as affirmative defenses
to preemption of state or local exercises of authority that would
otherwise violate (a)," and thus remanding because the district
court considered whether the ordinances "fell within the parameters
of (c), but never addressed, in the first instance, whether the
ordinances violated subsection (a)") with TCG Detroit, 206 F.3d at
624 (concluding that § 253(c) operates as a separate limitation on
state and local governments, "authoriz[ing] a private right of
action in federal court for telecommunications providers aggrieved
by a municipality's allegedly discriminatory or allegedly unfair
and unreasonable rates").
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The appellants raise two arguments regarding the
application of § 253(c) in this case. First, they argue that,
insofar as PRTC has not established that the ordinance violates
§ 253(a), the district court improperly placed the burden of proof
for demonstrating that the fee was "fair and reasonable
compensation" on the appellants. Second, they argue that, assuming
they do have the burden of establishing that the ordinance's 5%
gross revenue fee on outgoing calls does fall under the safe harbor
provision of § 253(c), they have met their burden. Both of these
arguments are unpersuasive.
i. Burden under § 253(c)
Citing Cablevision of Boston, Inc., the appellants argue
that, "[t]o the extent § 253(c) is viewed as . . . imposing an
independent negative restriction on local authorities' choices
regarding the management of their rights-of-way, the burden of
proof to establish that the Municipality's § 253(c) fee is not fair
and reasonable lies with[] PRTC." Thus, the appellants argue that
the district court erred by placing the burden on them.
The appellants' argument is predicated on its assertion
that the district court erred in concluding that the ordinance
violates § 253(a). If the appellants were correct on this point,
we would have to consider whether PRTC could challenge the
ordinance as being preempted directly under § 253(c). However,
because we affirm the district court's holding that PRTC has
-24-
established that Ordinance No. 40 violates § 253(a), we need only
consider whether the ordinance meets the § 253(c) safe harbor
provision, not whether § 253(c) would provide an independent basis
for preemption in this case. See N.J. Payphone Ass'n, 299 F.3d at
241 ("[T]here is . . . no need to resolve [the scope of preemption
under § 253(c)] at this time. As discussed below, the operation of
Section 253(a) is sufficient to preempt the Ordinance in this case
and it does not fall within the Section 253(c) safe harbor."). In
this context, the question of burden becomes more straightforward.
We join our sister circuits in holding that, once the party
challenging a regulation or ordinance establishes that it violates
§ 253(a), the burden is properly on the state or local government
seeking the safe harbor to establish that § 253(c) applies. See
City of Santa Fe, 380 F.3d at 1273 n.10; N.J. Payphone Ass'n, 299
F.3d at 240; Bell South Communications, Inc., 252 F.3d at 1192; see
also In re the Petition of Minnesota, 14 F.C.C.R. 21697, 21704 n.26
(1999) ("Although the party seeking preemption bears the burden of
proof that there is a violation of section 253(a), the burden of
proving that a statute, regulation, or legal requirement comes
within the exemptions found in sections 253(b) and (c) falls on the
party claiming that exception applies.").
ii. "Fair and reasonable compensation" under § 253(c)
The appellants next argue that they have demonstrated
that the ordinance's 5% gross revenue fee on outgoing calls does
-25-
fall under the safe harbor provision of § 253(c) as securing "fair
and reasonable compensation." 47 U.S.C. § 253(c). Specifically,
the appellants point out that the 5% gross revenue fee applies only
to outgoing calls that make use of public rights of way. By
crafting the ordinance in this manner, the appellants argue, the
Municipality "ensures an effective distribution of resources,
whereby it collects compensation depending on the use a provider
gives to the public rights-of-ways."
The TCA does not define the phrase "fair and reasonable
compensation" and the parties disagree over whether a gross revenue
fee can ever satisfy this requirement. PRTC argues that the term
"compensation" indicates that any fees imposed by state or local
law must be limited to the recovery of costs (for maintenance and
repair of public rights of way, such as sidewalk and street repair
near telephone poles and equipment), which a gross revenue fee is
not tailored to do. The appellants argue that the term
"compensation" encompasses both cost recovery and the notion of
"rent" for the use of public rights of way, and thus a gross
revenue fee can be appropriate. The district court, after
carefully reviewing decisions interpreting the terms "fair and
reasonable compensation," concluded that "the most favored
interpretation requires that the fees charged by a municipality be
related to the degree of actual use of the public rights-of-way,
but need not be limited to recoupment of the added costs to the
-26-
municipality resulting from such use." P.R. Tel. Co. I, 283 F.
Supp. 2d at 543.
Among the courts that have reached the issue, we agree
that most have not found gross revenue fees or other non-cost based
fees to be per se invalid under § 253(c). See, e.g., Qwest Comms.
Inc. v. City of Berkeley, 433 F.3d 1253, 1257 (9th Cir. 2006)
("[W]e decline to read [past precedent] to mean that all non-cost
based fees are automatically preempted, but rather that courts must
consider the substance of the particular regulation at issue.");
TCG Detroit, 206 F.3d at 624-25 (employing a "totality of the
circumstances test" to conclude that a gross revenue fee was "fair
and reasonable compensation" under § 253(c)); see also City of
Sante Fe, 380 F.3d at 1273 (discussing, without deciding, whether
an ordinance's "compensation scheme" had to be limited to cost
recovery under § 253(c)); TCG N.Y., Inc., 305 F.3d at 77-78
(discussing, without deciding, whether a gross revenue fee can
constitute "fair and reasonable compensation" under § 253(c)).
We need not decide whether fees imposed on
telecommunications providers by state and local governments must be
limited to cost recovery. We agree with the district court's
reasoning that fees should be, at the very least, related to the
actual use of rights of way and that "the costs [of maintaining
those rights of way] are an essential part of the equation." P.R.
Tel. Co. II, 354 F. Supp. 2d at 114. In this case, the appellants
-27-
have presented no evidence of the Municipality's costs of
maintaining the public rights of way. "Section 253(c) requires
compensation to be reasonable essentially to prevent monopolistic
pricing by towns. Without access to local government rights-of-
way, provision of telecommunications service using land lines is
generally infeasible, creating the danger that local governments
will exact artificially high rates." TCG N.Y., Inc., 305 F.3d at
79. As the district court noted in this case, "[a]bsent evidence
of costs, the Court cannot determine whether the Ordinance results
in fair and reasonable compensation as opposed to monopolistic
pricing." P.R. Tel. Co. II, 354 F. Supp. 2d at 113.
The appellants argue that, despite the lack of
information about the costs of maintaining the public rights of
way, they have nonetheless ensured that the ordinance's fee is
"fair and reasonable compensation" because the fee applies only to
revenue generated from calls that the providers certify are using
public rights of way. There are two problems with this argument.
First, the appellants concede that the 5% fee applies to the entire
revenue derived from calls that use any portion of the rights of
way, regardless of whether the call traverses over one inch or 100
feet of the public rights of way. Thus, the fee charged does not
directly relate to the extent of actual use of public rights of
way. Second, the appellants provide no rationale for why it is
"fair and reasonable" for the Municipality to charge 5%, as opposed
-28-
to another percentage, of the revenue generated from these calls.
The appellants provide no information or estimates regarding the
amount of fees that they expect to collect through the ordinance.
As the district court noted, "it is evident that the Municipality
intends to delay justifying its Ordinance until after it begins to
receive payments from the different providers. We refuse to uphold
the fee on the off chance that it might prove to be fair and
reasonable." P.R. Tel. Co. II, 354 F. Supp. 2d at 114.
The appellants note that the Sixth Circuit approved a 4%
gross revenue fee after applying a "totality of the circumstances"
test. TCG Detroit, 206 F.3d at 625. Under the "totality of the
circumstances" test, courts examine "the extent of the use
contemplated, the amount other telecommunications providers would
be willing to pay, and the impact on the profitability of the
business" to determine whether a fee scheme is "fair and
reasonable." City of Sante Fe, 380 F.3d at 1272-73 (citing TCG
Detroit, 206 F.3d at 625). In articulating this test, the Sixth
Circuit approached § 253(c) as providing a direct cause of action
for a telecommunications provider to challenge a regulation or
ordinance, not as a safe harbor provision for a state or local
government to save its regulation or ordinance once preemption
under § 253(a) had been established. See TCG Detroit, 206 F.3d at
625.
-29-
We therefore question the usefulness of the second and
third factors of the test in an analysis of § 253(c) as a safe
harbor provision following a determination that the regulation or
ordinance in question violates § 253(a). As a safe harbor
provision, § 253(c) permits state and local governments to seek
"fair and reasonable compensation . . . for the use of public
rights-of-way," notwithstanding the limitations on their authority
to regulate telecommunications providers as set forth in § 253(a).
To give effect to this safe harbor provision, it appears that we
must focus our inquiry (regarding what constitutes "fair and
reasonable compensation") on examining the burdens imposed on the
state or local government through the use of its public rights of
way, rather than the burdens of the ordinance on the
telecommunications providers, which is the focus of the § 253(a)
analysis.
Thus, both the second and third factors in the "totality
of the circumstances" test appear to miss the mark in the safe
harbor context. The second factor (the amount that other
telecommunication providers would be willing to pay) tells us more
about telecommunications providers' resources and their desire to
comply with local regulations than it does about why the fee chosen
is "fair and reasonable compensation" for the state or
municipality. The third factor (the impact on the profitability of
the telecommunications provider) seems to conflate the concerns of
-30-
subsection (c) with those of subsection (a). Presumably, if a
municipality demonstrated that the fee it imposes reflects the
actual cost to the municipality for the use of its rights of way,
it would be justified in charging this fee regardless of whether
the amount would render the provision of telecommunications
services unprofitable for a telecommunications provider.
Accordingly, we do not adopt the "totality of the
circumstances" test in the context of a § 253(c) safe harbor
analysis that follows a determination of preemption under § 253(a).
Nevertheless, we note that even if we were to apply the three
factors of the test to this case, Ordinance No. 40 would not fit
within § 253(c)'s safe harbor. First, nothing in the record
indicates that the ordinance accounts for the actual use of public
rights of way. As previously noted, the 5% fee applies to the
entire revenue derived from all calls that use any portion of the
rights of way, regardless of the actual extent of use. Second, the
appellants fail to point to any telecommunications providers who
have been willing to pay the requested fee. Third, as we have
previously noted, the fee would represent a significant increase in
PRTC's costs, undermining the profitability of its operations.
Thus, even under the test urged by the appellants, the ordinance
fails to satisfy § 253(c).
-31-
III.
Congress enacted the TCA in an attempt to maintain "the
balance . . . necessary to effectuate its intent to enhance
competition and eliminate local monopolies while leaving room for
reasonable regulation of issues of particular state and local
concern." N.J. Payphone Ass'n, 299 F.3d at 245. Ordinance No. 40
disrupts this balance. While we recognize the difficult task that
municipalities face when enacting ordinances that regulate public
rights of way, we conclude that the ordinance in this case is
preempted by § 253(a) of the TCA and is not saved by the safe
harbor provision of § 253(c). The decision of the district court
is therefore affirmed.
So ordered.
-32-
Puerto Rico Telephone Co. v. Municipality of Guayanilla
Court: Court of Appeals for the First Circuit
Date filed: 2006-06-07
Citations: 450 F.3d 9
Copy CitationsCombined Opinion