Local Government Law Bulletin January 7, 2013

Federal District Court Scrutinizes the Michigan Uniform Video Services Local Franchise Act

In the case of City of Detroit v. Michigan (July 10, 2012), the U.S. District Court for the Eastern District of Michigan held that the Michigan Uniform Video Services Local Franchise Act (the “Uniform Franchise Act”) did not violate the Michigan Constitution, but that a key provision of the Act was preempted by the federal Cable Communication Policy Act (the “Federal Cable Act”).

In 2006, the Michigan Legislature passed the Uniform Franchise Act. This Act eliminated the ability of local governments to independently negotiate a franchise agreement with cable TV companies and other companies offering video services in their community.

The Uniform Franchise Act mandated the use of a standardized agreement by each local government and announced that provisions in any existing franchise agreements were unenforceable if those existing contract provisions were “inconsistent with or in addition to” the provisions of the standardized uniform franchise agreement.

The Uniform Franchise Act also has a provision that required the local government to “approve” the submission of a complete franchise agreement within thirty days — or the agreement automatically would become effective through the operation of law.

The City of Detroit challenged the constitutionality of the Uniform Franchise Act and specifically challenged several provisions, including the foregoing elimination of existing “inconsistent” contract provisions and the wording of the provision that appears to permit only approval, not denial, of an application within 30 days.

The federal court invalidated the portion of the Uniform Franchise Act which rendered existing contract provisions unenforceable, holding that the amendment procedure for franchise agreements was preempted by the Federal Cable Act. The federal court justified its holding on two grounds: (1) the Federal Cable Act contains a mandatory procedure for modification of an existing agreement, so the Uniform Franchise Act cannot prescribe an alternate way for agreements to be modified; and (2) the Federal Cable Act specifically allows for enforcement of public, educational, and governmental (“PEG”) provisions contained in existing agreements, so the Uniform Franchise Act cannot take away those enforcement rights just because the terms are inconsistent with or in addition to the uniform franchise agreement provisions. Essentially, this holding means that if a cable operator is still operating under a pre-2007 franchise agreement, the local government is again empowered to enforce favorable terms that are inconsistent with or in addition to the uniform franchise agreement.

Perhaps in anticipation of this possible ruling, the cable companies have generally terminated their prior contracts and replaced them with new franchise agreements using the form prescribed by the Uniform Franchise Act. As a result, even though many communities reserved their rights by allowing the agreement to become effective only by operation of law, as a practical matter, only some communities (particularly those who lost benefits associated with PEG channels or those who desire to re-impose minimum build-out density requirements or other prior provisions), will find it worthwhile to seek a restoration of eliminated provisions from their prior agreement.

With regard to the Uniform Franchise Act ‘s apparent language giving it only the ability to approve, rather than approve or deny an application for a franchise agreement, the City of Detroit pointed out that this limit would violate the Michigan State Constitution by impeding the local franchising authorities’ “home rule rights.”

The Michigan Attorney General suggested that, to bring the Uniform Franchise Act within the bounds of the Michigan Constitution, the Uniform Franchise Act should be interpreted to mean that the local franchising authority has thirty days to approve or deny a complete franchise agreement upon receipt. The federal court reasoned that this was a “plausible” explanation and adopted it. Unfortunately, if the language really meant “approve or deny,” that interpretation arguably calls into question the validity of those agreements that went into effect by operation of law. This argument is being set forth by some as possible leverage to negotiate a new agreement with cable operators. The idea is that the cable company may be required to return to the pre-2007 agreements, especially as to PEG channel benefits.

A final holding by the federal court that may be useful, and which is of interest, is the ruling that Michigan law does not allow a cable operator to operate without an agreement in place and become a “holdover tenant.” In essence, the cable operator would be a trespasser. The federal court based this holding on prior Michigan court decisions. The federal court’s determination of an appropriate remedy for operating without a franchise agreement in place (that is, operating as a “trespasser”) was not addressed in this ruling, although the court ordered additional briefing.

For many communities, this decision will not have a significant impact on their cable franchise agreement. However, as to a larger community, particularly one that has lost PEG channel benefits or seeks to restore other lost provisions, it may be worthwhile to evaluate the opportunities this holding may offer. Clearly, the federal court has indicated that this sort of withdrawal of local rights attempted in the Uniform Franchise Act cannot occur without limits, but the case largely leaves intact the 2006 Uniform Franchise Act’s elimination of local government authority to independently negotiate franchise agreements.

Let’s start a partnership worth keeping.