THE SEVENTH CIRCUIT SENDS A MESSAGE
ABOUT FRANCHISE FEES
TO THE ILLINOIS SUPREME COURT

By BETH ANNE JANICKI
Staff Attorney, Illinois Municipal League

On March 9, 1992, the United States Court of Appeals for the Seventh Circuit decided the case of Diginet, Inc. v. Western Union, ATS, Inc., (No. 91-1658) (hereinafter referred to as "Diginet"). Diginet involved an appeal from a preliminary injunction granted by the district court to the City of Chicago. The district court enjoined Western Union ATS, Inc. (hereinafter referred to as "ATS") from operating its fiber optics telecommunications network on municipal property. ATS had refused to enter into a franchise agreement with the City of Chicago that Chicago required for the operation of fiber optic cable systems underneath the City's public ways. The Seventh Circuit's opinion, written by Judge Posner, vacated the preliminary injunction entered by the district court. The Seventh Circuit, weighing the likely harms to the parties, stated that the City had made "no showing that it would sustain any harm if a preliminary injunction were denied." (Slip op. at p.5). The Court found, however, that the harm to both ATS and the public from the grant of the injunction was substantial and irreparable. The Court pointed out that the public's access to an expanded fiber optic system had been delayed by the injunction, and that the public would never receive compensation for this. (Slip op. at p.7).

In addition, the Seventh Circuit found that the City's claim against ATS lacked merit. (Slip op. at p. 20). The majority in Diginet concluded that franchise fees constituted an illegal tax under Illinois law. On page 17 of the slip opinion, the Seventh Circuit stated:

"Municipalities have — must have — broad powers of regulation, but the usual rule in Illinois is that they may not tax without explicit authority from the State. (Citation omitted.) They may not circumvent this limitation by calling a tax something else, such as a "franchise fee".

The majority concluded that any municipally imposed fee, other than a user fee limited to the costs incurred by the municipality, is a tax and because it is of statewide and not local concern it could not be imposed by a home rule municipality. (Slip op. at pp. 17, 19.)

The case of AT & T v. Arlington Heights (hereinafter referred to as "AT & T"), which was argued before the Illinois Supreme Court on March 24, 1992, and is currently pending, involves substantially the same issues as Diginet. The specific issue involved in AT & T is whether a municipality can require a franchise fee as a condition precedent to the use of a public way by a telecommunications company. AT & T was pending before the Illinois Supreme Court at the same time that the Diginet opinion was rendered. The Seventh Circuit in Diginet expressed its views on the merits of the AT & T case. (Slip op. at pp. 8-10.) On page 19, the majority stated:

"If municipalities such as Chicago can use their control over the public ways to extract fees unrelated to costs from telephone and other right of way companies, the provision of telephone and other utility-type services may be disrupted. To run a cable across the state, a telephone company might have to cross a hundred municipal boundaries, and at each one — if the City of Chicago wins this case and the Village of Arlington Heights its case — it could be held up for a monopoly toll, as if Illinois municipalities were so many little medieval German Principalities."

It can be seen, quite obviously, that the Seventh Circuit had no qualms whatsoever in letting the Illinois Supreme Court know how they believe AT & T should be decided. On page 23 of the slip opinion. Judge Ripple points out in his dissent that:

"Under these circumstances, one must speculate as to the purpose of this gratuitous pronouncement. It is an unnecessary expenditure of the judicial resources of this Court and deprives the Illinois

May 1992 / Illinois Municipal Review / Page 9

Supreme Court of the opportunity to deal with this important problem comprehensively. A gratuitous effort to help another court with its own law is hardly sufficient countervailing justification. Indeed, as the majority notes, there is sufficient secondary literature available to the justices should they care to consult it.

The best one might be able to say about this effort to counsel the Illinois Supreme Court is that it 'could do no harm'. (Majority op. at 9.) However, even this justification is overly charitable. There is a significant harm, albeit an intangible one, when a federal appellate court ignores without good and sufficient reason an available mechanism that allows a state to declare the content of its own law.

Indeed, preliminary injunction analysis requires that we include in our weighing of the 'balance of harms' the 'public good'. That public good requires that we do something other than gratuitously express a preference for a free market solution to a complex municipal regulatory problem. It requires that we give respectful heed to the prerogatives of the state courts to determine definitively the content of state law."

The City of Chicago has filed a Petition for a Rehearing in the Diginet case. No decision has been made regarding that Petition. Because an opinion has yet to be rendered in the AT & T case, it remains to be seen what, if any, effect the Seventh Circuit's "message" will have. •

Page 10 / Illinois Municipal Review / May 1992