3rd Circuit adopts the FCC's "materially inhibits" test to affirm reversal of municipal tower siting denial; 10th Circuit declines to find that a small revenue-based fee "materially inhibited" wireline internet service

Two recent decisions issued this summer by different United States Courts of Appeals interpreting Sections 253 and 332 of the Communications Act demonstrate the continuing uncertainty carriers face when challenging state and local legal requirements that may impede their provision of telecommunications services.

Background

In 2018, the FCC released a Declaratory Ruling and Third Report and Order ("Small Cell Order") aimed at accelerating the roll-out of 5G services and facilities. Among other things, the Order sought to clarify the legal framework by which telecommunications carriers may challenge state and local regulations affecting the construction of telecommunications networks in public rights of way under Sections 253 and 332(c)(7) of the Communications Act.

As explained in the Small Cell Order, parallel provisions in Section 253(a) and Section 332(c)(7)(B)(i)(II) expressly forbid any local regulation that would "prohibit or have the effect of prohibiting" the provision of telecommunications and personal wireless services respectively. After examining — and rejecting — several federal appeals courts' interpretations of the "effective prohibition" language in these statutes, the FCC stated that the correct interpretation for both is the standard that the Commission first announced for Section 253 in its seminal 1997 California Payphone decision. Under California Payphone, a local regulation that "materially inhibits or limits the ability of any competitor or potential competitor to compete in a fair and balanced legal and regulatory environment" effectively prohibits the provision of service, and therefore is unlawful unless it satisfies one of the limited exceptions within Section 253.

Although numerous government entities challenged the Small Cell Order, arguing that Section 253 preempts only "actual prohibition(s)" of service, the 9th Circuit largely upheld the FCC's interpretation in City of Portland v. FCC. In the aftermath of that case, there has been considerable interest among the telecom industry and governments on how the Small Cell Order will apply to claimed Section 253 violations for wireless as well as wireline service providers. Recent cases from the United States Courts of Appeals for the 3rd Circuit and 10th Circuit show that despite the FCC's effort to clarify and harmonize the application of Sections 253 and 332, significant uncertainty remains.

3rd Circuit Court of Appeals Decision in White Deer Township

• The precedential 3rd Circuit case highlights the differences between the FCC's "materially inhibits" test under California Payphone and the outdated standard requiring the "least intrusive means" to fill a "significant coverage gap."

In Cellco Partnership (d/b/a Verizon Wireless) v. White Deer Township Zoning Hearing Board, Verizon sued the township under Section 332(c)(7)(B) after the township rejected Verizon's request for a zoning variance needed to erect a 195-foot cell tower to fill a four-mile gap in its wireless service coverage. The district court found that the zoning decision had the effect of prohibiting personal wireless service under Section 332(c)(7)(B), and ordered the township to approve Verizon's variance application. On appeal, the 3rd Circuit's July 14, 2023 opinion upheld the district court decision. In doing so, the court adopted the FCC's California Payphone standard as articulated in the Small Cell Order, and rejected the Circuit's previous test from APT Pittsburgh, under which providers had to show that a proposed cell tower both filled a significant gap in coverage and did so in the "least intrusive manner."

Noting the Court's authority to "reevaluate precedent in light of intervening authority and amendments to statutes or regulations," the panel held that the FCC's Small Cell Order was a reasonable interpretation of an ambiguous statute, and therefore the Commission's decision was entitled to deference under the administrative law principles of Chevron v. Natural Resource Defense Council and its progeny. In doing so, the panel derived three "key points" from the FCC's discussion of the California Payphone standard: (1) government prohibitions on service need not be complete or insurmountable to violate Section 332(c)(7); (2) local actions that result in either unreasonable fees or unreasonable costs materially inhibit wireless services; and (3) the "materially inhibits" test requires consideration of the totality of the circumstances, including the aggregate effect of costs across different jurisdictions. By applying the standard from California Payphone, which was a Section 253 case, to Verizon's claims under Section 332(c)(7), the 3rd Circuit accepted the FCC's holding that the same "effective prohibition" standard applies to both sections.

Applying California Payphone, the 3rd Circuit ruled that the township's actions materially inhibited Verizon's service by "prevent[ing] Verizon from providing wireless services without incurring unreasonable costs," including the "substantial increase in costs" from litigating the feasibility of potential cell sites. The panel concluded that "[t]his case reveals the inadequacy of the APT Pittsburgh test," explaining that the "materially inhibits" test from California Payphone provides necessary limits on what localities can require because otherwise a local government could "materially inhibit" new or improved wireless service if there are no coverage gaps. Specifically, the court recognized that under the FCC standard, providers may be entitled to a zoning variance not only for "insufficiency in coverage," but for "insufficiency in network capacity, 5G services, or new technology." Thus, White Deer Township highlights the differences between the current "materially inhibits" test and the now obsolete, higher threshold "significant gap" test, although the court noted that the township's actions were preempted even under the obsolete test.

10th Circuit Court of Appeals Decision in NMSURF v. Santa Fe

• The 10th Circuit case leaves uncertainty as to how much of a cost increase a provider must show to establish a material inhibition, suggesting that a "massive" increase would suffice while ruling that a $12 increase was not—without addressing the middle-ground.

Just as White Deer Township illustrates how local regulations and legal requirements that result in fees or costs that materially inhibit new or improved services may constitute effective prohibitions in violation of Section 332(c)(7), another recent case illustrates that insignificant fees, with no showing of the effects of such fees in the aggregate, do not automatically meet the California Payphone standard of materially inhibiting the provision of services.

In NMSURF v. City of Santa Fe, a non-precedential 10th Circuit opinion decided without oral argument on August 15, 2023, the court affirmed a lower court decision that rejected a wired internet service provider's claim that a 2% gross revenues fee for right-of-way use was an "effective prohibition" of service in violation of Section 253. The court emphasized that the provider had only one wireline customer that paid $49.99 per month, resulting in an annual fee of just $12. Although NMSURF's argument expressly appealed to general principles that the FCC articulated in the Small Cell Order — principles that may be equally applicable to wireline services subject to Section 253 — the court viewed NMSURF's evidence as insufficient, particularly as compared to the extensive evidence of fees inhibiting wireless service on which the FCC relied in the Small Cell Order. Notably, NMSURF appears not to have presented evidence as to the aggregate effect of right-of-way fees on similar services, such as the nationwide aggregate effects on which the FCC's Small Cell Order expressly relied. The court explained that under its decision in Qwest Corp. v. City of Santa Fe (a decision that cited California Payphone), NMSURF had the evidentiary burden of showing a prohibitive effect—namely that the fee would "materially inhibit the provision of services."

Noting that NMSURF could meet its burden by showing a "massive increase in costs," the court ruled that "NMSURF's increase in costs—just $12 in 2019—self-evidently does not qualify as a massive increase." The court also rejected NMSURF's argument that "any imposition of fees based on revenues rather than actual costs is a per se violation of § 253(a)," pointing out that the FCC's holding in the Small Cell Order that "fees are only permitted to the extent that they are nondiscriminatory and represent a reasonable approximation of the locality's reasonable costs" and "gross revenue fees generally are not based on [ ] costs," finding that was part of an order addressing small-scale wireless infrastructure, not wired internet infrastructure. The court expressly declined to rule on whether the FCC's reasoning from the Small Cell Order was applicable to wireline internet service, stating that "we decline to adopt the reasoning of the order under the circumstances presented here" (emphasis added). Rather, the court simply held that NMSURF did not carry its burden of showing that the fees imposed by Santa Fe were "materially prohibitive."

It remains to be seen whether evidence of substantial fees or cost increases—or the aggregate effects of lesser fees or costs on the industry—would lead this court to find that fees based on gross revenues "materially inhibit" wireline deployment in violation of Section 253.

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