Cable technology for providing Internet access is in its infancy.² Most cable systems nationally have not yet been upgraded to allow subscribers to receive these services. For example, although TCI has already invested substantial sums in upgrading its systems nationally, only 60% of its system will be broadband-ready by the end of 1999. See In the Matter of Inquiry Concerning the Deployment of Advanced Telecommunications Capability to All Americans in a Reasonable and Timely Fashion, and Possible Steps to Accelerate Such Deployment Pursuant to Section 706 of the Telecommunications Act of 1996, CC Docket No. 98-146, FCC Rep. 99-5 (released February 2, 1999) ¶ 37 (hereinafter "Advanced Services Report"). Indeed, as of [begin page 4] December 31, 1998, there were only 350,000 subscribers for Internet access services using cable modem technology on all cable systems nationwide. See FCC Approval Order ¶ 7. In comparison, America Online, Inc. ("AOL") has 15 million subscribers for Internet access. See id. ¶ 65 n.197.

TCI is in the process of upgrading its cable facilities nationally so that it may offer programming services that use content from the Internet, among other sources. TCI has designed its network to provide these services through @Home, an on-line service and information provider owned in large part by four cable companies, including TCI. @Home has created its own national backbone network with servers and other facilities that collect and store information from the Internet and other sources; @Home also aggregates proprietary content for use by subscribers. By collecting and storing this information in its own network servers, @Home can provide access to these materials more quickly than directly over the Internet. See FCC Approval Order ¶ 72; Fifth FCC Competition Report ¶ 56. TCI purchases @Home’s services and then offers these services for sale to its individual subscribers. See Internet Over Cable, 1998 FCC LEXIS 4518, at *220-21. TCI is not yet offering @Home in the City and County and, in fact, TCI only has approximately 44,000 customers nationwide who subscribe to @Home.

TCI and other cable companies are also upgrading their systems so that they may offer telephone service. The technological upgrades and investment required to make cable systems suitable for providing telephone voice service are complicated and expensive and involve different technical considerations and improvements than those necessary for Internet-based services. See Fifth FCC Competition Report ¶ 58. At present, there is no wide-spread offering of cable telephony in the United States. Id. ¶ 59.

C. The Role of Local Franchising Authorities.

Historically, local franchising authorities like the City and County have attempted to regulate various aspects of cable television operations. Using their authority over public streets [begin page 5] and rights-of-way, local franchising authorities, at times, have sought to exercise the following kinds of control: regulating cable television rates, collecting franchise fees, obtaining free service for government agencies, seeking preferred programming, and approving transfers of cable systems to new owners or renewing cable television franchises to allow cable operators to continue to serve the public. See James C. Goodale, All About Cable § 3.02 (rates), § 4.02[1] (fees), § 4.02[2] (services), § 4.04 (renewal) (1981). The scope of power of local franchising authorities over such decisions is the subject of this litigation and has previously been the subject of much other litigation, acts of Congress, and a variety of FCC rulemakings, investigations, and orders that define and limit the role of local franchising authorities.

D. The Merger.

On June 23, 1998, AT&T signed a definitive merger agreement with TCI in a transaction valued at approximately forty-eight billion dollars. See Luppold Aff., Ex. 5 (Form 394). AT&T has stated that, by virtue of the merger, it intends to accelerate the upgrade of TCI’s cable infrastructure to extend the benefits of digital cable services, Internet access, and cable telephony throughout the TCI network. Id.

1. Federal Review.

The proposed merger required review by a number of federal agencies, including the DOJ and the FCC.³ During the course of this review, AOL and other Internet service provider ("ISP") competitors filed comments requesting that approval of the proposed merger be conditioned on granting to all on-line service providers and ISPs "access" or "interconnection" to the cable plant and the headend of each TCI cable system. See FCC Approval Order ¶ 75. In response to these [begin page 6] competitor demands, AT&T and TCI argued that it was improper to impose such a condition as part of an approval of a transfer of ownership. AT&T and TCI pointed out that the public interest would be served by the planned investment in TCI’s cable infrastructure and advised the DOJ and the FCC that these investments would be severely hampered if the merger were conditioned on the kind of access requested by the ISPs. Id. ¶¶ 88-90. Both the DOJ and the FCC approved the merger and rejected the requests to impose a mandatory access condition, id. ¶¶ 11 & n.47, 96, in part because AT&T/TCI met their burden of proving to the FCC that their merger serves the public interest. Finding that, "[i]n virtually every TCI franchise area, an incumbent local exchange carrier, at least two wireless providers, and the local electrical utility also have facilities that may prove to be viable platforms for residential broadband access," id ¶ 129, the FCC rejected allegations of the potential for competitive abuse. In turn, the FCC concluded : "while the merger is unlikely to yield anticompetitive effects, we believe it may yield public interest benefits to consumers in the form of quicker roll-out of high-speed Internet access services." Id. ¶ 94.

As part of the FCC merger review, the Mount Hood Cable Regulatory Commission ("MHCRC") (the citizen advisory board that recommended the mandatory access condition at issue here) submitted information to the FCC regarding the City and County’s mandatory access condition. See Luppold Aff., Ex. 37, at 2 ("MHCRC Comments"); see also FCC Approval Order ¶ 75 & n.219; id. ¶ 86 & n.251. Stating that the MHCRC had "sought to carry out . . . a broad, federally-encouraged policy" by its mandatory access condition, the MHCRC requested the FCC to provide "a nationwide resolution of these important national communications matters." MHCRC Comments, at 3; see also Luppold Aff. Ex. 17, at 3 (MHCRC memo to Multnomah County, referring to cable modem access as an issue "all agree must eventually be decided by the FCC and Congress"); id. Ex. 18, at 3 (Multnomah County acknowledging that the issue of access to the cable modem platform will be decided by the FCC and Congress). The FCC did provide a nationwide resolution by rejecting the mandatory access condition. FCC Approval [begin page 7] Order ¶ 96; id. ¶ 62 ("[T]he proposed merger does not actually cause public interest harm that warrants conditioning or denying the requested transfers.").

Concurrent with its review of the proposed AT&T/TCI merger, the FCC was engaged in a lengthy and more general study of the availability of broadband communications, including use of cable television facilities, throughout the United States. See Advanced Services Report ¶ 1. In this parallel proceeding, AOL and ISPs argued again that the FCC should impose on all cable operators an obligation to allow unaffiliated ISPs access to the operators’ cable television plant. Id. ¶ 100. The FCC’s Cable and Common Carrier Bureaus investigated the alternatives to cable for providing Internet access and determined that "multiple methods of increasing bandwidth are or soon will be available to a broad range of customers." Id. ¶ 101. As a result, the FCC determined that there was no basis at this time for mandating ISP competitor access to cable systems, although it determined it would continue to monitor developments and evaluate whether future action was required or appropriate. Id.

2. Local Review.

AT&T and TCI have also sought approval of their merger from local and state franchising authorities throughout the United States. Nine hundred and sixty local bodies have approved the merger after determining that AT&T has the technical, financial, and legal qualifications to assume control of TCI and its subsidiaries; none have imposed an unlawful condition like the City and County. These local authorities are allowed to review transfers of control over a cable system pursuant to their franchise agreements with TCI subsidiaries, as permitted under 47 U.S.C. § 537. The City and County both have entered into franchise agreements with two TCI subsidiaries, TCI Cablevision of Oregon, Inc. ("TCI/Oregon") and TCI of Southern Washington ("TCI/Washington").

Congress and the FCC have established limitations on the power of local franchising [begin page 8] authorities to preclude or condition any transfer. In fact, the FCC provides a form for cable operators to submit and local authorities to review in evaluating transfers, Form 394. That form requires information pertaining to the new owner’s technical, legal, and financial qualifications for providing the services required by the franchise agreement, and any information explicitly required by the franchise or local law. See In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, 8 FCC Rcd. 6828, app. B (1993) (Form 394); see also In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, Mem. Opin. & Order on Reconsideration, 10 FCC Rcd. 4654, ¶ 55 (1995) (Form 394 filing must include "information explicitly required by the franchise agreement or local law"). Federal law requires that the local authority complete its review within 120 days from the time the cable operator files its Form 394. See 47 U.S.C. § 537.

In recognition of these limitations on a local municipality’s authority to review a transfer of control, many franchise agreements include provisions similar to those found in Form 394. The franchise agreements at issue here, for example, limit review by both the City and County to an analysis of the technical, legal, and financial qualifications of the proposed transferee. See Luppold Aff., Ex. 1, ¶ 15.1 (Portland Franchise); id., Ex. 3, ¶ 14.1 (Multnomah County Franchise).

On September 2, 1998, AT&T and TCI provided to the City and County their FCC Form 394 setting out in detail the technical, legal, and financial qualifications of the combined AT&T/TCI entity. See Luppold Aff., Ex. 5. Because the City and County have delegated responsibility for cable television issues to the MHCRC, AT&T and TCI submitted the Form 394 to both the City and County through the MHCRC. Shortly after receiving the Form 394, the MHCRC adopted a resolution establishing a process and timeline for considering the proposed transfer of control. See Luppold Aff., Ex. 6, at 3 (Sept. 21, 1998 MHCRC Meeting Minutes).

[begin page 9]

On September 30, 1998, the MHCRC requested additional information from AT&T and TCI, including whether AT&T and TCI intended to introduce cable modem Internet services in its Portland and Multnomah County franchise areas. See id., Ex. 8, at 1, 4 (Oct. 12, 1998 Letter From AT&T to Portland Office of Cable Communications). AT&T and TCI responded in October 1998 and informed the MHCRC that they intended to deploy @Home, "a proprietary cable service on the residential cable system, offering high speed Internet access to its customers." Id. at 4. In the same letter, AT&T and TCI indicated a hope to begin testing the @Home service in the Portland area by January 1999. Id.

After receiving the response from AT&T and TCI, the MHCRC held its first public hearing on the transfer. Potential competitors of TCI, such as AOL, other ISPs and U S WEST, attended the hearing and offered testimony opposing approval of the transfer. The MHCRC then sent a second letter to AT&T asking whether ISPs would have access to the TCI cable modem platform. AT&T and TCI responded on November 9, 1998, advising the MHCRC that they had no legal obligation to provide ISPs with access to their facilities. See id., Ex. 13, at 7 (Nov. 9, 1998 Letter From AT&T to Portland Office of Cable Communications).

On November 16, 1998, the MHCRC adopted a resolution and proposed ordinance for review by the Portland City Council and Multnomah County Commission recommending that AT&T and TCI be required to provide "nondiscriminatory access" to TCI facilities for all providers of Internet and on-line services. The proposed ordinance demanded the following:

Non-discriminatory access to cable modem platform. Transferee shall provide, and cause TCI to provide, nondiscriminatory access to TCI’s cable modem platform for providers of internet and on-line services, whether or not such providers are affiliated with Transferee or TCI, unless otherwise required by applicable law. So long as cable modem services are deemed by law to be "cable services," as provided under Title VI of the Communications Act of 1934, as amended, Transferee and TCI agree to comply with all lawful requirements regarding such services, including, but not limited to, the inclusion of revenues from cable modem services and [begin page 10] access within the gross revenues of TCI’s cable franchises, and commercial leased access requirements.

See id., Ex. 20, at 2 (Dec. 10, 1998 MHCRC Memo to Portland).

On December 14, 1998, the MHCRC again recommended that approval of the AT&T/TCI transaction be conditioned on providing mandatory access. Id., Ex. 21, at 8. On December 17, 1998, the Portland City Council and Multnomah County Commissioners adopted the ordinances proposed by the MHCRC. When AT&T and TCI declined to accept the mandatory access condition, the City and County adopted ordinances denying approval of the proposed change in control. See id., Ex. 35 (Jan. 7, 1999 letter from Multnomah County); id., Ex. 36 (Jan. 8, 1999 letter from Portland). These two ordinances are challenged in this proceeding.

III. ARGUMENT

There are five separate bases upon which this Court should reject the condition that the City of Portland and Multnomah County have attempted to impose on the merger.

First, the franchise agreements that govern the relationship between TCI and the City and County contractually limit the conditions that the City and County may impose in approving a change in control of the cable franchisees. The condition imposed by the City and County exceeds those contractual limits.

Second, federal law expressly prohibits the City and County from requiring AT&T and TCI to provide such mandatory access to their cable facilities. The federal Cable Act was enacted, in part, for the purpose of preventing just the kind of piecemeal regulation found in the ordinances adopted by the City and County.

Third, the condition imposed by the City and County violates the First Amendment. Cable operators like TCI are speakers entitled to the protections of the First Amendment. By mandating that TCI carry the speech of other ISPs, the City and County have violated the First Amendment. Fourth, the condition imposed here impairs TCI’s contract rights, in violation of the Oregon and [begin page 11] United States Constitutions. Finally, the ordinances adopted by the City and County unlawfully place burdens upon interstate commerce, in violation of the Commerce Clause of the United States Constitution.

Each of these arguments provides independent and sufficient grounds for granting the relief that AT&T and TCI request in this Motion. The condition in the City and County ordinances requiring mandatory access to AT&T and TCI’s cable systems must be set aside.

A. The Franchise Agreements Prohibit the Condition for Approval.

The franchise agreements between plaintiffs TCI/Oregon and TCI/Washington and defendants City of Portland and Multnomah County preclude the imposition of conditions relating to access for ISPs that the City and County seek to impose here. The City entered into a franchise with TCI/Oregon through Ordinance No. 166469, as modified and extended by Ordinance No. 172543, passed by the Council on July 30, 1998 (hereinafter "Portland Franchise"), see Luppold Aff., Ex. 1, and with TCI/Washington through Ordinance No. 169417, passed by the City Council on October 25, 1995 (hereinafter "HI Franchise"). Similarly, the County entered into a franchise with TCI/Oregon, as authorized by Resolution No. 97-124, passed by the Multnomah County Board of Commissioners on June 26, 1997 (hereinafter "Multnomah Franchise"), and with TCI/Washington under Ordinance No. 838, passed by the Board of Commissioners on October 26, 1995 (hereinafter "HI Franchise"). See Luppold Aff., Exs. 3 & 2. Each of these agreements is a binding and enforceable contract between the government entity and the franchisee. See Rose City Transit v. City of Portland, 18 Or. App. 369, 380, 525 P.2d 1325 (1974). As the court in Rose City Transit held, quoting Eugene McQuillin, 12 McQuillin Municipal Corporations § 34.06 (3d ed. 1970):

"When the [franchise] is granted and accepted and all conditions imposed incident to the right performed, it ceases to be a mere license and becomes a valid contract, and constitutes a vested [begin page 12] right. . . . The conditions therein are binding, the same as the terms of any other contract, both on the municipality and the company, and their successors."

Rose City Transit, 18 Or. App. at 381.

Because each franchise is a binding and enforceable contract, "the rights and liabilities of the parties to that contract are evaluated in standard contract terms." Id. Each of these contracts directly addresses defendants’ right to condition their consent to a transfer or change in control. Each does so in a manner that precludes imposition of a condition such as mandatory access for ISPs.

1. The HI Franchise.

Paragraphs 3.5 and 3.6 of the HI Franchise demonstrate the limited powers granted to the County under the agreement. These provisions govern transfers – a change in the actual franchisee operating the cable system through sale, merger or assignment – and changes in control in which the franchisee itself remains the same, but its ultimate parent changes. Here, the TCI subsidiaries holding the franchises will remain in place after the merger occurs. Only the identity of the ultimate parent company will change. Whether the transaction is treated as a transfer or a change in control, the contractual limits on the County foreclose the conditions the County has imposed here.

Section 3.5 of the HI Franchise limits the County’s control over a transfer to the same authority "as it is empowered to exercise over a change in control as provided for in Section 3.6 below." It also requires that the County’s consent to a transfer "not be withheld unreasonably."

Section 3.6 contains the following limitation on the conditioning of such consent, whether the transaction is a transfer or a change in control:

For the purpose of determining whether they will consent to such change, the County may inquire whether the prospective controlling [begin page 13] party qualifies to perform the obligations of the Cable Company under this agreement. . . . The County may make its approval of a change in control subject to any conditions they deem appropriate so long as such conditions are limited to those deemed necessary by the County to ensure strict performance of this agreement by the cable company."

(Emphasis added.)

Under the clear terms of Section 3.6, the County may impose only conditions that relate to performance under the existing agreements. Therefore, the contract precludes any expansion of or alteration to the terms or the scope of the existing franchise agreement through conditions imposed during a change in control.

The County’s attempt to condition its consent on mandatory access for ISPs goes beyond the terms of the existing contract, which makes no reference to that subject. Therefore, the County’s attempt to impose the mandatory access condition in the HI Franchise is a breach of the express terms of contract between the County and TCI/Washington and may not be enforced. See J.G.N. Corp. v. National Am. Ins. Co., 736 F. Supp. 1570, 1573 (D. Or. 1988) (Panner, C.J.) ("Neither party should be required to perform additional, material terms to which it did not explicitly or implicitly agree."); McQuillin Municipal Corporations, supra § 19.44 (a city "cannot in derogation of its contract, by ordinance or otherwise, impose additional burdens on the grantee or vary the conditions contained in the contract").

2. The Portland and Multnomah County Agreements.

The Portland Franchise and Multnomah County Franchise contracts also limit the conditions that may be imposed in approving a change in control or transfer of a TCI franchise. Section 15.1 of the Portland Franchise states in pertinent part:

In determining whether the City will consent to any Transfer, the City may inquire into the technical, legal, and financial qualifications of the prospective party. . . . The City may condition any transfer [begin page 14] upon such conditions, related to the technical, legal, and financial qualifications of the prospective party to perform according to the terms of the Franchise, as it deems appropriate.

(Emphasis added.) The language in Section 14.1 of the Multnomah County Franchise is virtually identical:

In determining whether the County will consent to any Transfer, the County may inquire into the technical, legal, and financial qualifications of the prospective transferee. . . . The County may condition any such Transfer upon such conditions, related to technical, legal, and financial qualifications of the prospective transferee to perform according to the terms of the Franchise, as it deems appropriate.

(Emphasis added.)

Each of these provisions define and limit the nature of the conditions which the City or County may impose during a transfer. By their terms, they limit such conditions to those "related to the technical, legal, and financial qualifications of [AT&T] to perform according to the terms of the Franchise." These qualifications do not encompass mandatory access for ISPs and the subject of mandatory access for ISPs is mentioned nowhere in the existing Portland or Multnomah County franchises.

The proceedings before the local franchising authorities demonstrate that the condition which the City and County attempt to impose is not related to the qualifications of AT&T to perform under the existing contracts. As the MHCRC staff made clear, and hundreds of other local and state authorities have specifically found, there was never any question of AT&T’s technical, legal, and financial qualifications to perform under such franchises. See Luppold Aff., Ex. 12, at 2 (memo from MHCRC staff); id. Ex. 14, at 2 (Nov. 16, 1998 MHCRC Meeting Minutes); see also FCC Approval Order ¶ 75 (citing AT&T’s financial strength as a reason to require access to the cable modem platform). Any attempt to enforce the mandatory access condition is a breach of the express terms of the contracts with plaintiffs; the condition is not [begin page 15] enforceable and is void. See J.G.N. Corp., 736 F. Supp. at 1573; McQuillin Municipal Corporations, supra, § 19.44.

These contractual limitations on the City and County are no accident. The restrictions mirror the federal statutory and regulatory scheme regarding consents to transfers or changes in control. The federal statute (47 U.S.C. §§ 541, 537, 546), FCC regulations, and FCC Form 394 affirm the right of cable operators to rely on their existing franchises during and after any transfer or change in control. The FCC’s Form 394 limits review of a transfer or change in control by local authorities to a reasonable consideration of the transferee’s technical, legal, and financial abilities to perform the obligations of the existing franchise agreement; it does not authorize the imposition of unrelated additional conditions. See In the Matter of Implementation of Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, 8 FCC Rcd. 6828, app. B (1993) (Form 394). Defendants’ attempts to impose conditions beyond those related to the technical, legal, and financial qualifications of AT&T to perform under the existing franchises are invalid and void.

B. The Cable Act Prohibits the City and County From Requiring AT&T and TCI to Open Their Cable System to All Online and Internet Service Providers.

Federal law defines the permissible regulation of cable operators and provides this Court with an independent basis for overturning the municipal regulations at issue here. When Congress enacted the federal Cable Act, 47 U.S.C. § 521, et seq., it preempted local authorities from imposing access conditions, as part of approving transfers or otherwise. The City and County have acted outside the scope of their defined authority in imposing the mandatory access condition.⁴

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Prior to 1984 no federal statute comprehensively governed the cable television industry. Instead, cable operators were initially subjected to a patchwork of requirements imposed by state and local governments. Recognizing the need for a nationwide policy, the FCC began to regulate cable systems. See United States v. Southwestern Cable Co., 392 U.S. 157, 174-77 (1968); see also Midwest Video Corp. v. FCC, 871 F.2d 1025, 1036 (8th Cir. 1978) ("[T]he rapid growth of communications technology requires a unified system of regulation."), aff’d, 440 U.S. 689 (1979). The FCC found jurisdiction over cable in the Communications Act of 1934. See 47 U.S.C. § 151. The Commission specifically determined that cable operators were not communications common carriers over which it had jurisdiction under Title II of the Communications Act. See Cable Television Ass’n of N.Y., Inc. v. Finneran, 954 F.2d 91, 95-96 (2d Cir. 1992); see also FCC v. Midwest Video Corp., 440 U.S. 689, 701 n.11 (1979) (cable operators are not common carriers under the Communications Act); Southwestern Cable Co., 392 U.S. at 169 n.29 (same).

The FCC asserted "exclusive jurisdiction over all operational aspects of cable communication, including signal carriage and technical standards," while state and local authorities were given responsibility for delineating cable franchise boundaries, maintaining public rights-of-way, and regulating the construction of the cable system. See Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 702 (1984). The FCC’s approach to cable regulation is thus described as a "deliberately structured dualism." Id.; see also id. at 708 ("[T]he Commission has determined that only federal pre-emption of state and local regulation can assure cable systems the breathing space necessary to expand vigorously and provide a diverse range of program offerings to [begin page 17] potential cable subscribers in all parts of the country."); Guidry Cablevision/Simul Vision Cable Sys. v. City of Ballwin, 117 F.3d 383, 384-85 (8th Cir. 1997).

In 1984, Congress passed the Cable Act, defining the FCC’s express authority over cable television by adding a Title VI to the Communications Act, to establish "a national policy concerning cable communications" and to create "guidelines for the exercise of Federal, State, and local authority with respect to the regulation of cable systems." 47 U.S.C. § 521(1), (3); see also H.R. Rep. No. 98-934, at 23 (1984), reprinted in 1984 U.S.C.C.A.N. 4655, 4659 (hereinafter "House Report") ("The Committee has determined a need for national standards which clarify the authority of Federal, state and local government to regulate cable through the franchise process. These standards and procedures are the heart of H.R. 4103.") (emphasis added). "The Cable Act sought to balance two conflicting goals: ‘preserv[ing] the critical role of municipal governments in the franchise process,’ while affirming the FCC’s ‘exclusive jurisdiction over cable service, and overall [sic] facilities which relate to such service.’" City of New York v. FCC, 814 F.2d 720, 723 (D.C. Cir. 1987) (internal citations omitted) (quoting House Report at 19), aff’d, 486 U.S. 57 (1988); see also Guidry Cablevision, 117 F.3d at 385. Thus, the Cable Act adopted the FCC’s "deliberately structured dualism" by continuing to rely on municipalities to award franchises, collect franchise fees, monitor cable systems’ use of rights-of-way, and enforce customer service requirements; outside of these spheres, the Act limited franchising authorities’ power.

The legislative history reflects Congress’s intent to restrict the power of local governments over cable television. For example, the House Report contains the following:

H.R. 4103 establishes a national policy that clarifies the current system of local, state and Federal regulation of cable television. This policy continues reliance on the local franchising process as the primary means of cable television regulation, while defining and limiting the authority that a franchising authority may exercise through the franchise process.

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House Report at 19 (emphasis added). In regards to Section 624, the Report states that it "is intended to provide procedures for and impose limitations on a franchising authority regarding the establishment of requirements related to services, facility, and equipment provided by a cable operator." Id. at 68 (emphasis added); see also id. at 29 (in describing the Act’s treatment of cable operators’ provision of noncable services, the House Report states that, "[t]his limited, evolutionary approach protects cable companies from unnecessary regulation") (emphasis added); 130 Cong. Rec. 32,284 (1984) (on the floor of the House, Congressman Dingell, a key architect of the Cable Act, spoke of "the legislation’s purpose of protecting cable operators") (emphasis added).

Consistent with the FCC’s pre-Cable Act assertion of jurisdiction, the Act retains federal control over cable programming, access, and signal carriage, preempting local authorities from exercising any control over such issues independent of the Cable Act.⁵ The local franchising authority’s power to impose the mandatory access condition is preempted by the express terms of the Act and is necessary to effectuate the congressional objectives reflected in the language and structure of the Cable Act. See Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995); Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691, 698-99 (1984); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381, 387 (9th Cir. 1995).⁶ "The critical question in any pre-emption analysis is always whether Congress intended that federal regulation supersede state law." Louisiana Pub. Serv. Comm’n v. FCC, 476 U.S. 355, 369 (1969). This question was [begin page 19] clearly answered by Congress: the national policy on programming access to cable systems must be controlling and cannot coexist with piecemeal local regulation.

1. The Cable Act Preempts the City and County From Requiring Mandatory Access to AT&T and TCI’s Cable Modem Platform.

In Section 636(c), the Cable Act declares its intention to preempt and supersede "any provision of law of any State, political subdivision, or agency thereof, or franchising authority, or any provision of any franchise granted by such authority, which is inconsistent with this Act." 47 U.S.C. § 556(c). The statute prohibits local governments from imposing requirements that abrogate any of the rights or obligations provided by the Act. See Allarcom Pay Television, Ltd., 69 F.3d at 386 (Section 636 prohibits states from imposing obligations "contrary to rights or obligations contained in the [Communications Act]"); Cablevision Sys. Corp. v. Town of East Hampton, 862 F. Supp. 875, 881-83 (E.D.N.Y. 1994) (Congress preempted local franchising authorities from requiring cable operators to carry additional channels on the basic tier by specifying the contents of the basic tier in Section 623 of the Act), aff’d, 57 F.3d 1062 (2d Cir. 1995).

Section 624(a) thus provides that "[a]ny franchising authority may not regulate the services, facilities, and equipment provided by a cable operator except to the extent consistent with this title." 47 U.S.C. § 544(a). To emphasize this limitation, Section 624(f)(1) states that "[a]ny Federal agency, State, or franchising authority may not impose requirements regarding the provision or content of cable services, except as expressly provided in this title." 47 U.S.C. § 544(f)(1) (emphasis added). Similarly, Section 624(b)(1) provides that a franchising authority may not "establish requirements for video programming or other information services." See 47 U.S.C. § 544(b)(1).⁷ Separately, Section 621(b)(3)(D) prohibits any local franchising authority [begin page 20] condition on a franchise grant, renewal, or transfer that would "require a cable operator to provide any telecommunications services or facilities." 47 U.S.C. § 541(b)(3)(D). Working together with Section 636(c), these provisions ensure that local authorities may not evade the preemptive effect of the Cable Act.

By 1984, Congress had learned that unrealistic and uneconomic franchise requirements threatened to stifle the growth and development of cable systems, and Congress wanted to assure that local governments did not fall victim to the "more is always better" mentality that had driven their initial franchising actions in the 1960s and 1970s:

Cities were likewise caught up in the ‘blue sky’ potential of cable. Cities began to seek greater system capacity, more public access facilities and support, and one- and two- way communications systems for schools and municipal offices, often at minimal or no direct charge to government.

House Report at 21-22. Congress therefore has limited the scope of local authority in order to protect the cable operators’ interest in its investment. See, e.g., House Report at 26 ("Such a provision is necessary to protect the heavy investment made by cable operators in a cable system."); id. at 72 (expressing congressional desire to "encourage investment by the cable operator at the time of the initial franchise and during the franchise term" and "ensure such investment will not be jeopardized at franchise expiration without actions on the part of the operator justifying such a loss of business").⁸

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2. The City and County Are Preempted From Imposing Requirements Regarding Access to the Cable System For Preferred Programming.

Regardless of the setting or circumstance, local franchising authorities have no power to demand mandatory "open" access. Instead, the Cable Act leaves cable operators in control of access to their cable systems and programming decisions unless Congress has expressly abrogated that control. See infra Part III.C (describing cable operators’ First Amendment rights); see also House Report at 31 (Section 612 provides a "comprehensive scheme for commercial access" that "separates editorial control over a limited number of cable channels from the ownership of the cable system itself"). Even where Congress has done so, it has made the FCC the body with responsibility for and jurisdiction over disagreements relating to such access requirements.

Congress carved out three limited exceptions to cable operator control over access and programming: mandating carriage of local commercial broadcast stations and noncommercial educational television, see 47 U.S.C. §§ 534, 535 (the "must carry" rules);⁹ requiring cable operators to provide channels for public, educational, and governmental programming, see 47 U.S.C. § 531;¹⁰ and designation of a limited number of cable channels for use by unaffiliated commercial providers. See 47 U.S.C. § 532 ("leased access"). The City and County’s demand for mandatory competitor access does not fit in any of these three categories. ISPs are not broadcasters covered by the "must carry" rule. Nor are they public, governmental, or educational entities for whom local franchising authorities may demand access. See House Report at 30 (the [begin page 22] purpose of public access channels is to provide an outlet for "groups and individuals who generally have not had access to the electronic media," educational access channels are intended for local schools, and governmental access channels are meant to show the local government at work); see also Time Warner Cable of New York City v. Bloomberg L.P., 118 F.3d 917, 926-27 (2d Cir. 1997) (city could not, consistent with the franchise, force carriage of a commercial news network on an educational or governmental access channel).

Imposition of the mandatory access condition by the City and County also finds no support in the "leased access" provisions of Section 612. This section only requires the leasing of channels, subject to payment of appropriate fees and negotiation of acceptable terms and conditions, to sources of "video programming." See 47 U.S.C. § 532(a). The Act defines "video programming" as "programming provided by, or generally considered comparable to programming provided by, a television broadcast station." 47 U.S.C. § 522(20). Section 612 also makes clear that control over the terms and conditions of leased access rests with the cable operators and the FCC; local franchising authorities do not have a role at all. See, e.g., 47 U.S.C. § 532(b) (cable operator must designate channels consistent with limits established by the Act); 47 U.S.C. § 532(c) (cable operators establish the terms and conditions for leased access consistent with guidelines promulgated by the FCC); Luppold Aff., Ex. 14, at 3 (Nov. 16, 1998 MHCRC meeting minutes) (MHCRC staff admitted that "the FCC oversees leased access provisions of the Cable Act"). Moreover, Section 612(d) and (e) require that complaints based on a cable operator’s effectuation of its leased access obligations go either to federal district court or the FCC. See, e.g., In re Lorilei Communications, Inc. d/b/a The Firm v. TCA Cable of Fayetteville, Arkansas, 13 FCC Rcd. 1687 (1997) (adjudicating alleged violations of the leased access rules by the cable operator). Local franchising authorities have no jurisdiction over such disputes.

Even if ISPs provided "video programming," which they do not, the local franchising authorities’ mandatory access requirement violates Section 612. The Act specifies limits on the [begin page 23] number of channels cable operators must make available for leased access, see 47 U.S.C. § 532(b)(1), and states that franchising authorities may not require designations in excess of that required by the Act. See 47 U.S.C. § 532(b)(2). Here, the City and County are demanding mandatory access for ISPs with no limits. The absence of any express congressional grant of permission for the City and County’s mandatory access requirement renders it preempted by the Cable Act pursuant to Sections 636(c) and 624(a).

3. The Cable Act Preempts Local Franchising Authorities From Requiring Cable Operators to Become Common Carriers.

"Any cable system shall not be subject to regulation as a common carrier or utility by reason of providing any cable service." 47 U.S.C. § 541(c). Ignoring this prohibition, the City and County’s condition impermissibly imposes common carrier duties on AT&T and TCI.¹¹ A "common carrier," by definition, is an entity that is required to offer service to all members of the public on equal terms, see California v. FCC, 905 F.2d 1217, 1240, n.32 (9th Cir. 1990), and that transmits "intelligence of the user’s own design and choosing." Midwest Video Corp. v. FCC, 571 F.2d 1025, 1050-51 (8th Cir. 1978), aff’d, 440 U.S. 689 (1979); see also FCC v. Midwest Video Corp., 440 U.S. at 700-02. The City and County’s demand that AT&T and TCI offer the Internet service of any and all ISPs would make AT&T and TCI common carriers: the companies could no longer choose whether and on what terms they wished to offer such access nor would they have control over the content of the communications sent over their facilities by unaffiliated ISPs.¹²

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No local franchising authority has the right to make AT&T and TCI common carriers. Congress has reserved this power exclusively for itself, barring the FCC as well as local regulators from imposing common carrier obligations. FCC v. Midwest Video, 440 U.S. at 708-09 (in the absence of express congressional intent to impose common carrier requirements, the Supreme Court refused to allow the FCC to impose access obligations on cable operators).¹³ In its order approving the AT&T/TCI merger, the FCC "recognize[d] and adhere[d] to the distinctions Congress drew between cable and common carrier regulation." See FCC Approval Order ¶ 29. The City and County’s mandatory access requirement ignores Congress’s distinctions by forcing common carrier obligations on AT&T and TCI. Defendants are preempted from imposing the mandatory access condition.

4. Section 624(e) Preempts Franchising Authorities From Regulating AT&T and TCI’s Use of Their Cable Facilities.

Prior to amendment in 1996, Section 624(e) allowed franchising authorities to require cable operators to meet certain minimum technical standards established by the FCC. The House Commerce Committee, however, found that this led to "disjointed local regulation" that was inappropriate for "today’s intensely dynamic technological environment." See H.R. Rep. No. 104-204, at 110 (1995). Congress therefore amended Section 624(e) in 1996 to take away [begin page 25] franchising authority control over the cable system’s technical standards through the following addition: "No State or franchising authority may prohibit, condition, or restrict a cable system’s use of any type of subscriber equipment or any transmission technology." 47 U.S.C. § 544(e). The legislative history accompanying the 1996 amendment clarifies that Section 624(e)’s preemption applies to local regulation of all "technical standards" in addition to "subscriber equipment" and "transmission technology." See H.R. Conf. Rep. No. 104-458, at 168 (1996); see also City of New York v. FCC, 486 U.S. 57, 69-70 (1988) (FCC had the authority to preempt local regulation of technical standards under the 1984 Cable Act). The City and County’s requirement that AT&T and TCI open their cable system to all online and Internet service providers impermissibly regulates the use of transmission technology. The mandatory access requirement is inconsistent with the Cable Act and is preempted.

5. The City and County’s Access Requirement Would So Frustrate Congressional Objectives That It Must Be Preempted.

Congressional intent to preempt is also found if local law would frustrate Congress’s objectives or if compliance with both local and federal law would not be possible. See Capital Cities Cable, 467 U.S. at 699; Jones v. Rath Packing Co., 430 U.S. 519, 540-42 (1977) (because the major purpose of a statute was to facilitate comparisons based on information in food labels, the state’s different labeling requirements would frustrate that purpose and were therefore preempted).

In enacting the Cable Act, Congress sought to eliminate the patchwork of inconsistent regulations applied to cable operators by the local franchising authorities. See 47 U.S.C. § 521(1), (3). Congress determined that issues like access to the cable system and programming carriage demanded a national policy and were, therefore, left to federal regulators. See City of New York v. FCC, 814 F.2d 720, 723 (D.C. Cir. 1987) ("The Cable Act sought to balance two conflicting goals: ‘preserv[ing] the critical role of municipal governments in the franchise [begin page 26] process,’ while affirming the FCC’s ‘exclusive jurisdiction over cable service, and overall [sic] facilities which relate to such service.’") (quoting House Report at 19, 95 (1984)) (internal citations omitted), aff’d, 486 U.S. 57 (1988). In the same vein, Congress has expressed a goal of developing a national policy for new communications technologies. See California v. FCC, 75 F.3d 1350, 1359 (9th Cir.) (Congress has given to the FCC "the mission of encouraging ‘the provision of new technologies and services to the public’") (quoting 47 U.S.C. § 157), cert. denied, 517 U.S. 1216 (1996).

Congress also has specifically noted the benefits that minimal governmental regulation has brought to the development of cable and online services. One of the Cable Act’s purposes was to "promote competition in cable communications and minimize unnecessary regulation that would impose an undue economic burden on cable systems." See 47 U.S.C. § 521(6). In Section 230(a)(4) of the Communications Act, Congress found that the "Internet and other interactive computer services have flourished, to the benefit of all Americans, with a minimum of government regulation." 47 U.S.C. § 230(a)(4). Likewise, Congress has sought "to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation." 47 U.S.C. § 230(b)(2). The municipal regulations at issue would frustrate Congress’s intention to create minimal regulatory burdens for cable, online, and Internet services.

The local franchising authorities’ actions are also preempted because it is impossible for AT&T and TCI to comply simultaneously with the mandatory access requirement and national policy that allows the market, not regulation, to guide development of such access. The FCC has determined it will not demand that cable operators provide access to their cable plant for ISPs. See FCC Approval Order ¶ 96; Advanced Services Report ¶ 101. AT&T and TCI, therefore, cannot at the same time be forced to provide open access to all ISP competitors under the ordinances at issue here and comply with the FCC's decision to foster technological development by allowing cable operators to control access to their facilities. Where there has been a decision [begin page 27] not to regulate, it may reflect a decision that regulation is not appropriate, a decision entitled to preemptive effect). Cf. Freightliner Corp. v. Myrick, 514 U.S. 280, 286 (1995); Ray v. Atlantic Richfield Co., 435 U.S. 151, 177-78 (1978).

C. The Mandatory Access Condition Violates the First Amendment.

"Cable programmers and cable operators engage in and transmit speech, and they are entitled to the protection of the speech and press provisions of the First Amendment." Turner Broadcasting Sys., Inc. v. FCC [Turner I], 512 U.S. 622, 636 (1994). The City and County’s proposed mandatory access condition unconstitutionally burdens TCI’s speech, because it compels TCI to carry the speech of others, namely competitive ISPs and on-line service providers. By "impos[ing] special obligations upon [a] cable operator[]" the mandatory access condition invokes a "measure of heightened First Amendment scrutiny." Id. at 641.

Content-based laws burdening cable operators are subject to "strict" or "close" scrutiny, while those that are content-neutral are analyzed under the less demanding "intermediate" scrutiny test. See id. at 642; Denver Area Educational Telecommunications Consortium, Inc. v. FCC, 518 U.S. 727, 743 (1996) (plurality opinion).¹⁴ If the mandatory access condition is viewed as "content neutral," intermediate scrutiny is the standard. See id. at 662. Under intermediate scrutiny, a challenged government regulation will be upheld only if it 1) "‘further[s] an important or substantial government interest . . . unrelated to the suppression of free expression’"; and 2) "‘the incidental restriction on alleged First Amendment freedoms is no greater than is essential to the furtherance of that interest.’" Id. at 662 (quoting United States v. O’Brien, 391 U.S. 367, [begin page 28] 377 (1968)). The government bears the burden of proving each element in the test. See id. at 664-65.

For the government interest to be important or substantial, there must naturally be a government interest. The law therefore requires that the government articulate that interest clearly. See Turner Broadcasting Sys., Inc. v. FCC [Turner II], 117 S. Ct. 1174, 1187-88 (1997) (declining to accept recharacterizations of the government interest different from those explicitly stated in the "congressional findings"); see also Neal K. Katyal, Judges as Advicegivers, 50 Stan. L. Rev. 1709, 1764 (1998) ("Turner essentially requires Congress, if it seeks to survive constitutional challenge, to clearly articulate the reasons behind its policies."). Here, the City and County have failed to articulate any substantial interest or supporting factual record. See Luppold Aff., Ex. 29, at 2 (Dec. 17, 1998 Multnomah County Resolution 98-208) (only mention of Internet access in the findings is contained in a single clause listing "TCI’s proposed cable modem Internet platform and services, and compliance with applicable cable commercial requirements" as one of the County’s "specific concerns"); id. Ex. 32, at 2 (Dec. 17, 1998 Portland Ordinance 172955) (same).

While courts ordinarily "accord substantial deference to the predictive judgments of Congress" regarding the factual basis of its lawmaking, Turner I, 512 U.S. at 665, when the legislative body fails to articulate detailed or supportable factual findings, deference is unwarranted. See Sable Communications of Cal., Inc. v. FCC, 492 U.S. 115, 129 (1989) (rejecting deference because, "aside from conclusory statements during the debates by proponents of the bill, as well as similar assertions in hearings . . . the congressional record presented to [the Court] contain[ed] no evidence as to how effective or ineffective the . . . regulations were or might prove to be"); Carver v. Nixon, 72 F.3d 633, 644 (8th Cir. 1995) (finding a "failure of proof as to any of the facts Turner . . . would require that we consider to justify according deference"). Furthermore, states or municipalities are not entitled to the same deference as Congress since "the deference recognized in Turner is the consequence, at least in part, of [begin page 29] the constitutional delegation of legislative power to a coordinate branch of government, a factor not present in [this] case." California Prolife Council Political Action Committee v. Scully, 989 F. Supp. 1282, 1299 (E.D. Cal. 1998); see also Russell v. Burris, 978 F. Supp. 1211, 1226 (E.D. Ark. 1997) ("[T]he Supreme Court . . . [has never] held that special deference should be given to state laws."); cf. Carver, 72 F.3d at 644 (stating that the court would not decide whether Turner deference should be given to state laws). But cf. One World One Family Now v. City and County of Honolulu, 76 F.3d 1009, 1013 (9th Cir. 1996) (assuming some deference due to municipality).

In the case of the "must carry" statute upheld by the Supreme Court in Turner, for example, Congress made a series of explicit factual "findings" in the statute itself, facts upon which it relied in determining the need for must carry. See Turner I, 512 U.S. at 665 (citing Pub. L. No. 102-385, sec. 2(a)(16), 106 Stat. 1460, 1462 (1992)); id. at 662 (citing S. Rep. No. 102-92, at 58 (1991), reprinted in 1992 U.S.C.C.A.N. 1133, 1191; H.R. Rep. No. 102-628, at 63 (1992), reprinted in 1992 U.S.C.C.A.N. 1231, 1245; Pub. L. No. 102-385, sec. 2(a)(8), (9), (10), 106 Stat. at 1461). Indeed, the record was replete with evidence about the reasons for must carry. See Turner II, 117 S. Ct. at 1191-97; id. at 1185 (factual record supporting Congress’s finding consisted of "tens of thousands of pages"). Here, in marked contrast, the City’s ordinance and the County’s resolution contain only abbreviated and conclusory support for the need for any mandatory access condition to be imposed on a nascent medium; there is by no means the extensive factual background the Supreme Court requires to sustain the constitutionality of laws that burden a cable operator’s First Amendment rights. Indeed, the FCC itself conducted a national study of the issue and refused to impose access conditions because "multiple methods of increasing band width are or soon will be available to a broad range of customers." See Advanced Services Report ¶ 101 (quoted in FCC Approval Order ¶ 62). Yet defendants claim – without adopting any formal findings – that they must impose the same conditions. Contrast Luppold Aff., Ex. 29, at 2 (Dec. 17, 1998 Multnomah County Resolution 98-208); id. Ex. 32, at 2 (Dec. 17, 1998 Portland Ordinance 172955); id. Ex. 30, at 16 (Norman Thomas, chair of the MHCRC, [begin page 30] acknowledging to the Portland City Council that the MHCRC has "barely looked at" the cable modem issue but that constituents want open access) with FCC Approval Order ¶ 95. Because the City and County cannot show that the mandatory access condition furthers an important or substantial interest, the condition must be invalidated as violative of TCI’s right of free expression.¹⁵

Finally, the conditions imposed by the City and County fail intermediate scrutiny because they are not "narrowly tailored." The conditions must not "‘burden substantially more speech than is necessary to further the government’s legitimate interests.’" Turner I, 512 U.S. at 662 (quoting Ward v. Rock Against Racism, 491 U.S. 781, 798 (1989)). There is no reasonable fit between the unlawful means chosen by the City and County and the ill-defined ends they hoped to achieve. The condition burdens speech "substantially more than necessary" and must be lifted.

D. The Mandatory Access Condition Violates Article 1, Section 21 of the Oregon Constitution by Substantially Impairing Established Contract Rights.

The actions of defendants not only breach the franchising agreements, federal law, and the First Amendment; they also violate the Oregon and United States Constitutions in other ways. Both Constitutions prohibit states from impairing contracts, including franchises. See, e.g., Paragould Cablevision, Inc. v. City of Paragould, 930 F.2d 1310, 1314-15 (8th Cir. 1991) (franchise is a contract); Storer Cable Communications v. City of Montgomery, 806 F. Supp. 1518, 1562-64 (M.D. Ala. 1992) (contracts clause analysis involving cable franchise). The [begin page 31] mandatory access condition contradicts the express contract terms on which TCI relied and, therefore, fail to comply with either constitution.

The Oregon Constitution mandates that "[n]o . . . law impairing the obligation of contracts shall ever be passed." Or. Const. art. 1, § XXI. The provision includes contracts between the state, or its subdivisions, and private parties. Hughes v. State, 314 Or. 1, 12-13, 838 P.2d 1018 (1992). Oregon applies a two-part test when analyzing violations of the Contracts Clause. First, this Court must determine that a contract exists. Second, it must look at whether the state impaired any rights in that contract. Id. A court must not balance the severity of the impairment against the state, or public, interest in abrogating the contract. Id. at 14 n.16; Eckles v. State, 306 Or. 380, 398-99, 760 P.2d 846 (1988) (noting that the state cannot justify an impairment of contract by invoking the general police power).

Defendants have violated the Oregon Contracts Clause by requiring mandatory access as a condition for approving the franchise transfer between AT&T and TCI. Two franchise agreements specifically limit acceptable conditions to "technical, legal, and financial qualifications." See Luppold Aff., Ex. 1, ¶ 15.1 (Portland Franchise); id., Ex. 3, ¶ 14.1 (Multnomah County Franchise). The third agreement limits the franchising authority to inquiries regarding "whether the prospective controlling party qualifies to perform the obligations of the Cable Company under this agreement." Id., Ex. 2, ¶ 3.6 (HI Franchise). Again, this restricts the franchising authority to an examination of AT&T’s ability to perform existing obligations. Conditions regarding unrestricted access to TCI’s facilities exceed these restrictions and abrogate the contracts.

This abrogation will substantially impair TCI’s rights. The conditions require TCI to sacrifice control over its facilities and provide access to all comers. TCI accepted franchises that specifically limited municipal control, and TCI relied on those contract limitations to protect its investment in the development and maintenance of cable facilities. See Hughes, 314 Or. at 31 (relied that pension would not be taxed); Eckles, 306 Or. at 398-99 (relied on insurance fund). A [begin page 32] condition imposed now would undermine TCI’s reasonable business expectations based on specific contract language.

Oregon courts have struck down comparable actions under the Contracts Clause. As stated by the Oregon Supreme Court, "[o]nce offered and accepted, a . . . promise by the state is not a mirage." Oregon State Police Officers’ Ass’n v. State, 323 Or. 356, 375, 918 P.2d 765 (1996). Oregon courts find violations of the Contracts Clause when the government nullifies an express purpose of the contract, especially when the nullification increases costs and decreases benefits for the private party. Hughes, 314 Or. at 31 (striking law that subjected formerly exempt benefits to income taxes); Eckles, 306 Or. at 398-99 (striking law that allowed state to spend targeted insurance funds for any purpose, decreasing value of fund). The condition defendants wish to impose on TCI would similarly nullify the transfer provisions of the contracts to the severe detriment of TCI. Such unilateral alterations breach the contract and violate the Oregon Constitution. This Court should strike down the ordinances and allow the transfer to proceed as the contracts dictate.

E. The Mandatory Access Condition Violates Article 1, Section 10 of the United States Constitution.

The U.S. Constitution contains a similar prohibition on impairment of contracts. U.S. Const. art. 1, § 10 ("No State shall . . . pass any . . . Law impairing the Obligation of Contracts"). Courts must strike a provision if it "substantially impairs" a contract. Keystone Bituminous Coal Ass’n v. DeBenedictis, 480 U.S. 470, 504-505 (1987); United States Trust Co. v. New Jersey, 431 US. 1, 17, 25-26 (1977); State of Nevada Employees Ass’n, Inc. v. Keating, 903 F.2d 1223, 1226 (9th Cir. 1990). Suspicion heightens when the state is a party to the contract, as it is in the franchise with TCI. See, e.g., Energy Reserves Group, Inc. v. Kansas Power and Light Co., 459 U.S. 400, 413 n. 14 (1983); Trust Co., 431 U.S. at 25-26; Keating, 903 F.2d at 1226.

[begin page 33]

The federal impairment analysis parallels the analysis under the Oregon Constitution. TCI need not prove total destruction of the contract. Energy Reserves, 459 U.S. at 411. Instead, this Court must examine how the governmental actions affected TCI’s reasonable expectations and reliance on the contract terms. See, e.g., Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 245 (1978) (statute unconstitutional because employer relied on pension benefit vesting provisions of contracts); Keating, 903 F.2d at 1227 (statute unconstitutional because employees relied on ability to withdraw pension funds without penalty). For example, the Spannaus court struck down a statute because it "nullifies express terms of the company’s contractual obligations and imposes a completely unexpected liability in potentially disabling amounts." 438 U.S. at 247.

The condition imposed by defendants would substantially impact TCI’s reliance on the contract terms and create unexpected liability. As explained above, the City and County seek to force TCI to relinquish control of its facilities, thereby substantially impairing both TCI’s investment in the cable system and TCI’s ability to transfer its interests. This nullification of a key contract term violates the Contracts Clause.

The City and County cannot justify their actions as an attempt to address broad social or economic problems. Courts must distinguish "between legitimate exercises of state police power and illegitimate attacks by the state on the private ordering of contractual obligations and remedies for the benefit, not of society, but of special interests." Storer, 806 F. Supp. at 1562 (discussing allegations of impairment of cable franchises) (emphasis added). A court must not defer to the government’s justifications when the government itself is a party to the contract. See, e.g., Energy Reserves, 459 U.S. at 413 n. 14; Trust Co., 431 U.S. at 25-26; Keating, 903 F.2d at 1226.

The City and County’s ordinances target TCI and impose a condition only for the benefit of other Internet providers. See Luppold Aff., Ex. 30, at 22 (the fact that "some harm could come to the other Portland companies" weighed in favor of demanding mandatory access according to Commissioner Sten). The actions do nothing to protect the public welfare. Rather, [begin page 34] they impermissibly favor other private interests at TCI’s expense. See Spannaus, 438 U.S. at 248-49 (statute unconstitutional because it targeted specific employers). This Court should prevent defendants from violating the U.S. Constitution by abusing their government power.

F. The Ordinances Violate Article I, Section 8, Clause 3 of the U.S. Constitution by Placing Unnecessary Burdens on Interstate Commerce.

The Commerce Clause restricts states and their subdivisions from implementing legislation that harms interstate commerce. U.S. Const. art. I, § 8, cl. 3; Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970); Dean Milk Co. v. City of Madison, 340 U.S. 349, 353 (1951) (commerce clause applies to local actions). A nondiscriminatory law that unduly burdens interstate commerce violates the Constitution unless the burdens are necessary to serve a legitimate purpose. See, e.g., Pike, 397 U.S. at 142; Shamrock Farms Co. v. Veneman, 146 F.3d 1177, 1179 (9th Cir. 1998). Because both cable and Internet services are part of interstate commerce, this Court must closely scrutinize the mandatory access condition placed on AT&T and TCI. See United States v. Southwestern Cable, 392 U.S. 157 (1968) (cable is in interstate commerce); American Libraries Ass’n v. Pataki, 969 F. Supp. 160, 169 (S.D.N.Y. 1997) (same for Internet). The condition cannot withstand such scrutiny.

The "undue burden" analysis requires this Court to determine whether the mandatory access condition would result in "competing and interlocking local economic regulation." Healy v. Beer Institute, 491 U.S. 324, 336-37 (1989); see also Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520, 529 (1959). Inconsistent standards become especially troublesome when the local law targets nationally regulated industries, such as cable. See, e.g., American Libraries, 969 F. Supp. at 175 (Internet requires consistent regulation); Cox Cable Communications, Inc. v. Simpson, 569 F. Supp. 507, 522 (D. Neb. 1983) (questioning whether states should regulate cable); cf. Storer, 806 F. Supp. at 1557 (city could become a "blockaded fortress in the sea of interstate cable programming"). Undue burdens also exist when local laws increase costs, require companies to [begin page 35] alter equipment and procedures, or discourage parties from entering interstate commerce. See, e.g., Kassel v. Consolidated Freightways Corp., 450 U.S. 662, 1318 (1981) (law forced change in equipment and discouraged commerce); Bibb, 359 U.S. at 525, 526-27 (law increased costs and forced change in equipment). The mandatory access condition imposed by the City and County will unduly burden AT&T and TCI’s ability to provide cable service to the public.

The City and County’s ordinances will necessarily result in inconsistent standards for a nationally regulated industry. The City and County have used the fortuity of the proposed merger between AT&T and TCI to impose these new access obligations. As a result, of all the companies engaged in providing cable service across the United States, only TCI is subject to the mandatory access requirement. Moreover, no other local franchising authorities have imposed such a condition for approval of this proposed merger. The City and County, therefore, present an isolated pocket imposing mandatory access requirements not found elsewhere in the country.¹⁶

This pocket of inconsistent regulation will have significant practical impact on AT&T and TCI. AT&T and TCI will have to change their facilities and procedures at the County line, increasing their costs and discouraging provision of the services at all. Moreover, the threat of this kind of local regulation will discourage other cable companies from entering into transactions that might provide a local authority with a similar opportunity to impose mandatory access requirements. These burdens do not simply cause minimal, incidental problems for AT&T and TCI; they create uncertainty for an entire industry and are "clearly excessive in relation to the putative local benefits." Pike, 397 U.S. at 142. As such, the mandatory access condition violates the Commerce Clause.

[begin page 36]

IV. CONCLUSION

For all of these reasons, and each independently, AT&T and TCI request that this Court enter a declaratory judgment vacating the illegal condition the City and County have sought to impose on the proposed merger and that the Court issue a permanent injunction requiring that the City and County approve the change in control without this condition.

DATED this ____ day of June, 1999.

Davis Wright Tremaine LLP

By

DUANE A. BOSWORTH
OSB#82507
(503) 241-2300
Of Attorneys for Plaintiffs AT&T Corp.; Tele-Communications, Inc.; TCI Cablevision of Oregon, Inc.; and TCI of Southern Washington

[begin page 37]

Of counsel:

Daniel M. Waggoner
Marshall J. Nelson
Mary Steele
Catherine Maxson
2600 Century Square
1501 Fourth Avenue
Seattle, WA 98101-1688

Thomas Pelto
AT&T
1875 Lawrence St.
Room 1575
Denver, CO 80202

Laura Kaster
AT&T
150 Allen Rd., Suite 3000
Liberty Corner, NJ 07938

Wes Heppler
Bob Scott
Cole, Raywid & Braverman, L.L.P.
1919 Pennsylvania Ave., N.W., Suite 200
Washington, D.C. 20006