Metropolitan Government of Nashville and Davidson County v. Teleport Communications America, LLC

          Session September 5, 2017

         Appeal from the Chancery Court for Davidson County No. 02-679-I, 02-749-III Russell T. Perkins, Chancellor

         The Metropolitan Government of Nashville and Davidson County ("Metro") sued Teleport Communications America, LLC ("TCG") in the Chancery Court for Davidson County ("the Trial Court") to recover a fee for TCG's use of Metro's public rights-of-way. TCG contended the fee was unlawful and refused to pay. Metro and TCG previously had entered into a franchise agreement in keeping with an ordinance requiring telecommunications providers to pay 5% of their gross revenues to Metro. The Tennessee Court of Appeals later ruled in another case against an ordinance purporting to set a gross revenue franchise fee as being akin to a tax. The Trial Court cited this holding to invalidate the ordinance in the present case. Metro nevertheless pursued this action further, seeking to recover under a contractual theory. After extensive litigation, the Trial Court found that TCG owed damages to Metro in the amount of $550, 000. The Trial Court reasoned that even though the underlying ordinance was invalid, the parties had entered into a franchise agreement and Metro was entitled to some measure of compensation. TCG appealed. We affirm the judgment of the Trial Court.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed; Case Remanded

          William L. Harbison and John L. Farringer, IV, Nashville, Tennessee, and, Hans J. Germann, Chicago, Illinois, for the appellant, Teleport Communications America, LLC.

          Jon Cooper, Director of Law, Law Department of the Metropolitan Government of Nashville and Davidson County, J. Brooks Fox and Lora Barkenbus Fox, Nashville, Tennessee, for the appellee, the Metropolitan Government of Nashville and Davidson County.

          D. Michael Swiney, C.J., delivered the opinion of the court, in which Frank G. Clement, Jr., P.J., M.S., and W. Neal McBrayer, J., joined.

          OPINION

          D. Michael Swiney, C.J

         Background

         This long-running case began in 2002 when Metro sued TCG seeking to recover franchise fees.^[1] TCG asserted that the franchise fees were unlawful and refused to pay them.^[2] Years of protracted litigation followed.

         In 1997, TCG, a full-service provider of telecommunication services, entered into an agreement with Nashville Electric Service ("NES"), an independent agency of Metro, to install a system of cables. This system would service NES and TCG customers. TCG was to own 50% of the system and NES would own 50%, with NES retaining the option of asserting ownership over TCG's facilities. NES exercised its option to acquire TCG's system in 2002. TCG later conveyed the entirety of the system to NES in 2008, when a Bill of Sale issued. TCG continued to use the system through an indefeasible right of use. In addition to entering the agreement with NES, TCG entered into a franchise agreement with Metro. The franchise agreement included, in keeping with a franchise ordinance, a charge of 5% of TCG's gross revenue in Nashville each year to be paid to Metro. A severability clause in the franchise agreement purported to preserve the remainder of the agreement should any particular provision of the contract be invalidated.

         In 2004, during the course of this lawsuit, the Tennessee Court of Appeals entered its opinion in the case of BellSouth Telecommunications, Inc. v. City of Memphis, 160 S.W.3d 901 (Tenn. Ct. App. 2004). In BellSouth, this Court struck down an ordinance that charged a 5% franchise fee, holding that the fee did not bear a reasonable relation to the city's regulatory costs. The Trial Court applied the BellSouth holding in the present case to find that "the gross revenue and dark fiber compensation provisions of the franchise ordinance (§§6.26.230 and 6.26.240) are invalid and unenforceable . . . ."

         As a result of BellSouth and the Trial Court's ensuing holding regarding the invalidity of the ordinance, Metro changed its legal strategy. Metro sought leave to amend its complaint to allege that it was entitled to recovery in quasi-contract because, notwithstanding the invalidity of the ordinance, Metro and TCG did enter into an agreement and TCG did receive the benefits under that agreement. In 2007, the Trial Court granted Metro leave to amend. This case was tried in May 2013. The relevant period for which Metro seeks damages is 1997 through 2012.

         The record contains substantial evidence as to the parties' respective proposed methodologies for calculating costs. Metro's method involved calculating the total costs for public rights-of-way, then determining which portion was incurred by utilities. Metro then determined that TCG, in 2007, occupied 0.07486% of Metro's rights-of-way. Metro applied indices to arrive at a figure of $1, 511, 856 in costs owed by TCG. A report entered in the record as Metro's exhibit 11 elaborated upon Metro's allocation of costs as follows:

         4.2 Pricing Implications

         For the reasons explored at some length in the 2010 Reports (e.g., see Part 2.2), TAI [Technical Associates, Inc., a consulting firm retained by Metro] has concluded that the application of a fully-allocated cost ("FAC") methodology based on a cubic feet measure of cost-causation best meets the goals of fairness, reasonableness, and nondiscrimination in the instant case. Further, while an ideal application of FAC methodology involves a distinction between joint/common costs and directly-attributable costs when warranted, TAI has treated all of the PROW costs incurred by Metro as being of a joint-common nature; i.e., to be shared equally among Metro PROW user organizations at the same amount per cubic foot of space that their facilities consume of Metro's PROW. Anecdotal evidence exists that some of the PROW costs incurred by Metro in certain of its Departments are likely to be of a directly-attributable nature. But at the same time, TAI's prior work for Metro also revealed that only through significant additional research might these directly-attributable costs be meaningfully quantified. This finding was confirmed during the recent Event (F) meetings outlined earlier in Part 2.2.

         The treatment of all Metro PROW costs during FY2007 as joint/common converted to approximately $4.41 per 1, 000 cubic feet in the 2010 Reports. This figure has now risen to $5.05; i.e., $129, 018, 131/25, 559, 987 thousand cubic feet per Table 1A(Revised). Thus, and with respect to the flat and one-part rate design discussed in Part 4.7 of the 2010 Reports, the relevant price has become $5.05 per 1, 000 cubic feet of Metro PROW space utilization. Upward movements in rates are also applicable to the other potential pricing structures outlined in TAI's earlier reports. To illustrate, regarding the issue of recognizing the benefits conferred on other Metro PROW user organizations by Metro Stormwater and Metro SL facilities, where a corresponding rate of $5.26 per 1, 000 cubic feet was found to be appropriate on Page 57 of the November 15, 2010 Report, this amount has increased to approximately $6.23 per 1, 000 cubic feet.

         Other than with respect to specific rate levels, all elements of the discussions in Part 4.7 of the 2010 Reports remain unchanged. Put alternatively, while the revisions and corrections incorporated in this 2012 Report have necessarily modified the prices that Metro may appropriately charge for the use of its PROW on a strict cost basis, the various rate design considerations (e.g., goals in addition to cost recovery, balancing among alternative goals, and bill offsets) addressed in the 2010 Reports of TAI remain valid.

         (Footnote omitted).

         Patricia Kravtin, an expert witness for TCG, advanced a much more restrictive methodological approach. Kravtin testified at trial in part, as follows:

Q. Well, I thought I understood your testimony to be that the only cost that could be re-cooped by local government would be those marginal or incremental costs that are caused by, say in this example, TCG, and, in fact, TCG's impact on the right-of-way?

A. No. That was not my testimony.

Q. Okay. So it's not just that Metro should only recoup the marginal or incremental costs caused by ...