METROPOLITAN GOVERNMENT OF NASHVILLE AND DAVIDSON COUNTY, TENNESSEE
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 ...