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Zayo Group, LLC v. Mayor and City Council of Baltimore

United States District Court, D. Maryland

June 14, 2016

ZAYO GROUP, LLC, et al,
v.
MAYOR AND CITY COUNCIL OF BALTIMORE, et al.

          MEMORANDUM

          J. FREDERICK MOTZ UNITED STATES DISTRICT JUDGE.

         Plaintiffs Zayo Group LLC, Broadwing LLC, Centurylink Communications LLC, Comcast of Baltimore City LLC, Crown Castle NG Atlantic LLC, 24/7 Mid-Atlantic Networks LLC, Fiberlight LLC, Level 3 Communications LLC, Level 3 Telecom of Maryland LLC, Quantum Telecommunications Inc., Telcove Operations LLC, and Wiltel Communications LLC (collectively "plaintiffs" or "communications providers") bring suit against defendant Mayor and City Council of Baltimore[1] ("the City") relating to the City's increase of plaintiffs' conduit rates. Now pending is the City's motion to dismiss plaintiffs' complaint. The parties have fully briefed the motion, and no oral argument is necessary, See Local Rule 105.6. For the reasons below, the motion is granted in part and denied in part.

         BACKGROUND

         The parties' dispute arises out of the City of Baltimore's September 2015 decision to more than triple plaintiffs' conduit fee rates. The City owns and maintains a system of underground conduit-dating back to 1898-that provides the infrastructure for a labyrinth of electric, telephonic, and fiber optic connections owned by communications providers. By ' Baltimore City ordinance, communications providers-aside from the incumbent, Verizon-are required to place all such connections in the City-owned underground conduit, Baltimore City Code, Art. 26, § 23-7, and pay leasing fees to the City for occupying the conduit.[2] Plaintiffs allege that, as a practical matter, the City requires them to place their connections in the City's underground conduit and functionally prevents them from using or interconnecting with Verizon's conduit system. (ECF No. 1, ¶¶ 32, 56). Further, the plaintiffs allege that when they build their own conduit in places the city-owned system does not reach, the City forces them to turn over ownership of the conduit to the City and then pay fees to occupy the conduit space they themselves built. Id. at ¶ 37.

         Under leasing agreements with the City, the plaintiffs agreed to pay leasing rates based on their "share of the City's actual cost of owning, operating, and maintaining [the conduit], in proportion to the amount of conduit space occupied by each user."[3] Id. at ¶ 131. Plaintiffs' fee payments are placed in the City Conduit Enterprise Fund, where they are used for maintenance and operation of the system. The Baltimore City Board of Estimates ("BOE") is responsible for setting plaintiffs' rates and the Baltimore City Department of Transportation ("DOT") is responsible for maintaining and operating the conduit.

         In September 2015, the BOE considered and approved a DOT proposal to set the conduit lease fee at $3.33 per linear foot per year-a more than tripling of the previous conduit fee of $.98 per linear foot. This significant increase came after the rate had only increased ' incrementally from $.83 to $.98 over the past decade. (ECF No. 1, ¶ 67). The DOT argued that the proposed rates had "been verified to accurately reflect costs associated with operating and capital maintenance as determined to be necessary to bring the system into a good state of repair over the next 8 to 10 years." (ECF No. 14, p, 5) (internal quotation marks omitted). Plaintiffs contend that this increase came as a complete surprise to them-the increase was significantly higher than previous increases and, according to plaintiffs, they learned of the BOE hearing discussing the increase only two days before it occurred. (ECF No. 1, ¶¶ 73, 75).

         Although the new fee came into effect starting November 2015, plaintiffs, with the exception of Quantum Telecommunications, continued to pay conduit fees at the old rate of $.98 per linear foot. Plaintiffs sent the City a protest letter explaining that they were continuing their payments at the old rate and proposed meeting with the City to discuss the increase. Id. at ¶82. Plaintiffs also requested information from the City, pursuant to the Maryland Public Information Act, related to the cost basis for the rate increase.[4] After plaintiffs sent the letter, the parties met but did not reach an agreement on the disputed fees. Id. at ¶ 84.

         In January 2016, Chief City Solicitor Victor Tervala sent letters to all but one of the plaintiffs alleging that they had breached their contracts and stated that if they did not pay the new conduit fees, the City would terminate their lease agreements and remove their communications facilities (i.e., their electric, telephonic, and fiber optic connections) from the conduit. Id. at ¶ 89. In response, plaintiffs suggested more negotiations on the matter and offered to pay outstanding fees on the condition that the City correct any overpayments if the conduit fee increase was deemed unlawful. Id. at ¶¶ 92-93. According to plaintiffs, Tervala ' rejected their proposal and said that if plaintiffs paid the new fees, the City would immediately spend them. Id. at ¶ 94.

         In February, the City once more reiterated its position that it refused to accept anything less than full payment. The City imposed a deadline for payment of March 1, 2016-after that day, the City said it would start removing the plaintiffs' communications facilities from the conduit. Id. at ¶ 95. The parties met again on February 19, this time the plaintiffs offered to place the disputed funds in escrow pending resolution of the parties' dispute, but the City again declined plaintiffs' settlement offer. On February 25, the City yet again sent out communications to plaintiffs holding firm to its March 1 deadline and also threatened to refuse to issue any more construction permits to the plaintiffs if they did not pay the increased rate. Id. at ¶103.

         Plaintiffs filed the instant complaint on February 29, 2016 against the City. The complaint asserts twelve counts. Plaintiffs allege violations of the Telecommunications Act of 1996, 47 U.S.C. § 151 et seq. ("TCA") (Count I), Baltimore City Charter art. VI, §3(b) (Count V), the City's police power (Count VI), the Fifth Amendment (Count VII), the First Amendment (Count VIII), 42 U.S.C. §§ 1983 and 1988 (Count IX), and counts of tortious interference with economic and contractual relations (Count X), unjust enrichment (Count XI), and declaratory judgment (Count XII). Plaintiff Comcast asserts that the City has violated § 542 of the Cable Act of 1992, 47 U.S.C. §521 et seq. (Count II), and breached their contract and franchise agreement (Count IV). Plaintiffs Zayo, Level 3, Crown Castle, FiberLight, and Quantum also allege a breach of contract claim (Count III).

         After the filing of the lawsuit, the parties agreed that plaintiffs would pay the disputed fees-the difference between the new fees and old fees-into escrow pending resolution of ' plaintiffs' request for a preliminary injunction. (See ECF No. 20, p. 9). On May 17, 2016, 1 held a hearing on plaintiffs' request for a preliminary injunction. At the end of the hearing, I ordered continuance of the escrow agreement. Currently pending is the City's motion to dismiss (ECF No. 14) and plaintiffs' motion to strike or for leave to file surreply (ECF No. 34).

         STANDARD

         The City moves to dismiss plaintiffs' complaint under Rule 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint, relying on only well-pled factual allegations, must state at least a "plausible claim for relief." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). The "mere recital of elements of a cause of action, supported only by conclusory statements, is not sufficient to survive a motion made pursuant to Rule 12(b)(6)." Walters v. McMahen, 684 F.3d 435, 439 (4th Cir. 2012). To determine whether a complaint has crossed "the line from conceivable to plausible, " a court must employ a "context-specific inquiry, " drawing on the court's "experience and common sense." Iqbal, 556 U.S. at 680. When ruling on a Rule 12(b)(6), a court accepts "all well-pled facts as true and construes these facts in the light most favorable to the plaintiff in weighing the legal sufficiency of the complaint." Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009). A court, however, does not afford the same deference to legal conclusions. Iqbal, 556 U.S. at 678.

         Where, as here, a defendant files a Rule 12(b)(1) motion to dismiss for lack of subject-matter jurisdiction, "plaintiff bears the burden of proving that subject matter jurisdiction properly exists in the federal court." Biktasheva v. Red Square Sports, Inc., 366 F.Supp.2d 289, 294 (D. Md. 2005). A district court should grant a Rule 12(b)(1) motion only when "the material jurisdictional facts are not in dispute and the moving party is entitled to prevail as a matter of law." Id. (internal quotation marks omitted)

         ANALYSIS

         A. Plaintiffs' Motion to Strike or File Surreply

         Plaintiffs have filed a motion to strike parts of the City's Reply, or, in the alternative, file a surreply. Plaintiffs contend that the City, for the first time in its Reply brief, raised new arguments regarding the deference owed to the City's rate-setting powers. (See ECF No. 34, p. 2; see also ECF No. 28, pp. 3-8), The City disagrees, arguing that it was merely responding to plaintiffs' contentions in their Opposition. (ECF No. 37, p. 3).

         "The ordinary rule in federal courts is that an argument raised for the first time in a reply brief or memorandum will not be considered." Clawson v. FedEx Ground Package Sys., Inc., 451 F.Supp.2d 731, 734 (D. Md. 2006). The rationale underlying this rule is "to avoid prejudice to the party who is not afforded a chance to rebut a new argument." EEOC v. Freeman, 961 F.Supp.2d 783, 801 (D. Md. 2013). A court, however, has discretion to deviate from this rule and consider a previously unraised argument, especially when the other party has had an opportunity to respond. See Clawson, 451 F.Supp.2d at 734. Here, plaintiffs have attached to their motion a proposed surreply responding to the City's new arguments. Plaintiffs therefore will have had an adequate opportunity to respond to the City's new arguments if I grant their motion to file a surreply (which the City does not oppose). And I will have the benefit of considering the City's new arguments if I deny plaintiffs' motion to strike. Accordingly, I deny plaintiffs' motion to strike and grant their motion to file a surreply. See Minter v. Wells Fargo Bank, N.A., 283 F.R.D. 268, 270 n.3 (D. Md. 2012) (granting a motion for leave to file a surreply in like circumstances).

         B. Plaintiffs' Motion to Dismiss

         Plaintiffs' twelve claims can be broken down into five categories. The first category encompasses plaintiffs' TCA claim (Count I), wherein they allege that the City's fee increase, as well as its discriminatory treatment of plaintiffs in favor of Verizon, compels preemption of the City's conduit regulations. The second category is plaintiffs' breach of contract, violation of police power, and unjust enrichment claims (Counts III, VI, and XI). Each of these claims turns on whether the City's revenues from the new conduit fee exceed its actual cost for maintaining and operating the conduit. The third category of claims is plaintiff Comcast's Cable Act and breach of contract claims (Counts II and IV), which allege that the City's conduit fees are illegal franchise fees under the Cable Act, The fourth category is plaintiffs' Fifth Amendment (Count VII), First Amendment (VIII), 42 U.S.C. §§1983 and 1988 (Count IX), and tortious interference with economic and contractual relations (Count X) claims, which allege that the City violated plaintiffs' legal rights by threatening to remove their communications facilities from the conduit. The last category of claims includes a claim that the City violated art. VI, §3(b) of the Baltimore City Charter (Count V) by failing to proffer notice of the conduit fee increase and an overarching claim for declaratory judgment (Count XII).

         I. Plaintiffs' TCA Claim (Count I)

         Plaintiffs contend that the City's regulatory scheme is preempted[5] by the TCA to the extent it requires them to install and use communications facilities in the City's conduit system, imposes fees that exceed the City's cost to maintain and operate the conduit system, and favors the incumbent telecommunications provider, Verizon, over them. (ECF No. 1, ¶ 116). For its part, the City argues that plaintiffs have failed to plead a plausible TCA claim and that the City's actions are entitled to deference under the TCA. Because I find that the plaintiffs plead a plausible TCA claim, however, Count I survives.

         Congress enacted the TCA "to ensure that telecommunications providers have competitive access to state and local telecommunications markets." Puerto Rico Tel. Co. v. Municipality Of Guayanilla, 450 F.3d 9, 15 (1st Cir. 2006). The TCA was a manifestation of Congress's intent to "end[ ] the States' longstanding practice of granting and maintaining local exchange monopolies." AT&T Corp. v. Iowa Utils. Bd, 525 U.S. 366, 405 (1999) (Thomas, J., concurring in part, dissenting in part). The section of the TCA at issue here, section 253, puts in place a general bar to local government actions that "prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." 47 U.S.C. § 253(a). § 253(a) is "a clear expression by Congress of an intent to preempt local ordinances which prohibit the provision of telecommunications services." Qwest Corp. v. City of Santa Fe, New Mexico, 380 F.3d 1258, 1269 (10th Cir. 2004). Subsection (c) of § 253, by contrast, provides local governments with a safe-harbor from, subsection (a)'s general prohibition, stating that:

Nothing in this section affects the authority of a State or local government to manage the public rights-of-way or to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way on a nondiscriminatory basis, if the compensation required is publicly disclosed by such government.

47 U.S.C. § 253(c). Put another way, subsection (c) authorizes state and local governments "to regulate telecommunication services on public property and to collect compensation for its use, if certain parameters are observed." Global Network Commc 'ns, Inc. v. City of New York, 562 F.3d 145, 151 (2d Cir. 2009).

         While the Fourth Circuit has yet to formulate a legal standard for an § 253(a) preemption claim, sister circuits have determined that an § 253(a) claim involves two parts. First, a court decides whether the "local provision in question is prohibitive in effect." Qwest, 380 F.3d at 1269. To meet this requirement, a plaintiff "need not show a complete or insurmountable prohibition ... but it must show an existing material interference with the ability to compete in a fair and balanced market." Level 3 Commc'ns, L.L.C. v. City of St. Louis, Mo., 477 F.3d 528, 533 (8th Cir. 2007) (citing to the FCC's interpretation of § 253(a)); see also Qwest, 380 F.3d at 1269 (a provision "need not erect an absolute barrier to entry in order to be found prohibitive"). In Qwest, the Tenth Circuit found that a "near quadrupling]" of cost was sufficient to show that city regulations were prohibitive because the increase in cost would "materially inhibit" the provision of communications services. 380 F.3d at 1271.

         If a plaintiff demonstrates that a regulatory action is prohibitive, the burden shifts to defendant to show that the regulation falls under the safe-harbor of § 253(c). To carry its burden, a defendant must show that its action relates to regulation of the public rights of way, is "fair and reasonable, " and is imposed "on a competitively neutral and nondiscriminatory basis." Id. at 1272. If the local ...


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