Opinion
CIVIL ACTION NO. 3:00CV-723-R
March 20, 2001
MEMORANDUM OPINION
This case is before the Court on Defendant Insight Communications Company, L.P.'s and Insight Kentucky Partners II, L.P.'s Motion to Dismiss for Lack of Subject Matter Jurisdiction and Failure to State a Claim Upon Which Relief May Be Granted (Dkt. #16). The quality of the briefs was excellent and oral argument is unnecessary. Therefore, the Court DENIES any request for oral argument. This Court DENIES Insight's Motion to Dismiss.
BACKGROUND
Insight's predecessor in interest received a non-exclusive cable television franchise from the City of Louisville in 1998. The City of Louisville granted Knology a cable television franchise on September 12, 2000. Both franchises were enacted into ordinances. Both franchises (and ordinances) contain parity provisions. These provision prevent the City of Louisville from granting more favorable franchises to others and require that any granted franchise be automatically suspended if an action is filed challenging the parity of the agreements. The stay of the franchise is effective until the court hearing the parity arguments issues a final and appealable order.
Shortly after the City of Louisville granted Knology's franchise, Insight filed a panty action against the City of Louisville in Jefferson Circuit Court. This action triggered the automatic stay provision and has prevented Knology from building the granted system in Louisville. Knology thereafter filed this action seeking declaratory and injunctive relief against both Insight and the City of Louisville and seeking money damages from Insight.
STANDARD
When considering a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the district court must accept all of the allegations in the complaint as true, and construe the complaint liberally in favor of the plaintiff. See Lawrence v. Chancery Court of Tennessee, 188 F.3d 687, 691 (6th Cir. 1999). Denial of the motion is proper "unless it can be established beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Achterhof v. Selvaggio, 886 F.2d 826, 831 (6th Cir. 1989) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)).
DISCUSSION
I. City of Louisville
Insight moved to dismiss the City of Louisville as a Defendant arguing that no true case or controversy exists. Insight cites numerous cases to support its position. Those cases are not applicable here. The cases sighted by Insight caution against instances where parties contrive a case in order to have the judiciary interpret a statute. That is not the case. A true adverse party, Insight, exists in this case. While it may be true that the City of Louisville may share some of Knology's positions rather than Insight's positions, this alone does not indicate a lack of case or controversy. The Court DENIES that motion at this time.
II. Knology
Insight sets forth a number of reasons it believes this Court should grant its motion to dismiss each of Knology's claims. The Court will address each separately.
A. First Amendment
Insight asserts that the First Amendment bars Knology's federal law claims because each claim is based on Insight petitioning the government. Petitioning the government and its accompanying lobbying are protected by the First Amendment right "to petition the Government for a redress of grievances" and by the Noerr-Penningon doctrine, developed by Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., 365 U.S. 127 (1961), and United Mine Workers v. Pennington, 381 U.S. 657 (1965). This doctrine applies to petitioning activities directed at legislative, administrative or judicial branches of government. California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 510 (1972). Corporations as well as individuals enjoy First Amendment rights. First Nat'l Bank of Boston v. Bellotti, 435 U.S. 765, 784 (1978). While the Noerr-Pennington doctrine arose in the context of antitrust litigation, it has been extended to other areas of law including § 1983 litigation. Video Int'l Prod., Inc. v. Warner-Amex Cable Communications, Inc., 858 F.2d 1075, 1084 (6th Cir. 1998).
Knology's claims invoke the Supremacy Clause of the United States Constitution, 42 U.S.C. § 1983, and Section 1 of the Sherman Act. Each of these claims is based either on Insight obtaining a cable television franchise from the City with a regulatory parity provision or Insight filing an action against the City to enforce that provision with respect to the franchise the City awarded Knology. Insight argues that under well-settled authority, none of these acts create the claims made by Knology in its complaint because Insight is exerting a protected right of petitioning the government.
1. Antitrust Liability
Insight argues that this Court should dismiss Claims Eight and Nine of Knology's Complaint. Insight states that those who petition the government for redress are generally immune from antitrust liability unless the lawsuit is objectively baseless and is a concealed attempt to directly interfere with the business relationships of the competitor. Insight asserts that Knology has failed to plead facts that make such a showing of baselessness.
"Those who petition the government for redress are generally immune from antitrust liability." Prof'l Real Estates Investors v. Columbia Pictures Indus., Inc., 508 U.S 49, 56 (1993). The Supreme Court has recognized that the "Sherman Act does not prohibit . . . persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law that would produce a restraint or a monopoly." Eastern Railroad Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127, 136 (1961); accord Mine Workers v. Pennington, 381 U.S. 657, 669 (1965). The Supreme Court expanded this doctrine to include petitioning administrative agencies and courts in California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 510 (1972).
These cases embody what is today known as the Noerr-Pennington doctrine. Essentially, the doctrine prohibits the use of antitrust laws to prosecute individuals who petition the government for actions favorable to them even when motivated by anticompetitive intent. Video Int'l Prod., Inc. v. Warner-Amex Cable Communications, 858 F.2d 1075, 1082 (5th Cir. 1988). Noerr-Pennington is not without exceptions. Courts generally apply both a "sham" exception and a "co-conspirator" exception. Id. Here, the first is at issue.
The Supreme Court has recently articulated a two-part definition of "sham" litigation.
First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant's subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals "an attempt to interfere directly with the business relationships of the competitor" through the "use [of] the governmental process — as opposed to the outcome of that process — as an anticompetitive weapon." This two-tiered process requires the plaintiff to disprove the challenged lawsuit's legal viability before the court will entertain evidence of the suit's economic viability. of course, even a plaintiff who defeats the defendant's claim to Noerr immunity by demonstrating both the objective and the subjective components of a sham must still prove a substantive antitrust violation. Proof of a sham merely deprives the defendant of immunity; it does not relieve the plaintiff of the obligation to establish all other elements of his claim.Columbia Pictures, 508 U.S. at 60-61.
Insight asserts that Knology has not plead facts sufficient to justify an exception to the general rule that litigants are not immune from antitrust prosecution for petitioning a court, i.e., that they have failed to allege sufficient facts to satisfy the subjective and objective "sham" definition of Columbia Pictures. This Court disagrees. In Claim Eight, Knology asserts that "[b]y filing an objectively baseless claim in Circuit Court, which challenges the terms of the franchise issued by the City to Knology, triggers the automatic stay provision in Knology's franchise, locks Knology out of Louisville, and prevents it from competing with Insight in the market, Insight has monopolized and maintained its monopoly power over the market for cable television services in Louisville." This sufficiently satisfies the notice pleading standards. Rule 8(a)(2) of the Federal Rules of Civil Procudure requires only that the complaint include "a short and plain statement of the claim showing that the pleader is entitled to relief." Knology meets that standard here. Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163 (1993).
Insight also argues that this Court should now decide whether the alleged "sham litigation" was objectively baseless as a matter of law. While a court may decide this issue as a matter of law when the parties do not dispute the predicate facts of the underlying legal proceeding, Columbia Pictures, 508 U.S. at 63, this Court finds such reasoning inapplicable here. The cable industry is a highly specialized one. While the parties here may not dispute whether the contracts at issue contain the questioned provisions, they do dispute the impact of those provisions and the relevance of the differences in the contracts. This dispute is critical to the outcome of this case. The Court is unprepared, based on the information before it, to determine whether this is a case of "sham litigation." Such a decision would require not only a clarity of facts, but also an agreement or at least some proof as to the significance of those facts for the industry in question.
Insight argues that a party seeking a good faith adjudication can never violate Section 1983. Insight argues that such activities are wholly protected by the First Amendment right "to petition the Government for a redress of grievances." U.S. Const. amend. I. Insight argues that this is so even when that petition results in depriving others of property interests. Insight directs the Court to Video Int'l Prod., Inc. v. Warner-Amex Cable Communications, Inc., 858 F.2d 1075, 1084 (6th Cir. 1998).
Before addressing whether Insight is immune from § 1983 liability because it is engaged in the protected activity of petitioning the government, the Court finds it prudent to first determine whether or not Insight is a state actor for purposes of a § 1983 action. Neither party disputes that the First and Fourteenth Amendment protections, codified in 42 U.S.C. § 1983, are triggered only in the presence of state action and that a private entity acting on its own cannot deprive a citizen of First Amendment rights. Flagg Brothers Inc. v. Brooks, 436 U.S. 149 (1978); Lansing v. City of Memphis, 202 F.3d 821, 828 (6th Cir. 2000). However, a court can hold a private entity to constitutional standards when its actions so approximate state action that they may be fairly attributed to the state. Lansing, 202 F.3d at 828.
The Supreme Court has identified a two-part approach to determine whether action may be fairly attributed, "effectively requiring that the action be taken (a) under color of state law, and (b) by a state actor." Id.; Lugar v. Edmonson Oil Co., Inc., 457 U.S. 922, 937 (1982). The Sixth Circuit applies three different tests to help courts determine whether the Lugar conditions are met. These are the public function test, the state compulsion test and the symbiotic relationship or nexus test. Lansing, 202 F.3d at 828. Insight asserts that Knology cannot demonstrate that Insight fits into any of these categories and that this Court should dismiss all 42 U.S.C. § 1983 claims.
The public function test requires that "the private entity exercise powers which are traditionally exclusively reserved to the state, such as holding elections or eminent domain." Wlotsky v. Huhn, 960 F.2d 1331, 1335 (6th Cir. 1992) (internal citations omitted); Lansing, 202 F.3d at 828 (internal citations omitted). Knology claims that by unilaterally invoking the illegal lockout provisions, thereby suspending Knology's franchise, "Insight has executed a power traditionally reserved to governmental franchising authorities." (Complaint at ¶ 31.) Thus, Knology claims that "by arrogating to itself a power that is traditionally — and by federal law — reserved to the City, Insight has satisfied the `public functions' test applied by the Sixth Circuit and brought itself within reach of section 1983." (Dkt. #22 at 28.)
The "public function" test for state action is satisfied only when the private actor is exercising "powers traditionally exclusively reserved" to the government. Jackson v. Metro. Edison Co., 419 U.S. 345, 352 (1974) (holding that public electricity utility was not engaged in a "public function"). In this case, the City of Louisville contracted with Insight to provide cable service. In that contract, the city agreed that it would not grant a more favorable franchise and that if Insight believed it did, it had the right to challenge that action in court. This challenge would automatically stay any franchise the city had granted until the issue had been resolved.
The Court does not find that Insight was performing a public function when it petitioned the court. Acts of private contractors do not become acts of the government by reason of their significant or even total engagement in performing public contracts. See Rendell-Baker v. Kohn, 457 U.S. 830, 841 (1982). In this case, the government chose to contract away some rights. That the government agreed to forgo its right to immediately grant a franchise when Insight challenged the favorableness of the conditions does not turn the results of Insight's court petition into a state action for the purposes of the public function test. Id.
Knology also asserts that Insight is a state actor under the symbiotic relationship or nexus test. The test requires the type of symbiotic relationship between the private party and the state in which the state has so far insinuated itself into a position of interdependence that it is a joint participant in the enterprise. In other words, "the action of a private party constitutes state action when there is a sufficiently close nexus between the state and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the state itself." Wolotsky, 960 F.2d at 1335.
The Sixth Circuit has held that private individual conduct "may constitute action under color of state statute where the power possessed by an individual or entity is possessed only because the individual or entity is clothed with the authority of state law." Martin-Marietta Corp. v. Bendix Corp., 690 F.2d 558, 562 (1982). This case fits squarely under the Martin-Marietta rule. The City of Louisville reached a contract agreement with Insight that was later adopted as a city ordinance. Under that ordinance, Insight had the right to petition a court if it believed another cable franchise contract to be more favorable than the one it received. The ordinance stated that "if Operator claims to be aggrieved, parties shall seek a Declaration of Rights in a court of competent jurisdiction during which time the effective date of the subsequent franchise shall be suspended pending a final and nonappealable decision resolving the issue." (Complaint at ¶ 12.)
Insight's ability to effectively stay the grant of franchise in this case arises specifically from a city ordinance. The power is possessed only because the individual is clothed with the authority of state law. While Insight might have been able to petition the court to assess damages for granting a more favorable contract to another party, without this ordinance, Insight would have no ability to automatically stay the grant of another franchise. Accordingly, the Court finds Insight a state actor under the symbiotic relationship/nexus test for the limited actions relating to the stay for purposes of 42 U.S.C. § 1983.
Even though the Court finds Insight a state actor for purposes of a § 1983 action, Insight may still be immune from a § 1983 action under the Noerr-Pennington doctrine. Because of the seriousness of infringing on First Amendment rights, courts have extended Noerr-Pennington beyond anti-trust to cover a number of legal claims including § 1983 actions. "[A]ny behavior by a private party that is protected from antitrust liability by the Noerr-Pennington doctrine is also outside the scope of section 1983 liability." Video Int'l, 858 at 1084. This Court has already determined it premature to rule on the applicability of the Noerr-Pennington doctrine. Because the validity of the § 1983 action turns on the outcome of the Noerr-Pennington analysis, the Court must deny Insight's motion to dismiss that claim at this time.
3. Supremacy Clause
Insight argues that in its First and Third Claims, Knology has not stated a claim under the Supremacy Clause because Knology has not invoked a federal statute. (Dkt. #16, at n. 4.) While Knology might have used more precision in drafting its complaint, the First Claim alleges preemption by the Telecommunications Act of 1996. This Court finds such language sufficient to satisfy notice pleading requirements. A Supremacy Clause claim merely asserts that a federal law preempts a state law and Knology has made such an allegation.
B. Waiver
Insight argues that Knology has waived its rights to assert all claims in this complaint, excluding those that duplicate Insight's state court claims. This Court disagrees.
Kentucky law defines a waiver as the voluntary and intentional relinquishment of a known right. Howard v. Motorists Mut. Ins. Co., 955 S.W.2d 525 (Ky. 1997). Insight argues that Kentucky invokes a three-part test to determine the validity of a waiver: (1) is the waiver clear and unambiguous; (2) did the parties stand on equal foot in entering into the waiver agreement; and (3) under the circumstances of the case, is the waiver clause against public policy. Cabbage Patch Settlement House v. Wheatley, 987 S.W.2d 784 (Ky. 1999). This Court will apply this standard here.
Knology's franchise agreement contained the following provision: "By accepting the Franchise, the Franchisee . . . agrees that the Franchise was granted pursuant to processes and procedures consistent with applicable law, and that it will not raise any claim to the contrary." (Dkt. #16, Exh B. at § 38(5)(d).) Insight argues that Knology waived each of its claims here by agreeing to this provision. The Court finds otherwise.
First, the Court does not find that Knology clearly and unambiguously waived its rights. The words "granted," "processes" and "procedures" indicate that Knology waived any rights to challenged the "processes" and "procedures" the City of Louisville invoked in "granting" a franchise. It does not imply that Knology waived any right to ever challenge the legitimacy of any contract provision, but merely that it could not challenge to procedures the City of Louisville used in granting its franchise. At best, the provision is ambiguous.
Insight has a stronger argument on the second prong of the three-part test. This Court finds that Knology and the City of Louisville were on equal footing during the contract process. Knology is a sophisticated corporation with a team of highly educated and experienced lawyers and negotiators.
Finally, for purposes of this motion, the Court finds that enforcing the contract provision in this case could be against public policy. If Knology is correct in its argument that federal law preempts the challenged provisions, it would be contrary to public policy to prevent them from asserting as much. Because Insight cannot meet two of the required tests to show waiver under Kentucky law, this Court finds Insight's waiver unpersuasive.
C. Subject Matter Jurisdiction Over Supremacy Claims
Insight asserts that Knology's federal claims under the Supremacy Clause are nothing more than an anticipatory defense to actions filed in state court involving issues that arise wholly under state law. As such, Insight argues these portions of Knology's Complaint do not state a federal claim. This Court disagrees.
To survive a motion to dismiss based on lack of federal question jurisdiction, the nonmoving party must show that its claims arise under federal law and that § 1331 preemption is not preempted by a more specific statutory provision which confers jurisdiction elsewhere. GTE North, Inc. v. Strand, 209 F.3d 909, 916 (6th Cir. 2000). Knology asserts that its claims arise under the Constitution and laws of the United States, specifically the Supremacy Clause, the Cable Act of 1992 and the Telecommunications Act of 1996, and that no other law confers jurisdiction elsewhere.
Insight disagrees. Insight argues that this Court does not have subject matter jurisdiction under the Supreme Court's ruling in Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1 (1983). Franchise held that no federal declaratory judgment shall issue if "but for the availability of the declaratoiy judgment procedure, the federal claim would arise only as a defense to a state created action." Franchise, 463 U.S. at 1. However, the Supreme Court has given direction limiting its holding in Franchise.
The Court's decision today in Franchise Tax Board v. Construction Laborers Vacation Trust . . . does not call into question the lower courts' jurisdiction to decide these actions. Franchise Tax Board was an action seeking a declaration that state laws were not pre-empted by ERISA. Here, in contrast, companies subject to ERISA regulation seek injunctions against enforcement of state laws they claim are preempted by ERISA, as well as declarations that those laws are pre-empted. It is beyond dispute that federal courts have jurisdiction over suits to enjoin state officials from interfering with federal rights.Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n. 14 (1983). This case falls within the exception. Knology's claim arises from an allegation that its federal rights have been preempted by a state law; it seeks a declaration that the state law is preempted.
Insight also argues that subject matter does not exist in this case pursuant to Nashoba Communications Ltd. P'ship No. 7 v. Town of Danvers, 893 F.2d 435 (1st Cir. 1990). In Nashoba, a cable operator mailed letters to customers indicating a planned rate increase. The city asserted the increase violated contracted rate freeze provisions and threatened suit. Nashoba, the cable operator, brought an action for declaratory judgment claiming that attempts by a town to enforce contracted rate freeze provisions would violate the Cable Communications Policy Act. The court held that subject matter jurisdiction did not exist under the well-pleaded complaint rule because the action was merely an attempt to assert a federal defense to an anticipated state court action to enforce the freeze. The court applied a two part test to reach this conclusion. First, the court ascertained whether the federal right asserted by the declaratory judgment plaintiff was "nothing more than an anticipatory defense" in response to the defendant's threatened suit. Nashoba, 893 F.2d at 438. The court then asked whether the case presented a substantial federal question. Id. The court held that if the court concludes that the defendant's threatened suit arises "solely or most importantly under state law, and the plaintiff's complaint merely anticipates a defense, there is no jurisdiction." Id.
This Court finds Nashoba inapplicable here. First, Insight has done more than threatened suit; it has filed suit. Accordingly, Knology's actions are more than just anticipation. In the instant case, Knology has already been subjected to enforcement of the allegedly preempted provision as its franchise is currently stayed pending the conclusion of the state proceeding. Importantly, Knology is not a party to that suit. Knology's action here cannot be an anticipated defense, or any sort of defense, as Knology is not a named party in the action Insight filed. Further, Insight's action was to compare the favorableness of the contracts. The Supremacy Clause claims here would not be a defense to that action, but rather are aimed at the validity of the stay.
This Court finds that the general rule governing the Supremacy Clause governs here. A plaintiff who "seeks injunctive relief from a state [or local] regulation on the ground that such regulation is preempted by federal law . . . presents a federal question which the federal courts have jurisdiction under 28 U.S.C. § 1331 to resolve." Id. citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 n. 14 (1983). This Court concludes that Knology's claims do arise under federal law, that jurisdiction is proper under § 1331, and that no evidence of a law conferring jurisdiction elsewhere has been presented. Accordingly, subject matter jurisdiction exists.
D. Failure To State A Claim Under the Telecommunications Act of 1996 or the Cable Acts 1984 and 1992
Insight argues that Knology's Complaint does not state claims under either the Telecommunications or Cable Acts. Federal courts properly hear claims that federal law preempts local statutes under 28 U.S.C. § 1331. Shaw, 463 U.S. at 96 n. 14. Such forms of direct suit under the Supremacy Clause are not infrequent in Telecommunications Act and Cable Act cases. See Cablevision, Inc. v. Public Improvement Comm'n, 184 F.3d 88, 96 (1st Cir. 1999). Accordingly, dismissal at this time is inappropriate.
E. Failure to State a Claim Under the Sherman Act
Knology has made claims for violations of the Sherman Act. To sustain such a claim, Knology must allege that Insight has done something to willfully acquire or maintain a monopoly power. Eastman Kodak v. Image Technical Serv., Inc., 504 U.S. 451, 481 (1992). Insight asserts that Knology has failed to allege facts that show that Insight has the power to "control prices or exclude competition," the accepted definition of monopoly.
This Court finds Insight's challenge meritless. Insight is the sole cable operator in Louisville. The entire thrust of Knology's case is that Insight unfairly kept Knology from the market by filing a baseless state action that triggered an automatic stay of Knology's franchise, effectively preventing it from entering the Louisville market as a competitor. Such allegations, if true, could amount to actionable antitrust violations.
F. Abstention
Insight argues that this Court should abstain from hearing Knology's state law claims under the Younger abstention doctrine. Younger v. Harris, 401 U.S. 37 (1971). This Court declines abstention.
Younger abstention is inappropriate. In Younger, the Supreme Court held that federal courts should abstain from deciding cases within their jurisdiction only when: (1) there are ongoing state court proceedings; (2) those proceedings involve important state interests; and (3) the parties have an adequate opportunity to raise constitutional issues in the state proceedings. See GTE Mobilnet of Ohio v. Johnson, 111 F.3d 469, 481 (6th Cir. 1997).
The Court need not apply this test here. Although the concern for comity and federalism led the Supreme Court to expand the protection of Younger beyond state criminal prosecutions, to civil enforcement proceedings, and even to civil proceedings involving certain orders that are uniquely in furtherance of the state courts' ability to perform their judicial functions, "it has never been suggested that Younger requires abstention in deference to a state judicial proceeding reviewing legislative or executive action. Such a broad abstention requirement would make a mockery of the rule that only exceptional circumstances justify a federal court's refusal to decide a case in deference to the States." New Orleans Pub. Serv. Inc., v. Council of City of New Orleans, 491 U.S. 350 (1989).
Here, both parties assert that the grant of a cable franchise involves legislative power. Accordingly, Younger does not apply.
CONCLUSION
This Court DENIES Insight's Motion to Dismiss.