C. D.C. Circuit Issues Mixed Ruling on FCC’s Cable Ownership Rules

     The D.C. Circuit invalidated, on First Amendment grounds, the Commission’s vertical integration limits applicable to multiple system operators (MSOs).  However, the court declined to hold that the Commission’s horizontal ownership limit violated the First Amendment.  Nonetheless the court invalidated -- as in excess of the agency’s statutory authority -- the rule capping at 30 percent the number of subscribers that an MSO was permitted to serve.  The D.C. Circuit partially upheld and partially struck down the agency’s remaining cable ownership rules.   

     Relying upon its decision in Time Warner Entertainment Co. v. United States, 211 F.3d 1313 (D.C. Cir. 2000), the D.C. Circuit held that the regulations imposing the horizontal and vertical ownership limits were subject to intermediate scrutiny, just as the statutory provisions requiring the Commission to impose limits had been subject to intermediate scrutiny.

     The court invalidated, as exceeding the FCC’s statutory authority, the horizontal ownership limit that capped at 30 percent the number of subscribers an MSO could serve, either through systems it owned or through systems in which it had an attributable ownership interest. 

     The D.C. Circuit rejected the FCC’s claim that the 30-percent horizontal limit satisfied its statutory obligation to ensure that no single “cable operator or group of cable operators can unfairly impede, either because of the size of any individual operator or because of joint actions by a group of operators of sufficient size, the flow of video programming from the video programmer to the consumer.”  47 U.S.C. Sec. 533(f)(2)(A). 

     Reasoning that the 30-percent limit would only fulfill the statute’s mandate if a serious risk of collusion among MSOs existed, the court examined the Commission’s order and found that the agency had not presented “substantial evidence” that such collusion had occurred or was likely to occur.  Without evidence of collusion, the court determined that a 60-percent limit would satisfy the statutory mandate that no single MSO be in a position to impede the flow of programming. 

     The court also rejected the FCC’s alternate claim that the statute authorized it to protect programmers against the risk of being independently rejected by two or more MSOs.  Although petitioners challenged this claim on First Amendment as well as statutory grounds, the court found the statutory argument alone persuasive.  The court noted its “concern [over] how far [the Commission’s] theory may be pressed against First Amendment norms,” explaining that while the presence of an additional voice would probably enhance diversity, at some point the marginal value of another voice did not qualify as an “important” governmental interest.  Time Warner II, 240 F.3d at 1135. 

     The court then declined to decide the First Amendment issue, holding that the statute does not authorize the Commission to guarantee a programmer more than two possible MSO outlets for its programming.  In so holding, the court found that the statutory term “unfair” did not apply to the “legitimate, independent editorial choices of multiple MSOs” and that any other reading of the statute would “open[] the door to illimitable restrictions in the name of diversity.”  Id.

     In sum, the Time Warner II court found that the record supported no more than a 60-percent limit on the number of subscribers an MSO could reach, and concluded that the 30-percent limit exceeded the FCC’s statutory authority.  The court reversed and remanded the 30-percent rule to the Commission.

     The court next invalidated the FCC’s vertical integration limit, which capped at 40 percent the “number of channels on a cable system that can be occupied by a video programmer in which a cable operator has an attributable interest.”  47 U.S.C. Sec. 533(f)(1)(B).  The court reasoned that the vertical limit substantially burdened more speech than necessary, stating that “far from satisfying this [intermediate scrutiny] test, the FCC seems to have plucked the 40-percent limit out of thin air.”  Time Warner II, 240 F.3d at 1137. 

     While recognizing that any numerical line drawn by an agency is arbitrary to some degree, the court required the agency to at least reveal “a rational connection between the facts found and the choice made.”  Id.  Here, the FCC provided the court with no justification for the vertical limit other than the statement: “We believe that a 40-percent limit is appropriate to balance the goals” of program diversity and fair competition.  Id. 

     The D.C. Circuit rejected the Commission’s argument that the vertical limit was not ripe for review because no MSO had yet complained that the limit required it to alter programming.  The court observed that the rule may have forced MSOs to scuttle certain plans, and that cable system operator subsidiaries frequently must change their program lineups to comply with the cap.  Additionally, the court found the FCC’s limited review of relevant market conditions inadequate because the Commission failed to show any connection between the vertical limits it chose and possible benefits or detriments that might arise from them.

     Finally, the Time Warner II court favorably discussed a proposal, previously rejected by the FCC, which would have exempted cable operators who are subject to effective competition from the vertical limits.  The court reasoned that the existence of effective competition would reduce MSOs’ incentives to use in-house productions if those productions offered an inferior price-quality tradeoff to independent programs.  The court then reversed and remanded the 40-percent vertical limit on the ground that the FCC had failed to demonstrate that the limit did not substantially burden more speech than necessary.

     The court next rejected an argument that the rules attributing ownership for purposes of the horizontal and vertical limits interfered with cable operators’ ability to “speak” to subscribers, holding that “petitioners’ speech rights are implicated only where their interest allows them to exercise editorial control, in which case attribution would be proper and it is the horizontal or vertical limit that constrains speech.”  Time Warner II, 240 F.3d at 1140.  Thus, the court declined to analyze the rules under the First Amendment, but instead considered whether they were arbitrary and capricious pursuant to the Administrative Procedure Act.