Breaking News

Appeals Court Affirms FCC’s Extension of Program Access Exclusivity Ban

March 16 , 2010
printable version

A three-judge panel of the United States Court of Appeals for the District of Columbia Circuit has denied Cablevision’s and Comcast’s petitions for review of the FCC’s decision to extend the prohibition on exclusive contracts between cable operators and vertically-integrated cable networks until 2012. Cablevision and Comcast had argued that the FCC’s decision was inconsistent with the plain meaning of Section 628 of the Communications Act (the “program access” statute) and that it violated both the Administrative Procedure Act (“APA”) and the First Amendment. Over the dissent of one of the judges (who concluded that the rule should be struck down on constitutional grounds), the court concluded that the Commission’s interpretation of its statutory mandate was reasonable and that it satisfied arbitrary and capricious review under the APA. The majority also concluded that the petitioners failed to establish a claim under the First Amendment, and thus determined that review of the FCC’s action on constitutional grounds was not warranted.

Background. The program access statute, adopted in 1992, directs the FCC to adopt rules banning exclusive contracts between cable operators and their affiliated programming networks so that competing multichannel video programming distributors (“MVPDs”) are not denied access to vertically-integrated programming. The statutory provision specified that the ban on exclusivity was to lapse ten years after its enactment unless the Commission determined that the prohibition continued to be necessary to preserve and protect competition and diversity in the distribution of video programming. In 2002, the Commission found that the prohibition remained “necessary” and extended it for five years with a commitment to evaluate the market again at the end of the five-year period. Although competition had improved significantly since 1992, the Commission found that conditions had not changed enough to allow the prohibition to sunset.

Over the next five years, the video programming and distribution marketplace saw dramatic changes. At the time of the Commission’s 2007 review, there were 531 national programming networks, an increase from 294 in 2002 and 68 in 1992. The percentage of those networks that were vertically integrated decreased to 22 percent from 35 percent in 2002 and 57 percent in 1992. At the same time, cable’s share of the overall programming distribution market had decreased significantly. In 2007, cable operators controlled about 67 percent of the market, down from 78 percent in 2002 and 95 percent in 1992. Direct broadcast satellite (“DBS”) operators’ share of the market had grown to 30 percent, up from 18 percent in 2002. In addition, telephone companies had begun offering video service to subscribers, and were seen as a significant threat due to their ability to offer bundled video programming, voice and Internet service offerings that cable operators could provide but that DBS operators could not.

Nonetheless, in 2007, the Commission again found that the exclusivity ban was “necessary” and thus extended it for an additional five years. In support of its action, the FCC noted that seven top-20 satellite-delivered networks and almost half of all regional sports networks (“RSNs”) were affiliated with the four largest cable operators and that system clustering had allowed cable operators to assert near-monopoly control in certain geographic areas. Furthermore, based on a case study of existing exclusive arrangements between cable operators and their terrestrial-delivered networks, which were not subject to the exclusivity ban at the time of the FCC’s decision, the Commission extrapolated that exclusive agreements for satellite-delivered programming could be profitable for cable operators and that vertically-integrated cable companies would enter into such arrangements, if allowed.

The Court’s Decision. In challenging the FCC’s decision to again extend the exclusivity prohibition, the petitioners first argued that the FCC had applied the incorrect standard for determining whether the ban continued to be “necessary” to preserve competition as directed by the statute. The petitioners also argued that the FCC misinterpreted its mandate to preserve and protect competition as a requirement to protect competitors, rather than consumers.

The court rejected these arguments, finding that the term necessary could mean anything from “useful” or “convenient” to “indispensable” or “essential” depending on the context and that the statute offered little guidance as to which definition was most appropriate in the context of the exclusivity ban. Thus, the court concluded it was obligated to give deference to the standard used by the Commission: that the exclusivity ban continued to be necessary “if, in the absence of the prohibition, competition and diversity in the distribution of video programming would not be preserved and protected.” In addition, the court found that the Commission had sufficiently linked the impact of vertical integration on MVPDs to the effects on consumers in justifying its decision to extend the exclusivity prohibition.

The petitioners also argued that the Commission did not rely on substantial evidence when it reached its decision that cable companies would enter into exclusive contracts for their vertically-integrated satellite-delivered programming if the exclusivity ban was allowed to sunset. Although the court acknowledged that the video programming and distribution market was rapidly changing and the FCC’s predictive judgment as to cable operators’ propensity to enter into exclusive agreements was based primarily on its evaluation of a single and potentially unrepresentative example (the exclusive arrangement between Comcast and its affiliated RSN Comcast SportsNet Philadelphia), it nevertheless found that the Commission’s predictive findings and technical analysis were precisely the type of conclusions that warranted the court’s deference and that they were sufficiently plausible and rational to satisfy arbitrary and capricious review. The court did observe, however, that in light of marketplace developments, it anticipated the Commission would “weigh heavily” Congress’ intention that the exclusivity prohibition sunset when it comes up for review in 2012. As the court stated, “[w]e expect that if the market continues to evolve at such a rapid pace, the Commission will soon be able to conclude that the exclusivity prohibition is no longer necessary to preserve and protect competition and diversity in the distribution of video programming.”

As a fallback position, the petitioners had argued that at the very least the FCC should have narrowed the exclusivity rule to apply only to certain types of cable companies or certain types of programming. According to the petitioners, the FCC’s current procedure for obtaining an exemption from the prohibition on a case-by-case basis was not sufficient to prevent the exclusivity ban from being overbroad. This argument also was rejected by the court, which found that because it was reasonable for the Commission to conclude that the exclusivity prohibition continued to be necessary, it was reasonable for the Commission to extend the prohibition in the same form.

Finally, the petitioners argued that the exclusivity ban was a forced-sharing mandate that did not satisfy intermediate scrutiny under the First Amendment. However, the majority concluded, over a lengthy dissent from Judge Kavanaugh, that the petitioners had failed to state a First Amendment claim that distinguished their arguments from those already rejected in a previous court case. Specifically, in Time Warner Entertainment Co., L.P. v. FCC (D.C. Cir. 1996), the court had already considered and rejected arguments that the ban was unconstitutional on its face, which only left open the possibility of an “as-applied” challenge in the future. According to the majority, while the petitioners made references to the First Amendment “in passing,” they did not specifically argue that the provision was unconstitutional as applied, and thus there was no need to review the provision under the intermediate scrutiny standard.

Judge Kavanaugh disagreed with the majority’s characterization of the petitioners’ arguments and presented a number of examples from the petitioners’ briefs and oral arguments demonstrating that the case could not be resolved without addressing the relevant first Amendment limits. Observing the changing competitive landscape, Judge Kavanaugh concluded that the ban is no longer necessary to prevent bottleneck monopoly cable operators from thwarting competition, and thus no longer satisfies the intermediate scrutiny standard requiring an important or substantial governmental purpose to justify the impediment of free speech under the First Amendment.

Comcast has indicated that it will not appeal the decision to the full court, while Cablevision is weighing its options.

We would be pleased to respond to any questions regarding this matter.