On September 4, 2013, the U.S. Court of Appeals for the Second Circuit rejected a First Amendment challenge to the Federal Communications Commission’s (FCC) revised program carriage rules, but struck down on procedural grounds the FCC’s program carriage “standstill rule.” The unanimous decision, jointly resolving two cases arising from the FCC’s 2011 Order amending the program carriage rules, holds that the FCC’s new prima facie standard for reviewing alleged discrimination by a multichannel video programming distributor (MVPD) against an unaffiliated programmer does not violate the First Amendment. At the same time, the Court vacated the program carriage standstill rule, which, upon the request of a programmer, allows the FCC to order the continued carriage of video programming where the programming contract between a programmer and MVPD has expired. According to the court, the FCC failed to comply with the Administrative Procedure Act’s (APA) notice-and-comment requirements when it adopted the rule.

Background. In 2011, the FCC updated its program carriage rules to adopt a new prima facie standard and a standstill rule. The prima facie standard has its roots in a 1993 Order by the FCC that requires unaffiliated programmers complaining of discrimination by a MVPD to make a prima facie “showing that [the MVPD]… engaged in behavior prohibited by § 616(a)(3).” In its 2011 Order, the FCC adopted rules establishing that a prima facie case must be made by showing that a MVPD discriminated “on the basis of affiliation or non-affiliation” in the “selection, terms, or conditions for carriage.” To make this showing, the programmer may use circumstantial evidence that establishes that (1) “the complaining unaffiliated network ‘provides video programming that is similarly situated to video programming provided by’” an affiliated network based on factors that include “genre, ratings, license fee, target audience,” and other factors; and (2) the MVPD treated the unaffiliated programmer differently than the affiliated programmer. Further, the complainant must show that discrimination “had the effect of ‘unreasonably restraining’ its ability ‘to compete fairly.’”

The 2011 Order also adopted a “standstill rule” to keep the current terms of an agreement in place while the affected programmer and MVPD negotiated a new contract. The FCC stated that it adopted this rule to protect programmers who file complaints with the FCC from retaliatory actions by MVPDs. To secure a standstill, a programmer must demonstrate (1) likely success on the merits of their complaint against the MVPD, (2) that it will face irreparable harm without a standstill; (3) no substantial harm to other interested parties, and (4) that the standstill furthers the public interest.

Discussion. Time Warner Cable and the National Cable & Telecommunications Association (“the cable companies”) appealed the FCC’s 2011 Order, arguing that the program carriage rules adopted therein violate the First Amendment. The cable companies relied on the Supreme Court’s decisions in the Turner cases holding that MVPDs are entitled to First Amendment protection and argued that the revised program carriage rules should be subjected to the “strict scrutiny” review standard. Further, the cable companies argued that increased competition in the video marketplace since the Cable Act was passed in 1992 indicates that MVPDs do not have market power sufficient to justify an intrusion on their First Amendment rights, even under the intermediate level of scrutiny.

The Court rejected these arguments, finding that intermediate scrutiny is appropriate and that the prima facie standard survives such scrutiny because it serves an important government interest – market regulation to promote fair MVPD competition – and is narrowly tailored to serve that interest. The Court noted, however, that it considered the possibility “more real than speculative” that changing market conditions due to increased MVPD competition will undermine this conclusion at some point in the future. So, although the Court upheld the program carriage regime, it “encourage[d] the FCC to reevaluate the program carriage regime as warranted by increased competition in the video programming industry.” Moreover, throughout the opinion’s First Amendment analysis, the court directed the FCC, when applying the program carriage rules in specific cases, to conduct a searching, case specific market power analysis.

Notably, the Court’s opinion also suggested that the full host of federal regulatory restrictions on cable operators may no longer be justified: “There is no denying that the video programming industry is dynamic and that the level of competition has rapidly increased in the last two decades. In light of these changes, some of the Cable Act’s broad prophylactic rules may no longer be justified.” Given this language, courts may begin to require the FCC to more carefully take competitive specifics into account when regulating the industry going forward.

With respect to the standstill rule, the court agreed with the cable companies’ argument that the FCC failed to comply with the Administrative Procedure Act’s (APA) notice-and-comment requirements when it adopted the rule. The cable companies had argued that the 2007 Notice of Proposed Rulemaking addressing the program carriage rules did not indicate that the FCC was even considering adopting any sort of standstill rule. The court found that such a failure was procedurally fatal in that it violated basic requirements for government rulemaking found in the APA. It should be noted that nothing in the opinion prevents the FCC from attempting to re-promulgate such a rule, as long as the APA’s requirements, namely sufficient prior notice to interested parties, are followed. Indeed, the opinion specifically contemplates such an option going forward (“We order that [the standstill rule] be vacated without prejudice to the FCC attempting to re-promulgate it consistent with the APA.”).