On Friday, March 12, 2010, the US Court of Appeals for the District of Columbia Circuit issued a decision upholding a September 2007 order of the Federal Communications Commission (FCC) that extended until Oct. 5, 2012, the prohibition on exclusive cable network programming agreements.

The victory for the FCC and its allies on appeal, intervenors AT&T and Verizon, was a narrow one. In a 2-1 decision, the court ruled that the Commission’s interpretation of the operative federal statute was reasonable, and that its actions were not arbitrary and capricious. The court, however, sidestepped the First Amendment challenge brought by the cable operator petitioners, finding that they had failed to sufficiently raise the issue. In a lengthy dissent, Circuit Judge Brett Kavanaugh opined that the petitioners had, in fact, adequately raised the First Amendment challenge and that their First Amendment rights had been violated.

Absent further judicial review, either by the Court of Appeals on panel rehearing or en banc, or by the U.S. Supreme Court, the effect of the court’s ruling is that the exclusivity ban, which has been in effect since 1992, will remain in force until at least October 2012. At some point prior to that time, the FCC will be required to consider anew whether to extend the ban yet again or allow it to sunset by its own terms.

Background

Section 628(c)(2)(D) of the Communications Act and Section 76.1002(c) of the FCC’s rules generally prohibit exclusive contracts for satellite cable programming between vertically integrated programming vendors and cable operators in areas where a cable operator is providing service. The prohibition on exclusive cable network programming agreements, enacted as part of the 1992 amendments to the Cable Act, was originally scheduled to sunset on Oct. 5, 2002.

However, in the 1992 amendments, Congress authorized the FCC to extend the prohibition upon a finding that it “continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.” In 2002, the FCC extended the prohibition for five years until Oct. 5, 2007, and in September 2007, the FCC unanimously voted to extend the ban another five years, to Oct. 5, 2012.

Despite the significant industry developments that have occurred since 2002—including continued subscriber growth by direct broadcast satellite (DBS) providers, DBS’s own “exclusive” programming, and the increase in the provision of competing multichannel video program distributor (MVPD) service, most notably by Verizon and AT&T—the FCC found in its 2007 examination of the competitive landscape that the ban “remains necessary for viable competition in the video distribution market.” The Commission concluded that vertically integrated programming “is some of the most popular programming available today, for which there are no good substitutes.” Two major cable operators then sought review of the FCC’s order in the U.S. Court of Appeals for the D.C. Circuit.

Majority decision

The court applied the standard “Chevron” analysis for judicial review of agency action (Chevron USA, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984)) and agreed with the FCC’s finding that the ban on exclusive contracts “continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.” It rejected the petitioners’ argument that the Commission was improperly attempting to protect particular groups of “competitors” rather than “competition.”

The court further found that “conclusions based on the FCC’s predictive judgment and technical analysis are just the type of conclusions that warrant deference from this Court.” While conceding that the MVPD market has “transformed substantially” since the ban’s enactment in 1992, the court deferred to the FCC’s assessment that “the transformation presents a mixed picture” of the MVPD market. In dicta, however, the court stated 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,” suggesting that the FCC may face more exacting scrutiny if it attempts to extend the ban again in 2012.

Likewise, while acknowledging that the Commission’s calculations on the likelihood of future withholding “appear susceptible to questions about their predictive power,” the court excused such shortcomings and determined that, because the Commission’s judgment did not “run counter to the evidence, nor is it implausible or irrational,” it was not arbitrary or capricious for purposes of judicial review.

This portion of the court’s decision stands in stark contrast to an August 2009 decision rendered by a different panel of the U.S. Court of Appeals for the D.C. Circuit, which refused to give deference to the FCC when it attempted to impose a 30 percent national market share cap for cable operators. Comcast Corp. v. FCC, 579 F.3d 1 (D.C. Cir. 2009). In that case, the court unanimously found the FCC’s action to be arbitrary and capricious because the Commission failed to take account of the “overwhelming evidence” of “many significant changes” that have occurred in the video distribution marketplace since 1992.

Finally, the court rejected the petitioners’ contention that the FCC should have narrowed the exclusivity prohibition to apply only to certain types of cable companies or certain types of programming. The court ruled that, given its finding that the FCC had reasonably concluded that the exclusivity ban—in its original form—continued to be necessary to promote competition, it was not arbitrary and capricious for the FCC to reject proposals to narrow the scope of the exclusivity ban and to maintain the prohibition in its original form.

Perhaps the most significant aspect of the majority decision is what it failed to decide—specifically, whether the FCC’s extension of the ban violates cable operators’ rights under the First Amendment. To the extent that the petitioners were deemed to be presenting a “facial” challenge to the exclusivity ban, based on the language of the statute itself, the court found nothing new to consider and merely referred back to its prior opinion in Time Warner Entertainment Co., L.P. v. FCC, 93 F.3d 957 (D.C. Cir. 1996), where it held that the statute met the “intermediate scrutiny” standard applicable to such challenges. Addressing the petitioners’ principal constitutional claim—that the statute should be held to be unconstitutional “as applied”—the majority found that the cable operator petitioners had failed to sufficiently present an “as-applied” First Amendment challenge to the FCC’s decision to extend the ban, and consequently declined to address that question.

Dissenting opinion

Judge Kavanaugh’s lengthy dissent focused entirely on the cable operators’ First Amendment arguments. In the 1996 Time Warner case, the exclusive cable programming ban survived a facial challenge. However, Judge Kavanaugh found that the relevant facts of the Time Warner case no longer exist and, therefore, concluded that decision was not binding. Judge Kavanaugh further believed that the cable operators had properly presented a First Amendment challenge.

On the merits, the dissent reasoned that the exclusivity ban failed the First Amendment’s “intermediate scrutiny” test, which requires the ban to (1) further an important or substantial governmental interest, unrelated to the suppression of free expression, and (2) be no greater than essential to the furtherance of that interest. Judge Kavanaugh found that the extension of the exclusivity ban failed both prongs of that test.

He found that, given the existence of a “radically changed and highly competitive marketplace,” the FCC could not show that a ban on exclusive contracts furthers the interest of fair competition in the MVPD marketplace. Judge Kavanaugh also found that the ban burdens more speech than is necessary by highlighting the ubiquitous nature of exclusive contracts (such as Apple’s exclusive contract with AT&T for iPhones), as well as their widely recognized procompetitive benefits.

Finally, Judge Kavanaugh found that the ban violates the First Amendment because it unfairly discriminates among similarly situated MVPDs in that it applies only to incumbent cable operators, but not their major competitors such as DirecTV and DISH.