Last week, a panel of the United States Court of Appeals for the Third Circuit, by a 2-1 decision, vacated the revised newspaper/broadcast cross ownership rule adopted by the Federal Communications Commission (“FCC”) in 2008. The court also voted unanimously to overturn elements of the FCC’s diversity order relating to eligible entities and to uphold the FCC’s decision to reinstate the radio/television cross-ownership rule, local television ownership rule, local radio ownership rule, dual network rule and failed station solicitation rule that were in place prior to 2003.

Background. This case marks the second time the Third Circuit has reviewed FCC changes to its ownership rules. In 2004, the Third Circuit remanded back to the FCC revisions it made to its ownership rules in 2003. In 2007, as part of the 2006 Quadrennial Regulatory Review of the FCC’s ownership rules, the Commission adopted a revised newspaper/broadcast cross-ownership rule and granted permanent waivers of the new rule to five specific newspaper/broadcast combinations. Instead of attempting further revisions to the other ownership rules remanded by the Third Circuit, the Commission decided to reinstate those rules as they existed prior to the Third Circuit’s first decision. As part of a separate but related proceeding relating to diversity, the FCC adopted a series of other measures in 2007 to address broadcast ownership diversity among minorities and women.

A group of non-profit “public interest groups” appealed the FCC’s 2008 order arguing that the revisions to the newspaper/broadcast cross-ownership rule were not warranted by the record, while several media corporations appealed the same order arguing that the FCC’s reinstatement of the former ownership rules was not justifiable under the record of the proceeding. The public interest groups also appealed the FCC’s new diversity rules on the grounds that they were not sufficiently aimed at addressing the shortfall of minority and women broadcast owners.

Newspaper/Broadcast Cross-Ownership. Instead of substantively examining the FCC’s revision to its newspaper/broadcast cross-ownership rule as it had done in 2004, this time the Third Circuit overturned the latest revision on the procedural grounds that the FCC failed to meet the notice and comment standard under the Administrative Procedure Act (APA).

The FCC’s 2008 order revised the rule to evaluate potential newspaper/broadcast cross-ownership proposals on a case-by-case basis using reversible presumptions. If the proposed combination was in a top 20 Nielsen Designated Market Area (“DMA”), the FCC would presume that the combination would be in the public interest as long as the television station in question was not ranked among the top four stations in the market and eight independent “major media voices” remained in the market after the combination. In areas outside of the top 20 DMAs, combinations would be presumed not in the public interest. This negative presumption could be overcome if the proposed combination initiated at least seven hours a week of additional local news programming or the newspaper or broadcast outlet qualifies as “failed” or “failing” under FCC rules.

The court found that the Notice of Proposed Rulemaking (“NPRM”), which mentioned using local markets as part of the new rule in only two sentences, did not provide sufficient notice of the revised rule as it failed to provide any details concerning how a potential rule that accounted for local markets might be formulated. The main structure of the 2008 rule was first outlined in an Op-Ed in the New York Times and accompanying press release issued by then FCC Chairman Kevin Martin in late 2007, almost a year and a half after the issuance of the NPRM. While Martin’s press release had asked for comment, the court found that an independent press release solely issued by the FCC Chairman did not pass muster under the APA, a conclusion that the FCC also conceded. The Court further criticized the FCC for its failure to remain “open minded” about the issues raised and comments submitted, finding that the agency could not have possibly been open minded since a draft order containing Martin’s proposal was circulated for a vote among the other commissioners two weeks before the comment period for Martin’s press release closed.

With respect to the five permanent waivers granted by the FCC’s 2008 order (one for Gannett’s combination in Phoenix, AZ and four for Media General’s combinations in Myrtle Beach-Florence, SC; Columbus, GA; Panama City, FL and Bristol, VA-Kingsport-Johnson City, TN), the court found that it lacked jurisdiction to address the waivers due to the fact that the public interest parties opposing the waivers failed to exhaust their administrative remedies by filing petitions for reconsideration at the FCC. Notwithstanding the jurisdictional finding, the court opined in a footnote that it had doubts about whether the FCC had full opportunity to consider the waivers and the “propriety of the decision-making process” given that some of the commissioners had only 12 hours notice that the waivers would be included in the order and the fact that representatives from Media General visited or called the FCC 37 times in the 10 months leading up the 2008 Order’s adoption.

Other Ownership Rules. The Third Circuit upheld the FCC’s decision to reinstate its remaining pre-2003 media ownership rules. While many of the individual media companies and organizations argued that the record in front of the agency compelled deregulatory action, the court had no difficulty accepting the FCC’s conclusions that continuing anti-competitive concerns in the media marketplace necessitated the need for the radio/television cross-ownership rule, local television ownership rule, local radio ownership rule and dual network rule as they had previously existed before the 2003 round of revisions. The court also found that the ownership rules were permissible under the First Amendment “because they are rationally related to substantial government interests in promoting competition and protecting viewpoint diversity.”

Diversity. In 2003, the Third Circuit invalidated the FCC’s decision to repeal the failed station solicitation rule, which requires applicants seeking waivers of the local television rule to provide notice of the sale to potential out-of-market buyers before it can sell a failed, failing, or unbuilt television station to an in-market buyer, because the court concluded the FCC failed to consider the impact that repealing the rule might have on potential minority and women broadcast owners. Not surprisingly, the FCC’s decision in the 2008 Order to reinstate the failed station solicitation rule met with the court’s quick approval.

The court did take issue, however, with many of the provisions of the 2007 diversity order due to the fact that these provisions were designed to create opportunities for “eligible entities,” which are defined by Small Business Administration standards based on revenue. The court found that the FCC failed to explain how use of the eligible entity standard would achieve the Commission’s purported goal in adopting the regulation - increasing broadcast ownership by women and minorities. The court also criticized the FCC for knowingly adopting regulations without reliable data concerning television ownership by minorities and women and radio ownership by women.

Provisions in the 2007 diversity order that did not rely upon the eligible entity definition were upheld by the court, which included: a ban on discrimination in broadcast transactions, a “zero tolerance” policy for ownership fraud, non-discrimination provisions in advertising sales contacts, longitudinal research on minority and women ownership trends, local and regional bank participation in SBA guaranteed loan programs, an “access to capital” conference and a guidebook on diversity.

Going Forward. The FCC is currently in the midst of the 2010 Quadrennial Regulatory Review of its ownership regulations and is likely to address the Third Circuit’s most recent decision within the context of that proceeding. The FCC also indicated to the court that it intended to address in that proceeding a petition for reconsideration of the five permanent newspaper/broadcast rule waivers filed by a group that was not a party to the Third Circuit case. The Third Circuit panel’s decision indicates that the panel will retain jurisdiction over any future appeals of FCC actions relating to the court’s decision.