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Time Warner Cable Inc. v. Federal Communications Commission

United States Court of Appeals, Second Circuit

September 4, 2013

Time Warner Cable Inc., National Cable & Telecommunications Association, Petitioners,
Federal Communications Commission, United States of America, Respondents.

Argued: October 4, 2012

Petitions for review of a 2011 Order of the Federal Communications Commission promulgating rules under § 616(a)(3) and (5) of the Communications Act of 1934, as amended by the Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460 (1992) (codified at 47 U.S.C. § 536(a)(3), (5)). Petitioners contend that the prima facie standard established by the 2011 Order, as well as § 616(a)(3) and (5) pursuant to which it was promulgated, violate the First Amendment. They further assert that the 2011 Order's standstill rule was promulgated in violation of the Administrative Procedure Act's notice-and-comment requirements. See 5 U.S.C. § 553(b), (c). We reject the first argument, but are persuaded by the second.

Floyd Abrams (Marc Lawrence-Apfelbaum, Jeff Zimmerman, Time Warner Cable Inc., New York, New York; Richard P. Press, Matthew A. Brill, Amanda E. Potter, Matthew T. Murchison, Latham & Watkins LLP, Washington, D.C.; Landis C. Best, Ari Melber, Cahill Gordon & Reindel, New York, New York, on the brief), Cahill Gordon & Reindel, New York, New York, for Petitioner Time Warner Cable Inc.

Miguel A. Estrada (Rick Chessen, Neal M. Goldberg, Michael S. Schooler, Diane B. Burstein, National Cable & Telecommunications Association, Washington, D.C.; Cynthia E. Richman, Scott P. Martin, Gibson, Dunn & Crutcher LLP, Washington, D.C.; Howard J. Symons, Tara M. Corvo, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., Washington, D.C., on the brief), Gibson, Dunn & Crutcher LLP, Washington, D.C., for Petitioner National Cable & Telecommunications Association.

Peter Karanjia, Deputy General Counsel (Joseph F. Wayland, Acting Assistant Attorney General, Catherine G. O'Sullivan, Nancy C. Garrison, United States Department of Justice, Washington, D.C.; Sean A. Lev, General Counsel, Jacob M. Lewis, Associate General Counsel, James M. Carr, Counsel, Federal Communications Commission, Washington, D.C., on the brief), Federal Communications Commission, Washington, D.C. for Respondents Federal Communications Commission and United States of America.

Stephen Díaz Gavin, Andrew M. Friedman, Patton Boggs LLP, Washington, D.C., for Amicus Curiae Bloomberg L.P.

Erin L. Dozier, Jane E. Mago, Jerianne Timmerman, The National Association of Broadcasters, Washington, D.C., for Amicus Curiae The National Association of Broadcasters.

Harold Feld, Senior Vice President, Sherwin Siy, Vice President, Legal Affairs, Public Knowledge, Washington, D.C., for Amicus Curiae Public Knowledge.

C. William Phillips, Covington & Burling LLP, New York, New York; Stephen A. Weiswasser, Kurt A. Wimmer, Gerard J. Waldron, Neema D. Trivedi, Covington & Burling LLP, Washington, D.C., for Amici Curiae The Tennis Channel, Inc. & NFL Enterprises LLC.

Before: Raggi, Chin and Carney, Circuit Judges

Reena Raggi, Circuit Judge

Time Warner Cable Inc. ("Time Warner") and the National Cable & Telecommunications Association ("NCTA" and, collectively with Time Warner, the "Cable Companies") petition for review of an August 1, 2011 order of the Federal Communications Commission ("FCC" or "Commission").[1] See Revision of the Commission's Program Carriage Rules, 26 FCC Rcd. 11494 (2011) ("2011 FCC Order"). The 2011 FCC Order promulgates rules under § 616(a)(3) and (5) of the Communications Act of 1934 ("Communications Act"), as amended by the Cable Television Consumer Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460 (1992) ("Cable Act") (codified at 47 U.S.C. § 536(a)(3), (5)). Section 616(a)(3) and (5) and that part of the 2011 FCC Order establishing the standard for demonstrating a prima facie violation of these statutory provisions (collectively, the "program carriage regime") are intended to curb anticompetitive behavior by limiting the circumstances under which a distributor of video programming can discriminate against unaffiliated networks that provide such programming. The Cable Companies contend that, on its face, the program carriage regime violates their First Amendment right to free speech. See U.S. Const. amend. I. They further argue that the 2011 FCC Order's standstill rule—which requires a distributor to continue carrying an unaffiliated network under the terms of its preexisting contract until the network's complaint against the distributor under the program carriage regime is resolved—was promulgated in violation of the notice-and-comment requirements of the Administrative Procedure Act ("APA"). See 5 U.S.C. § 553(b), (c).

For the reasons set forth in this opinion, we reject the Cable Companies' First Amendment challenge to the program carriage regime. At the same time, however, we conclude that the challenged standstill rule was not promulgated in accordance with the APA. Accordingly, the Cable Companies' petitions are denied in part and granted in part, and the 2011 FCC Order's standstill rule is vacated without prejudice to the FCC's pursuing promulgation consistent with the APA.

I. Background

A. The Video Programming Industry

To provide context for our discussion of the legal issues raised by the Cable Companies, we begin with an overview of the video programming industry and its relevant terminology. As pertinent to this case, the video programming industry includes video programming vendors, multichannel video programming distributors ("MVPDs"), and online video distributors ("OVDs"). See Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, No. 12-203, 2013 WL 3803465, ¶¶ 2–6, 9–11 (July 22, 2013) ("2013 FCC Report"); Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, 27 FCC Rcd. 8610, ¶¶ 2–6, 9–11, 18, 42 (2012) ("2012 FCC Report").[2]

Video programming vendors are primarily programming networks, such as ESPN, Bravo, and CNN, which create or acquire video programming, such as television shows and movies, and which contract with MVPDs and OVDs to distribute that programming to consumers. See 47 C.F.R. § 76.1300(e) (defining "[v]ideo programming vendor"); 2012 FCC Report ¶¶ 18–19, 44, 238, 244–248, Table B-1. MVPDs and OVDs are services that transmit video programming to subscribers for viewing on televisions, computers, and other electronic devices. See 47 C.F.R. § 76.1300(d) (defining "[m]ultichannel video programming distributor"); 2012 FCC Report ¶¶ 2 n.6, 9, 18–19, 21, 237–39. MVPDs and OVDs generally do not alter the programming that they transmit; rather, once an MVPD or OVD acquires programming from networks, it functions as a "conduit for the speech of others, transmitting it on a continuous and unedited basis to [consumers]." Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 629 (1994) ("Turner I"); see 2012 FCC Report ¶ 238.

MVPDs include (1) cable operators, such as Time Warner and Comcast Corporation ("Comcast"), which transmit programming over physical cable systems; (2) direct broadcast satellite ("DBS") providers, such as DISH Network and DIRECTV, which transmit programming via direct-to-home satellite; and (3) telephone companies, such as AT&T and Verizon, which transmit programming via fiber-optic cable. See 2012 FCC Report ¶¶ 18, 30.[3] While MVPDs primarily transmit programming to televisions, increasingly, they also offer access to their programming through the Internet. See id. ¶¶ 6, 21. MVPDs sometimes acquire ownership interests in the networks from which they obtain video programming, and vice versa. See id. ¶ 42. Such networks are deemed "affiliated" with MVPDs, whereas networks without any shared ownership interests are deemed "unaffiliated." Id. ¶¶ 42–43. The "geographic footprint[]" of an MVPD varies based on the type and size of the MVPD. Id. ¶ 24. Cable operators, for instance, operate in "discrete geographic areas defined by the boundaries of their individual systems, " id., and "[n]o cable operator provides nationwide coverage or statewide coverage, " 2013 FCC Report ¶ 25. Telephone companies are similarly limited by their physical systems. See id. ¶ 28. By contrast, DBS providers have "national footprints, " id. ¶ 23, offering "service to most of the land area and population of the United States, " id. ¶ 27.

OVDs, like Hulu and Netflix, are relatively new services that transmit video programming to consumers via broadband Internet for viewing on television and other electronic devices.[4] See 2012 FCC Report ¶¶ 2 n.6, 9, 237–39, 246, 252–53. OVDs may offer programming for free, by subscription, on a rental basis, or for sale. See id. ¶¶ 10, 245–46, 252–53. "[A]n OVD's market generally covers the entire national broadband footprint." Id. ¶ 243; see 2013 FCC Report ¶ 220.

Two markets in the video programming industry are relevant to this case. The first, which we will refer to as the "video programming market, " is the market in which programming networks and other video programming vendors compete with each other to have MVPDs and OVDs carry their video programming. See 2012 FCC Report ¶¶ 9, 11; 2011 FCC Order ¶ 4 & nn.10–12. The second market, which we will refer to as the "MVPD market, " consists of MVPDs and, to a lesser extent, OVDs competing to deliver video programming to consumers. See 2012 FCC Report ¶¶ 3–6, 9, 11; 2011 FCC Order ¶ 4 & n.13. See generally Cablevision Sys. Corp. v. FCC, 597 F.3d 1306, 1319 (D.C. Cir. 2010) (Kavanaugh, J., dissenting) (citing Christopher S. Yoo, Vertical Integration & Media Regulation in the New Economy, 19 Yale J. on Reg. 171, 220 (2002), and discussing chain of production in video programming industry).

B. The Cable Act

In 1992, after three years of hearings, Congress overrode President George H.W. Bush's veto and enacted the Cable Act to regulate the video programming industry. At the time, cable operators held 95% of the MVPD market in the United States. See Implementation of Cable Television Consumer Protection & Competition Act of 1992, 17 FCC Rcd. 12124, ¶ 20 (2002) ("2002 FCC Report"). Nascent MVPD systems, such as DBS and fiber-optic telephone systems, did not then pose a significant competitive threat to cable operators, see 2012 FCC Report ¶ 27; S. Rep. No. 102-92, at 8 (1991), reprinted in 1992 U.S.C.C.A.N. 1133, 1140–41, and OVDs did not yet exist, see 2012 FCC Report ¶ 239. Cable operators also generally did not compete against one another in any given locality, see 2012 FCC Report ¶¶ 27, 39, due in part to "local franchising requirements and the extraordinary expense of constructing more than one cable television system to serve a particular geographic area, " Cable Act § 2(a)(2). Thus, the country was effectively divided into numerous local cable monopolies, with few consumers having a choice of MVPDs. See id.; S. Rep. No. 102-92, at 8, reprinted in 1992 U.S.C.C.A.N. at 1141 ("A cable system serving a local community, with rare exceptions, enjoys a monopoly.").

In conjunction with their local monopolies, cable operators exercised "bottleneck" control, a power that allowed them to prevent certain programming networks from reaching consumers in particular geographic areas. Turner I, 512 U.S. at 656–57. It is the "physical connection between the [subscriber's] television set and the cable network" that affords cable operators this power to "silence the voice" of a particular network "with a mere flick of the switch." Id. at 656 (observing that "simply by virtue of its ownership of the essential pathway for cable speech, a cable operator [could] prevent its subscribers from obtaining access to programming it [chose] to exclude"); see generally 3B P. Areeda & H. Hovenkamp, Antitrust Law ¶¶ 771a, 772a (3d ed. 2008) (discussing bottleneck control and essential facilities doctrine in antitrust context).

Concerns about cable operators' anticompetitive market power informed Congress's enactment of the Cable Act. See Turner I, 512 U.S. at 633–34; Cable Act § 2(a) (listing congressional findings about video programming industry). Among other goals, the Act sought to promote the availability to the public of diverse views through cable television, to protect consumer interests where cable operators were not subject to effective competition, and to ensure that cable operators did not have undue market power vis-à-vis programming networks and consumers. See Cable Act § 2(b). Toward these ends, the Cable Act imposed various restrictions on cable operators and other MVPDs and directed the FCC to establish further regulations. See Turner I, 512 U.S. at 630. The focus of this appeal is certain statutory restrictions on MVPDs dealings with programming networks and the FCC regulations promulgated thereunder, namely, the program carriage regime and the standstill rule.

C. The Program Carriage Regime and the Standstill Rule

1. Section 616(a)(3) and (5)

As amended by the Cable Act, § 616(a) of the Communications Act directs the FCC to "establish regulations governing program carriage agreements and related practices between cable operators or other [MVPDs] and video programming vendors." 47 U.S.C. § 536(a). Section 616(a)(3) specifies that such regulations shall

contain provisions designed to prevent [an MVPD] from engaging in conduct the effect of which is to unreasonably restrain the ability of an unaffiliated video programming vendor to compete fairly by discriminating in video programming distribution on the basis of affiliation or nonaffiliation of vendors in the selection, terms, or conditions for carriage of video programming provided by such vendors.

Id. § 536(a)(3). Section 616(a)(5) further instructs that such regulations shall "provide for appropriate penalties and remedies for violations of this subsection, including carriage." Id. § 536(a)(5).

Congress enacted these provisions to prevent cable operators from using their market power to take unfair advantage of unaffiliated programming networks. See 2012 FCC Report ¶ 42. As the Senate and House Reports indicate, Congress was concerned that cable operators were leveraging "their market power derived from their de facto exclusive franchises and lack of local competition" to require networks to give them "an exclusive right to carry the programming, a financial interest, or some other added consideration as a condition of carriage on the cable system." S. Rep. No. 102-92, at 24, reprinted in 1992 U.S.C.C.A.N. at 1156–57; see H.R. Rep. No. 102-628, at 42–44 (1992); 2012 FCC Report ¶ 42. The Senate Report notes that such tactics were "not surprising" in light of the lack of competition in the MVPD market: unaffiliated networks either had to "deal with operators of such systems on their terms or face the threat of not being carried in that market." S. Rep. No. 102-92, at 24, reprinted in 1992 U.S.C.C.A.N. at 1157. The report acknowledged aspects of the MVPD and video programming markets that could sometimes offset or reduce these anticompetitive concerns. See id. For example, the extent of cable operators' market power varied from locality to locality. See id. Moreover, certain major networks, like CNN and ESPN, could "fend for themselves, " as cable operators were unlikely not to carry such popular networks given the operators' incentive to carry programming that "increase[d] subscribership and decrease[d] churn." Id. Nevertheless, Congress remained concerned that "in certain instances" a cable operator would be able to "abuse its locally-derived market power to the detriment of programmers." Id.; see H.R. Rep. No. 102-628, at 43–44.

This concern was exacerbated by pervasive vertical integration in the video programming industry. "Vertical integration occurs when a firm provides for itself some input that it might otherwise purchase on the market." Areeda & Hovenkamp ¶ 755a. "A vertically integrated cable company is a company that owns both the programming and the distribution system." S. Rep. No. 102-92, at 24–25, reprinted in 1992 U.S.C.C.A.N. at 1157–58. In 1992, when the Cable Act was enacted, 39 of the 68 national programming networks, or approximately 57%, were vertically integrated with cable operators. See H.R. Rep. No. 102-628, at 41; see also 2012 FCC Report ¶ 42. This vertical integration provided cable operators with the incentive and ability to favor their affiliated networks, for example, by giving an affiliated network a more desirable channel position than an unaffiliated network or by refusing to carry an unaffiliated network altogether. See S. Rep. No. 102-92, at 25, reprinted in 1992 U.S.C.C.A.N. at 1158; H.R. Rep. No. 102-628, at 41. Indeed, the Senate Report noted hearing testimony that stated as much:

Because of the trend toward vertical integration, cable operators now have a clear vested interest in the competitive success of some of the programming services seeking access through their conduit. You don't need a Ph.D. in Economics to figure out that the guy who controls a monopoly conduit is in a unique position to control the flow of programming traffic to the advantage of the program services in which he has an equity investment and/or in which he is selling advertising availabilities, and to the disadvantage of those services . . . in which he does not have an equity position.

S. Rep. No. 102-92, at 25–26, reprinted in 1992 U.S.C.C.A.N. at 1158–59 (internal quotation marks omitted); see also Areeda & Hovenkamp ¶ 756b (stating that vertically-integrated monopolist "at one stage of the production-distribution process may carry with it the power to affect competition in earlier and later stages").

On the other hand, Congress recognized that vertical integration could sometimes promote competition. See S. Rep. No. 102-92, at 26–27, reprinted in 1992 U.S.C.C.A.N. at 1159–60; H.R. Rep. No. 102-628, at 41. The Senate Report cited hearing testimony recounting how vertical integration had allowed cable operators to "stimulate[] the development of programming that was necessary to flesh out the promise of cable . . . when nobody else was really willing to step up and put up the money." S. Rep. No. 102-92, at 27, reprinted in 1992 U.S.C.C.A.N. at 1160; see also Areeda & Hovenkamp ¶ 756b ("[V]ertical integration by a monopolist may or may not have desirable or adverse consequences on economic performance.").

Given these mixed views on the competitive impact of vertical integration in the video programming industry, Congress rejected proposals to ban vertical integration and instead enacted "legislation bar[ring] cable operators from discriminating against unaffiliated programmers" to ensure "competitive dealings between programmers and cable operators." S. Rep. No. 102-92, at 27, reprinted in 1992 U.S.C.C.A.N. at 1160; see also H.R. Rep. No. 102-628, at 173 ("While vertical integration of cable systems has led to a diversity of program offerings which had previously been unknown, we cannot countenance discriminatory practices by cable systems in favor of program suppliers in which the cable company has an interest.").

2. The 1993 FCC Order

Pursuant to the Cable Act's mandate, on October 22, 1993, the FCC released an order establishing a procedural framework for addressing § 616(a)(3) discrimination complaints by unaffiliated networks against MVPDs. See Implementation of Sections 12 & 19 of the Cable Television Consumer Protection & Competition Act of 1992, 9 FCC Rcd. 2642 (1993) ("1993 FCC Order"). In so doing, the FCC sought to establish regulations that balanced the need to proscribe "behavior prohibited by the specific language of the statute" with the need to preserve "the ability of affected parties to engage in legitimate, aggressive negotiations." Id. ¶ 14. It thus determined that resolution of § 616(a)(3) complaints would be case specific, focusing "on the specific facts pertaining to each negotiation" to determine if a violation of the program carriage rules had occurred. Id.

Under the 1993 FCC Order's complaint process, an unaffiliated network, as a first step to obtaining relief against an MVPD, had to make a prima facie "showing that [the MVPD] . . . engaged in behavior that is prohibited by" § 616(a)(3). Id. ¶ 29. To carry its prima facie burden, the unaffiliated network had to, among other things, "identify the relevant Commission regulation allegedly violated, " "describe with specificity the behavior constituting the alleged violation, " and provide documentary evidence of the alleged violation or an affidavit setting forth the basis for its allegations. Id. Defendant MVPDs were permitted to file an answer supported by documentary evidence or a refuting affidavit, to which the complainant could then reply. See id. ¶ 30. If, upon FCC review of these submissions, the agency determined that the complainant had not shown a prima facie violation, the complaint would be dismissed. See id. ¶ 31. But if a prima facie violation were shown, the FCC could order discovery, refer the case to an administrative law judge ("ALJ") for a hearing, or, if appropriate, grant relief on the basis of the existing record. See id.

Pursuant to § 616(a)(5), the 1993 FCC Order also established penalties for violations of § 616(a)(3), which included forfeitures, mandatory carriage, or carriage on terms revised or specified by the FCC. See id. ΒΆ 26. The FCC emphasized that ...

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