Cablevision Sys. Corp. v. Fed. Commc'ns Comm'n, No. 07-1425

• Decision Date: 12 March 2010
• Docket Number: No. 07-1487.,No. 07-1425
• Citation: 597 F.3d 1306
• Parties: CABLEVISION SYSTEMS CORPORATION, Petitioner V. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents. AT&T Inc. and Verizon, Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

597 F.3d 1306

CABLEVISION SYSTEMS CORPORATION, Petitioner V. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents. AT&T Inc. and Verizon, Intervenors.

No. 07-1425

No. 07-1487.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 22, 2009.

Decided March 12, 2010.

On Petitions for Review of an Order of the Federal Communications Commission.

Henk Brands argued the cause for petitioners. With him on the briefs were David P. Murray and Howard J. Symons.

Nandan M. Joshi, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the brief were Thomas 0. Barnett, Assistant Attorney General, U.S. Department of Justice, Catherine G. O'Sullivan and Nancy C. Garrison, Attorneys, Matthew B. Berry General Counsel, Federal Communications Commission, Joseph R. Palmore, Deputy General Counsel, and Daniel M. Armstrong, Associate General Counsel. Richard K. Welch, Deputy Associate General Counsel, entered an appearance.

Helgi C. Walker argued the cause for intervenors Verizon, et al. With her on the brief were Michael E. Glover, Edward Shakin, William H. Johnson, Eve Klindera Reed, Christopher M. Heimann, Gary L Phillips, Lynn R. Charytan, Jack N. Goodman, Heather M. Zachary, Dileep S. Srihari, and Pantelis Michalopoulos.

Harry F. Cole was on the brief for amicus curiae Broadband Service Providers Association in support of respondents.

Before: SENTELLE, Chief Judge GRIFFITH and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Chief Judge SENTELLE.

Dissenting opinion filed by Circuit Judge KAVANAUGH.

SENTELLE, Chief Judge:

In these consolidated cases, Cablevision Systems Corporation and Comcast Corporation petition for review of the Federal Communications Commission's decision to extend for five years a statutory prohibition against exclusive contracts between cable operators and cable affiliated programming networks. Petitioners assert that the Commission misinterpreted the plain meaning of the underlying statute. In addition, they argue the Commission's decision was arbitrary and capricious and therefore violates the Administrative Procedure Act (APA). Lastly, petitioners claim the decision fails under First Amendment intermediate scrutiny. We hold that the Commission's interpretation of its statutory mandate was reasonable. Because we also hold that the Commission's decision satisfies arbitrary and capricious review, and that intermediate scrutiny is not applicable, we deny the petitions for review.

I. Background

Multichannel video programming distributors (MVPDs), such as cable television operators or direct broadcast satellite providers, offer customers multiple channels of video programming, generally by subscription. From the 1940s when the first cable television systems were built until the 1990s, the cable industry dominated this market. In most geographic areas, cable operators were the only MVPDs, often enjoying local cable monopolies because they were permitted to enter into exclusive local franchises when they laid cables using pubhc rights of way and easements. As the market for cable subscriptions grew, so did the market for cable programming to supplement television broadcast programming. Cable programmers began to develop programs for sale or license to cable operators. These two halves of the cable industry often had—and still have—overlapping ownership, with cable operators having ownership interests in cable programmers, and vice versa. Such companies constitute "vertically integrated" entities.

In 1990, the Federal Communications Commission reported to Congress that the cable operators' monopolies in the MVPD market persisted partly because competitors were unable to secure programming owned by vertically integrated cable companies. Competition, Rate Deregulation and the Commission's Policies Relating to the Provision of Cable Television Service 5 F.C.C.R. 4962, 5006-08 (1990). In response to the Commission's report. Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (Cable Act). Pub.L. No. 102-385, 106 Stat. 1460. Section 628 of the Act, 47 U.S.C. § 548, prohibits various activities that inhibit competition in video programming. One provision, § 628(c)(2)(D), directs the Commission to promulgate regulations prohibiting exclusive contracts for cable and broadcast progi-amming between a cable operator and a cable programming vendor in which a cable operator has an attributable interest, unless the Commission determines that the contract would be in the public interest. This provision ("the exclusivity prohibition") applies to programming delivered to distributors via satellite, the most common method of delivery, but not to programming delivered by terrestrial lines such as fiber optic cables. The exclusivity prohibition was subject to a sunset provision, which provided that the exclusivity prohibition would lapse ten years after the date of the Cable Act's enactment, "unless the Commission finds in a proceeding conducted during the last year of such 10-year period, that such prohibition continues to be necessary to preserve and protect competition and diversity in the distribution of video programming." 47 U.S.C. § 548(c)(5).

At the end of the ten year period, in 2002, the Commission extended the exclusivity prohibition for five years with a commitment to evaluate the market again at the end of the five years. In its analysis the Commission concluded that the prohibition was "necessary" "if, in the absence of the prohibition, competition and diversity would not be preserved and protected." Implementation of the Cable Television Consumer Protection and Competition Act of 1992 and Development of Competition and Diversity in Video Programming Distribution: Section 628(c)(5) of the Communications Act—Sunset of Exclusive Contract Prohibition, Report and Order, 17 F.C.C.R. 12, 124, 12, 128-30 (2002). Though competition in the multichannel video programming market 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 markets for both multichannel video programming distribution and programming creation continued to change dramatically. When the Commission compiled its report on the state of the MVPD market in 2007, it recorded many differences between the 2002 and 2007 markets. Implementation of the Cable Television Consumer Protection and Competition Act of 1992 and Development of Competition and Diversity in. Video Programming Distribution: Section 628(c)(5) of the Communications Act—Sunset of Exclusive Contract Prohibition, Report and Order and Notice of Proposed Rulemaking, 22 F.C.C.R. 17791 (2007) ("2007 Order"). As of 2007, there were 531 national programming networks, up from 294 in 2002 and just 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. However, many of the most popular networks were still cable affiliated; seven of the Top 20 satellite-delivered networks as ranked by prime time ratings, and almost half of all regional sports networks, were affiliated with the four largest cable operators, Comcast, Time Warner, Cox, and Cablevision.

The cable delivery market also changed significantly. At the time of the Order, cable operators controlled 67 percent of multichannel video programming distribution, down from 78 percent in 2002 and 95 percent in 1992. Direct broadcast satellite operators such as DirecTV and EchoStar served 30 percent of the market, up from 18 percent in 2002. Since 2002, telephone companies have begun offering wireline services based on their telephone infrastructure. While wireline competitors only represent a small share of the MVPD market, they represent a potentially powerful force because they can offer the same bundled voice, broadband data, and video services that cable operators provide but that direct broadcast satellite cannot offer.

To monitor the geographic variations in the television market, the Commission designates geographic television markets, called "designated market areas, " based on local viewing patterns. Each county in the United States is allocated to a market based on which stations receive a preponderance of total viewing hours in the county. 2007 Order at 17, 828 n. 276. Examining these designated market areas individually, the Commission noticed that in many areas consumers continue overwhelmingly to subscribe to cable. Cable operators tend to cluster regionally, and over the years smaller operators have consolidated with large operators. Because of this clustering and consolidation, a single geographic area can be highly susceptible to near-monopoly control by a cable company. The four largest cable operators have in fact increased their share of the national MVPD market from 48 percent in 2002 to between 53 and 60 percent in 2007.

In the 2007 Order, the Commission also assessed the incentives of vertically integrated cable companies to withhold programming from competitors. In order to make this evaluation, the Commission extrapolated from exclusive contracts that are allowed to and do exist. See 2007 Order, App'x C, 22 F.C.C.R. at 17, 883. Because the exclusivity prohibition only applies to programming delivered to distributors via satellite, vertically integrated cable companies can and do enter into exclusive contracts for programming to be delivered through terrestrial cables. These programming networks tend to be regional, such as Comcast SportsNet Philadelphia or CN8, a Comcast-owned local news and information channel serving 20 television markets. Comcast currently withholds its SportsNet Philadelphia net-work from competitors, and the FCC used this example as a case study to reverse engineer what market conditions make withholding profitable. The Commission then extrapolated from these data to predict how many...