Echostar Satellite L.L.C. v. Fed. Commc'ns Comm'n

• Decision Date: 15 January 2013
• Docket Number: Nos. 04–1033,04–1109.,s. 04–1033
• Citation: 704 F.3d 992
• Parties: ECHOSTAR SATELLITE L.L.C., Petitioner v. FEDERAL COMMUNICATIONS COMMISSION and United States Of America, Respondents National Cable & Telecommunications Association, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

704 F.3d 992

ECHOSTAR SATELLITE L.L.C., Petitioner

v. FEDERAL COMMUNICATIONS COMMISSION and United States Of America, RespondentsNational Cable & Telecommunications Association, Intervenor.

Nos. 04–1033, 04–1109.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 14, 2012.

Decided Jan. 15, 2013.

On Petitions for Review of Orders of the Federal Communications Commission.

Pantelis Michalopoulos argued the cause for petitioner. With him on the briefs were Stephanie A. Roy and Andrew W. Guhr.

James M. Carr, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the briefs were Catherine G. O'Sullivan and James J. Fredricks, Attorneys, U.S. Department of Justice, Austin C. Schlick, General Counsel, Federal Communication Commission, Peter Karanjia, Deputy General Counsel, and Jacob M. Lewis, Associate General Counsel. Richard K. Welch, Deputy Associate General Counsel, Daniel M. Armstrong III, Associate General Counsel, and John A. Rogovin entered appearances.

Paul Glist and Neal M. Goldberg were on the brief for intervenor National Cable & Telecommunications Association in support of respondent. Loretta P. Polk entered an appearance.

Before: BROWN, Circuit Judge, and EDWARDS and RANDOLPH, Senior Circuit Judges.

Opinion for the court filed by Circuit Judge BROWN.

Concurring opinion filed by Senior Judge EDWARDS.

BROWN, Circuit Judge:

In an industry marked by constant innovation and year-to-year change, the dispute over the regulations in this case has lasted a full decade. DISH Network L.L.C. (“DISH”),¹ is a direct broadcast satellite provider. DISH challenges two orders of the Federal Communications Commission because they impose “encoding rules,” which limit the means of encoding that cable and satellite service providers may employ to prevent unauthorized access to their broadcasts. We conclude the FCC lacked statutory authority to imposethese rules and grant DISH's petitions for review.

I

Multichannel video programming distributors (“MVPDs”)—a category that includes both cable and satellite television service providers—commonly offer access to their content through navigation devices, such as converter boxes. See47 C.F.R. § 76.1200(a)-(c). Traditionally, cable television subscribers leased their navigation devices directly from their cable providers. See Gen. Instrument Corp. v. FCC, 213 F.3d 724, 727 (D.C.Cir.2000). But Congress, anxious to create separate markets for navigation devices and cable television services, added § 629 to the Communications Act as part of the Telecommunications Act of 1996. See id. That provision attempts to strike a balance: On the one hand, § 629 directs the FCC to “adopt regulations to assure the commercial availability” of “equipment used by consumers to access [MVP] services ... from [independent] manufacturers, retailers, and other vendors.” 47 U.S.C. § 549(a). At the same time, the regulations must not “jeopardize security of multichannel video programming ... or impede the legal rights of a provider of such services to prevent theft of service.” Id. § 549(b). Achieving this dual mandate demands technical standardization among MVPDs so that navigation devices can be marketed nationally while still proving capable of thwarting unauthorized access to service.

In 2002, with FCC prompting, cable television service providers negotiated with representatives of the consumer electronics industry to arrive at uniform standards that would allow compatibility across all cable systems. In particular, the FCC sought standards enabling “plug and play,” which would allow consumers to connect digital television receivers directly to their cable systems, thus circumventing the need for an external navigation device. The negotiations resulted in a memorandum of understanding (“MOU”)—a set of joint recommendations to the FCC—including rules prescribing what distributors could encode within their programming streams, and banning “selectable output control,” which allows distributors and content providers to remotely shut off a connector or output on a program-by-program basis (e.g., preventing a subscriber from recording a certain television program). The agreement was contingent on application of the encoding rules to all MVPDs, not just cable television service providers.

The FCC issued a notice of proposed rulemaking in January 2003 soliciting comment on the MOU's proposed rules. During the comment period, various satellite carriers criticized the proposed application of the encoding rules to all MVPDs. They both complained that satellite carriers were excluded from the negotiations that gave rise to the MOU and also characterized imposition of the encoding rules on all MVPDs as a quid pro quo for cable service providers' acquiescence to plug-and-play standards. The FCC nevertheless adopted the proposed rules with only minor changes in Implementation of Section 304 of the Telecommunications Act of 1996, Second Report and Order, 18 FCC Rcd. 20885 (2003) (“Order”). As the MOU recommended, the Order's encoding rules barred selectable output control. The adopted encoding rules also addressed two related issues: prohibiting down-resolution of broadcast programming—which involves streaming content at an intentionally degraded resolution quality—and limiting the level of copy protection encoding applicable to certain categories of programming. In the FCC's view, applying the encoding rules only to the cable industry “would create a permanent competitive imbalance,” whereas “[u]niform application of the proposed encoding caps serves the dual function of providing a competitive baseline for MVPDs while ensuring that consumers have equal access to content regardless of their service provider.” Order ¶ 71, 18 FCC Rcd. at 20916. Reaffirming its “stated goal ... to strike a measured balance between the rights of content owners and the home viewing expectations of consumers, while ensuring competitive parity among MVPDs,” the FCC later revised the encoding rules to clarify their application to encrypted and unencrypted broadcast programming. See Implementation of Section 304 of the Telecommunications Act of 1996, Order on Reconsideration, 18 FCC Rcd. 27059, 27059–60 (2003) (“Reconsideration Order”).

DISH now petitions for review of the Order and the Reconsideration Order.

II

DISH argues the FCC's decision to apply the encoding rules to all MVPDs exceeded the agency's statutory authority. Because we agree the FCC lacked the power to impose the encoding rules on all MVPDs, we need not reach DISH's alternate contention that the decision was arbitrary and capricious. But first we must satisfy ourselves of our jurisdiction to review DISH's challenge.

A

As a threshold matter, the FCC insists § 405 of the Communications Act bars review of DISH's claim that the agency was without authority to apply encoding rules to all MVPDs. Section 405 bars judicial review of questions upon which the Commission, or its designated authority, has been afforded no opportunity to pass unless a party first files a petition for reconsideration. 47 U.S.C. § 405(a). The question, then, is whether the FCC had an opportunity to consider DISH's challenge to its authority to promulgate the encoding rules.

Because § 405 is phrased in the passive voice, whether the FCC “has been afforded [an] opportunity to pass” on an argument does not depend on whether DISH raised it. See Time Warner Entm't Co., L.P. v. FCC, 144 F.3d 75, 79 (D.C.Cir.1998). Absolute precision is unnecessary; judicial review is permitted so long as “the issue is necessarily implicated by the argument made to the Commission.” Id. at 80.

The Order's discussion of the FCC's authority satisfies us that § 405's requirements have been met. See Order ¶¶ 45–47, 55–57, 18 FCC Rcd. at 20905–10. In justifying the encoding rules, the FCC invoked both explicit and ancillary authority under § 629 of the Communications Act, as well as ancillary authority under § 624A of the Act, which covers “[c]onsumer electronics equipment compatibility.” 47 U.S.C. § 544a. This was no cursory reference; the FCC devoted several pages of the Order to discussing the statutory basis of its authority to promulgate encoding rules regulating all MVPDs. Even if no other party brought the matter to the agency's attention, the FCC's independent contemplation of the issue satisfies § 405's mandate. See DIRECTV, Inc. v. FCC, 110 F.3d 816, 825 (D.C.Cir.1997). We thus proceed to the merits of DISH's claim.

B

The FCC cites three sources for its authority: § 629's mandate that the FCC “adopt regulations to assure the commercial availability ... of converter boxes, interactive communications equipment, and other equipment used by consumers to access multichannel video programming,” 47 U.S.C. § 549(a); authority ancillary to § 629; and authority ancillary to § 624A, which permits the FCC “to restrict cable systems in the manner in which they encrypt or scramble signals” to assure “compatibility between televisions and video cassette recorders and cable systems,” 47 U.S.C. § 544a(b). None is availing.

Section 629 provides no direct authority for the encoding rules, but deference to the FCC's view of § 629's meaning is appropriate so long as “Congress has not directly addressed the precise question at issue” and the FCC's interpretation is “reasonable.” Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 843–44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).² Here, the FCC's reading founders on Chevron 's second step: though § 629's directive to “adopt regulations to assure the commercial availability” of navigation devices may afford the FCC some wiggle room in crafting its regulatory regime, the statute's language is not as capacious as the agency suggests.

Certainly, § 629 provides no explicit textual basis for the encoding rules, instead authorizing “regulations to assure the commercial availability” of navigation devices. 47 U.S.C. § 549(a). But the FCC points out...