Montgomery Cnty. v. Fed. Commc'ns Comm'n, Nos. 08-3023/15-3578

• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)
• Writing for the Court: KETHLEDGE, Circuit Judge.
• Citation: 863 F.3d 485
• Parties: MONTGOMERY COUNTY, MARYLAND, et al. Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION, et al., Respondents, United States Telecom Association, et al., Intervenors.
• Docket Number: Nos. 08-3023/15-3578
• Decision Date: 12 July 2017

863 F.3d 485

MONTGOMERY COUNTY, MARYLAND, et al. Petitioners,
v.
FEDERAL COMMUNICATIONS COMMISSION, et al., Respondents,

United States Telecom Association, et al., Intervenors.

Nos. 08-3023/15-3578

United States Court of Appeals, Sixth Circuit.

Argued: December 8, 2016
Decided and Filed: July 12, 2017

863 F.3d 487

ARGUED: Joseph Van Eaton, BEST BEST & KRIEGER LLP, Washington, D.C., for Petitioners. Maureen K. Flood, FEDERAL COMMUNICATIONS COMMISSION, Washington, D.C., for Respondents. ON BRIEF: Joseph Van Eaton, BEST BEST & KRIEGER LLP, Washington, D.C., for Petitioners. Maureen K. Flood, FEDERAL COMMUNICATIONS COMMISSION, Washington, D.C., Robert B. Nicholson, Robert J. Wiggers, UNITED STATES DEPARTMENT OF JUSTICE, for Respondents. Robert G. Kidwell, Tara M. Corvo, MINTZ, LEVIN, COHN, FERRIS, GLOVSKY AND POPEO, P.C., Washington, D.C., Bennett L. Ross, Brett A. Shumate, Dwayne D. Sam, WILEY REIN LLP, Washington, D.C., William H. Johnson, VERIZON, Washington, D.C., for Intervenors. James N. Horwood, Tillman L. Lay, SPIEGEL & MCDIARMID LLP, Washington, D.C., for Amici Curiae.

Before: McKEAGUE, GRIFFIN, and KETHLEDGE, Circuit Judges.

OPINION

KETHLEDGE, Circuit Judge.

In this case we have one set of regulators litigating against another. Over the last ten years, the Federal Communications Commission has published three written orders that together establish a series of rules governing how local governments may regulate cable companies and cable services. Several local governments have petitioned our court to review the FCC's two most recent orders, arguing among other things that the FCC misinterpreted the Communications Act, 47 U.S.C. § 151 et seq. , and failed to explain the bases for some of its decisions. We agree with some of those criticisms, and thus grant the petition in part and deny it in part.

I.

A.

Our opinion in Alliance for Community Media v. FCC , 529 F.3d 763 (6th Cir. 2008), sets forth the relevant history of the Communications Act and cable regulation generally. In short, the Act regulates the way cable services, which include video programming, reach viewers nationwide. Under the Communications Act, cable companies may provide cable services only if their local or state governmental authorities (which we call "franchising authorities") grant them a "cable franchise." 47 U.S.C. § 541(b)(1). But those authorities do not have unlimited discretion in negotiating, granting, and denying franchises. See id. § 541(a)(1). For example, those authorities may not "grant an exclusive franchise" to any operator, or "unreasonably refuse to award an additional competitive franchise." Id. And they may not require a cable company to pay a "franchise fee" that exceeds five percent of the company's gross revenues for any 12-month period. Id. § 542(b).

As a condition of granting a franchise, local government authorities may demand, among other things, that a cable operator provide certain services or equipment for public, educational, or governmental purposes. See id. §§ 541(a)(3)-(4), 544(b)(1), 546(c)(1)(D). In return, some cable operators demand concessions like "most-favored-nation clauses," which allow incumbent franchisees to adjust the terms of their franchise agreements whenever a competing cable provider secures more favorable contract terms. Once a company has a franchise, it may provide cable services to subscribers via an infrastructure that the Act calls a "cable system[.]" Id. § 522(7). Franchises generally expire every ten to fifteen years, at which time the

863 F.3d 488

cable companies and franchising authorities can renegotiate. See id. § 546; Denver Area Educ. Telecomm. Consortium, Inc. v. FCC , 518 U.S. 727, 792-93, 116 S.Ct. 2374, 135 L.Ed.2d 888 (1996) (Kennedy, J., concurring in part).

The FCC is authorized to make "such rules and regulations as may be necessary" to carry out the purposes of the Communications Act. 47 U.S.C. § 201(b) ; see Alliance , 529 F.3d at 773-74. Under the Administrative Procedure Act (or APA), the FCC must provide the public with notice of any proposed rule and an opportunity to comment on it. See 5 U.S.C. § 553. When the FCC promulgates a final rule, it must also publish a "final regulatory flexibility analysis" responding to the comments and explaining, among other things, the rationale for the rule and its effects on "small entities." Id. § 604.

B.

In early 2007, the FCC issued an order establishing several new rules designed to encourage competition in the cable markets by allowing applicants for a cable franchise to get franchises more easily. See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 22 FCC Rcd. 5101 (March 5, 2007) (hereinafter First Order ). These rules barred franchising authorities from, among other things, imposing unreasonable demands on franchise applicants or requiring new cable operators to provide non-cable services. Alliance , 529 F.3d at 771 & n.6. In that same order, the FCC also read narrowly the phrase "requirements or charges incidental to the awarding ... of [a] franchise" as used in 47 U.S.C. § 542(g)(2)(D), which had the effect of limiting the monetary fees that local franchising authorities can collect from cable operators. Certain local franchising authorities challenged the order on various grounds, but we denied their petition. See Alliance , 529 F.3d at 775-87.

Meanwhile, the FCC sought comment on whether it should expand the application of some of the First Order's rules—which applied only to new applicants for a cable franchise—to incumbent cable providers as well. See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 72 Fed. Reg. 13230-01 (proposed March 21, 2007) (to be codified at 47 C.F.R. pt. 76). In its Second Order, the FCC then expanded the First Order's application as proposed. See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 22 FCC Rcd. 19633 (Nov. 6, 2007) (hereinafter Second Order ). Various local franchising authorities again objected, and by early 2008 the FCC had received three petitions for reconsideration. The FCC neglected to respond to those petitions for nearly seven years, but finally rejected them for the most part in 2015, in its Order on Reconsideration (which we call the "Reconsideration Order"). See Implementation of Section 621(a)(1) of the Cable Communications Policy Act, 30 FCC Rcd. 810 (January 21, 2015). In that order the FCC adhered to the Second Order, with two exceptions. First, the FCC clarified that the Second Order applied to only local (rather than state) franchising processes. Id. ¶¶ 6-7. Second, the FCC adopted and published a "Supplemental Final Regulatory Flexibility Act Analysis" as part of the Reconsideration Order to replace the Second Order's analysis, which the FCC conceded was inadequate in some respects. Id. at App'x ¶¶ 1-17.

Several local governments and franchising authorities (whom we call the "Local Regulators") then petitioned this court for review of the Second Order and the Reconsideration Order. The United States Telecom Association, National Cable &

863 F.3d 489

Telecommunications Association, and Verizon (collectively, the "Intervenors") filed a brief in support of the FCC.

II.

The Local Regulators challenge five aspects of the Second Order and the Reconsideration Order. In some of those challenges, the Local Regulators argue that the FCC interpreted the relevant statutory provisions incorrectly; in others, the Local Regulators argue that the orders were entered in violation of the Administrative Procedure Act. As to the interpretative challenges, if the relevant statutory text is unambiguous, "we give effect to Congress's answer without regard to any divergent answers offered by the agency or anyone else." Hadden v. United States , 661 F.3d 298, 301 (6th Cir. 2011). But if the statute is "silent or ambiguous" on the question presented, then we determine "whether the agency's answer is based on a permissible construction of the statute." Id. (citation omitted). As for the APA challenges, we determine whether the agency rules at issue are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A) ; Nat'l Truck Equip. Ass'n v. Nat'l Highway Traffic Safety Admin. , 711 F.3d 662, 667 (6th Cir. 2013) (citation omitted).

A.

The Local Regulators challenge the FCC's interpretation of "franchise fee" as defined by 47 U.S.C. § 542(g)(1). That subsection provides: "the term ‘franchise fee’ includes any tax, fee, or assessment of any kind imposed by a franchising authority or other governmental entity on a cable operator or cable subscriber, or both, solely because of their status as such [.]" Section 542(g)(2)(D) separately provides: "the term ‘franchise fee’ does not include ... requirements or charges incidental to the awarding or enforcing of the franchise, including payments for bonds, security funds, letters of credit, insurance, indemnification, penalties, or liquidated damages [.]" Requirements or charges that fall within the scope of § 542(g)(2)(D) thus do not count towards the five-percent cap (as measured against a "cable operator's gross revenues" from its provision of cable services) on the franchise fees that...