Viacom Intern. Inc. v. F. C. C., 227
| Decision Date | 09 February 1982 |
| Docket Number | D,No. 227,227 |
| Citation | 672 F.2d 1034 |
| Parties | 8 Media L. Rep. 2005 VIACOM INTERNATIONAL INC., Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, CBS Inc., American Broadcasting Companies, Inc., National Broadcasting Company, Inc., RCA Corporation, Overseas Tele Video Corporation, Intervenors. ocket 81-4119. |
| Court | U.S. Court of Appeals — Second Circuit |
Daniel M. Armstrong, Associate Gen. Counsel, Washington, D. C. (Stephen A. Sharp, Gen. Counsel, C. Grey Pash, Jr., Lisa B. Margolis, Washington, D. C., of counsel), for respondent F.C.C.
George H. Shapiro, Washington, D. C. (Marilyn D. Sonn, Arent, Fox, Kintner, Plotkin & Kahn, Washington, D. C., of counsel), for petitioner.
Scott H. Robb, New York City, for intervenor Overseas Tele Video Corp.
Timothy Dyk, Washington, D. C. (J. Roger Wollenberg, Thomas W. White, Wilmer, Cutler & Pickering, Joseph DeFranco, Mark W. Johnson, Washington, D. C., of counsel), for intervenor CBS Inc.
James A. McKenna, Jr., Washington, D. C. (Thomas N. Frohock, Dennis P. Corbett, McKenna, Wilkinson & Kittner, Washington, D. C., of counsel), for intervenor American Broadcasting Co.
Bernard G. Segal, Philadelphia, Pa. (Jerome J. Shestack, Schnader, Harrison, Segal & Lewis, Peter S. Greenberg, Deena Jo Schneider, Philadelphia, Pa., of counsel), for intervenors National Broadcasting Co. and RCA Corp.
Before WATERMAN, OAKES and MESKILL, Circuit Judges.
This administrative law case, occurring in an era of deregulation, presents several interesting questions concerning regulations of the television industry which were several years in the adopting and which have been in effect for a decade. The three national television networks obtained from the Federal Communications Commission (FCC) on June 23, 1981 a declaratory ruling that the "financial interest" rule, 47 C.F.R. § 73.658(j)(1)(ii), does not prohibit them from acquiring rights to "nonbroadcast" uses of independently produced television programs-e.g., on cable television, video cassettes, and video discs. Memorandum Opinion and Order, Request by CBS Inc., for a Declaratory Ruling, 87 F.C.C.2d 30 (1981). Viacom International, Inc. (Viacom), joined by intervenor Overseas Tele Video Corporation (Overseas), petitions for review of that FCC ruling. The four arguments they make on review are (1) that the ruling was not an interpretation but an amendment of the financial-interest rule, requiring the rule-making procedures of the Administrative Procedure Act; (2) that the Commission improperly relied on an internal staff memorandum; (3) that the Commission improperly failed to disclose publicly the content of ex parte communications, denying interested parties an opportunity to respond; and (4) that in any event the Commission's ruling was arbitrary, capricious, and an abuse of discretion. While the case is not without difficulty, we believe the Commission acted within its statutory and regulatory powers in compliance with the Administrative Procedure Act and did not abuse its discretion. We therefore deny the petition to review.
The financial-interest rule was one of three rules proposed by the FCC on March 22, 1965 1 after a six-year study of the lack of competitive sources of television programming. 2 After lengthy proceedings with comments from many parties, including a report prepared for the networks by Arthur D. Little, Inc. (Little Report) setting forth detailed data on industry program practices, the Commission adopted the three rules on May 4, 1970: 3 the "syndication" rule eliminating networks from domestic syndication and from foreign distribution of independently produced programs; 4 the "financial interest" rule prohibiting networks from acquiring additional rights to independently produced programs other than a license for network exhibition; 5 and the "prime time access" rule limiting the time allotted network programs during prime time. 6
The three rules, the parties agree, were intended to operate together to promote diversity and competition in television programming. Each rule was targeted at a separate aspect of network domination of the television industry. The prime-time-access rule, note 6 supra, prohibited network-affiliated television stations in the fifty largest television markets from devoting more than three of the four hours of evening prime time to network programs or programs formerly on network television. By ensuring that such stations had at least one hour available each night to broadcast nonnetwork programs, the Commission sought to give independent program producers, including local stations, greater access to prime-time television.
The syndication rule, note 4 supra, prohibited the networks from distributing (i.e., syndicating) television programs to domestic television stations for nonnetwork exhibition, distributing programs of which the network was not the sole producer for exhibition outside the United States, or participating in profit-sharing arrangements involving those distribution activities. Network programming is typically broadcast simultaneously by network-affiliated stations which are compensated by the network for presenting the programs. Nonnetwork or syndicated programming, by contrast, is generally licensed to individual stations which pay the syndicator for rights to independent exhibition. The syndication rule was imposed to keep the networks out of the syndication business, and thus to increase opportunities for independent producers to provide programs for nonnetwork exhibition.
The financial-interest rule prohibited networks from acquiring subsidiary rights or profit shares in independently produced programs. As finally adopted, the financial-interest rule provides in pertinent part that no network shall
acquire any financial or proprietary right or interest in the exhibition, distribution, or other commercial use of any television program produced wholly or in part by a person other than such television network, except the license or other exclusive right to network exhibition within the United States and on foreign stations regularly included within such television network....
47 C.F.R. § 73.658(j)(1)(ii). In the Report and Order announcing the rules' adoption, the Commission stated that the financial-interest rule would limit the networks' potential for competitive restraint by limiting the advantage they would otherwise have in the syndication market from their existing relations with affiliates. Report and Order, supra note 3, 23 F.C.C.2d at 398. In the Commission's words, the financial-interest rule was necessary, "as little would be accomplished in expanding competitive opportunity in television program production if we were to exclude networks from active participation in the syndication market and then permit them to act as brokers in acquiring syndication rights and interests and reselling them to those actively engaged in syndication." Id. 7
Over the last decade, technological developments such as satellite television, video cassettes, and video discs, as well as the expansion of cable television, have operated to threaten, if not yet significantly reduce or altogether eliminate, the networks' domination of television programming. In November 1980, CBS Inc., one of the three leading networks, petitioned the Commission for a declaratory ruling construing the financial-interest rule "to permit CBS to acquire rights in nonbroadcast uses of a television program," which the network deemed essential to its full participation in the growing markets for home video and cable television. CBS stated in its petition that it had begun production and distribution of video cassettes, and that it planned to produce and distribute video discs and to offer advertiser-supported performing arts and cultural cable-television programming (both of which it has since begun). In each of these new businesses, CBS sought to acquire nonbroadcast rights to programs from outside suppliers including public and foreign television stations. CBS also sought to enter co-production ventures that would produce original television programs for initial exhibition on local noncommercial television stations and subsequent distribution on cable, video disc, or video cassette.
The FCC solicited comments on the CBS petition and eleven parties responded. Additional information was requested from CBS and interested parties had another opportunity to comment. American Broadcasting Companies, Inc. (ABC) and National Broadcasting Company, Inc. (NBC) and its parent corporation RCA Corporation (RCA), joined CBS in supporting a favorable interpretation of the financial-interest rule. Viacom-a diversified communications company engaged in program production and syndication, in cable television, and in satellite-distributed pay television-as well as Overseas and other video and cable competitors opposed the CBS petition.
The Commission's order of June 23, 1981 interpreted the financial-interest rule as not barring network acquisition of nonbroadcast interests. 87 F.C.C.2d at 35. This conclusion followed a review of the rule's history. While the Notice of Proposed Rulemaking, supra note 1, had indirectly mentioned network bargaining for certain nonbroadcast rights, the Commission observed that such bargaining was "never raised as a matter of concern." 87 F.C.C.2d at 35. The discussion of nonbroadcast interests, the Commission explained, arose "only in the context of a description of the rights and interests then obtained by networks." Id. Directly addressed in the Notice, rather, was "the Commission's concern that networks not be permitted to engage in program syndication or hold any financial interest in such syndication." Id. 8 The Commission pointed out that while it had relied in this rulemaking on reports...
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