The D.C. Circuit has struck down as arbitrary and capricious the FCC’s “cable cap.”  The cap prevented a single cable operator from serving more than 30% of U.S. homes—precisely the same percentage limit struck down by the court in 2001.  The court ruled that the FCC had failed to demonstrate that “allowing a cable operator to serve more than 30% of all cable subscribers would threaten to reduce either competition or diversity in programming.”

The court’s decision rested on the two critical charts (both generated by my PFF colleague Adam Thierer in his excellent Media Metrics special report) at the heart of the PFF amicus brief I wrote with our president, Ken Ferree:

First, the record is replete with evidence of ever increasing competition among video providers: Satellite and fiber optic video providers have entered the market and grown in market share since the Congress passed the 1992 Act, and particularly in recent years. Cable operators, therefore, no longer have the bottleneck power over programming that concerned the Congress in 1992.

Second, over the same period there has been a dramatic increase both in the number of cable networks and in the programming available to subscribers.

Our chart shows the explosion in the number of programmers (though not the total amount of programming), as well as the falling rate of affiliation between cable operators and programmers, which was among the prime factors motivating Congress when it authorized a cable cap in the 1992 Cable Act:

These two charts show how much less defensible the FCC’s 30% cap is now than it was back in 2001. If the Court had needed still more evidence, it could have cited the broader trend towards “Cutting the Video Cord.” As we explained in our amicus brief, viewers are shifting away from cable, satellite and fiber (“Multichannel Video Programming Distributors,” in FCC-speak) towards sites like Hulu and Netflix (which we dubbed “Internet Video Programming Distributors” in the hopes that a familiar-sounding acronym might resonate inside a regulatory agency that can’t even figure out how to stream its own meetings properly). Nothing better demonstrates how the Internet is revolutionizing video distribution than the fact that Hulu.com has actually overtaken TimeWarner cable in viewership:

Ken Ferree and I just filed an amicus brief with the D.C. Circuit in what could be among the most important First Amendment cases involving economic regulation in years:  Comcast’s challenge to the FCC’s cap on the maximum size of a cable operator’s nationwide subscriber-audience.  While few may feel righteous indignation at limitations targeted at large corporations such as Comcast or Time Warner, the larger principle at stake here is deeply important: Will the First Amendment provide a meaningful check on what USC law professor Chris Yoo has called “architectural censorship” (i.e., so-called “structural” regulations that “have the unintended consequence of reducing the quantity, quality, and diversity of media content”).

In a nutshell, we argue that that:

1. The provisions of the 1992 Cable Act authorizing the FCC to impose a “cable cap” are outdated in world of media abundance and vibrant platform competition.
2. Because cable is no longer the unique “bottleneck” or “gatekeeper” that it was in 1992, these statutory provisions (not just the FCC’s 30% rule) must be subject to strict scrutiny under the First Amendment as a limitation on free speech.
3. Because there are “less restrictive means” of ensuring cable operators do not impede the flow of video programming to consumers, the court should strike down these provisions.
4. Even if the court upholds the statute, it should nonetheless strike down the cap issued by the FCC in December 2007 (30% of all Multichannel Video Programming (MVPD)  subscribers as based on an outdated model of the video marketplace.

I encourage you to read our brief (below).  I’ve provided a summary below, along with some additional commentary we just couldn’t cover under our 3500 word limit.

Strict Scrutiny.  Yoo’s article Architectural Censorship and the FCC is essential reading for anyone who believes that government regulations on the size and shape of the “soapbox” can have huge effects on speech itself.   Yoo argues that the First Amendment should check this kind of regulation–however “content-neutral” it might seem–under “strict scrutiny”, which requires that the government show that a regulation is the “least restrictive means” available for advancing a “compelling government interest.”  But Yoo ultimately concludes (pp. 713-718, PDF pp. 45-50) that, under existing precedent, most “architectural censorship will be effectively insulated from meaningful judicial review.”  Yoo explains that the Supreme Court’s 1983 decision in Minneapolis Star & Tribune Co. v. Minnesota Commissioner of Revenue, “appeared to entertain the possibility of subjecting structural restrictions to strict scrutiny even in the absence of facial content discrimination or content-based motive.”  But in its 1991 Leathers v. Medlock decision, the Court “foreclose[d] any prospect that Minneapolis Star and its progeny would serve as a check on architectural censorship” by limiting the Minneapolis Star line of precedents to cases where “a statute of general application affects a small number of speakers.”  The Court reaffirmed this position in its 1994 Turner I decision, when it applied intermediate, rather than strict, scrutiny to the Cable Act’s “must-carry provisions,” which require nearly all cable operators to carry certain television broadcast signals.  Intermediate scrutiny requires only that important governmental interests that are furthered by “substantially related means.”

Unfortunate as the Leathers/Turner I line of cases is for those concerned about architectural censorship, the cable cap is exactly the sort of regulation that falls within the reduced scope of Minneapolis Star as “affect[ing] a small number of speakers” because, unlike the Cable Act’s must-carry provisions, the cap limits the speech of only the very largest cable operators.  So the question of whether the Court should default to intermediate scrutiny as it did in its 2000 Time Warner I decision (when the cap was first challenged) should turn entirely on the question of whether cable still has the “special characteristic” of “bottleneck” or “gateekeeper” power despite all the changes in the media marketplace since 1992 and even in just the last eight years.

The Modern Media Marketplace.  The subscriber limitation provisions of the Cable Act were intended to prevent cable operators from “unfairly impeding the flow of video programming.”  Yet each of the key premises behind these provisions has been disproven:

1. Increased horizontal concentration of the cable industry has, far from reducing media choices, been accompanied by an explosive growth in the amount and diversity of video content available to consumers.
2. The rate of “vertical integration” (i.e., ownership of cable programmers by cable operators), which Congress feared would cause cable operators to discriminate against unaffiliated programmers, has plummeted.
3. Cable’s share of the MVPD market has also plummeted dramatically, with the two DBS providers now sharing 1/3 of the MVPD market and representing the second and third largest MVPDs

Two charts say it all.  First, from Adam Thierer’s excellent book Media Metrics, the number of programming services (cable channels) has grown by nearly six-fold by 1992, while the rate of vertical integration has plummeted:

(That chart stops in 2006 (based on 2005 data) because the FCC still has not released the 2007 Video Competition Report, which it approved in December 2007.  Since then, Time Warner Cable has been spun off of Time Warner’s content empire, so the actual affiliation rate today is likely less than 10%.)

Second, cable’s share of the MVPD market has fallen from 95% in 1992 to ~64% today:

In 1992, when consumers had only a single MVPD option, cable might fairly have been considered a “bottleneck” or “gatekeeper.”  But today, every American has at least three MVPD choices (their local cable franchisee + two DBS operators), and can also subscribe to a Telco video service such as Verizon’s FiOS.  (“Over-building” where two cable operators serve the same area is rare.)

Internet Video.  We also describe how the availability of TV content online provides yet another distribution channel for programmers:

The last two years have seen growing numbers of Americans increasingly substituting consumption of online video for MVPD video and the Internet driving popularity of MVPD content, rather than vice versa.  But only in the last year, since the adoption of the [FCC’s December 2007 order issuing the 30% cap], has the large-scale delivery of television  content online become a reality, as large numbers of programmers have begun distributing increasing numbers of complete episodes and entire series through their own websites and/or through a new class of rapidly-growing Internet Video Programming Distributor (IVPD) websites such as Netflix, Hulu, Amazon Video on Demand, iTunes, Vuze, Sony Playstation Store, the Microsoft Xbox 360 Marketplace, Joost and Veoh.  These IVPDs already offer a staggering, and growing, library of currently-airing and archived content—as much as 90% of broadcast shows and 20% of cable shows.  These sites are supported by a growing number of set-top devices (e.g., Netflix Player by Roku, TiVo) and wildly popular game consoles (e.g., Microsoft Xbox 360, Sony PlayStation 3) that allow users to play IVPD content from broadcast and cable programmers on demand on their television, while TiVo allows users to seamlessly switch between IVPD, MVPD and OTA content.

The FCC’s decision to exclude Internet video from its analysis is hardly surprising when one considers that the economic model behind the new 30% cap comes from a 2005 study based on cable market data from 1984-2001 and that the last official data released by the agency about the video marketplace date to June 2005.  But nine months later, the agency waxed ecstatic about the promise of IVPDs when doing so supported Kevin Martin’s attempts to enforce the FCC’s non-binding 2005 “Net Neutrality” policy statement:

In August 2008, the FCC even cited [the rapid emergence of IVPDs] in support of its claim of jurisdiction over Comcast’s broadband network management practices (because of alleged harm to an IVPD that distributes content through peer-to-peer file sharing):  “consumers with [broadband] service will have available a source of video programming (much of it free) that could rapidly become an alternative to cable television.”  But the immediate competitive impact of IVPDs comes not from the fact that some IVPD users are already canceling their MVPD subscriptions, but in the ease with which IVPDs can supplement an MVPD subscription—because most IVPDs are free, while those that charge for content do so on a per-episode/show basis.  Furthermore, IVPDs have little—if any—incentive not to offer a particular program because they are not subject to the same capacity constraints as MVPDs.  Thus, even if IVPD video consumption remains relatively small in its early years, IVPDs already offer programmers a strong alternative distribution channel capable of reaching all broadband users.

Less Restrictive Means. Of course, the fact that cable no longer has a special characteristic of gateekeeper or bottleneck power does not automatically render the Cable Act’s subscriber limits provisions unconstitutional; this merely means that the government must show that no less restrictive means are available to satisfy a compelling government interest.  We suggest a variety less restrictive means that could ensure competitive video distribution and programming markets.  These include dispute resolution assisted by the FCC, enforcement of existing antitrust laws, and crafting “special obligations on cable operators with more than 30% of the MVPD market to ensure that they do not unfairly impede the flow of video programming.”

Challenging The FCC’s Rule. Besides attacking the statute, we argue that the 30% cap imposed by the FCC last year is even more obviously unconstitutional than when the D.C. Circuit struck down the same limit seven years ago in Time Warner II. To many lay observers, this argument may seem like a “no-brainer” given how much more competitive the video marketplace is than it was in 2001.  But one must understand that when the Court struck down the 30% cap the first time, it did so on the grounds that the FCC’s own rationale justified not a 30% cap but a 60% cap.  The FCC had decided that the average video programmer (network) needed an “open field” of 40% of the MVPD market to be viable.  The FCC leapt from that conclusion to a 30% cap so that even if the two largest cable companies denied carriage, the programmer would still have the required 40% “open field.”  The court found that there was no evidence that the leading two cable operators would collude to deny carriage and that the statute did not “protect programmers against the risk of completely independent rejections by two or more companies.”  In other words, the purpose of the statute was not to guarantee carriage even if, for example, a cable operator decided (exercising the same constitutionally-protected “editorial discretion” enjoyed by all media) spend part of its limited system capacity carrying a network with questionable appeal, or to raise subscription rates to cover the marginal cost of carrying the network.

But the FCC has since come up with a new “open field” model that the court must consider anew.  This time, the model more clearly supports a 30% cap–but only if one accepts the premises underlying the model and the accuracy of the data put into the model, which we do not.  We argue that their model is “based on flawed assumptions about the nature of competition for video programming” and is thus incapable of “accurately reflect[ing] cable’s present (or future) bottleneck power.”

Click the button at the top right of Scribd’s handy iPaper display to switch to full page display of the brief–or click on the top left to download the PDF itself.

PFF Amicus Brief – Cable Ownership Cap http://documents.scribd.com/ScribdViewer.swf?document_id=8630011&access_key=key-2obr4z2ohtozi1gabbay&page=1&version=1&viewMode=

Along with my friends John Morris and Sophia Cope of the Center for Democracy & Technology, I have just submitted an amicus brief to the Supreme Court in the potentially historic free speech case FCC v. Fox, which will be heard in November.

[Reminder: The FCC v. Fox case is the indecency case involving the FCC’s new policy for “fleeting expletives.” I wrote about the Second Circuit Court of Appeals decision here. The full decision is here. By contrast, the so-called “Janet Jackson case” — CBS v. FCC — took place in the Third Circuit Court of Appeals and that court recently handed down a decision that also went against the FCC. I wrote about the Third Circuit’s decision here.]

The FCC v. Fox case could become the most important First Amendment-related Supreme Court case since FCC v. Pacifica Foundation, which just turned 30 years old last month. Of course, it could be that the Supreme Court simply sticks to the procedural questions regarding whether the FCC moved too far, too fast in reversing it’s long-standing policy of restraint regarding “fleeting expletives.” That’s essentially what the Second Circuit did. On the other hand, the Supremes might reach the substantive First Amendment issues tied up in the Pacifica case. We just won’t know for sure until the case is handed down.

Regardless, in the joint CDT-PFF amicus brief filed today, we argue that the FCC has both gone too far procedurally and that “the time is rapidly approaching for this Court to find that broadcast, like the Internet and other means of mass communication, ‘is entitled to the highest protection from government intrusion’ and that there is no longer a factual ‘basis for qualifying the level of First Amendment scrutiny that should be applied to this medium.'” Citing Reno v. ACLU, 521 U.S. at 863, 870.”

A more detailed summary of our argument follows below. Our brief contends that the “pervasiveness rationale,” which is the basis of the FCC’s authority to regulate broadcast programming, is being challenged by technological convergence, the proliferation of new media platforms, and the widespread availability of parental control technologies. Video content available over broadcast television is available over a variety of other platforms, such as the Internet and mobile devices, and an increasing number of households subscribe to satellite or cable video services. “With broadcast television being just one of the myriad of ways that people can access lawful content (including indecent content), it no longer makes sense from a constitutional or policy perspective to give broadcast speech less First Amendment protection,” we argue.

Parental controls, such as the V-Chip and set-top box controls, allow parents to block content they deem offensive or inappropriate. Better yet, the rise of VCRs, DVD recorders, video on demand, and digital video recorders means that parents can tailor media consumption to their specific needs and values. Those tools are widely available and provide a less restrictive alternative to government regulation. As a result, the FCC can no longer justify broadcast television content censorship on “pervasiveness” grounds. [I have written much more about that point here, here and here.]

Our joint brief also states that complaint data the FCC cites as justification for the expansion of indecency enforcement, has been inflated through accounting changes. These changes in the way the complaints are counted, which were only instituted for indecency complaints, are in violation of the APA. These complaints, mostly generated by a single advocacy group, cannot be a substitute for an analysis of “community standards” and essentially represent a “heckler’s veto” that violates the First Amendment rights of other viewers.

The brief also cites the Commission’s inconsistent analysis of what it deems “indecent” as a violation of both the First Amendment rights of broadcasters and the APA. The inconsistency in what the FCC finds as indecent has a chilling effect on the free expression of content providers and provides inadequate guidance to broadcasters, which is required under FCC statutes.

The CDT-PFF brief can be found online here and I have also embedded the document below via the Scribd reader. [And those interested in this case might also be interested my recent law review article: “Why Regulate Broadcasting: Toward a Consistent First Amendment Standard for the Information Age.”]

Incidentally, other briefs that have been filed in the matter can be found here. And, last month, I wrote about how personally troubled I was about the lack of support from liberals who have already filed in this case. See: “Liberals Abandoning the First Amendment, Part 3: The Fox Case.”

The Federal Communications Commission (FCC) lost another major First Amendment-related case today involving its recent efforts to expand the parameters of “indecency” enforcement for broadcast programming. The case involves the now infamous “wardrobe malfunction” that occurred during an unscripted 2004 Super Bowl halftime performance involving singers Justin Timberlake and Janet Jackson. When Ms. Jackson’s breast was exposed on camera for nine-sixteenths of one second, the FCC immediately launched an investigation into the incident and fines were eventually levied on the grounds that the fleeting exposure of Ms. Jackson’s breast was a violation of broadcast decency standards. CBS challenged the FCC’s decision, leading to a legal showdown in the U.S. Court of Appeals for the Third Circuit.

In today’s decision, CBS Corp. v. FCC, the three-judge panel of the 3rd Circuit ruled that the Federal Communications Commission “acted arbitrarily and capriciously” when it imposed a $550,000 fine on CBS for the incident. The court’s 102-page decision, which can be found here, was decided squarely on procedural grounds. That is, it didn’t touch the more substantive speech-related issues or precedents such as the Pacifica or Red Lion decisions that constitute the foundations of all modern FCC broadcast regulation.

The case is important because it now joins the June 2007 decision handed down by the Second Circuit Court of Appeals in the case of Fox Television Stations v. FCC. That was the indecency case involving the FCC’s new policy for “fleeting expletives.” In that 2-1 decision, the Second Circuit ruled that “the FCC’s new policy sanctioning ‘fleeting expletives’ is arbitrary and capricious under the Administrative Procedure Act for failing to articulate a reasoned basis for its change in policy.” As a result, the FCC’s order was vacated and remanded to the agency. [And the FCC is now challenging the decision in the Supreme Court.]

This is very similar to what the 3rd Circuit said today in the CBS case. Specifically, the court held that:

Like any agency, the FCC may change its policies without judicial second-guessing. But it cannot change a well-established course of action without supplying notice of and a reasoned explanation for its policy departure. Because the FCC failed to satisfy this requirement, we find its new policy arbitrary and capricious under the Administrative Procedure Act as applied to CBS. (p. 14)

The court reached that finding by noting that the agency’s previously “restrained” enforcement policy had changed quite suddenly and dramatically, and without much justification. “[A]n an agency must be afforded great latitude to change its policies, but it must justify its actions by articulating a reasoned analysis behind the change,” the court argued. (pp. 30-31) “The agency’s obligation to supply a reasoned analysis for a policy departure requires an affirmative showing on record.” (p. 32). But the FCC failed in that regard, the court said:

The Commission’s conclusion on the nature and scope of its indecency regime – including its fleeting material policy – is at odds with the history of its actions in regulating indecent broadcasts. In the nearly three decades between the Supreme Court’s ruling in Pacifica and CBS’s broadcast of the Halftime Show, the FCC had never varied its approach to indecency regulation based on the format of broadcasted content. (pp. 36-37)

The FCC was basically arguing that its actions in the Fox and CBS cases were nothing new and that the agency should be allowed to impose significant new penalties for fleeting words or images. But neither the 2nd or 3rd Circuits bought that argument. In today’s decision the 3rd Circuit, for example, the judges held:

In sum, the balance of the evidence weighs heavily against the FCC’s contention that its restrained enforcement policy for fleeting material extended only to fleeting words and not to fleeting images. As detailed, the Commission’s entire regulatory scheme treated broadcasted images and words interchangeably for purposes of determining indecency. Therefore, it follows that the Commission’s exception for fleeting material under that regulatory scheme likewise treated images and words alike. Three decades of FCC action support this conclusion. Accordingly, we find the FCC’s conclusion on this issue, even as an interpretation of its own policies and precedent, “counter to the evidence before the agency” and “so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” State Farm, 463 U.S. at 43. Because the Commission fails to acknowledge that it has changed its policy on fleeting material, it is unable to comply with the requirement under State Farm that an agency supply a reasoned explanation for its departure from prior policy. (pp. 47-48)

As you might have guessed from the context of that passage, the State Farm case referenced by the court dealt with how an agency must reach a decision by examining relevant data and articulating a reasonable explanation for the rational connection between that data and the decision made by the agency. Again, the court today held that the FCC did not pass that test nor the requirements of the Administrative Procedure Act: “Consequentially, the FCC’s new policy of including fleeting images within the scope of actionable indecency is arbitrary and capricious under StateFarm and the Administrative Procedure Act, and therefore invalid as applied to CBS.” (p. 49)

The court also rejected the FCC’s assertion that CBS should be held liable on the common law doctrine of respondeat superior, which allows liability to be imposed on employers for the actions of employees. The question is: Where Timberlake and Jackson CBS employees? The court said no:

it is undisputed that CBS’s actual control over the Halftime Show performances did not extend to all aspects of the performers’ work. The performers, not CBS, provided their own choreography and retained substantial latitude to develop the visual performances that would accompany their songs. Similarly, as the FCC notes, CBS personnel reviewed the performers’ selections of set items and wardrobes, but the performers retained discretion to make those choices in the first instance and provided some of their own materials.

Instead, the court held that Timberlake and Jackson were “independent contractors” for CBS and that the FCC was trying to breathe far too much life into the doctrine:

Under the FCC’s rationale, band members contracted to play a one-song set on a talk show or a “one-show-only” televised concert special presumably would be employees of the broadcaster. These performers – who frequently promote their work through brief contractual relationships with media outlets – would be “employees” of dozens of employers every year.

So, what happens next? It’s likely that the FCC will appeal, just as it has in the 2nd Circuit Fox case. One wonders why the agency doesn’t just throw in the towel. As my boss Ken Ferree, President of PFF, noted in response to today’s decision: “Perhaps it is time to read the handwriting on the wall: the guardians of our First Amendment freedoms in the courts are not going to allow the FCC to play the role of media supernanny. A free and vibrant, even if occasionally coarse, marketplace of speech is the cornerstone of a free society. We allow government to meddle in that marketplace at our peril.”

You will not be surprised to hear that I agree with Ken! And I summarized some additional concerns about the FCC’s expanded activism on this front in a joint amicus brief with the Center for Democracy & Technology to the 3rd Circuit before this case was heard. You can find that filing here.