Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-01542/USCOURTS-caDC-99-01542-0/pdf.json

Parties Involved:
AT&T Corporation
Petitioner
Federal Communications Commission
Respondent
Time Warner Entertainment Co., L.P.
Intervenor
United States of America
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 17, 2000 Decided March 2, 2001

No. 94-1035

Time Warner Entertainment Co., L.P.

Petitioner

v.

Federal Communications Commission and

United States of America,

Respondents

BellSouth Corporation, et al.,

Intervenors

Consolidated with

95-1337, 99-1503, 99-1504, 99-1522,

99-1541, 99-1542, 00-1086

On Petitions for Review of Orders of the

Federal Communications Commission

David W. Carpenter argued the cause for petitioners

AT&T Corporation and Time Warner Entertainment Co.,

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L.P. With him on the briefs were Peter Keisler, David L.

Lawson, C. Frederick Beckner III, Henk Brands and Robert

D. Joffe. Charles S. Walsh, Richard B Beckner, Stuart W.

Gold and Marc C. Rosenblum entered appearances.

Robert D. Joffe and Henk Brands were on the briefs for

petitioner Time Warner Entertainment Co., L.P. Charles S.

Walsh, Richard B. Beckner and Stuart W. Gold entered

appearances.

Andrew Jay Schwartzman, Cheryl A. Leanza and Harold

Feld were on the briefs for petitioner Consumers Union.

James M. Carr, Counsel, Federal Communications Commission, argued the cause for respondents. With him on the

brief were Christopher J. Wright, General Counsel, Daniel

M. Armstrong, Associate General Counsel, Joel Marcus and

James M. Carr, Counsel, David W. Ogden, Acting Assistant

Attorney General, U.S. Department of Justice, Mark B. Stern

and Jacob M. Lewis, Attorneys, and Wilma A. Lewis, U.S.

Attorney. William E. Kennard, General Counsel, Federal

Communications Commission, John E. Ingle, Deputy Associate General Counsel, and Catherine G. O'Sullivan, Robert B.

Nicholson and Robert J. Wiggers, Attorneys, U.S. Department of Justice, entered appearances.

Henk J. Brands, Robert D. Joffe, Peter D. Keisler, David

L. Lawson and C. Frederick Beckner III were on the brief for

intervenor Time Warner Entertainment Co., L.P. in No.

99-1522. Mark C. Rosenblum entered an appearance.

Before: Williams, Randolph and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Section 11(c) of the Cable Television Consumer Protection and Competition Act of 1992, Pub.

L. No. 102-385, 106 Stat. 1460 ("1992 Cable Act"), amends 47

U.S.C. s 533 to direct the Federal Communications Commission to set two types of limits on cable operators. The first

type is horizontal, addressing operators' scale: "limits on the

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number of cable subscribers a person is authorized to reach

through cable systems owned by such person, or in which

such person has an attributable interest." 47 U.S.C.

s 533(f)(a)(1)(A). The second type is vertical, addressing

operators' integration with "programmers" (suppliers of programs to be carried over cable systems): "limits on the

number of channels on a cable system that can be occupied by

a video programmer in which a cable operator has an attributable interest." 47 U.S.C. s 533(f)(a)(1)(B). The FCC has

duly promulgated regulations. See 47 C.F.R. s 76.503-04.

Petitioners Time Warner and AT&T challenge the horizontal

limit as in excess of statutory authority, as unconstitutional

infringements of their freedom of speech, and as products of

arbitrary and capricious decisionmaking which violate the

Administrative Procedure Act. Time Warner similarly challenges the vertical limit. Together with AT&T, Time Warner

also challenges as arbitrary and capricious the rules for

determining what counts as an "attributable interest." Concluding that the FCC has not met its burden under the First

Amendment and, in part, lacks statutory authority for its

actions, we remand for further consideration of both limits.

In addition we vacate specific portions of the attribution rules

as lacking rational justification.

Consumers Union also files a petition for review, which

need not detain us long. It objects to the Commission's

action to the extent that it continued a stay on enforcement of

the horizontal limit. See Implementation of Section 11(c) of

the Cable Television Consumer Protection and Competition

Act of 1992, 14 F.C.C.R. 19098, 19127-28 p p 71-73 (1999)

("Third Report"). The Commission issued the stay after a

district court found the statute underlying that limit unconstitutional, see Daniels Cablevision, Inc. v. United States, 835

F. Supp. 1 (D.D.C. 1993), and provided that in the event of

Daniels's reversal the stay would end. See Implementation

of Sections 11 and 13 of the Cable Television Consumer

Protection and Competition Act of 1992, 8 F.C.C.R. 8565,

8609 p 109 (1993) ("Second Report"). We did reverse Daniels

in Time Warner Entertainment Co. v. United States, 211

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F.3d 1313 (D.C. Cir. 2000) ("Time Warner I"), so the stay

ended automatically.1 Thus the stay issue is moot unless the

issue posed is capable of repetition yet evading review. Even

if we assume that the issue evades review, its recurrence is

not probable enough to qualify it as "capable of repetition."

See Spencer v. Kemna, 523 U.S. 1, 17 (1998) (requiring "a

reasonable expectation that the same complaining party [will]

be subject to the same action again") (internal citations

omitted). Although we find here that the regulations fail

constitutional scrutiny, the specific condition that led to the

stay--a pending challenge to the statute's constitutionality--

is highly unlikely to recur. We therefore find Consumers

Union's claim moot and dismiss the petition.

* * *

The horizontal rule imposes a 30% limit on the number of

subscribers that may be served by a multiple cable system

operator ("MSO"). See 47 C.F.R. s 76.503; Third Report 14

F.C.C.R. at 19119 p 55. Both the numerator and denominator of this fraction include only current subscribers to multichannel video program distributor ("MVPD") services. See

id. at 19107-10 p p 20-25. Subscribers include not only users

of traditional cable services but also subscribers to non-cable

MVPD services such as Direct Broadcast Satellite ("DBS"),2 a

__________

1 The cross-appeals of the government and the cable firms from

the district court's decision in Daniels were originally consolidated

with the cable firms' petitions for review of earlier iterations of the

implementing regulations. See Time Warner I, 211 F.3d at 1315-

16. After a date for oral argument was set, the FCC initiated a

new rulemaking as part of its planned quinquennial review of the

horizontal regulations. We therefore severed the Daniels appeals

from the challenges to the regulations, holding the latter in abeyance until the completion of the new rulemaking. See id. The

challenge to the new horizontal rules has supplanted that portion of

the earlier challenges.

2 DBS "is a nationally distributed subscription video service that

delivers programming via satellite to a small parabolic 'dish' antenna located at the viewer's home." Annual Assessment of the Status

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rapidly growing segment of the MVPD market. See id. at

19110-12 p p 26-35. The Commission pointed out that under

this provision the nominal 30% limit would allow a cable

operator to serve 36.7% of the nation's cable subscribers if it

served none by DBS. See id. at 19113 p 37 & n.82.3 In an

express effort to encourage competition through new provision of cable, the Commission excluded from any MSO's

numerator all new subscribers signed up by virtue of "overbuilding," the industry's term for cable laid in competition

with a pre-existing cable operator. See id. at 19112-13 p p 34,

37. Further, subscribers to a service franchised after the

rule's adoption (October 20, 1999) do not go into an MSO's

numerator, even if not the result of an overbuild. See id. at

19112 p 33. As a result, the rule's main bite is on firms

obtaining subscribers through merger or acquisition.

The vertical limit is currently set at 40% of channel capacity, reserving 60% for programming by non-affiliated firms.

See 47 C.F.R. s 76.504; Second Report, 8 F.C.C.R. at 8593-

94 p 68; Implementation of Section 11(c) of the Cable Television Consumer Protection and Competition Act of 1992, 10

F.C.C.R. 7364, 7368 p 14 (1995) ("Reconsideration Order").

Channels assigned to broadcast stations, leased access, and

for public, educational, or governmental uses are included in

the calculation of channel capacity. See id. at 7371-73 p p 20-

27. Capacity over 75 channels is not subject to the limit, so a

cable operator is never required to reserve more than 45

channels for others (.60 x 75 = 45). See id. at 7374-76

p p 31-35.

__________

ming, Seventh Annual Report, CS Docket No. 00-132, FCC 01-01

(rel. Jan. 8, 2001) p 71 (2000) ("Seventh Annual Report").

3 30% of roughly 80 million MVPD subscribers would be about 24

million subscribers, which in turn would be 36.69% of roughly 66

million cable subscribers. Under the Commissions most recent

subscriber estimates, this provision would allow an MSO to serve

37.4% of cable subscribers, or approximately 1.1 million more

customers than when the Third Report was written. See Seventh

Annual Report at p p 6-7.

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As cable operators, Time Warner and AT&T "exercise[ ]

editorial discretion in selecting the programming [they] will

make available to [their] subscribers," Time Warner I, 211

F.3d at 1316, and are "entitled to the protection of the speech

and press provisions of the First Amendment," Turner

Broadcasting System, Inc. v. Federal Communications Commission, 512 U.S. 622, 636 (1994) ("Turner I") (quoting

Leathers v. Medlock, 499 U.S. 439, 444 (1991)). The horizontal limit interferes with petitioners' speech rights by restricting the number of viewers to whom they can speak. The

vertical limit restricts their ability to exercise their editorial

control over a portion of the content they transmit.

In Time Warner I we upheld the statutory provisions

against a facial attack, after finding them subject to intermediate rather than, as the cable firms argued, strict scrutiny.

Time Warner I, 211 F.3d at 1316-22. The regulations here

present a related but independent set of questions. Constitutional authority to impose some limit is not authority to

impose any limit imaginable.

In briefs written before the issuance of Time Warner I,

petitioners argued here for strict scrutiny. At oral argument

they withdrew from this position and said, euphemistically,

that they were "happy to stand on intermediate scrutiny."

Because of that concession and, in any event, not seeing any

distinction between the statute and the regulations for levelof-scrutiny purposes, we apply intermediate scrutiny. Under

the formula set forth in United States v. O'Brien, 391 U.S.

367, 377 (1968), and reaffirmed by Turner Broadcasting

System, Inc. v. Federal Communications Commission, 520

U.S. 180, 189 (1997) ("Turner II"), a governmental regulation

subject to intermediate scrutiny will be upheld if it "advances

important governmental interests unrelated to the suppression of free speech and does not burden substantially more

speech than necessary to further those interests." Id. (quoting O'Brien, 391 U.S. at 377).

The interests asserted in support of the horizontal and

vertical limits are the same interrelated interests that we

found sufficient to support the statutory scheme in Time

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Warner I: "the promotion of diversity in ideas and speech"

and "the preservation of competition." Time Warner I, 211

F.2d at 1319; see also Turner I, 512 U.S. at 662-64 (concluding that both qualify as important governmental interests).

After a review of the legislative history, we concluded that

Congress had drawn "reasonable inferences, based upon substantial evidence, that increases in the concentration of cable

operators threatened diversity and competition in the cable

industry." Time Warner I, 211 F.3d at 1319-20. But the

FCC must still justify the limits that it has chosen as not

burdening substantially more speech than necessary. In

addition, in "demonstrat[ing] that the recited harms are real,

not merely conjectural," Turner I, 512 U.S. at 664, the FCC

must show a record that validates the regulations, not just

the abstract statutory authority.

* * *

The FCC asserts that a 30% horizontal limit satisfies its

statutory obligation to ensure that no single "cable operator

or group of cable operators can unfairly impede ... the flow

of video programming from the video programmer to the

consumer," 47 U.S.C. s 533(f)(2)(A), while adequately respecting the benefits of clustering4 and the economies of scale

that are thought to come with larger size. See Third Report,

14 F.C.C.R. at 19123-24 p 61. It interpreted this statutory

language as a directive to prohibit large MSOs--either by the

action of a single MSO or the coincidental or collusive actions

of several MSOs--from precluding the entry into the market

of a new cable programmer. See id. at 19116 p 43. In

setting the limit at 30%, it assumed there was a serious risk

of collusion. See id., Part VI, at 19113-25 p p 36-65. But

__________

4 "Clustering" refers to the strategy under which MSOs concentrate their operations within a particular geographic region, giving

up scattered holdings around the country. The benefits are

thought to be in achieving economies of both scale and scope,

allowing MSOs to spread fixed investment costs over a larger

customer base and to better compete with telephone companies

owning local loops that are actual or potential substitutes. See

Seventh Report p p 152-53.

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while collusion is a form of anti-competitive behavior that

implicates an important government interest, the FCC has

not presented the "substantial evidence" required by Turner

I and Turner II that such collusion has in fact occurred or is

likely to occur; so its assumptions are mere conjecture. See

Turner II, 520 U.S. at 195 (citing Turner I, 512 U.S. at 666).

The FCC alternatively relies on its supposed grant of authority to regulate the non-collusive actions of large MSOs. Congress may indeed, under certain readings of Turner I and

Turner II, have the power to regulate the coincidental but

independent actions of cable operators solely in the interest of

diversity, but "[w]here an administrative interpretation of a

statute invokes the outer limits of Congress' power, we expect

a clear indication that Congress intended that result." Solid

Waste Agency v. United States Army Corps of Eng'rs, __

U.S. __, 121 S. Ct. 675, 683 (2001). The 1992 Cable Act, as

we shall see, instead expresses the contrary intention.

Part VI of the Third Report lays out the calculations that

lead the FCC to the 30% limit. See Third Report, Part VI,

14 F.C.C.R. at 19113-25 p p 36-65. First the FCC determines that the average cable network needs to reach 15

million subscribers to be economically viable. See id. at

19114-16 p p 40-42. This is 18.56% of the roughly 80 million

MVPD subscribers, and the FCC rounds it up to 20% of such

subscribers. The FCC then divines that the average cable

programmer will succeed in reaching only about 50% of the

subscribers linked to cable companies that agree to carry its

programming, because of channel capacity, "programming

tastes of particular cable operators," or other factors. Id. at

19117-18 p 49. The average programmer therefore requires

an "open field" of 40% of the market to be viable (.20/.50 =

.40). See id. at 19117-18 p p 46-50.

Finally, to support the 30% limit that it says is necessary to

assure this minimum, the Commission reasons as follows:

With a 30% limit, a programmer has an "open field" of 40% of

the market even if the two largest cable companies deny

carriage, acting "individually or collusively." Id. at 19119

p 53. A 50% rule is inadequate because, if a duopoly were to

result, "[t]he probability of tacit collusion is higher with 2

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competitors than 3 competitors." Id. at 19118-19 p 51. Even

if collusion were not to occur, independent rejections by two

MSOs could doom a new programmer, thwarting congressional intent as the Commission saw it. See id. A 40% limit is

insufficient for the same reason: "two MSOs, ... representing a total of 80% of the market, might decline to carry the

new network" and leave only 20% "open," which by hypothesis is not enough (because of the 50% success rate). Id. at

19119 p 52. Although the Commission doesn't spell out the

intellectual process, it is necessarily defining the requisite

"open field" as the residue of the market after a programmer

is turned down either (1) by one cable company acting alone,

or (2) by a set of companies acting either (a) collusively or (b)

independently but nonetheless in some way that, because of

the combined effect of their choices, threatens fulfillment of

the statutory purposes. We address the FCC's authority to

regulate each of these scenarios in turn.

The Commission is on solid ground in asserting authority to

be sure that no single company could be in a position singlehandedly to deal a programmer a death blow. Statutory

authority flows plainly from the instruction that the Commission's regulations "ensure that no cable operator or group of

cable operators can unfairly impede, either because of the size

of any individual operator or because of joint actions of

operators of sufficient size, the flow of video programming

from the video programmer to the consumer." 47 U.S.C.

s 533(f)(2)(A) (emphasis added). Constitutional authority is

equally plain. As the Supreme Court said in Turner II: "We

have identified a corresponding 'governmental purpose of the

highest order' in ensuring public access to 'a multiplicity of

information sources.' " 520 U.S. at 190 (quoting Turner I,

512 U.S. at 663); see also Time Warner Entertainment Co. v.

Federal Communications Commission, 93 F.3d 957, 969

(D.C. Cir. 1996). If this interest in diversity is to mean

anything in this context, the government must be able to

ensure that a programmer have at least two conduits through

which it can reach the number of viewers needed for viability--independent of concerns over anticompetitive conduct.

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Assuming the validity of the premises supporting the

FCC's conclusion that a 40% "open field" is necessary (a

question that we need not answer here), the statute's express

concern for the act of "any individual operator" would justify

a horizontal limit of 60%. To reach the 30% limit, the FCC's

action necessarily involves one or the other of two additional

propositions: Either there is a material risk of collusive

denial of carriage by two or more companies, or the statute

authorizes the Commission to protect programmers against

the risk of completely independent rejections by two or more

companies leaving less than 40% of the MVPD audience

potentially accessible. Neither proposition is sound.

First, we consider whether there is record support for

inferring a non-conjectural risk of collusive rejection. Either

Congress or the Commission could supply that record, and we

take them in that order. We give deference to the predictive

judgments of Congress, see Turner II, 520 U.S. at 195-96

(citing Turner I, 512 U.S. at 665), but Congress appears to

have made no judgment regarding collusion. The statute

plainly alludes to the possibility of collusion when it authorizes regulations to protect against "joint actions by a group

of operators of sufficient size." 47 U.S.C. s 533(f)(2)(A) (emphasis added). But this phrase, while granting the Commission authority to take action in the event that it finds collusion extant or likely, is not itself a congressional finding of

actual or probable collusion. Such findings have not been

made. No reference to collusion appears in the Act's findings

or policy, see 1992 Cable Act s 2, 106 Stat. at 1460-63, nor in

the legislative history discussing the horizontal or vertical

limits. See H.R. Rep. No. 102-628, at 40-43 (1992) ("House

Report"); S. Rep. No. 102-92, at 24-29, 32-34, reprinted in

1991 U.S.C.C.A.N. 1133, at 1156-62, 1165-67 ("Senate Report"). It was thus appropriate for the FCC to describe

Congress's reference to "joint" action as merely a "legislative

assumption." Third Report, 14 F.C.C.R. at 19116 p 43 (emphasis added).

The Commission's own findings amount to precious little.

It says only:

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The legislative assumption [about joint action] is not

unreasonable given an environment in which all the

larger operators in the industry are vertically integrated

so that all are both buyers and sellers of programming

and have mutual incentives to reach carriage decisions

beneficial to each other. Operators have incentives to

agree to buy their programming from one another.

Moreover, they have incentives to encourage one another

to carry the same non-vertically integrated programming

in order to share the costs of such programming.

Id. None of these assertions is supported in the record. The

Commission never explains why the vertical integration of

MSOs gives them "mutual incentive to reach carriage decisions beneficial to each other," what may be the firms'

"incentives to buy ... from one another," or what the probabilities are that firms would engage in reciprocal buying

(presumably to reduce each other's average programming

costs). After all, the economy is filled with firms that, like

MSOs, display partial upstream vertical integration. If that

phenomenon implies the sort of collusion the Commission

infers, one would expect the Commission to be able to point to

examples. Yet it names none. Further, even if one accepts

the proposition that an MSO could benefit from sharing the

services of specific programmers, programming is not more

attractive for this purpose merely because it originates with

another MSO's affiliate rather than with an independent.

The only justification that the FCC offers in support of its

collusion hypothesis is the economic commonplace that, all

other things being equal, collusion is less likely when there

are more firms. See Third Report 14 F.C.C.R. at 19118-19

p 51. This observation will always be true, although marginally less so for each additional firm; but by itself it lends no

insight into the question of what the appropriate horizontal

limit is. Turner I demands that the FCC do more than

"simply 'posit the existence of the disease sought to be

cured.' " Turner I, 512 U.S. at 664 (quoting Quincy Cable

TV, Inc. v. Federal Communications Commission, 768 F.2d

1434, 1455 (D.C. Cir. 1985). It requires that the FCC draw

"reasonable inferences based on substantial evidence." TurUSCA Case #99-1542 Document #579773 Filed: 03/02/2001 Page 11 of 31
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ner I, 512 U.S. at 666. Substantial evidence does not require

a complete factual record--we must give appropriate deference to predictive judgments that necessarily involve the

expertise and experience of the agency. See Turner II 520

U.S. at 196, citing Federal Communications Commission v.

National Citizens Comm. For Broadcasting, 436 U.S. 775,

814 (1978). But the FCC has put forth no evidence at all that

indicates the prospects for collusion.

That having been said, we do not foreclose the possibility

that there are theories of anti-competitive behavior other

than collusion that may be relevant to the horizontal limit and

on which the FCC may be able to rely on remand. See 47

U.S.C. s 533(f)(1). Indeed, Congress considered, among other things, the ability of MSOs dominant in specific cable

markets to extort equity from programmers or force exclusive contracts on them. See 1992 Cable Act s 2(a)(4)-(5), 106

Stat. at 1460-61; Senate Report at 3, 14, 23-29, 32-34,

reprinted in 1991 U.S.C.C.A.N. at 1135, 1146-47, 1156-62,

1165-67; House Report at 40-43. A single MSO, acting

alone rather than "jointly," might perhaps be able to do so

while serving somewhat less than the 60% of the market (i.e.,

less than the fraction that would allow it unilaterally to lock

out a new cable programmer) despite the existence of antitrust laws and specific behavioral prohibitions enacted as part

of the 1992 Cable Act, see 47 U.S.C. s 536, and the risk might

justify a prophylactic limit under the statute. See Time

Warner I, 211 F.3d at 1322-23. So the absence of any

showing of a serious risk of collusion does not necessarily

preclude a finding of a sufficient governmental interest in

preventing unfair competition. (We express no opinion on

whether exploitation of a monopoly position in a specific cable

market to extract rents that would otherwise flow to programmers alone gives rise to an "important governmental

interest" justifying a burden on speech.) But the FCC made

no attempt to justify its regulation on these grounds.

We pause here to address an aspect of petitioners' statutory challenge that is relevant to a showing of non-conjectural

harm. Congress required that in setting the horizontal limit,

the FCC "take particular account of the market structure ...

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including the nature and market power of the local franchise."

47 U.S.C. s 533(f)(2)(C). Petitioners assert that the Commission's failure to take adequate account of the competitive

pressures brought by the availability and increasing success

of DBS make the horizontal limit arbitrary and capricious.

Although DBS accounts for only 15.4% of current MVPD

households, the annual increase in its total subscribership is

almost three times that of cable (nearly three million additional subscribers over the period June 1999 to June 2000, as

against one million for cable). See Seventh Annual Report

p p 6-8. To the extent petitioners argue that the horizontal

limit must fail because market share does not equal market

power, they misconstrue the statutory command. The Commission is not required to design a limit that falls solely on

firms possessing market power.5 The provision is directed to

the Commission's intellectual process, and requires it, in

evaluating the harms posed by concentration and in setting

the subscriber limit, to assess the determinants of market

power in the cable industry and to draw a connection between

market power and the limit set.

It follows naturally from our earlier discussion that we do

not believe the Commission has satisfied this obligation.

Having failed to identify a non-conjectural harm, the Commission could not possibly have addressed the connection between the harm and market power. But the assessment of a

real risk of anti-competitive behavior--collusive or not--is

itself dependent on an understanding of market power, and

the Commission's statements in the Third Report seem to

ignore the true relevance of competition. In changing the

calculation of the horizontal limit to reflect subscribers instead of homes at which a service is available, for instance,

the Commission wrote:

[W]hether subscribership or homes passed data is used is

largely a mechanical issue in terms of the market power

issue.... As the market develops in terms of competi-

__________

5 Contrast Congress's requirement that the FCC "make such

rules and regulations reflect the dynamic nature of the communications marketplace." 47 U.S.C. s 533(f)(2)(E) (emphasis added).

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tion we believe ... that an operator's actual number of

subscribers more uniformly and accurately reflects power in the programming marketplace.

Third Report, 14 F.C.C.R. at 19108 p 22.

But normally a company's ability to exercise market power

depends not only on its share of the market, but also on the

elasticities of supply and demand, which in turn are determined by the availability of competition. See AT&T Corp. v.

Federal Communications Commission, 236 F.3d 729, 736

(D.C. Cir. 2001). If an MVPD refuses to offer new programming, customers with access to an alternative MVPD may

switch. The FCC shows no reason why this logic does not

apply to the cable industry. Indeed, its most recent competition report suggests that it does. According to the Commission, "several very small and rural cable systems have used a

variety of schemes to add digital channels, expand their

program offerings, and take preemptive action against aggressive DBS marketing." Seventh Annual Report p 67.

Given the substantial changes in the cable industry since

publication of the Third Report in 1999 and our reversal on

other grounds, there is little point in our reviewing the

Commission's assessment of then-existing market power of

cable MVPDs. But whatever conclusions are to be drawn

from the new data, it seems clear that in revisiting the

horizontal rules the Commission will have to take account of

the impact of DBS on that market power. Already when the

Third Report was written, DBS could be considered to "pass

every home in the country." Third Report, 14 F.C.C.R. at

19107-08 p 20. The technological and regulatory changes

since then appear only to strengthen petitioners' contention.

See Seventh Annual Report p p 60-82, 140.

With the risk of collusion inadequately substantiated to

support the 30% limit and no attempt to find other anticompetitive behavior, there remains the Commission's alternative ground--that programming choices made "unilaterally" by multiple cable companies, Third Report, 14 F.C.C.R. at

19118-19 p 51; see also id. at 19119 p 53 ("individually"),

might reduce a programmer's "open field" below the 40%

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benchmark. The only support the Commission offered for

regulation based on this possibility was the idea that every

additional chance for a programmer to secure access would

enhance diversity:

[T]he 30% limit serves the salutary purpose of ensuring

that there will be at least 4 MSOs in the marketplace.

The rule thus maximizes the potential number of MSOs

that will purchase programming. With more MSOs making purchasing decisions, this increases the likelihood

that the MSOs will make different programming choices

and a greater variety of media voices will therefore be

available to the public.

Id. p 54. Petitioners challenge the FCC's authority to regulate for this purpose on both constitutional and statutory

grounds.

We have some concern how far such a theory may be

pressed against First Amendment norms. Everything else

being equal, each additional "voice" may be said to enhance

diversity. And in this special context, every additional splintering of the cable industry increases the number of combinations of companies whose acceptance would in the aggregate

lay the foundations for a programmer's viability. But at

some point, surely, the marginal value of such an increment in

"diversity" would not qualify as an "important" governmental

interest. Is moving from 100 possible combinations to 101

"important"? It is not clear to us how a court could determine the point where gaining such an increment is no longer

important. And it would be odd to discover that although a

newspaper that is the only general daily in a metropolitan

area cannot be subjected to a right of reply, see Miami

Herald Publishing Co. v. Tornillo, 418 U.S. 241 (1974), it

could in the name of diversity be forced to self-divide. Certainly the Supreme Court has not gone so far.

We need not face that issue, however, because we conclude

that Congress has not given the Commission authority to

impose, solely on the basis of the "diversity" precept, a limit

that does more than guarantee a programmer two possible

outlets (each of them a market adequate for viability). We

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analyze the agency action under the familiar framework of

Chevron USA, Inc. v. National Resources Defense Council,

Inc., 467 U.S. 837 (1984). If we find (using traditional tools of

statutory interpretation) that Congress has resolved the question, that is the end of the matter. FDA v. Brown &

Williamson Tobacco Corp., 529 U.S. 120, 132 (2000); National Resources Defense Council, Inc. v. Browner, 57 F.3d 1122,

1125 (D.C. Cir. 1995). We must place the statutory language

in context and "interpret the statute 'as a symmetrical and

coherent regulatory scheme.' " Brown & Williamson, 529

U.S. at 133.

We begin with the statutory language. The relevant section requires the FCC to

ensure that no cable operator or group of cable operators

can unfairly impede, either because of the size of any

individual operator or because of joint actions by a group

of operators of sufficient size, the flow of video programming from the video programmer to the consumer.

47 U.S.C. s 533(f)(2)(A).

The language addresses only "unfair[ ]" impediments to the

flow of programming. The word "unfair" is of course extremely vague. Certainly, the action of several firms that is

"joint," in the sense of collusive, may often entail unfairness

of a conventional sort. The statute goes further, plainly

treating exercise of editorial discretion by a single cable

operator as "unfair" simply because that operator is the only

game in town. (And Time Warner I authoritatively determines that the government is constitutionally entitled to

impose limits solely on that ground.) But we cannot see how

the word unfair could plausibly apply to the legitimate, independent editorial choices of multiple MSOs. A broad interpretation is plausible only for actions that impinge at least to

some degree on the interest in competition that lay at the

heart of Congress's concern.6 The Commission's reading of

__________

6 The Commission's economic theory--that cable operators have

an incentive to contract with the same programmers in order to

lower the programmers' average costs (see discussion in the colluUSCA Case #99-1542 Document #579773 Filed: 03/02/2001 Page 16 of 31
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the clause effectively deletes the word "joint" and opens the

door to illimitable restrictions in the name of diversity.

Looking at the statute as a whole does little to support the

FCC's position. The "interrelated interests" of promoting

diversity and fair competition run throughout the 1992 Cable

Act's various provisions. Turner II, 520 U.S. at 189.7 But

despite the duality of interests at work in this section, see

Time Warner I, 211 F.3d at 1319, it is clear from the

structure of the statute that Congress's primary concern in

authorizing ownership limits is "fair" competition. The statute specifies, after all, that these regulations are to be promulgated "[i]n order to enhance effective competition." 47

U.S.C. s 533 (f)(1). In only two of the other sections of the

1992 Cable Act does Congress specify a dominant purpose.8

__________

sion context, supra p. 11)--would seem to apply regardless of any

horizontal limit. Putting various special cases aside, any profitmaximizing firm will have an incentive to lower its costs. In a

market where a cable operator is a monopolist, the resulting benefit

to the firm would be classified as monopoly rents. In a market

where an operator is in competition, it can be expected to pass the

benefits on to its customers. But the FCC has not shown why such

pursuit of lower costs, by the monopolist or the competitive firm, is

by itself "unfair," and the statute allows for regulation only if

unfairness can be shown.

7 The 1992 Cable Act is a wide-ranging statute that includes,

besides the ownership limits, must-carry and leased-access requirements, rate regulation, behavioral prohibitions, and privacy protections. See 1992 Cable Act, 106 Stat. 1460.

8 The leased access provision was amended to add the words "to

promote competition in the delivery of diverse sources of video

programming" to the section's previously stated purpose of assuring

"that the widest possible diversity of information sources are made

available." 1992 Cable Act s 9(a), 106 Stat. at 1484; 47 U.S.C.

s 532(a). The various behavioral rules designed to prevent cable

operators from abusing their market power were passed for the

stated purpose of promoting "the public interest, convenience, and

necessity by increasing competition and diversity in the multichannel video programming market." 1992 Cable Act s 19, 106 Stat. at

1494; 47 U.S.C. s 547.

This statement of purpose supports a reading that sharply

confines the authority to regulate solely in the interest of

diversity.

The FCC points to the statutory findings that the "cable

industry has become highly concentrated" and that "the

potential effects of such concentration are barriers to entry

for new programmers and a reduction in the number of media

voices available to consumers." Third Report, 14 F.C.C.R. at

19118-19 p 51, 1992 Cable Act s 2(a)(4), 106 Stat. at 1460.

But reference to a congressional finding cannot overcome the

clear language and purpose of the actual provision. The

quoted finding stands as little more than support for the

proposition that Congress was concerned with the possibilities

for market failure and the possible impact on new programmers. The legislative history also offers little. Again, the

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fact that Congress's interest in anti-competitive behavior may

have been animated by an interest in preserving diversity

doesn't give the FCC carte blanche to cobble cable operators

in the name of the latter value alone. After all, Congress also

sought to "ensure that cable operators continue to expand,

where economically justified, their capacity," 1992 Cable Act

s 2(b)(3), 106 Stat. at 1463, and it specifically directed the

FCC, in setting the ownership limit, to take into account the

"efficiencies and other benefits that might be gained through

increased ownership or control." 47 U.S.C. s 533(f)(2)(D).

On the record before us, we conclude that the 30% horizontal limit is in excess of statutory authority. While a 60% limit

might be appropriate as necessary to ensure that programmers had an adequate "open field" even in the face of

rejection by the largest company, the present record supports

no more. In addition, the statute allows the Commission to

act prophylactically against the risk of "unfair" conduct by

cable operators that might unduly impede the flow of programming, either by the "joint" actions of two or more

companies or the independent action of a single company of

sufficient size. But the Commission has pointed to nothing in

the record supporting a non-conjectural risk of anticompetitive behavior, either by collusion or other means.

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Accordingly, we reverse and remand with respect to the 30%

rule.

* * *

The FCC presents its 40% vertical limit as advancing the

same interests invoked in support of its statutory authority to

adopt the rule: diversity in programming and fair competition. As with the horizontal rules the FCC must defend the

rules themselves under intermediate scrutiny and justify its

chosen limit as not burdening substantially more speech than

necessary. Far from satisfying this test, the FCC seems to

have plucked the 40% limit out of thin air.

The FCC relies almost exclusively on the congressional

findings that vertical integration in the cable industry could

"make it difficult for non-cable affiliated ... programmers to

secure carriage on vertically integrated cables systems" and

that "vertically integrated program suppliers have the incentive and the ability to favor their affiliated cable operators

... and program distributors." Second Report, 8 F.C.C.R. at

8583 p 41 (citing 1992 Cable Act s 2(a)(5), 106 Stat. at 1460).

Regulatory limits in response to these consequences would

"increase the diversity of voices available to the public."

Second Report, 8 F.C.C.R. at 8583-84 p 42 (citing Senate

Report at 80, reprinted in 1991 U.S.C.C.A.N. at 1213). In

Time Warner I we thought these findings strong enough to

overcome the First Amendment challenge to the relevant

provision of the 1992 Cable Act. In doing so, we held that

such a prophylactic rule was not "rendered unnecessary

merely because preexisting statutes [such as the antitrust

laws and the antidiscrimination provisions of the 1992 Cable

Act] impose behavioral norms." Time Warner I, 211 F.3d at

1322-23. Beyond that we did not assess the appropriateness

of the burden on speech. We upheld no specific vertical

limit--none was before us.

We recognize that in drawing a numerical line an agency

will ultimately indulge in some inescapable residue of arbitrariness; even if 40% is a highly justifiable pick, no one

could expect the Commission to show why it was materially

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better than 39% or 41%. See Missouri Public Service

Comm'n v. FERC, 215 F.3d 1, 5 (D.C. Cir. 2000). But to pass

even the arbitrary and capricious standard, the agency must

at least reveal " 'a rational connection between the facts found

and the choice made.' " Dickson v. Secretary of Defense, 68

F.3d 1396, 1404-05 (D.C. Cir. 1995) (quoting Motor Vehicle

Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,

43 (1983). Here the FCC must also meet First Amendment

intermediate scrutiny. Yet it appears to provide nothing but

the conclusion that "we believe that a 40% limit is appropriate

to balance the goals." See Second Report, 8 F.C.C.R. at

8593-95 p 68. What are the conditions that make 50% too

high and 30% too low? How great is the risk presented by

current market conditions? These questions are left unanswered by the Commission's discussion.

The FCC argued before us that no MSO has yet complained that the 40% vertical limit has required it to alter

programming. This is no answer at all, as it says nothing

about plans that the rule may have scuttled. Petitioners

responded that their subsidiaries frequently must juggle their

channel lineups to stay within the cap. Furthermore, it

appears uncontested that AT&T's merger with MediaOne

brings the vertical limits into play. See In the Matter of

Applications for Consent to the Transfer of Control of Licenses and Section 214 Authorizations from MediaOne Group,

Inc. to AT&T Corporation, 15 F.C.C.R. 9816 (2000).

In fairness, the FCC does make an attempt to review some

relevant conditions. See Second Report, 8 F.C.C.R. at 8583-

85 p p 41-45. The FCC cites the House Report's conclusion

that "some" vertically integrated MSOs favor their affiliates

and "may" discriminate against others. Id. at 8583-84 p 42

(citing House Report at 43). But it also notes a report that

none of the top five MSOs "showed a pattern" of favoring

their affiliates. Id. at 8584 p 43. Indeed, the FCC concludes

that "vertical relationships had increased both the quality and

quantity of cable programming services." Id. p 44. But still

it settled on a limit of 40%. There is no effort to link the

numerical limits to the benefits and detriments depicted.

Further, given the pursuit of diversity, one might expect

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some inquiry into whether innovative independent originators

of programming find greater success selling to affiliated or to

unaffiliated programming firms, but there is none.

Quite apart from the numerical limit vel non, petitioners

attack the Commission's refusal to exclude from the vertical

limit cable operators that are subject to effective competition.

The FCC had proposed exempting cable operators who met

the definition of effective competition provided by s 623 of

the Communications Act of 1934. See Implementation of

Sections 11 and 13 of the Cable Television Consumer Protection and Competition Act of 1992, 8 F.C.C.R. 6828, 6862 p 231

(1993) ("First Report"); see also 47 U.S.C. s 543(l )(1) (defining the categories of cable operators that are not subject to

rate regulation under that section).9 Of course our decision

in Time Warner I acknowledged the existence of incentives

__________

9 The term "effective competition" means that--

(A) fewer than 30 percent of the households in the franchise

area subscribe to the cable system;

(B) the franchise area is--

(i) served by at least two unaffiliated multichannel video

programming distributors each of which offers comparable

video programming to at least 50 percent of the households

in the franchise area; and

(ii) the number of households subscribing to programming

services offered by multichannel video programming distributors other than the largest multichannel video programming

distributor exceeds 15 percent of the households in the

franchise area; or

(C) a multichannel video programming distributor operated by

the franchising authority for that franchise area offers video

programming to at least 50 percent of the households in that

franchise area; or

(D) a local exchange carrier or its affiliate (or any multichannel

video programming distributor using the facilities of such carrier or its affiliate) offers video programming services ... in the

franchise area of an unaffiliated cable operator which is providing cable service in that franchise area, but only if the video

programming services so offered in that area are comparable to

to use affiliated programming. 211 F.3d at 1322. For example, even where an unaffiliated supplier offered a better costquality trade-off, a company might be reluctant to ditch or

curtail an inefficient in-house operation because of the impact

on firm executives or other employees, or the resulting

spotlight on management's earlier judgment. But petitioners

argue, quite plausibly, that exposure to competition will have

an impact on a cable company's ability to indulge in favoritism for in-house productions. After all, while reliance on inhouse suppliers offering an inferior price-quality trade-off will

reduce a monopolist's profits, it may threaten a competitive

firm's very survival. This analysis is not foreign to the

Commission, which endorsed it when proposing the exemption:

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We believe that this proposal is appropriate since effective competition will preclude cable operators from exercising the market power which originally justified channel occupancy limits. Where systems face effective

competition, their incentive to favor an affiliated programmer will be replaced by the incentive to provide

programming that is most valued by subscribers.

First Report, 8 F.C.C.R. at 6862 p 231.

The FCC makes two arguments to justify its refusal to

exempt MVPDs that are subject to effective competition.

First, it says that the definition of competition provided by 47

U.S.C. s 543 was "not adopted for this specific purpose" but

rather for relief from rate regulation. See Reconsideration

Order 10 F.C.C.R. at 7379 p 47. Indeed, we have recognized

that one of the ways in which the statutory standard is met

may be surprisingly defective as a mark of real competition.

See Time Warner Entertainment Co., L.P. v. Federal Communications Commission, 56 F.3d 151, 166 (D.C. Cir. 1995)

(MVPDs satisfying subsection (A) of 47 U.S.C. s 543(l )(1)

(low penetration) may do so more as a result of geography

than competition). But the Commission is free to carve out

__________

the video programming services provided by the unaffiliated

cable operator in that area.

47 U.S.C. s 543(l )(1).

subsections that are truly pertinent to competition, as it had

proposed. See First Report, 8 F.C.C.R. at 8662-63 p 232;

Second Report, 8 F.C.C.R. at 8602 p 85.

Of course competition that is adequate to justify dispensing

with rate regulation could still leave an undue likelihood of

improper favoritism for affiliated programmers. But the

possible failure of readily available criteria does not itself

justify the use of so blunt a blade. Congress expressly

directed the Commission to take "particular account of the

market structure..., including the nature and market power

of the local franchise." 47 U.S.C. s 533(f)(2)(C) (emphasis

added). Because competition raises the stakes for a firm that

sacrifices the optimal price-quality trade-off in its acquisition

of programming, the issue seems to trigger the legislative

directive. Yet the Commission seems to ignore its own

conclusions about cable companies' incentives and constraints,

and the dynamics of the programming industry. See First

Report, 8 F.C.C.R. at 6862 p 231. If the criteria of

s 543(l )(1) are unsuitable, the Commission can consider concepts of effective competition that it finds more apt for these

purposes.

Second, the FCC comments that if a competing MVPD

favored its own affiliated programmers, the presence of competition would have no tendency to create room for independent programmers. See Reconsideration Order 10 F.C.C.R

at 7379 p 47. But this theory seems contradicted by the

Commission's own observation, mentioned earlier, that no

vertically integrated MPVD has complained of reaching the

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40% limit. Vertically integrated MVPDs evidently use loads

of independent programming. Further, although cable operators continue to expand their interests in programmers,

"[t]he proportion of vertically integrated channels ... continue[d] to decline" for each of the last two years. Sixth

Annual Report, 15 F.C.C.R. at 1058-59 p 181, Seventh Annual Report p 173 (emphasis added). Even if competing MSOs

filled all of their channels with affiliates' products (as unlikely

as that seems), the Commission nowhere explains why, in the

pursuit of diversity, the independence of competing vertically

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ated programmers. In any event, the Commission's point

here does not respond to the intuition that competition spurs

a firm's search for the best price-quality trade-off.

In its brief the Commission adds the argument that truly

effective competition under s 543(l )(1) existed only for a tiny

fraction of cable systems. Indeed, it said in its Sixth Annual

Report that of the nation's 33,000 cable community units, only

157 satisfy the definition through being in a market offering

more than one wireline MVPD. Sixth Annual Report, 15

F.C.C.R. at 1045-46 p 142. (In the Seventh Annual Report

we learn that now 330, or 1% of the total, meet the competition standard through exposure to another MVPD; in this

report the qualifier "wireline" is absent. See Seventh Annual

Report p 138.) But in determining whether or not the regulations burden substantially more speech than necessary, it is a

weak move to point to the paucity of MVPDs facing competition if, as seems the case, it is easy to exempt them from the

limit.

We find that the FCC has failed to justify its vertical limit

as not burdening substantially more speech than necessary.

Accordingly, we reverse and remand to the FCC for further

consideration.

* * *

We turn, finally, to several aspects of the rules for attributing ownership for purposes of the horizontal and vertical

limits, recently revised by the FCC and challenged by petitioners. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992, 14 F.C.C.R.

19014 (1999) ("Attribution Order"). Petitioners suggest that

these rules affect their ability to "speak" to subscribers

because of their connection to the horizontal and vertical

limits. But petitioners' speech rights are implicated only

where their interest allows them to exercise editorial control,

in which case attribution would be proper and it is the

horizontal or vertical limit that constrains speech. The only

effect of the attribution rules where no control is exercised is

to limit the extent of petitioners' investments in a particular

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class of companies. We therefore review the agency actions

under the APA standards, to determine whether they are

"arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law." See 5 U.S.C. s 706(2)(A).

The FCC adopted as its starting point the pre-existing

rules for attributing ownership of broadcast television stations, finding that the purposes of the rules are the same.

See Attribution Order, 14 F.C.C.R. at 19030 p 35; Second

Report 8 F.C.C.R. at 8577-79, 8593-96 p p 30-35, 56-63. Under that standard, attribution is triggered by ownership of 5%

of the voting shares of a company, with various exceptions.

See Attribution of Ownership Interests, 97 FCC 2d 997

(1984). Because the decisions in the Attribution Order

tracked, to a large degree, similar decisions related to the

broadcast attribution rules, the FCC incorporated by reference much of the reasoning from the broadcast orders. See

Attribution Order, 14 F.C.C.R. at 19015-16 p 1.

Petitioners challenge the sufficiency and relevance of the

Commission's evidence in support of the 5% attribution rule

and its failure to adopt an alternative proposed by cable

industry interests. They begin by asserting that the FCC

improperly relied on two studies that were mentioned neither

in the FCC's notice nor in any party's submission. See

Notice of Proposed Rulemaking, 13 F.C.C.R. 12990 (1998).

Although it is true that an agency cannot rest a rule on data

" 'that, [in] critical degree, is known only to the agency,' "

Community Nutrition Institute v. Block, 749 F.2d 50, 57

(D.C. Cir. 1984) (quoting Portland Cement Ass'n v. Ruckelshaus, 486 F.2d 375, 393 (D.C. Cir. 1973); see also International Union, UAW v. OSHA, 938 F.2d 1310, 1324-35 (D.C.

Cir. 1991) (approving reliance on documents not exposed to

comment if not "vital" to agency's support for rule), obviously

not every cited document is "critical."

Here, although petitioners assert that the studies were the

sole evidence cited by the FCC, the Commission also relied

on a survey, used to support the 1984 broadcast attribution

rules, showing that in widely held corporations, an owner of

5% or more would ordinarily be one of the two or three

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largest shareholders. See Attribution Order, 14 F.C.C.R. at

19034 p 46; Block, 749 F.2d at 58 (1984) (new information

"expanded on and confirmed information"). The earlier rulemaking had inferred that with such ownership a holder of 5%

or more would be able "to potentially affect the outcome of

elective or discretionary decisions and to command the attention of management." Attribution of Ownership Interests, 97

FCC 2d at 1005-06 p 14. This hardly seems implausible.

Presumably an owner of 5% or more typically has enough of

an interest to justify the burden of informing himself about

the company's activities and trying to influence (or supplant)

management, a fact that management would bear in mind in

deciding to whose exhortations it should pay attention. Petitioners have not pointed to any evidence suggesting that the

FCC's survey is no longer accurate, or that the conclusion

they draw from it has been undermined.

Furthermore, in attacking the relevance of the new studies,

the petitioners fail to acknowledge that the FCC sought a

rule that would capture "influence or control," not just control. Attribution Order, 14 F.C.C.R. at 19015-16 p 1 (emphasis added). The Commission specifically noted that a "firm

does not need actual operational control over ... a company

in order to exert influence." Id. at 19030-31 p 36. This

distinction also tends to rebut petitioners' critique of the

Commission's reliance on the Securities and Exchange Commission's requirement that investors report to the SEC when

their holdings exceed 5% of any class of a firm's shares. See

15 U.S.C. s 78m(d)(1). The FCC noted that the purpose of

the SEC's requirement was to alert investors to potential

changes in control, and reasoned that this was similar to its

own purpose in the attribution rules, encompassing not merely control but influence. See Attribution Order, 14 F.C.C.R.

at 19035 p 49 (citing Securities and Exchange Comm'n v.

Savoy Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978)).

Finally, petitioners contend that it was arbitrary for the

FCC to reject a "control certification" approach, such as it

adopted for partnerships, under which a partner can avoid

attribution if (but only if) it certifies to the absence of certain

relationships that might betoken control. In this argument,

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petitioners make a classic apples-and-oranges mix, since the

bases that they proposed for self-certification, see Attribution

Order at 19024 p 22, are quite different from those adopted by

the Commission for partnerships, see id. at 19038 p 57 n.163.

Even if corporations and partnerships were virtually identical, the Commission would hardly be guilty of selfcontradiction if it rejected certification scheme A for corporations and accepted certification scheme B for partnerships.

In any event, for corporations the Commission rejected a

case-by-case approach on conventional grounds, observing

that a bright-line rule was to be preferred because it "reduces

regulatory costs, provides regulatory certainty, and permits

planning of financial transactions." Id. at 19035 p 48; see

also id. at 19031 p 38. Given an agency's very broad discretion whether to proceed by way of adjudication or rulemaking, see N.L.R.B. v. Bell Aerospace Co., 416 U.S. 267, 294

(1974), and the reasonableness of the 5% criterion, we doubt

there was need to explain further. The Commission did,

however, observe that the certification proposals offered did

"not take into account the variety of ways that an investor

may exert influence or control over a company." Id. at

19030-31 p 36. And it implicitly distinguished its treatment

of partnerships when it said that a limited partner's influence

may not be proportional to equity interest "because the

extent of its power may be modified by contract." Id. at

19039 p 61. Indeed, the Commission's certification rules for

partnerships require voting restrictions that would not normally, and perhaps could not, be paralleled in the corporate

world (such as abnegation of any power to remove the general

partner except under extremely limited circumstances, see id.

at 19038 p 57 n.163). We find the Commission's discussion

adequate.

We also uphold the FCC's adoption of an "equity-and-debt"

rule to capture "nonattributable investments that could carry

the potential for influence." Id. at 19047 p 83. The rule

triggers attribution "to an investor that holds an interest that

exceeds 33% of the total asset value (equity plus debt) of the

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applicable entity." Id. at 19046-47 p 82.10 Petitioners attack

the sufficiency of evidence to support both the rule itself and

the selection of 33% as limit. They observe in particular that

the Commission's own claims seem to depend on combinations of debt and equity with contractual rights. See, e.g., id.

at 19047 p 83. But the Commission explicitly relied on an

earlier rulemaking, see, e.g., id. at 19047 p 83, citing Review

of the Commission's Regulations Governing Attribution of

Broadcast and Cable/MDS Interests, 14 F.C.C.R. 12559

(1999) ("Broadcast Attribution Order"), which in turn relied

on academic literature, see id. at 12589 p 62 nn.132, 134.

Petitioners offer no critique of that literature's relevance, and

it is not our role to launch one on our own. So we must

accept the Commission's basic finding.

Although petitioners independently attack the Commission's selection of 33% as the debt-and-equity limit, we are

constrained in our review by the sketchy character of their

attack on the basic theory. The Commission's choice of 33%

certainly has modest support. It recited the numbers offered

by various parties, which ranged from 10% to 50%, in some

cases with variations dependent on the presence of special

contract provisions. Attribution Order, 14 F.C.C.R. at

19048-49 p p 85-86. Obviously 33% is not far off the median,

but, as the Commission says nothing to evaluate the numbers

recited, that tells us little.

The Commission also cited its own past decisions, saying

that it had used the same percentage for the parallel rule in

its broadcast cross-interest policy, and that there it "does not

__________

10 The Commission often writes as if investors owned the assets

of the companies in which they hold stock or bonds. See, e.g.,

Attribution Order, 14 F.C.C.R. at 19047-48 p 84 n.230. No issue is

made here of how its calculations are to be made, e.g., percentage of

book value, percentage of market capitalization, or some other

method, although the Commission has attempted "clarification" in

the broadcast context by allowing applicants to choose their valuation method. See Review of the Commission's Regulations Governing Attribution of Broadcast and Cable/MDS Interest, MM Docket

No. 94-150, FCC 00-438 (rel. Jan. 19, 2001) p p 26-28 (2001) ("Attribution Clarification Order").

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appear to have had a disruptive effect," id. at 19048-49 p 86,

though without indicating what (if any) assessment it had

made. And it referred to two prior adjudications. Id. (citing

Cleveland Television Corp., 91 FCC 2d 1129 (Rev. Bd. 1982),

aff'd, Cleveland Television Corp. v. Federal Communications

Commission, 732 F.2d 962 (D.C. Cir. 1984), and Roy M.

Speer, 11 F.C.C.R. 18393 (1996)). In Cleveland Television it

had simply held that a one-third preferred stock interest

conferred " 'insufficient incidents of contingent control' " under various policies, Attribution Order, 14 F.C.C.R. at 19048-

49 p 86 (emphasis added). In Roy M. Spear, it relied on

Cleveland Television to impose a 33% ownership on a creditor's purchase option, but deferred establishment of any

general rule. See 11 F.C.C.R. 18393 p 126 n.26. These prior

adjudications provide thin affirmative support for the choice

of 33%, though they at least suggest that the Commission has

not indulged in self-contradiction. But given the absence of a

real probe of the Commission's underlying reasoning for

having the restriction at all, the inevitable difficulty in picking

such a number, and the deference due the Commission, we

cannot find the choice of 33% arbitrary. See Cassell v.

Federal Communications Commission, 154 F.3d 478, 485

(D.C. Cir. 1998).

Petitioners also challenge the Commission's elimination of

an exemption that prevailed in the broadcast attribution rules

at the time the cable attribution rules were promulgated. In

the broadcast context, an otherwise covered minority shareholder in a company with a single majority shareholder was

exempted, on the principle that in such a case the minority

shareholder would ordinarily not be able to direct the activities of the company.11 See Attribution of Ownership Interests, 97 FCC 2d at 1008-09 p 21; Attribution Order, 14

F.C.C.R. at 19044-46 p p 74-81. There were contentions in

the Broadcast Attribution Order proceeding that the majority

shareholder exemption was being used evasively. See 14

F.C.C.R. at 12574-75 p 29. The Commission neither rejected

__________

11 The FCC has since eliminated the single majority owner exemption in the broadcast rules to bring it into conformity with the

cable rules. See Attribution Clarification Order at p p 41-44.

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nor accepted these claims, but retained the exemption. See

id. at p 36. In dispatching the exemption here, the Commission cited only its concern that a minority shareholder might

be able to exercise influence even in these circumstances, the

"lack of a record ... that the exemption should be retained,"

and the fact that no one claimed to be using the exemption.

Attribution Order, 14 F.C.C.R. at 19046 p 81.

The Commission argues here that petitioners lack standing

because they have not shown that they are using the exemption. Again, the FCC disregards the impact the rule can

have on investment plans. Petitioners say that they are

continually reviewing investment opportunities and that they

are constrained by the absence of the single majority exemption. See supra p. 20. This is an actual "injury in fact" that

is "fairly traceable" to the administrative action. See Lujan

v. Defenders of Wildlife, 504 U.S. 555, 561 (1992); see also

Committee for Effective Cellular Rules v. Federal Communications Commission, 53 F.3d 1309, 1315-16 (D.C. Cir. 1995).

And of course the absence of current use is no reason to

delete an exemption. Removal of the exemption is a tightening of the regulatory screws, if perhaps a minor one. It

requires some affirmative justification, cf. State Farm, 463

U.S. at 41-42 (requiring justification for removal of a restriction), yet the Commission effectively offers none. Its "concern" about the possibility of influence would be a basis, if

supported by some finding grounded in experience or reason,

but the Commission made no finding at all. Accordingly,

deletion of the exemption cannot stand.

Finally, petitioners object to one of the seven criteria that a

cable operator must satisfy in order to be exempt from

attribution of limited partnership. The general rule is that

any partnership interest, no matter how small, leads to

attribution, Attribution Order, 14 F.C.C.R. at 19039-40 p 61,

but a limited partner can secure exemption if it certifies

compliance with certain criteria intended to ensure that the

partner "will not be materially involved in the media management and operations of the partnership." Id. The Commission interprets one of these criteria to bar exemption when a

limited partner that is a vertically integrated MSO also sells

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programming to the partnership. See id. at 19055 p 106.

This criterion applies even though the limited partner, to

achieve exemption, must have certified that it does not "communicate with the licensee or general partners on matters

pertaining to the day-to-day operations of its videoprogramming business." Id. at 19040-41 p 64.

We agree with petitioners that the no-sale criterion bears

no rational relation to the goal, as the Commission has drawn

no connection between the sale of programming and the

ability of a limited partner to control programming choices.

Of course a programmer might secure contract terms giving

it some control over a partnership's programming choices,

but, given the independent criterion barring even communications on the video-programming business, see Attribution

Order, 14 F.C.C.R. at 19040-41 p 64, exercise of that power

would seem to be barred. Even if it weren't, the bargaining

opportunity would depend on the desirability of the partner's

programming, not on its status as a partner. The FCC does

not even offer a hypothetical to the contrary.

* * *

To summarize, we reverse and remand the horizontal and

vertical limits, including the refusal to exempt cable operators

subject to effective competition from the vertical limits, for

further proceedings. We also reverse and remand the elimination of the majority shareholder exception and the prohibition on sale of programming by an insulated limited partner.

We uphold the basic 5% attribution rule and the creation of a

33% equity-and-debt rule.

So ordered.

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