Minority Ownership of Broadcast Properties: A Legal Analysis
Released: 2010-02-01T00:00:00

Summary:
Amidst growing media ownership consolidation and a significant decline in minority ownership of telecommunications businesses, there has been renewed interest in programs that foster diversity among telecommunications business owners. One potential avenue under consideration is to revive, in revised fashion, a tax program that would allow current owners who sell their broadcast properties to eligible purchasers to defer taxes on gains from the sale. That program had been available for sales to minority-owned firms, defined as socially and economically disadvantaged businesses (SDBs). It was abolished by Congress in 1995 amidst allegations of abuse. In that same year, the Supreme Court held that all government race-based classifications must meet the most exacting standard of review applied by the Court, meaning that all racial classifications must be narrowly tailored to achieve a compelling government interest. To the extent that legislation or FCC programs seek to increase racial and ethnic minority ownership of broadcast stations, they are likely to be subjected to intense scrutiny if challenged in court. The analysis that may be conducted is discussed in detail in this report.

subsections: section_title: Overview
paragraphs: Diversity of viewpoint has long been a primary goal of U.S. communications policy. Congress and the Federal Communications Commission (FCC) have a history of supporting programs that foster diversity of broadcast station ownership, in general, and minority and female ownership, in particular, as a means to achieve that goal. The courts have reinforced the notion that minority ownership is a valid concern that should be addressed by the FCC when constructing its media ownership rules, but also have set restrictions on how programs can be structured to foster that goal. 
The FCC is under judicial mandate to consider how its ownership rules will affect minority ownership of broadcast stations. On May 5, 2009, the FCC issued a Notice of Proposed Rulemaking (NPRM) seeking comment on methods to improve the agency's data regarding minority and female ownership of broadcast properties. The new data may be used to aid the FCC in deciding whether and to what extent programs to increase minority and female ownership should be implemented. Also, two bills were introduced in the 110 th Congress that would have revived a tax incentive to aid certain businesses seeking to acquire telecommunications, including broadcast, properties. Insofar as these proposals define minorities based on race, they will be subject to strict review by the courts. Structuring the programs narrowly may be necessary in order to survive a judicial challenge.
section_title: Background
paragraphs: From 1978 to 1995, the FCC operated a tax certificate program under §1071 of the Internal Revenue Code (IRC) that was designed, among other goals, to aid minority-owned economically disadvantaged businesses in acquiring broadcast properties in furtherance of the FCC's congressional mandates relating to ownership and control of broadcasting stations. To qualify for a tax certificate, the purchasing business had to be controlled by a minority. At the time, the FCC defined minorities as those of "Black, Hispanic Surnamed, American Eskimo, Aleut, American Indian, or Asiatic American extraction." If the certificate was granted the selling corporation was allowed to defer paying taxes on any capital gain from the sale.
In 1995, certain aspects of the program were questioned by Congress when Viacom structured a deal to sell a large portion of its broadcast property to an entity that qualified as a minority-owned business. The deal was conditioned upon receiving the tax certificate under the FCC's program. Some Members of Congress took notice when they learned that the deal could allow Viacom to defer an estimated $440 million to $640 million in taxes.
Congress expressed concern that the tax certificate program provided little protection from abuse. There was no limit to the amount of gain on a sale that could be deferred. Furthermore, minority ownership was only required to continue for one year from the date of sale. Members were also concerned that the short holding period requirement rendered the tax incentive ineffective, because properties could quickly transfer from minority ownership without penalty. Amidst these concerns, Congress repealed IRC §1071.
The FCC also currently has in place a "distress sale" policy that allows broadcasters whose licenses have been designated for a revocation hearing to sell those licenses to qualified minority-owned buyers before the hearing. Use of the "distress sale" program and other FCC policies that encourage minority ownership of broadcast stations has declined since the Supreme Court announced its opinion in Adarand Construction v. Peña amidst concerns that the programs, in their current form, could not withstand a legal challenge.
On August 1, 2007, the FCC issued a Second Further Notice of Proposed Rulemaking (SFNPR) in its review of the Commission's Broadcast Ownership Rules. The SFNPR contained 14 proposals for the amendment of the FCC's Broadcast Ownership Rules, 10 of which would require a definition for Socially Disadvantaged Businesses (SDBs). The SFNPR invited comment for the definition of SDBs, including how such a definition would comply with constitutional standards. 
The FCC adopted new rules to promote diversification of broadcast ownership on December 18, 2007. The order was published on March 5, 2008. The new rules define eligible entities as "any entity that would qualify as a small business consistent with Small Business Administration standards for its industry grouping, based on revenue." This definition does not appear to take the race or gender of the owner of the eligible entity into account; the FCC is seeking further comment on whether the definition of "eligible entity" may be expanded.
In May of 2009, the FCC issued a Fourth Further Notice of Proposed Rulemaking in this proceeding. The agency is seeking to improve its data on minority and female ownership of broadcast properties by modifying and expanding reporting requirements for broadcasters as well as improving the agency's database. Once the data have been gathered, the FCC may attempt to use the new information to develop programs to encourage broadcast station ownership by minorities and women. However, to the extent that those programs are designed to benefit individuals based on their race, they will likely be subject to the standard of review described below.
section_title: Judicial Review of Racial Classifications in Broadcast Ownership Policies
paragraphs: In 1995, the Supreme Court decided Adarand Construction v. Peña , which held that all race-based classifications by the federal government must withstand strict scrutiny, as discussed in the following section. New tax incentives or other broadcast ownership policies that give preference to racial minorities, therefore, would need to withstand close judicial analysis.
subsections: section_title: Strict Scrutiny
paragraphs: In Adarand , the Supreme Court declared that any racial classification by government at any level (state, local, or federal) must comply with strict scrutiny. Strict scrutiny is the most exacting review a court will undertake and requires the government to prove the measure is necessary to achieve a compelling government interest and that the program is narrowly tailored to achieve that interest. The Court reasoned that this requirement was in line with the intentions of the Fifth and Fourteenth Amendments, which protect individuals and not groups from discrimination based on race. Government action that distinguishes between individuals based on membership in a racial or ethnic group is inherently suspect and warrants the most exacting review.
subsections: section_title: Compelling Interest
paragraphs: Law or regulation that would attempt to define SDBs using the race or ethnicity of the business owners as a factor in determining eligibility would have to meet strict scrutiny, as mandated by the Court in Adarand . The first question a reviewing court would ask is whether the interest the legislation or regulation seeks to achieve is "compelling." In the context of tax provisions and FCC programs that encourage SDBs to own broadcast properties, the government interest that has been articulated is to promote broadcast viewpoint diversity. The theory underlying this interest is that diverse ownership creates diversity of voices and viewpoints in the marketplace of ideas, a concept essential to our democracy and embodied within the First Amendment. The Supreme Court has acknowledged that diversity of viewpoint in public discussion benefits the populace and that the government has an interest in encouraging such diversity over the broadcast airwaves; however, whether that interest is sufficiently compelling to survive strict scrutiny remains a matter of debate.
Prior to Adarand , the Supreme Court decided Metro Broadcasting v. FCC , and upheld the FCC's minority broadcast ownership policies after applying intermediate scrutiny. Intermediate scrutiny is a less exacting standard than strict scrutiny and requires the government to prove only that the relevant classification is substantially related to an important government interest. The Court, agreeing with Congress and with the FCC, held that enhancing broadcast diversity "is, at the very least, an important government interest."
The Metro Broadcasting majority grounded their "important interest" analysis in the scarcity of electromagnetic spectrum and the government's duty to distribute that spectrum to encourage the availability of the widest array of information sources and viewpoints. The Court noted that "it is axiomatic that broadcasting may be regulated in light of the rights of the viewing and listening audience, and that the 'widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.'" According to the Court, it is the right of the public to receive a diverse array of viewpoints and programming over the publicly owned broadcast airwaves, and it is the duty of Congress and the FCC to safeguard that right. Against this backdrop, the Metro Broadcasting majority concluded that the diversity of viewpoints on the broadcast airwaves serves important First Amendment principles and that this was sufficient basis for the minority ownership policies. Though Metro Broadcasting can provide some guidance as to the arguments that would be advanced in favor of finding that broadcast viewpoint diversity is a compelling government interest, because the Court applied a lower standard of scrutiny to what it termed a "benign racial classification," deeper analysis is required to determine if the interest is sufficiently compelling to withstand strict scrutiny.
The Court made clear in Adarand that strict scrutiny is not "strict in theory, but fatal in fact." Justice O'Connor noted, "[t]he unhappy persistence of both the practices and lingering effects of racial discrimination against minorities in this country is an unfortunate reality, and the government is not disqualified from acting in response to it." This language suggested to some that in order to survive strict scrutiny racial classifications would be permissible only to remedy the effects of past discrimination. Such an interpretation probably would have ruled out the legitimacy of all other justifications for classification of individuals based on their race. The dissent in Metro Broadcasting , in fact, would have applied strict scrutiny to the ownership rules at issue in that case. The dissenters would have determined that broadcast ownership diversity was not a compelling interest and noted that only one compelling interest supporting a race-based classification had ever been recognized—to remedy past discrimination.
In light of recent decisions, however, it is possible that diversity of broadcast viewpoint could be classified as a compelling interest. In Grutter v. Bollinger , the Court made clear that remedial classifications are not the only racial classifications that will survive strict scrutiny. In Grutter , the Court held that diversity within a student body is a compelling interest sufficient to withstand strict scrutiny. The Court relied heavily upon the reasoning of Justice Powell's opinion in Regents of University of California v. Bakke for its determination that student body diversity is a compelling government interest. Underpinning Powell's opinion in Bakke were strongly rooted First Amendment principles and the educational need for diverse viewpoints to enhance the learning experience. Powell argued that in "seeking the right to select those students who will contribute most to the 'robust exchange of ideas,' a university seeks to achieve a goal that is of paramount importance to the fulfillment of its mission." The Grutter majority adopted this analysis, and further justified its determination by according deference to the University administration in the selection of it students. The Court noted that selection of a diverse student body is "at the heart of the" school's "proper institutional mission," and that "good faith" on the part of the university should be presumed. Because the educational benefits that diversity provided were supported by the evidence, the Court accorded the university's judgment of a compelling interest in student body diversity a degree of deference.
Arguably, there are a number of similarities between the compelling interest found in creating a diverse student body and that found in creating diversity of broadcast programming. The majority in Metro Broadcasting equated the interest in the creation of a diverse student body with the interest in creating diversity over the broadcast airwaves. Both interests have as their foundation the First Amendment principles encouraging the 'robust exchange of ideas.' Both interests serve the important purposes of public education and freedom of speech. Both interests also serve a wider range of people than the minority groups who would benefit ostensibly from any implemented policy. The entire student body benefits from exposure to diverse people and ideas. Likewise, the entire audience benefits from diverse viewpoints aired over broadcast, regardless of their race or ethnic background. Consequently, it appears that a case could be made based on these similarities for a finding that broadcast diversity is a compelling interest.
section_title: Narrow Tailoring
paragraphs: Assuming that viewpoint diversity in broadcasting is a compelling governmental interest, the government then must prove that the program is necessary and narrowly tailored to achieve that interest. The Supreme Court has yet to decide the parameters of a narrowly tailored program in this context, however, examples of narrow tailoring in other contexts and the Court's analysis in Metro Broadcasting may provide guidance.
The government must first show that diversity of broadcast ownership is necessary to increase diversity of broadcast viewpoint. The Metro Broadcasting majority gave weight to the findings of Congress and the FCC that minority-owned broadcast stations produced programming that was qualitatively different from their counterparts, and the finding that this programming contributed to broadcast programming diversity. The Court also deferred to the findings of Congress and the FCC that many minority viewpoints were underrepresented in broadcast programming and that race-neutral methods of increasing that representation had failed repeatedly. With these conclusions in mind, the Court found that increased diversity of broadcast property ownership is substantially related to increased diversity of broadcast programming. A conclusion, however, that a policy is substantially related to the achievement of an interest does not mean that the program is "necessary" to achieve that interest. The concerns of the dissenting Justices in Metro Broadcasting could provide guidance for the required nexus between broadcast property ownership and diversity of programming that would support a finding of necessity.
The dissenting justices in Metro Broadcasting found no supporting evidence for the concept that increased diversity among owners increased diversity of viewpoint, much less that a policy favoring minority ownership was necessary to increase diversity of viewpoint. The dissenters observed that the ownership policies were based on the assumption that minority-owned stations provide desired viewpoints, and that stations not owned by minorities do not or cannot provide these viewpoints. The dissenters opined that the FCC was barred by Congress from examining the factual basis for the asserted nexus between broadcast programming diversity and diversity among broadcast property owners, and that the evidence purporting the existence of a nexus was too weak to support a finding of necessity. Without stronger evidence that this assumption was correct, the dissenters could not conclude that increased minority ownership was necessary to achieve increased diversity of broadcast programming. The Metro Broadcasting dissenter's opinion could suggest a closer examination by the Court of the factual basis supporting the minority ownership program, than the deference accorded to Congress's fact finding by the Metro Broadcasting majority. Consequently, any future minority ownership policies that use race as a factor may need to be supported by evidence that demonstrates a tighter correlation between diversity of ownership and diversity of viewpoint in programming in order to establish that such policies are necessary to increase diversity of broadcast viewpoint.
Not only must the government show that diversity of broadcast station ownership leads to diversity of broadcast viewpoint, the government must also show that other race-neutral methods of achieving the goal of broadcast viewpoint diversity were considered. In Grutter , the Court held that "[n]arrow tailoring does not require exhaustion of every conceivable alternative," but does require "serious, good faith consideration of workable race-neutral alternatives." The government likely would be required, therefore, to consider race-neutral options for fostering diversity before adopting a program that takes race into account.
Assuming that a court found that diversity of ownership is necessary to achieve diversity of viewpoint, the government again must then prove that the program encouraging diversity of ownership is narrowly tailored to achieve the stated interest. Again, looking to the higher education cases and the dissent in Metro Broadcasting could inform the analysis of whether a particular minority broadcast ownership program would be narrowly tailored. In Metro Broadcasting , the dissent took particular issue with the fact that the policies at issue in that case were geared solely toward benefitting certain minorities, calling the policies "a 100% set aside," which placed impermissible burdens on non-minorities. The dissenters concluded that the FCC was attempting to allocate certain licenses based on race, an action prohibited by the Constitution. "Quotas" or "set asides" that place rigid numeric goals for inclusion of certain racial groups also fail in the school admissions cases. Whenever a school admissions policy has placed a numeric goal on the numbers or percentages of minorities desired, the policy has been struck down by the Supreme Court as violating the Equal Protection Clause.
In Grutter , however, the Court provided guidance for the types of permissible school admissions policies that use race as a factor. The Court held that taking race into account when making graduate school admission decisions is permissible so long as no strict quota system is used. Admissions decisions made on an individualized basis may take race into account, among the many other factors used, when deciding how a particular individual would contribute to the diversity of the educational environment. The Court noted that many other variables were considered when deciding whether or not to admit an individual applicant and that race was only one factor included in determining the extent to which an individual would contribute to student body diversity. The individualized nature of the determination seemed to assuage the Court's constitutional concerns, because the applicants were not evaluated or awarded admission based solely on their membership in a certain group. Furthermore, because the admissions program was based on individual assessments of contributions to diversity, the program did not place an "undue burden" on non-minority applicants.
Similarly, when encouraging diversity of broadcast ownership, it appears that a court would be more likely to uphold as narrowly tailored a program that accounts for the race of the owners if the program uses race as but one of a number of factors that could contribute to diversity of viewpoint. In addition, consideration may need to be given to the amount of "diverse" programming already available in individual markets.
An additional consideration in designing a narrowly tailored program that uses race as a factor is that the program must have reasonable durational limits. In Grutter the Court indicated that, in the context of admissions preferences, a program could meet the durational requirement for narrow tailoring through sunset provisions or periodic reviews to determine whether the racial preference remained necessary. Similar controls may be required as a component of any new minority ownership programs enacted by Congress or promulgated by the FCC.