Opinion ID: 218601
Heading Depth: 1
Heading Rank: 7

Heading: Treating all section 628(c)(2)-like conduct involving terrestrial programming as unfair

Text: This brings us finally to petitioners' contention that the Commission erred by concluding that section 628(c)(2)-like conduct involving terrestrial programming constitutes unfair methods of competition or unfair or deceptive acts or practices within the meaning of [s]ection 628(b). 2010 Order, 25 FCC Rcd. at 779 ¶ 49 (internal quotation marks omitted). In reaching this judgment, the Commission relied primarily on the fact that in proscribing such conduct in section 628(c)(2), Congress had implicitly treated it as unfair. By defin[ing] certain conduct that must be included in the Commission's implementing regulations, the Commission asserted, Congress . . . made a conclusive legislative judgment that the categories of conduct involving satellite-delivered programming that are enumerated in [s]ection 628(c)(2) satisfy the requirements of [s]ection 628(b), including the requirement of constituting an `unfair method[ ] of competition or unfair or deceptive act[ ] or practice[ ].' Id. at 778 ¶ 47 (quoting 47 U.S.C. § 548(b)). Defending its analysis here, the Commission maintains that given subsection (c)(2), it made sense for the Commission to conclude that the mirror image of these acts in the nearly identical context of terrestrially delivered programming also should be `unfair acts' for purposes of [s]ection 628(b). Resp'ts' Br. 49. The Commission's reasoning by analogy has several serious gaps. To begin with, it failed to justify its assumption that just because Congress treated certain acts involving satellite programming as unfair, the same acts are necessarily unfair in the context of terrestrial programming. Although we hold in this opinion that subsection (c)(2)'s focus on satellite programming in no way restricts the Commission from regulating terrestrial programming, see supra pp. 705-07, it is a different matter entirely for the Commission to assume that apparent congressional judgments regarding satellite programming necessarily apply in precisely the same way to terrestrial programming. Of course, for purposes of evaluating whether conduct within the video industry is unfair, it might well be that nothing turns on the technology used to deliver programming to MVPDs. That said, terrestrial programming is typically local and regional, whereas satellite programming includes national networks. See 2010 Order, 25 FCC Rcd. at 764 n. 98 ¶ 27. Which way this geographic distinction cuts is a question we leave for the Commission to resolve in the first instance. On the one hand, the Commission cited evidence that certain local and regional video distribution markets are significantly less competitive than the national market, making programming withholding in those markets potentially an even more profitable strategy than is typically the case. Id. at 763-64 & n. 99 ¶ 27. On the other hand, the Commission recognized that exclusivity plays an important role in the growth and viability of local cable news networks and that permitting such exclusivity should not . . . dissuade new MVPDs from developing their own competing regional programming services. Id. at 781 n. 200 ¶ 51 (internal quotation marks omitted). For our purposes, the point is simply that the Commission needs to consider whether there are relevant differences between satellite and terrestrial programming before invoking Congress's regulation of satellite withholding as a justification for treating terrestrial withholding as categorically unfair. Moreover, not only is the Commission's reasoning by analogy incomplete, but its central premise, as petitioners point out, is mistaken. In subsection (c)(2), Congress established broad program access rules for satellite programming, which suggests that Congress did believe that withholding such programming was generally unfair, at least given the state of the video market at the time. But Congress also recognized an important exception. It allowed cable operators and affiliated satellite programmers to enter exclusive programming contracts in markets previously served by cable if the Commission concluded, after receiving an exemption request, that the contract is in the public interest. 47 U.S.C. § 548(c)(2)(D). By creating this exception, as well as by building a sunset provision into the exclusive contract prohibition, id. § 548(c)(5), Congress sought to balance the need for regulatory intervention in markets possessing significant barriers to competition with its recognition that vertical integration and exclusive dealing arrangements are not always pernicious and, depending on market conditions, may actually be procompetitive. See S.Rep. No. 102-92, at 28, reprinted in 1992 U.S.C.C.A.N. at 1161 (The Committee believes that exclusivity can be a legitimate business strategy where there is effective competition. Where there is no effective competition, however, exclusive arrangements may tend to establish a barrier to entry and inhibit the development of competition in the market.). Reflecting this balanced approach, section 628(c)(4)'s public interest factors direct the Commission to consider the effect of exclusive contracts on (1) competition in local and national [MVPD] markets, (2) competition from [MVPD] technologies, (3) the attraction of capital investment in the production and distribution of new satellite cable programming, and (4) diversity of programming in the [MVPD] market, as well as (5) the duration of the exclusive contract. 47 U.S.C. § 548(c)(4). Congress's framework accords with the generally accepted view in antitrust and other areas that exclusive contracts may have both procompetitive and anticompetitive purposes and effects. See, e.g., Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327, 334-35, 81 S.Ct. 623, 5 L.Ed.2d 580 (1961) (finding that an exclusive dealing contract did not violate section 3 of the Clayton Act because it did not foreclose competition in a substantial share of the line of commerce affected, and recognizing that potential procompetitive justifications for the contract were relevant to assessing its legality); United States v. Microsoft Corp., 253 F.3d 34, 69 (D.C.Cir.2001) (en banc) (Permitting an antitrust action to proceed any time a firm enters into an exclusive deal would . . . discourage a presumptively legitimate business practice. . . .); 11 Herbert Hovenkamp, Antitrust Law ¶ 1803a, at 100 (2d ed.2005) (describing output contracts as presumptively procompetitive). Here, for example, the ability to enter into exclusive contracts could create economic incentives to invest in the development of new programming by allowing a vertically integrated cable operator to differentiate its service and secure the benefits of creating and promoting its programming networks. Time Warner, 93 F.3d at 979. Indeed, the Commission itself has recognized that exclusivity can further competition in certain circumstances. See In re Implementation of the Cable Television Consumer Prot. & Competition Act of 1992, 22 FCC Red. 17791, 17835 ¶ 63 (2007) (We recognize the benefits of exclusive contracts and vertical integration cited by some cable [companies], such as encouraging innovation and investment in programming and allowing for `product differentiation' among distributors.). For instance, as noted above, the Commission has taken the position that exclusivity plays an important role in the growth and viability of local cable news networks. 2010 Order, 25 FCC Rcd. at 781 n. 200 ¶ 51. Yet under the Commission's rules for terrestrial programming, exclusivity even in this context is unfair. The Commission responds that determining whether particular conduct is unfair represents only half the section 628(b) inquiry contemplated by their new regulations. Complainants must also show that an unfair act of terrestrial programming withholding has the purpose or effect of. . . hinder[ing] significantly or . . . prevent[ing] any MVPD from providing satellite programming to customers. 47 U.S.C. § 548(b). This case-by-case approach for terrestrial programming, the Commission contends, provides an even broader `escape valve' for procompetitive or benign exclusive contracts than does the public interest exception for satellite programming. Resp'ts' Br. 51. Of course, the Commission is correct that it has substantially narrowed the scope of its regulations by focusing on the effect of terrestrial withholding in individual cases. Indeed, this is one reason why its rules survive First Amendment scrutiny. See supra pp. 711-12. But the case-by-case inquiry into purposes or effects may fail to capture whether a particular act of terrestrial withholding should be considered unfair. For example, although the Commission has indicated it is highly unlikely that an unfair act involving local news and local community or educational programming will have the [proscribed] purpose or effect under [s]ection 628(b)because [u]nlike RSN programming, local news and local community or educational programming is readily replicable by competitive MVPDs, 2010 Order, 25 FCC Rcd. at 781 n. 200 ¶ 51the logic of the Commission's order dictates that should a complainant establish such a purpose or effect with respect to withholding by a terrestrially delivered local news network, then the Commission would require the network to share its programming. That result would follow even if the network's popularity and market impact stemmed from substantial investment in news content and advertising by the cable operator affiliated with the network, and even if MVPD competitors could duplicate those investments but have refrained from doing so. By contrast, if our hypothetical news network were delivered to MVPDs by satellite, the Commission would, if presented with an exemption application, consider whether an exclusive contract involving this programmer would be in the public interest despite the contract's negative impact on current free-riding competitors. In addition to relying by analogy on the congressional judgment reflected in section 628(c)(2), the Commission indicated that subsection (c)(2)-like acts involving terrestrial programming are unfair because such acts have the potential to impede entry into the video distribution market and to hinder existing competition in the market. Id. at 779 ¶ 48. But by labeling conduct unfair simply because it might in some circumstances negatively affect competition in the video distribution market, the Commission failed to consider whether it should treat conduct as unfair despite it being procompetitive in a given instance. Indeed, even though reducing prices amounts to paradigmatic legitimate competition, a cable operator's decision to cut its prices could conceivably qualify under the Commission's reasoning as unfair under section 628(b) because of the theoretical potential for a cable operator to engage in predatory pricing to drive its competitors from the market. Given the Commission's failure to articulate a satisfactory explanation for its action in defining certain acts of terrestrial withholding as categorically unfair, this part of its terrestrial programming order is arbitrary and capricious. State Farm Mut. Auto Ins. Co., 463 U.S. at 43, 103 S.Ct. 2856; see also Kristin Brooks Hope Ctr. v. FCC, 626 F.3d 586, 589-91 (D.C.Cir. 2010) (vacating a Commission decision as arbitrary and capricious for failure to provide a reasonable explanation). That said, we take no position on the ultimate issue of exactly how the Commission should define the inherently ambiguous statutory term unfair. See Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. But if the Commission believes that conduct involving the withholding of terrestrial programming should be treated as categorically unfair, as opposed to assessing fairness on a case-by-case basis or perhaps adopting a public interest exception mirroring the one for satellite programming, see 47 U.S.C. § 548(c)(2)(D), (c)(4), then it must grapple with whether its definition of unfairness would apply to conduct that appears procompetitive and, if so, whether that result would comport with section 628.