Opinion ID: 721443
Heading Depth: 3
Heading Rank: 1

Heading: Threshold Issues. We take up first the Commission's threshold objections.

Text: 28 (a) Exhaustion of Administrative Remedies. Adelphia points out that Newhouse Broadcasting, in response to the Second Order on Reconsideration, objected to the small-number rule on the ground that it lacks a rational basis, and objected to its corollary, retroactive imposition of refund liability, on the ground that it would be grossly unfair to make cable system operators liable for refunds with respect to rates charged while the Commission's rules were unclear. Rate Regulation, MM Dkt. No. 92-266 (Reply Comments of Newhouse Broadcasting, July 1994). Without even a reference to the Constitution let alone a suggestion that the rule burdens speech, this objection does not raise any recognizable first amendment claim. Rather, the Newhouse filing reads more like an arbitrary and capricious claim arising under the APA (although the statute is not cited either). 29 Adelphia cites footnote 3 in Northwestern Indiana Telephone Co., Inc. v. FCC, 872 F.2d 465, 470 (D.C.Cir.1989), for the proposition that a facial constitutional challenge to an FCC rule is not generally subject to exhaustion requirements. While the court did not distinguish carefully between the constitutional challenges advanced against the statute [319 U.S.App.D.C. 193] and against the regulation there at issue, N.I.T.C. must be read in the light of our earlier decision in Continental Air Lines v. Dep't of Transportation, 843 F.2d 1444 (D.C.Cir.1988). There we made it clear that although a constitutional attack upon a statute need not be raised before the agency--citing Weinberger v. Salfi, 422 U.S. 749, 765, 95 S.Ct. 2457, 2466-67, 45 L.Ed.2d 522 (1975), as we did in the N.I.T.C. footnote--a constitutional attack upon an agency's interpretation of a statute is subject to the exhaustion requirement; the agency must be given a shot at wrestling with the statute in a way that, in the agency's view, would comport with the demands of the First Amendment. 843 F.2d at 1456. The Commission was not given that shot here, and so we decline to reach the merits of Adelphia's constitutional claim. 30 (b) Ripeness. The Commission argues that Adelphia's APA challenges to the small-number rule are not ripe for review because the agency has not yet applied the rule; therefore the Commission's policy has not been fleshed out sufficiently to allow the court to see its concrete effects and implications. American Trucking Ass'ns, Inc. v. ICC, 747 F.2d 787, 789 (D.C.Cir.1984). We believe, however, that the rule and its apparent purpose provide a sufficient basis for addressing Adelphia's claim that the rule is arbitrary and capricious. 31 The Commission also argues that Adelphia's challenge to the retroactive application of this rule is not ripe, and here the Commission is at least partially correct. Adelphia suggests that the new rule may subject operators to retroactive rate rollbacks and to refund liability for rates charged before the Commission changed the rule, but points to no evidence suggesting the FCC has applied or intends to apply the rule in the manner that Adelphia claims to fear. See Public Citizen v. NRC, 940 F.2d 679, 682-83 (D.C.Cir.1991). Although the Commission has elsewhere required Adelphia to justify a rate it has charged since September 1993, it did so only after concluding that the a la carte offering in question clearly constituted a regulatory evasion even under the old rule. Adelphia Cable Partners, L.P., South Dade County, Florida, DA 94-1277 pp 18-23; Adelphia Cable Partners, L.P., South Dade County, Florida, FCC 95-378 p 21 (Dec. 1, 1995) (affirming based upon initial Rate Order). In other words, the Commission is not applying its new rule in that case. 32 We do, however, find Adelphia's retroactivity challenge ripe to the extent that it is based not upon possible refund liability, but upon the defeated expectations of cable system operators who created premium programming packages in the belief that they could charge unregulated rates. We address that challenge in § II.B.2. (b) below. 33 2. Arbitrary and Capricious Rulemaking. Adelphia argues that the small-number rule, 47 C.F.R. § 76.986(c)(2), rests upon the FCC's [implicit] assumption that cable operators who unbundled more than a 'small' number of channels [between April 1993 and September 1994] should have known that their actions would be deemed an 'evasion' of the FCC's rules, and that the rule is arbitrary and capricious because the underlying assumption is irrational. Adelphia's argument is itself, however, based upon an implicit assumption, viz., that rate regulation of premium packages is a sanction imposed by the Commission upon operators who had acted in bad faith under the ancien regime of the Second Order on Reconsideration. 34 The purpose of the rate regulation instantiated in the Sixth Order on Reconsideration is clearly remedial rather than punitive. It turns not upon the cable operator's state of mind but upon the likelihood that the operator's actions seriously compromised the goals of the Act. The Commission defines evasion not in terms of the operator's intent, but in terms of its conduct, as any practice or action which avoids the rate regulation provisions of the Act or our rules contrary to the intent of the Act or its underlying policies. Rate Regulation, MM Dkt. No. 92-266 p 451 (Rate Order, May 1993). With the understanding that the Commission's interest lies in achieving its regulatory objectives rather than in punishing bad faith, the basis for the small number rule is apparent. 35 Having encountered practical difficulties in administering its original regulation, the [319 U.S.App.D.C. 194] Commission dropped the exemption of premium packages and classified them as cable programming service tiers. Sixth Order on Reconsideration at pp 42-53; 47 C.F.R. § 76.986(a). In other words, unless a cable system can demonstrate that it faces effective competition, the FCC will ensure that the operator does not charge an unreasonable rate for any regulated tier. 47 U.S.C. § 543(c); 47 C.F.R. § 76.906. In the case of a new product tier, however, the FCC decided to treat as reasonable whatever rate the operator charges. 47 C.F.R. § 76.987. 36 The Commission's willingness in effect to presume that the rate is reasonable in any case in which the operator had reasonable grounds to believe the collective offering involving only a small number of migrated channels complied with the Commission's requirements as of the date it was first offered, 47 C.F.R. § 76.986(c)(2), manifestly reflects the agency's desire to balance equity and regulatory purpose. See Sixth Order on Reconsideration at p 51. Whether a cable operator had reasonable grounds to believe that an a la carte package met the Commission's former criteria for unregulated treatment bears not only upon its subjective good faith but also upon the likelihood that it's offerings significantly compromised the purpose of the regulatory regime. Although the former rule proved generally unworkable, it is not unreasonable for the agency to suppose that the most egregious transgressors were also the most obvious. In other words, the Commission could reasonably suppose that cases in which the package was not clearly ineligible for the exemption, id., and in which few channels had been moved from regulated tiers to unregulated a la carte offerings, are likely to be the cases in which the Commission's regulatory goals were least infringed. [Seeing] little reason to require an operator to reverse migrate in these cases, id., the Commission has indulged its equitable instincts. We see nothing arbitrary or capricious in that. 37 3. Retroactive Application. Adelphia argues that application of the small-number rule to premium packages created between April 1993 and September 1994 impairs substantive rights of cable system operators who created such packages in reliance upon the regulatory regime established by the Commission's initial Rate Order and elaborated upon in its Second Order on Reconsideration. The express premise of this argument is that nothing the Commission did or said prior to its Sixth Order on Reconsideration gave the operators any indication that future regulatory exemption would depend upon the number of channels that an operator had shifted from regulated to unregulated status. At that level of specificity, however, the premise is trivial. 38 Starting with the initial Rate Order the Commission clearly expressed its concern that exempting premium packages from regulation would create opportunities for regulatory avoidance inconsistent with the goals of the Cable Act. Rate Order p 328 n.808. For this reason the Commission warned that a premium package would not be exempt from regulation unless the operator's a la carte offering was a realistic service choice, and the Commission retained discretion to determine whether any particular offering met this standard. Id. Further, acknowledging the difficulty of anticipating evasive stratagems, the Commission reminded operators that it has a statutory mandate periodically [to] review and revise [its] regulations on evasion. Rate Order at p 451. 39 From the outset, therefore, cable system operators had notice that the Commission might change the rules in order to address evasive conduct. By the time of the Sixth Order on Reconsideration, because experience had taught the Commission that the problem of evasion was too great to be handled under the regime of the Second Order on Reconsideration, the Commission changed the rules. If the cable operators had disregarded the possibility of a rule change, then they misread the Commission from the outset; that does not give them an equitable claim against application of the new rule. New England Tel. & Tel. Co. v. FCC, 826 F.2d 1101, 1110 (D.C.Cir.1987).