Opinion ID: 472549
Heading Depth: 2
Heading Rank: 2

Heading: The Franchise Fee Regulation

Text: 38 Although we leave the Cable Act issues for later resolution in ACLU v. FCC, the lawfulness of the Commission's decision not to resolve the status of taxes imposed on the cable companies before the enactment of the Cable Act is appropriately before us at this time. The petitioners in this case filed valid petitions requesting relief under a lawful FCC regulation, and pursuant to a procedure established by the Commission. For over ten years, the FCC had routinely and consistently resolved franchise-fee disputes. Indeed, apart from the instant case, we cannot find a single instance in which the Commission refused to resolve a franchise-fee dispute. 39 The only possible explanation for the agency's refusal to resolve the petitioners' franchise-fee disputes is that the Commission retroactively changed its longstanding policy of resolving disputes under its franchise-fee regulation; no other credible explanation has been offered. The problem with this is that, as even agency counsel concedes, there is absolutely no basis in the administrative record for the FCC's retroactive change in its enforcement policy. Therefore, we are constrained to hold, under the principles announced in Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm Mutual Automobile Insurance Co., 29 that the Commission's action was arbitrary and capricious. 40 In State Farm, a unanimous Supreme Court ruled that an agency decision to rescind or modify a regulation is subject to review under the arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law standard. 30 As part and parcel of this standard, an agency changing its course by rescinding a rule is obligated to supply a reasoned analysis for the change. 31 As the State Farm Court explained: 41 Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise. 32 42 Because the FCC announced its change in enforcement practice in the order promulgating new rules to enforce the Cable Act, the principles of State Farm apply to the Commission's decision to leave franchise-fee issues to the courts. We need not decide whether the Commission's prospective change in its enforcement of the franchise-fee regulations would satisfy the requirements of State Farm. That issue is simply not before us; for the purposes of the instant case, we will assume without deciding that such a change in policy would be lawful. Rather, the question in this case is whether the Commission adequately explained its decision to change its enforcement policy retroactively. 43 Without doubt, the decision whether to make a new policy prospective or retroactive is an important aspect of the problem 33 that must be considered by an agency changing a longstanding policy. Indeed, courts have long hesitated to permit retroactive rulemaking and have noted its troubling nature. When parties rely on an admittedly lawful regulation and plan their activities accordingly, retroactive modification or rescission of the regulation can cause great mischief. Of course, an agency must balance this mischief against the salutary effects, if any, of retroactivity. Reviewing courts, in turn, must critically examine retroactive rulemaking to ensure that the agency has appropriately balanced the competing considerations. 34 In the context of administrative adjudication, this circuit has developed factors to guide our determination of whether an agency may give retroactive effect to a new policy developed in adjudication. 35 44 Obviously, in many instances, a retroactive change in policy is perfectly appropriate; however, the law requires that an agency explain why it has decided to take this rather extraordinary step. The agency must explain how it determined that the balancing of the harms and benefits favors giving a change in policy retroactive application. Only if an agency explains its rationale for retroactively changing its prior practice can a reviewing court determine whether that decision is a product of rational analysis. The Commission's failure to explain why it retroactively applied its new policy of leaving franchise-fee issues to the courts differs not at all from a failure to consider obvious alternatives to an agency's course of action. The FCC failed to consider an obvious and less drastic alternative to a retroactive change in enforcement policy--the prospective application of this new policy--and its failure to consider such an important alternative was arbitrary and capricious under the settled law of this circuit. 36 Put simply, the FCC arguably may change an enforcement policy retroactively, but its decision to do so must be justified and is subject to judicial review. 45 Although counsel for the Commission conceded at oral argument that there is absolutely no basis in the record for the agency's decision to change its enforcement policy retroactively, the FCC contends that we should affirm the Commission's exercise of its sound discretion 37 not to issue a declaratory ruling. We disagree. In the instant case, the Commission flatly refused to process all pending cases under an existing rule pursuant to longstanding procedures developed to resolve franchise-fee disputes. No intelligible explanation was offered for its decision. This unexplained retroactive shift in agency policy surely is not insulated from review on a claim of an exercise of sound discretion. In short, the Commission cannot avoid its obligation to justify retroactive rulemaking by relying on counsel's post hoc attempt to recast the nature of the agency's action. 46 Furthermore, although the Commission has broad power to refuse to grant declaratory relief, its decision to do so is subject to judicial review. 38 Therefore, even if the Commission had exercised its discretion to deny declaratory relief, the complete absence of an explanation for that denial would preclude affirmance. 47 Similarly, we reject the contentions of the intervening franchising authorities. They argue that the Cable Act applies retroactively, and, therefore, that the Act mandates the retroactive rescission of the agency's regulation. Under this view, the substantive provisions of the franchise-fee regulation, and not merely the remedy provided by the FCC, would be retroactively ineffective. This argument has absolutely no merit. First, nothing in the Cable Act even remotely implies that the rescission of the regulation must be retroactive. Instead, the Cable Act merely mandates that [a]ny Federal agency may not regulate the amount of the franchise fee paid by a cable operator, 39 and explicitly provides a prospective effective date for the Cable Act provisions: 48 Except where otherwise expressly provided, the provisions of this Act and the amendments made thereby shall take effect 60 days after the date of enactment of this Act. 40 49 Second, the legislative history of the Cable Act makes clear that Congress intended to make only one narrow exception to the prospective effect of the Cable Act's franchise-fee provisions. Under the old FCC regulation, franchising authorities required Commission permission to increase a franchise fee from three percent to five percent. The Cable Act, however, permits a five percent fee without FCC approval. The Conference Report for the Cable Act makes it clear that any payments of franchise fees already made by a cable system up to five percent would be lawful without FCC permission if the franchise agreement established such a fee: 50 Any franchise in effect on the effect [sic] date of [the Cable Act] that provides for a franchise fee in an amount up to or in excess of the five percent limitation in section 622(b) (with or without the need for action by any Federal agency) shall be deemed to have lawfully required such fee, up to but not in excess of five percent, as of such effective date, except that where a franchise explicity [sic] establishes a later date or any condition for the imposition of such fee, such later date or condition shall apply. 41 51 The Report states, however, that cable companies need not make retroactive payments. 52 Nothing in section 622 shall authorize any payment toward any such fee (of the type described in the paragraph above) for any period prior to the effective date of this title unless such payment has been made prior to such date to a franchising authority. 42 53 Thus, Congress intended only a narrow exception to the prospective effect of the Cable Act's franchise-fee provision. All other aspects of that provision must have prospective effect, as specifically required by the Act. 54 Finally, because the Cable Act unambiguously declares a prospective effective date, the case law on retroactivity discussed at length by the parties is simply not relevant. However, even if the Cable Act is somehow viewed as ambiguous on the question of retroactivity, the prevailing case law creates a presumption of prospective effect. In its most recent treatment of retroactivity, in Bennett v. New Jersey, 43 the Supreme Court carefully noted that statutes affecting substantive rights are presumed to have prospective effect. There the Court refused to apply retroactively amendments to Title I of the Elementary and Secondary Education Act. In reaching this result in Bennett, the Court carefully limited the applicability of Bradley v. Richmond School Board, 44 which contains broad language about a presumption of retroactivity. The Court explained: 55 [T]he presumption announced in Bradley does not apply here. Bradley held that a statutory provision for attorneys fees applied retroactively to a fee request that was pending when that statute was enacted. This holding rested on the general principle that a court must apply the law in effect at the time of the decision ... which Bradley concluded holds true even if the intervening law does not expressly state that it applies to pending cases.... Bradley, however, expressly acknowledged limits to this principle. The Court has refused to apply an intervening change to a pending action where it has concluded that to do so would infringe upon or deprive a person of a right that had matured or become unconditional. ... This limitation comports with another venerable rule of statutory interpretation, i.e., that statutes affecting substantive rights and liabilities are presumed to have prospective effect. 45 56 Similarly, this circuit views statutes that change substantive rights as differing from those--as in Bradley--that merely change substantive remedies. 46 Without doubt, the Cable Act affects the substantive rights of cable companies to be free of certain local taxes. We conclude, therefore, that a presumption of prospective effect applies to the Cable Act franchise-fee provisions. 57 In sum, by the FCC counsel's own admission, we are left without explanation for the Commission's refusal to resolve the petitioners' franchise-fee disputes. We therefore hold that the FCC decision to change retroactively its longstanding policy of resolving disputes over the franchise-fee regulation was arbitrary and capricious.