... Or Winning?

Jeffrey KraussIn March, by a 2-to-1 vote, the D.C. Circuit Court of Appeals upheld the Federal Communications Commission’s 2007 decision to extend for five years a statutory prohibition against exclusive contracts between cable operators and cable-affiliated programming networks. This is the policy that requires Cablevision to sell its satellite-delivered programming services, such as AMC and Sundance, to its competitors like DirecTV and Verizon. (More on the satellite delivery aspect later.) It may seem like a loss for the cable industry, but in fact it contains some winning words, too.

The requirement was part of the 1992 Cable Act. It imposed a prohibition that was to sunset after 10 years, but it gave the FCC authority to extend it for five years if “necessary.” The FCC decided on five-year extensions in 2002 and 2007, and the 2007 extension was appealed by Cablevision on several grounds, including that it was no longer “necessary” and that it violated the First Amendment.

The law gives the FCC the authority to extend the exclusivity ban if it “continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.” By 2007, the video distribution marketplace had changed drastically since the law was enacted in 1992. Nonetheless, the FCC decided that even in 2007, withholding programming from rivals can significantly impact subscribership, which can, in turn, harm competition and diversity in the distribution of video programming.

The dissenting opinion of Judge Kavanaugh provides a detailed description of just how much the market has changed: “Today, almost every home consumer has the choice of at least three video programming distributors – DirecTV, Dish and the local cable operator (usually Comcast, Time Warner, Cox, Charter or Cablevision). Many consumers can choose a fourth, or sometimes also a fifth, video programming distributor, Verizon FiOS or AT&T U-verse.” It goes on to mention the Internet, YouTube and Hulu.

The majority opinion refuses to deal with the First Amendment argument on the grounds that Cablevision did not list it as one of the “issues” in their statement of issues. But the dissenting opinion spends much effort to show that Cablevision did indeed focus on the First Amendment, and that even the FCC agreed that First Amendment issues were relevant in this case.

According to Judge Kavanaugh, the Supreme Court has held that a video programming distributor (such as Cablevision, DirecTV, Dish or Verizon) is constitutionally entitled to exercise “editorial discretion over which stations or programs to include in its repertoire.” Video programming distributors are similar to publishing houses, bookstores, playhouses, movie theaters or newsstands in the sense that they exercise editorial control in picking the content they will provide to consumers.

Programming networks, such as ESPN, TNT and CNN, also have a First Amendment right to speak – that is, to develop or purchase original programming and have it distributed as they see fit. Programming networks resemble magazines and newspapers. They create and aggregate content to entertain and inform a wide audience. And they choose when and where to sell that content.

The judge said that the exclusivity ban dampens incentives to invest in new or existing programming networks. The resulting reduction in speech (compared with what otherwise would occur) raises First Amendment issues.

In 1996, the D.C. Circuit Court upheld the exclusivity ban in the 1992 law because, at that time, cable systems were found to have bottleneck monopoly power in the video programming market. But that was then, and that bottleneck monopoly power no longer exists.

The test here is whether a regulation “advances important governmental interests unrelated to the suppression of free speech and does not burden substantially more speech than necessary to further those interests.” Judge Kavanaugh said that the FCC rule fails the test because it no longer serves an important government interest and burdens more speech than essential to achieve its aims. Moreover, it discriminates against cable operators because it does not cover Dish or DirecTV, and this discrimination also violates the First Amendment.

Finally – and here’s the best news – the majority opinion noted that Congress did intend for the exclusive contract prohibition to eventually sunset. And since the video distribution market has changed drastically since 1992, “we expect that if the market continues to evolve at such a rapid pace, the Commission will soon be able to conclude that the exclusivity prohibition is no longer necessary to preserve and protect competition and diversity in the distribution of video programming.”

The 1992 law covers only satellitedelivered programming, creating a “terrestrial loophole” that excludes a number of regional sports networks. The FCC has recently proposed to extend the exclusivity prohibition to also cover non-satellitedelivered programming, using an argument that seems to have little foundation in the plain words of the law. This decision makes it hard to see how the FCC could get court approval for that proposal.

Anyway, the five-year extension from 2007 comes up for review in 2012, and that’s only two years away. It seems to me the handwriting is on the wall for the program exclusivity ban.