The FCC has lost another big case at the Court of Appeals, with this one likely to have a big impact on cable TV programmers and the ability of cable operators to decide which programmers to carry, and on which tier. The specific case involves Comcast and the Tennis Channel.

To oversimplify a bit, the law—and the FCC rules—prohibit a cable operator from discriminating between affiliated and unaffiliated programmers. That’s the Tennis Channel claim, that Comcast delivers Golf Channel and Versus (now called NBC Sports Channel), two Comcast-owned programmers, on a basic tier, but unaffiliated Tennis Channel is relegated to a sports tier. Tennis Channel complained to the FCC in 2010, and first the FCC Mass Media Bureau, then an FCC Administrative Law Judge, and finally three of the five FCC Commissioners upheld the complaint.

But in late May, the United States Court of Appeals for the D.C. Circuit rejected those decisions. The judges concurred on the main point, but two of the three judges provided separate opinions that gave additional reasons why the FCC was wrong.

The primary court opinion went something like this. Tennis Channel is carried on the Comcast Sports tier, and Comcast pays a fee per subscriber. If Tennis Channel were carried on the Basic tier, Comcast might pay a smaller fee per subscriber, but there would be many more subscribers, so the total Comcast fee would be higher. (The court did not reveal how much higher, that was confidential.) So, according to the court’s logic, it would be a rational business decision for Comcast to move Tennis Channel to the Basic tier if that would generate enough revenue to exceed the higher fee. For example, that move might generate new subscribers, if it made the cable service more attractive to enough non-subscribers.

The problem, both for the Tennis Channel and the FCC, is that there is no evidence that Comcast would gain new subscribers, or benefit in any way, by moving Tennis Channel to the Basic tier. The Comcast decision was simply a business decision, not related to the fact that Versus and Golf Channel are Comcast-owned. And, according to the court, discrimination based on valid business reasons is not illegal.

In fact the FCC itself said that in 2010. That case involved the Mid-Atlantic Sports Network (MASN) and Time Warner Cable (TWC). MASN carries Baltimore Orioles and Washington Nationals baseball games. MASN complained that TWC would not agree to put MASN on an analog tier in North Carolina, and put them on a digital tier instead. TWC’s News 14 channel telecasted games of the Charlotte Bobcats basketball team, and Turner South, another TWC affiliate, held the distribution rights for the Atlanta Thrashers hockey team, the Atlanta Hawks basketball team, and the Atlanta Braves baseball team. TWC said that it would cost money to reconfigure plant to move MASN, and that there was little demand in North Carolina to watch Orioles and Nationals games. The FCC found that there was no discrimination between affiliate and unaffiliated programmers and rejected the MASN complaint. That decision was upheld by the Fourth Circuit Court of Appeals in 2012. That court quoted the following FCC language:
This case was evaluated individually, and it was determined that "legitimate business practices common to a competitive marketplace," underpinned Time Warner's decision to deny statewide analog tier carriage. The FCC concluded that the "high cost of carriage" of Mid-Atlantic Sports Network was a "legitimate and non-discriminatory" reason for its refusal to carry Mid-Atlantic Sports Network on a statewide analog tier.

One of the other D.C. Circuit judges rejected the FCC decision in the Tennis Channel case for another reason. The complaint was filed in 2010 but Comcast and Tennis Channel entered into a carriage contract in 2005. The FCC Rules have a statute of limitations of one year. Tennis Channel asked for Basic tier placement in 2009, and argued that it could file a complaint within one year from that request. The FCC agreed, but Comcast argued, and the judge agreed, that the language in the FCC Rules required the complaint to be filed within one year of the contract signing.

The other judge looked closely at the language of the law (Section 616 of the Communications Act) and accused the FCC of misreading it. The law prohibits discrimination that “unreasonably restrains” the ability of an unaffiliated programmer to compete fairly. The judge said that the language comes from antitrust law, and is only applicable to a cable operator with “market power.” That might have been true of cable systems in 1996 when the law was written, he said, but not anymore. He quoted another court opinion saying that the video distribution market is now “highly competitive.” Consequently, he wrote, the FCC violated Comcast’s First Amendment rights.

The bottom line here is that cable operators now have near-total freedom to discriminate against non-affiliated programmers, because it will almost always be a good business decision. Adding a new startup programmer to the lineup won’t entice any new subscribers. Moving a sports network from a sports tier to a basic tier is unlikely to generate significant new revenues. But both would likely increase carriage costs. That’s just the way it is.