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Third Circuit Strikes Down FCC's Newspaper Broadcast Cross-Ownership Rules, Finding Rules Were Improperly Adopted

Thursday, August 4, 2011
Ashok Chandra | Bloomberg Law Over the past decade, the Federal Communications Commission has taken steps to ease restrictions placed on entities that seek to own multiple media businesses in local geographic areas. Opponents of such consolidation argue that cross-ownership would drown out local voices in favor of national voices and would make the messages that the public receives from multiple media sources repetitive. With print media facing economic hardships in recent years, as well as the rise in competition fostered by digital media, the FCC has sought to relax some of the rules governing an entity's cross ownership of multiple forms of media. Following a controversial 2003 FCC order and another highly debated 2008 order, the U.S. Court of Appeals for the Third Circuit, in Prometheus Radio Project v. FCC,1 struck down the FCC's proposed media ownership rules on procedural grounds, finding that irregularities in the FCC's implementation of the rules were improper. Additionally, the court ordered that the FCC reconsider the "eligible entity" definition in its 2008 Diversity Order. The court determined that the FCC failed to provide adequate data to bolster its determination that the Diversity Order would in fact increase media ownership among minorities and women. Media Cross-Ownership Rules Beginning in 1975, the FCC implemented rules banning common ownership of full-service broadcast stations and daily public newspapers.2 Later, the FCC also instituted rules regulating common ownership of television and radio stations. As mandated by the Telecommunications Act of 1996, the FCC must periodically review its rules governing ownership of media including newspapers, radio stations, and television stations to determine if the rules are still necessary and in the public interest. If the FCC deems that they are no longer in the public interest, the FCC may repeal or modify the rules. In 2002, under Chairman Michael Powell, the FCC began a review of its existing media ownership rules. In a 2003 Order, the FCC determined that "the existing rules were no longer in the public interest," and it modified the rules to relax media ownership regulations.3 The existing rules were replaced with a different set of cross-ownership limits determined by a "diversity index." Several parties filed appeals, and in 2004, the Third Circuit found that the common ownership ban was no longer necessary to protect diversity, but it was still necessary to regulate cross-ownership.4 The Third Circuit issued a stay on the 2003 Order and remanded the cross-ownership rules back to the FCC. As a result, in 2006, the FCC took the Prometheus I recommendations into consideration. The FCC then issued its 2008 Order, which did away with the diversity index and adopted a Diversity Order to enhance opportunities for minorities and women. Many of the ownership rules reverted to their pre-2003 status, but the FCC opted to permit limited cross-ownership between newspapers and broadcast television on a case-by-case basis. In the top 20 Designated Market Areas ("DMAs"), an entity could own either (a) a newspaper and a television station if (1) the television station is not ranked among the top four stations in the DMA, and (2) at least eight independent "major media voices" remain in the DMA; or (b) a newspaper and a radio station.5 In other markets, the FCC barred entities from owning newspaper and broadcast combinations, unless "the proposed combination initiates at least seven hours a week of additional local news programming" or "the newspaper and broadcast outlet qualifies as failed or failing."6 In considering whether or not to approve a proposed combination, the FCC would consider four factors:
(1) the extent to which cross-ownership will serve to increase the amount of local news disseminated through the affected media outlets in the combination; (2) whether each affected media outlet will exercise its own independent news judgment; (3) the level of concentration in the Nielsen DMA, and (4) the financial condition of the newspaper or broadcast station, and if the newspaper or broadcast station is in financial distress, the owner's commitment to invest significantly in newsroom operations. 7
In March 2008, several advocacy groups filed a petition for reconsideration of the Commission's 2008 Order and subsequently filed for a review of the 2008 Order. The Third Circuit declined the FCC's request to hold the litigation in abeyance until the FCC responded to the petition for reconsideration, and lifted the stay allowing litigation to proceed. Irregular Procedure Adopting NBCO The plaintiffs challenged the FCC's proposal to repeal its ban on newspaper/broadcast cross-ownership ("NBCO") ban in favor of a case by case approach. The plaintiffs argued that the FCC failed to provide notice as required by the Administrative Procedure Act ("APA"),8 elements of the rule were not supported by evidence, and the rules were too vague to be enforceable. Petitioners supporting deregulation argued that the FCC did not sufficiently relax the rules and they challenged the validity of the rule pursuant to the First and Fifth Amendments. In the wake of Prometheus I, the Third Circuit advised that any new measurement used for determining "diversity and competition in a market be made subject to public notice and comment before it is incorporated into a final rule."9 In its 2006 Further Notice of Proposed Rulemaking ("FNRP"),10 the FCC included a paragraph related to revisions of the NBCO in response to the issues brought up in Prometheus I. In the FNRP, the FCC determined that the diversity index was an inaccurate method of determining diversity. The FCC further invited comment "on how we should approach cross-ownership limits. Should limits vary depending upon characteristics of local markets? If so, what characteristics should be considered, and how should they be factored into any limits."11 Additionally the FCC sought comment on whether the rules governing newspaper/broadcast ownership should be similar to the rules governing newspaper/television ownership and whether these cross-ownership rules were necessary in light of competition. Two commissioners dissented in part, finding the FNPR vague. Commissioner Adelstein stated that the FNPR "failed to give notice regarding any new metric for measuring diversity and the Commission had not committed to allowing public comment before such a measuring device would be incorporated into 'rules that are likely to change the media landscape for generations to come.'"12 Commissioner Copps also agreed that the FNPR failed to comply with the holding in Prometheus I, finding that the process of adopting the new metrics could not be satisfied by asking broad questions. He further stated that the American people were precluded from commenting on the new standards.13 The Third Circuit observed that the timeline of events following the release of the FNPR was irregular. Following publication on July 24, 2006, the FCC allowed an initial 90-day comment period and a subsequent 60-day period for reply comments. On November 22, 2006, the FCC noted that it had commissioned 10 economic studies, including large data sets, which were released on July 31, 2007. The FCC gave the public 60 days to comment and an additional 15 days to submit reply comments. Commissioners Copps and Adelstein released a joint statement criticizing the FCC and indicating that relative to the amount of data, the time to reply was short considering the amount of review necessary.14 On November 13, 2007, then FCC Chairman Kevin Martin published an Op-Ed in the New York Times detailing his proposal for new NBCO rules. He concurrently put out a press release giving the public a 28-day window to comment on his proposal. In response to the Op-Ed, the Senate Committee on Commerce, Science, and Transportation approved a bill that required the FCC to delay its vote on the Chairman's proposal until the FCC provided an adequate notice and comment period.15 On December, 17, 2007, a group of 25 senators asked the FCC to delay its vote on the new NBCO rule until it provided an adequate period for comment. However, on December 18, 2011, the FCC voted 3-2 to adopt the 2008 Order and the Diversity Order. FCC Failed to Meet Notice and Comment Standard The Third Circuit observed that pursuant to the APA, an agency must provide notice for proposed rulemaking containing "either the terms or substance of the proposed rule or description of the subject and issues involved."16 After providing notice, "the agency shall give interested persons an opportunity to participate in the rulemaking through submission of written data, views or arguments with or without opportunity for oral presentation."17 The Third Circuit has noted that "the adequacy of the notice must be tested by determining whether it would fairly apprise interested persons of the 'subjects and issues' before the agency."18 While the parties agreed that Chairman Martin's Op-Ed failed to satisfy APA notice requirements, the FCC stated that that the Op-Ed was immaterial and its earlier notice was adequate to satisfy the APA. The court noted that the FNPR indicated that the FCC "was planning a significant revision to the NBCO rule and [was] looking for an alternative to the Diversity Index for measuring diversity."19 The court also observed that the FCC presented only two general questions in the FNPR, asking if limits should vary "depending on the characteristics of local markets," and, "if so, what characteristics should be considered."20 The court noted that although the new rule voted on by the FCC depended on the "characteristics of markets," "it was not clear which characteristics the Commission was considering or why."21 The court found the questions asked in the FNPR too open ended to allow for meaningful public comment. The court pointed out that many elements of the rule were not based on the "characteristics of the market," but also on factors such as "amount of 'local news' produced by an individual station involved in a potential merger and how the term is defined," what is meant by "major media voices," what is defined as a major newspaper, measurement of "market concentration," how to determine when a station is "failing," whether a station exercises "independent news judgment," and "whether a case-by-case approach or a categorical approach to proposed mergers would better serve the public interest."22 The court further noted that until Chairman Martin put out his Op-Ed, the general public was unaware of what options he was proposing with regard to the NBCO rule. The Third Circuit compared the FNPR to the FCC's May 2010 Notice of Inquiry ("NOI") initiating its 2010 Quadrennial Review of the Ownership Rules.23 The court pointed out that in the 2010 NOI, the questions asked and comments solicited went into much greater detail with regard to how to approach the NBCO rule.24 Additionally, the court observed that the comments in response to the FNPR were limited because of the limited information contained in the FNPR with regard to NBCO. The Third Circuit thus concluded the FCC failed to fulfill "its obligation to make its views known to the public in a concrete and focused form so as to make criticism or formulation of alternatives possible."25 The court found that the two lines soliciting comments were "too general and open-ended to have fairly apprised the public of the Commission's new approach to cross-ownership."26 The court thus found the NBCO unenforceable and instructed the FCC to revisit its 2008 NBCO rule and to ensure that the APA is followed with regard to any further revisions. As a result of the decision, the pre-2003 rules are still in effect barring cross-ownership of newspaper and broadcast media in the same region. Because the Third Circuit deemed the NBCO rules unenforceable based solely on procedural grounds, it is uncertain whether or not the rules would be deemed acceptable if the proper procedures were in place to adopt the rules. However, it should be noted the NBCO rules were adopted under Chairman Martin, and the composition of the FCC was different under the previous administration. It is uncertain what position the current FCC Chairman, Julius Genachowski, will take with regard to loosening the NBCO rule. FCC Commissioner Michael Copps has come out fervently against any deregulation. 27 He stated "we have had 18 months to reconsider the awful vote that loosened our newspaper-broadcast cross ownership rules, but the best we can do, judging from today’s brief, is to kick the media ownership can farther down the road."28 On the other hand, Commissioner Robert McDowell has stated that "is time to eliminate the outdated newspaper/broadcast cross-ownership rule in our upcoming quadrennial review of our media ownership regulations. Evidence suggests that the old cross-ownership ban may have caused the unintended effect of reducing the number of media voices – especially newspapers – in scores of American communities."29Deregulatory Petitioners Oppose Reversion to Pre-2003 Rules In Prometheus I, the Third Circuit invalidated cross-media limits to radio/television ownership, finding that the FCC did not "provide a reasoned analysis to support the limits it chose."30 As a result, in its 2008 Order, the FCC did away with its 2003 rules and reverted to the 1999 rules, which state that a party may own up to two television stations and up to six radio stations or one television station and seven radio stations in markets where there are at least 20 independently owned media voices that would remain after a merger. A party may own two television stations and one radio station regardless of the number of media voices in the market. The deregulatory petitioners, including the National Association of Broadcasters ("NAB") and CBS, argued that the FCC's framework did not "provide an explanation for why the rule is necessary and sufficient to protect the diversity of ownership in the light of the existence of the local ownership rules that also protect diversity."31 The Third Circuit, however, found that the FCC provided a sufficient explanation for its decision, noting that the current framework did not adequately protect a diversity of viewpoints in some markets. Deregulatory petitioners argued that diversity of ownership does not necessarily promote diversity of viewpoints and would, in fact, have the opposite effect. The FCC didn't dispute this argument, but contended that commonly owned outlets that share the same viewpoint and cross-ownership of two forms of media may duplicate the content that is provided to local consumers in a region. The court found that diversity of ownership would enhance the likelihood that the public would receive a diversity of viewpoints. CBS argued that the rule was no longer applicable because the media market had become more diverse and there was greater competition. The FCC asserted that while new forms of media were being adopted, traditional media is still the primary source for most people with regard to local and national news. The court cited a media ownership study noting that "38.2 percent of all respondents consider broadcast television stations and 30.1 percent consider local newspapers 'the most important source of local news or current affairs' whereas only 6.7 percent of respondents say the same concerning the Internet."32 Lastly, CBS argued that the rule treats radio stations as if they were television stations although radio stations have less impact on diversity of voices in a region. The FCC asserted that it would be reasonable to think that "broadcasters should have the flexibility to purchase an additional radio station instead of a second television station, since the latter would form a combination that would be[,] if anything[,] less worrisome from the standpoint of diversity."33 The court agreed, noting that the FCC has "wide discretion" in making policy decisions such as this.34 In its 2008 Order, the FCC retained the dual network rule which permitted common ownership of multiple broadcast networks, but prohibited any mergers between the top four networks including Fox, ABC, CBS and NBC.35 CBS argued that the rule should be repealed because the FCC "failed to identify the characteristics that make the four named networks unique" or why the networks' supposed 'uniqueness' should result in a regulatory disadvantage."36 However, the Third Circuit found this argument unconvincing, noting that the top four networks cater to a larger nationwide audience, whereas emerging networks target a more niche viewership. Constitutionality of Media Ownership Rules The petitioners seeking deregulation also asserted that the media ownership rules are unconstitutional and that the court should overturn the "scarcity doctrine," which establishes that "[i]n light of [their] physical scarcity, Government allocation and regulation of broadcast frequencies are essential."37 The court rejected petitioners' request, reiterating that "[t]he abundance of non-broadcast media does not render the broadcast spectrum any less scarce."38 The court observed that the rules do not violate the First Amendment because the rules are rationally related to a substantial government interest in "promoting competition and protecting viewpoint diversity."39 The court noted that limiting common ownership was a reasonable means of promoting viewpoint diversity. The court also rejected the deregulatory petitioners' argument that the media ownership rules were impermissible attempts to manipulate content, finding that there was no basis for this argument. "Eligible Entity" Definition Does Not Increase Minority Ownership In Prometheus I, the Third Circuit remanded two of the FCC's decisions with regard to broadcast ownership for minorities and women. The court found arbitrary and capricious the FCC's repeal of the failed station solicitation rule ("FSSR"), which required sellers to "provide notice of the sale to potential out-of-market buyers before it could sell the failed, failing, or unbuilt television station to an in-market buyer."40 The court found that the FCC's repeal of the FSSR was inconsistent with the FCC's obligation to make the spectrum available to all people. The court also found that the FCC failed to consider proposals aimed at promoting minority ownership. The court remanded the decision for further consideration of those proposals. In its 2008 Order, the FCC reinstated the FSSR and adopted a Diversity Order comprised of 13 proposals submitted during the rulemaking process designed to expand the eligible entities defined by industry groupings based on revenue, as well as to include a "zero tolerance" policy for ownership fraud and to ban discrimination in broadcast transactions.41 The FCC rejected 10 proposals that purportedly offered race and gender-neutral means of increasing opportunities for minorities and females. Citizen petitioners argued that the Diversity Order does not analyze whether the proposal would be effective in promoting ownership among women and minorities and that the FCC did not provide any data to supports the defining characteristics of an "eligible entity."42 The court agreed, noting that the "eligible entity" definition referred only to "small businesses," and "new entrants" and did not specifically identify minorities and women.43 The court observed that the FCC failed to address how the Diversity Order would specifically increase opportunities for women and minorities. Additionally, the court noted that the FCC acknowledged that it had no data on television ownership by minorities and women and no data on commercial radio ownership by women. The court thus found that "the eligible entity definition adopted in the Diversity Order lack[ed] a sufficient analytical connection to the primary issue that Order intended to address."44 "As such, the eligible entity definition adopted [was] arbitrary and capricious," and the court remanded "those portions of the Diversity Order that rely on it."45 The court thus requested the FCC to provide a basis for the definitions before it completes its 2010 Quadrennial Review. Although the Third Circuit remanded the definition of "eligible entities" back to the FCC for further consideration, numerous sections of the Order were not challenged, including the ban on discrimination in broadcast transactions, the "zero tolerance" policy for ownership fraud, non-discrimination provisions in advertising sales contracts, research on ownership trends, local and regional bank participation in SBA guaranteed loan programs, "Access to Capital" Conference, and a Guidebook on Diversity. The court, however, did not explain what measures would suffice to help promote minority and female ownership. It can be ascertained from the Prometheus II decision that the metrics used cannot be solely based on the economics of the market. What further complicates the matter is that the Supreme Court, in Adarand Constructors v. Pena,46 found that governmental classifications based on race must be analyzed under strict scrutiny. The Third Circuit acknowledged and dismissed the argument, noting that the Supreme Court has, in the past, found that "the interest in enhancing broadcast diversity is, at the very least, an important governmental objective."47 It is unclear whether the Third Circuit is encouraging the FCC to scrap the eligible entities definition altogether and craft a new definition, or whether the FCC can manipulate the definition within the existing framework. Although the Third Circuit found that the definition of eligible entity did not encompass a large enough demographic, it is conceivable that both minorities and females have had the opportunity to apply for media ownership under that framework. With the lack of guidance provided by the Third Circuit, it is likely that whatever definition is adopted will be the center of contentious debate. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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