Battle Over FCC Rule May Thwart Sinclair-Tribune Deal

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By Kyle Daly

A federal appeals court battle over a Federal Communications Commission policy on television station ownership may imperil Sinclair Broadcast Group Inc.'s $3.9 billion bid for Tribune Media Co. and dampen other industry dealmaking.

Public policy group Free Press is asking the U.S. Court of Appeals for the District of Columbia Circuit to reverse the FCC’s April 20 decision to restore what’s known as the UHF discount ( Free Press, et al v. FCC, et al , D.C. Cir., 17-01129, petition to intervene filed 5/30/17 ). The discount lets broadcasters own more television stations than they otherwise could under a nationwide cap on broadcast ownership. The Democrat-controlled FCC scrapped the discount last year, arguing that it was obsolete in the digital television era.

Ultra-high frequency (UHF) stations count only half as much toward a national cap on broadcast footprints as very high frequency (VHF) stations under the discount. Broadcasters can’t own an aggregate of stations that collectively reach more than 39 percent of all TV households. Without the discount, Sinclair is just under the cap, with stations reaching 38 percent of U.S. TV-viewing households; Tribune is over it, at 43 percent. Free Press and its allies filed a May 26 motion asking for an emergency stay of the discount, which is scheduled to be restored June 5.

“This is the rare case where a stay might be granted,” Bloomberg Intelligence analyst Matthew Schettenhelm said. Besides the argument that the discount is technologically outdated, the proposed Sinclair-Tribune combination may be a factor in a court decision to stay the discount, Schettenhelm said. If the FCC were to approve the merger, and then the court later vacated the UHF discount, it would leave the combined entity with stations reaching 72 percent of U.S. TV households and no clear way to get back under the cap without significant divestitures.

“Then you’d have a big mess on your hands,” Schettenhelm said. “I think that plays into the court’s analysis of whether a stay is appropriate.”

Other top broadcasters face a similar situation. ION Media Networks Inc. and Univision Communications Inc. are both, like Tribune, above the cap without the discount. Nexstar Media Group Inc., CBS Corp., Twenty-First Century Fox Inc., and Comcast Corp. are all just under it. They would all fall well under the cap if the discount is restored. If the court stays the discount, those companies won’t be able to grow much bigger through acquisitions. Without a stay, broadcasters will have a window of opportunity to propose and potentially get clearance for mergers that wouldn’t be permitted without the discount.

In recent days, broadcast industry players including Sinclair and Tribune, the National Association of Broadcasters, Fox, Univision, and ION have all asked the court to let them side with the FCC in the case. The broadcasters contend that bringing back the discount would affect broadcasters’ interests and ability to grow. The FCC has until June 1 to file a response to the emergency motion.

Free Press and its allies say the discount is obsolete. It dates back to the analog era of broadcast television, when UHF signals were harder to successfully transmit than VHF signals. The digital TV transition of 2009 eliminated that disadvantage. The court should stay the reinstatement, the groups said, because there’s no evidence the discount serves the public interest, and because the consolidation it would allow could drive local, diverse voices out of the broadcast industry.

The three judges comprising the D.C. Circuit panel will be Thomas Griffith, Nina Pillard and Sri Srinivasan, according to a May 27 order. The latter two are Barack Obama appointees who have sided with greater FCC oversight in other cases. Griffith, Schettenhelm said, is a “fairly moderate” George W. Bush appointee. The panel make-up should leave Free Press and the other groups “pretty comfortable” with their chances of getting a stay, Schettenhelm said.

Still, several broadcast attorneys told Bloomberg BNA on background that they don’t believe the petitioners will succeed. Bringing back the discount restored a rule that was in place for decades and was a factor in other rules, such as the 39 percent cap itself, the attorneys said. The court could be convinced that returning to the pre-2016 status quo would be neither arbitrary and capricious, nor damaging to the public interest. Even if the court is later inclined to vacate the FCC order restoring the discount, it may prove challenging for Free Press to convince the judges that they need to block the discount from being restored even temporarily.

To be sure, such judicial stays are rare, and the FCC has a track record of winning such challenges. But if the court blocks the UHF discount, it would dampen consolidation in an industry widely seen as hungry to start making deals.

To contact the reporter on this story: Kyle Daly in Washington at kdaly@bna.com

To contact the editor responsible for this story: Keith Perine at kperine@bna.com

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