D.C. Circuit Rejects FCC-Imposed Conditions on Charter-Time Warner Merger

The FCC did not even seek to defend its authority to impose the conditions.

Last Friday, the U.S. Court of Appeals for the D.C. Circuit invalidated two conditions that the Federal Communications Commission (FCC) had imposed on the Charter Communications merger with Time Warner Cable and Bright House Networks in 2016. Interestingly enough, the FCC did not seek to defend the conditions on the merits, arguing that consumers lacked Article III standing to challenge conditions agreed upon by the merging companies. In Competitive Enterprise Institute v. FCC, the D.C. Circuit split on the standing question, ultimately concluding consumers could challenge two of the four contested conditions, and striking them down.

The case is significant because it portends judicial review of FCC merger review. The Communications Act does not expressly authorize FCC review of mergers. It does, however, give the FCC authority to regulate the transfer of broadcast licenses. The FCC has used this authority to regulate mergers by conditioning the necessary license transfers on conditions that the FCC might not have been able to impose directly. This approach gives the FCC tremendous leverage to hold up mergers by refusing to authorize the license transfers unless the merging companies agree to conditions that the FCC believes are in the public interest.

The FCC  has seen fit to use this power act as a telecommunications antitrust regulator and impose broad conditions on industry mergers. In this case, the FCC forced the merged company, New Charter, to agree to various conditions on its business practices, including a commitment to not charge content providers for access to broadband subscribers and a commitment to discount broadband service to "needy subscribers." New Carter agreed to these terms, as there was no way for the companies to merge without satisfying the FCC.

CEI and several New Charter subscribers challenged the FCC's authority to impose these conditions. The FCC's response was that New Charter's customers lacked standing to raise such concerns. It did not otherwise seek to defend its authority to impose merger-related conditions on the necessary license transfers.

The D.C. Circuit split on the Article III standing question. Judge Katasas, joined by Judge Henderson, agreed that at least some of the challenged conditions would increase prices for New Charter customers, and that this was sufficient to satisfy Article III's requirements. Judge Sentelle disagreed, on the grounds that the redressability of any such injury was too speculative. This is a close and difficult standing question, and it's particularly important as the FCC sought to use standing as a means of precluding judicial review of its efforts to leverage its authority over licenses to reach matters otherwise beyond the FCC's reach.

After concluding the plaintiffs had standing to challenge two of the FCC-imposed conditions, the majority made quick work of the underlying merits. From Judge Katsas's opinion for the court:

On the merits, the appellants raise several troubling objections. For one thing, the governing statutes focus on individual licenses, not entire mergers: Section 214(a) authorizes the FCC to consider whether the "construction" or "operation" of a specific communications line is in the public interest at the time of an acquisition, while section 310(d) authorizes it to consider whether a proposed transferee meets the specific criteria for holding a station license under section 308. Moreover, after broadening its focus to the entire merger, the FCC imposed conditions sweeping even beyond that. For example, the agency readily acknowledged that providing
discounted service to needy consumers "is not a transaction specific benefit," but it nonetheless required New Charter to do so as a condition of approving the merger. New Charter Order, 31 FCC Rcd. at 6529. The Supreme Court has described such
non-germane conditions as "an out-and-out plan of extortion." Nollan v. Cal. Coastal Comm'n, 483 U.S. 825, 837 (1987) (quotation marks omitted). Commissioner O'Rielly made the same point in dissent: "Once delinked from the transaction itself, such conditions reside somewhere in the space between absurdity and corruption." 31 FCC Rcd. at 6674. The conditions target the provision of broadband Internet service, which is not covered by Title II, much less by section 214(a), under the FCC's current interpretation of the Communications Act. And to insinuate itself into that cable market, the FCC imposed conditions on the transfer of all licenses held by the appellants, including wireless licenses with no conceivable relevance to it.

We need not resolve these questions, however, for there is a simpler ground of decision. The lawfulness of the interconnection and discounted-services conditions are
properly before us, yet the FCC declined to defend them on the merits. The agency's only explanation for doing so was its view that we cannot reach the merits. Having lost on that question, the FCC has no further line of defense. "Because the Commission chose not to argue the merits in the alternative, we have no choice but to vacate the challenged portions of the order." Time Warner, 144 F.3d at 82.

This case is significant for many reasons. Not only does it discipline an agency intent on asserting regulatory authority beyond that authorized by Congress. It also illustrates how agencies sometimes seek to use Article III standing's requirements to insulate their actions from judicial review, potentially allowing them to engage in unlawful activity without consequence.

Another prominent example of an agency hiding behind Article III in this way was the Environmental Protection Agency's "Timing and Tailoring" rules for greenhouse gas emissions, that were structured so as make it more difficult for regulated firms to demonstrate standing. This effort was initially successful, as the D.C. Circuit accepted the EPA's standing defense. The Supreme Court, on the other hand, found the EPA's standing argument wanting, and brushed it aside without much discussion at all in UARG v. EPA. While I did not think much of the EPA's standing arguments in that case, the standing arguments made by the FCC here (and embraced by Judge Sentelle) are more serious and substantial.