Administrative Law

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.

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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.

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  1. But isn’t the new corporation a separate person — and hence aren’t all the licenses that the now dead old persons hold being transferred to the new person a “transfer” of licenses?

    I agree with the outcome of the ruling, but licenses *are* being transferred….

    1. No one is saying that they are not being transferred. The question is whether the FCC can jump from their narrow transactional right to regulate license transfers to a sweeping mandate to regulate everything about the companies that want to merge.

      1. IANAL, but that’s typical for government, and I don’t really understand how the court rejected it this time, but not previously. It reminds me of the feds handing out highway money with conditions attached it could not otherwise dictate — national speed limit, drinking age. I realize that’s no exactly the same, but it is similar; whether they are handing out merger permission or cold hard cash seems insignificant to the principal involved of getting around what the Constitution or law allows.

        1. Memory is that the drinking age was a Congress-passed statute.

          1. It was a condition on receiving funds.

            1. It was a condition on receiving funds because Congress can’t set the drinking age, except on federal property.

  2. The consumers might not have had a strong standing argument but I would have thought the companies would have if they had chosen to fight rather than capitulate.

    1. FIghting means wading through years of litigaiton before being able to go through with the merger. It’s not a viable option in most cases.

  3. The questions on the two conditions are somewhat interesting and potentially affect Internet access for millions of people, while the discounted internet service is of relatively little consequence. The scope of the other condition is a little unclear from the article as to whether it relates to Internet content providers or cable providers or both. If ISPs were free to charge content providers (Google?) they could effectively control what their subscribers are allowed to access this is I think different from cable channel providers who offer a slate of programming. Time Warner could for example charge Netflix and introduce a competing service.

    1. The costs of the discounted internet, school internet, library internet, etc., is starting to amount to real money.

      And your second issue are aspects of the Net Neutrality issue.

      1. The discounted access for certain customers is I think relatively small and if the article is accurate applied only to poor people. There could be an alternative for them similar to the Lifeline program for telephones, say discounted basic Internet access to households whose children qualify for the Free School Lunch Program. School Systems, Libraries other similar organizations often have alternates to the local Internet Duopoly either because they are large enough or because that are part of a larger government.

        For me I think Internet Access should be treated as a Common Carrier, after all bits is bits and where they come and go is largely irrelevant.

        1. Memory is that about a third of my phone/internet goes to this stuff, including the infamous “ObamaPhones.” That;s not small.

          1. You either have a very small bill, or a very bad memory, or else you’re just making shit up again.

            I just looked at my Xfinity bill. They charge me $1.81/month for the Federal Universal Service Fund. By contrast I pay a mandatory $8.75 for regional sports. The only sport I watch much is baseball and this year the Red Sox ought to be paying their viewers rather than the other way around.

            1. You either have a very small bill, or a very bad memory, or else you’re just making shit up again.

              Do we have to pick just one?

          2. “Memory is that about a third of my phone/internet goes to this stuff, including the infamous “ObamaPhones.””

            If this is true, your memory is not very accurate, or you and/or your ISP is bad at calculating percentages.

  4. So if the FCC, under new management that actually takes regulation of service providers to be part of their job, rejects the license transfers involved in this merger, what happens?

  5. I don’t know if there’s any lesson in this, but as someone whose cable and internet providers have been the subject of such high profile litigation (i.e., BrandX, and now this), all I can say is my service sure sucks.

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