Third Circuit Sends Broadcast Ownership Rules Back to FCC; Continues Stay Pending FCC Review

The revised broadcast ownership rules enacted by the FCC in June 2003 have been remanded back to the FCC by the U.S. Court of Appeals for the Third Circuit in a 2-1 decision issued June 24, 2004, under the name Prometheus Radio Project v. FCC. As described in our June 2003 Update, the FCC had enacted changes to a number of broadcast ownership rules, including the following: national TV ownership rule; newspaper/broadcast and radio/TV cross-ownership rules; local TV ownership rule; and the local radio ownership rule. All of these rule changes were appealed and the Court’s decision on each of these rules is discussed below. The Court also continued to stay enforcement of all of the new rules pending the FCC decision on remand.

National TV ownership

The Commission had increased the cap on national audience reach to 45 percent from the previous 35 percent cap. In January of this year, however, Congress pre-empted the Commission’s action and set the national TV audience reach ownership cap to 39 percent. At the same time, Congress changed the Commission’s required biennial review of all ownership rules to a quadrennial review. In view of this Congressional action, the Court found that the Commission’s decision regarding the 45 percent cap was now moot.

The Court also deemed moot challenges to the Commission’s decision to retain the 50 percent UHF discount (counting the UHF audience as half of the actual audience for cap purposes), noting that the Commission is currently reviewing that policy.

Cross-ownership rules

The Commission had eliminated the newspaper-broadcast and radio-TV cross-ownership rules in favor of new cross-media limits. The Court generally supported the Commission’s decision to impose cross-media limits in favor of the previous media specific cross-ownership rules, but disagreed with the Commission’s implementation of those media limits. Specifically, the Court agreed with the FCC decision to eliminate the ban on newspaper/broadcast cross-ownership, but disagreed with the Commission’s methodology in weighting various media outlets to determine what level of ownership would be permitted within a given market.

The FCC had included broadcast TV, daily newspapers, weekly newspapers, radio, and the Internet in weighted fashion to determine the level of viewpoint diversity within a local market. The Court disagreed with the Commission’s decision to include the Internet as a source of viewpoint diversity. For the same reason the Commission had excluded cable TV based on doubts as to the amount of independent local news added by cable (i.e., most cable subscribers get news from local broadcast stations received via cable), the Court doubted that Internet users receive local news from any independent sources. In the Court’s view, most news obtained from the Internet is national and, to the extent that anyone gets local news via the Internet, it likely comes from the Internet sites of local newspapers and broadcast stations. Thus, the Internet itself is not a significant source of independent local news.

The Court also disagreed with the Commission’s decision to assign equal market shares to all TV stations, newspapers and radio stations within a market, while assigning different weights to the different types of media. The Commission’s analysis would give equal weight to a college TV station and a network affiliate, ignoring the fact that the college station provides no local news, and thus contributes little to viewpoint diversity. In the Court’s view, such an analysis understates media concentration within a market and thus contravenes the Commission’s goal of making conservative assumptions about viewpoint diversity.

Finally, the Court criticized the way the Commission divided up markets for purposes of its cross-media limits. Its methodology would allow combinations in some markets where there was more pre-existing media concentration than in other markets where new combinations would be prohibited. In the Court’s view, these defects in the cross-media limits rendered those limits arbitrary and capricious.

Local TV ownership

The Commission’s “old” local TV ownership rule allowed one entity to own two TV stations in any market with at least five stations, so long as there were no combinations among the top four rated stations in a market, and so long as there were at least eight independently owned TV stations remaining after the merger. Following a prior court remand, the Commission’s 2003 decision continued to allow ownership of two TV stations in any market with at least five commercial TV stations, and retained the restriction on mergers among the top four stations. However, the Commission had removed the restriction on the number of independently owned stations remaining post-merger. Additionally, in markets with 18 or more full-power TV stations, the Commission decided to let one entity own as many as three TV stations, subject to the same restriction against combinations among the top four stations in the market.

The Court upheld the Commission’s authority to regulate TV ownership and its decision to prohibit combinations among the top four stations in any market. However, the Court remanded the Commission’s decision to allow mergers based simply on the number of TV stations in a market as inconsistent with its cross-media limits, which are based on media concentration. The Court noted that the Commission’s local TV ownership rule could allow media concentration in excess of that permitted under its cross-media limits. Thus, the local TV ownership rule was remanded to allow the Commission to “support and harmonize” the rationales of its various media ownership rules.

In a related matter, the Court also remanded the FCC’s decision to repeal the “Failed Station Solicitation Rule.” That rule required an applicant seeking a waiver of the local TV ownership rule to solicit other potential purchasers before selling a failing, failed or unbuilt station to the owner of another local TV station. The Court said that the Commission failed to address the impact of repeal on minority ownership of TV stations.

Local radio ownership rule

The FCC had made only slight changes to the local radio ownership rule. While retaining its prior numerical limits on the number of radio stations that could be owned within one market, it decided to use Arbitron metro markets rather than overlapping contours to define radio markets. In grandfathering ownership interests that would be in violation of the new rule, the Commission said it would restrict sales of those interests to eligible small business entities. The Commission also decided to attribute (i.e., subject to FCC ownership limits) Joint Sales Agreements among stations within a market, where those agreements sell more than 15 percent of a station’s advertising time.

The Court affirmed the Commission’s decision to use Arbitron data, the restriction limiting sales of grandfathered ownership interests to small businesses and the decision to attribute Joint Sales Agreements. However, the Court rejected the Commission’s decision to retain the current numerical limits on the number of stations that can be owned in a particular market. Those rules allow ownership of as many as eight radio stations in markets where there are 45 or more commercial radio stations. Although approving the concept of numerical limits, the Court took the Commission to task for permitting combinations that would result in media concentration levels exceeding that permitted by the Department of Justice and Federal Trade Commission Merger Guidelines.

The Commission justified its numerical limits on the premise that they would ensure at least five equal-sized competitors in the largest markets. The Court noted, however, that a market with five equal-sized competitors is considered “highly concentrated” in the Merger Guidelines, and further questioned whether the premise was even accurate. The Court noted that most markets are dominated by one or two large station owners, and said the Commission should have taken actual market share into account, in lieu of relying on the fiction of equal-sized competitors.

Finally, in view of the Commission’s acknowledgement that FM stations have both technological and economic advantages over AM stations, the Court questioned whether there was any need for a “subcap” on the number of AM stations that can be owned within a market by any one party.

All of these rules now go back to the FCC for review consistent with the Court’s opinion, while the “old” (pre-June 2003) media ownership rules remain in effect. It is possible, however, that the Commission and/or other parties to the proceeding will first seek U.S. Supreme Court review. Although it is doubtful that the Supreme Court would delve into the specifics of the Commission’s media ownership rules, the issue might well be whether the Third Circuit overstepped its bounds by substituting its judgment for that of the Commission in reviewing each aspect of the Commission’s rules and rationale in detail. Indeed, the Court’s decision is a lengthy 125 pages, followed by an almost equally lengthy dissent/concurrence by the Court’s Chief Judge, opining that his colleagues failed to accord deference to the FCC’s expert agency decision making. Additionally, as the Chief Judge noted, the Commission’s Congressionally mandated quadrennial review of all of its media ownership rules insures that any mistake in the FCC’s policy determinations can be corrected at a later date.

Please contact us if you would like additional details about this decision or the FCC’s ownership rules generally.