United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 17, 2000 Decided March 2, 2001
No. 94-1035
Time Warner Entertainment Co., L.P.
Petitioner
v.
Federal Communications Commission and
United States of America,
Respondents
BellSouth Corporation, et al.,
Intervenors
Consolidated with
95-1337, 99-1503, 99-1504, 99-1522,
99-1541, 99-1542, 00-1086
On Petitions for Review of Orders of the
Federal Communications Commission
David W. Carpenter argued the cause for petitioners
AT&T Corporation and Time Warner Entertainment Co.,
L.P. With him on the briefs were Peter Keisler, David L.
Lawson, C. Frederick Beckner III, Henk Brands and Robert
D. Joffe. Charles S. Walsh, Richard B Beckner, Stuart W.
Gold and Marc C. Rosenblum entered appearances.
Robert D. Joffe and Henk Brands were on the briefs for
petitioner Time Warner Entertainment Co., L.P. Charles S.
Walsh, Richard B. Beckner and Stuart W. Gold entered
appearances.
Andrew Jay Schwartzman, Cheryl A. Leanza and Harold
Feld were on the briefs for petitioner Consumers Union.
James M. Carr, Counsel, Federal Communications Com-
mission, argued the cause for respondents. With him on the
brief were Christopher J. Wright, General Counsel, Daniel
M. Armstrong, Associate General Counsel, Joel Marcus and
James M. Carr, Counsel, David W. Ogden, Acting Assistant
Attorney General, U.S. Department of Justice, Mark B. Stern
and Jacob M. Lewis, Attorneys, and Wilma A. Lewis, U.S.
Attorney. William E. Kennard, General Counsel, Federal
Communications Commission, John E. Ingle, Deputy Associ-
ate General Counsel, and Catherine G. O'Sullivan, Robert B.
Nicholson and Robert J. Wiggers, Attorneys, U.S. Depart-
ment of Justice, entered appearances.
Henk J. Brands, Robert D. Joffe, Peter D. Keisler, David
L. Lawson and C. Frederick Beckner III were on the brief for
intervenor Time Warner Entertainment Co., L.P. in No.
99-1522. Mark C. Rosenblum entered an appearance.
Before: Williams, Randolph and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Williams.
Williams, Circuit Judge: Section 11(c) of the Cable Televi-
sion Consumer Protection and Competition Act of 1992, Pub.
L. No. 102-385, 106 Stat. 1460 ("1992 Cable Act"), amends 47
U.S.C. s 533 to direct the Federal Communications Commis-
sion to set two types of limits on cable operators. The first
type is horizontal, addressing operators' scale: "limits on the
number of cable subscribers a person is authorized to reach
through cable systems owned by such person, or in which
such person has an attributable interest." 47 U.S.C.
s 533(f)(a)(1)(A). The second type is vertical, addressing
operators' integration with "programmers" (suppliers of pro-
grams to be carried over cable systems): "limits on the
number of channels on a cable system that can be occupied by
a video programmer in which a cable operator has an attrib-
utable interest." 47 U.S.C. s 533(f)(a)(1)(B). The FCC has
duly promulgated regulations. See 47 C.F.R. s 76.503-04.
Petitioners Time Warner and AT&T challenge the horizontal
limit as in excess of statutory authority, as unconstitutional
infringements of their freedom of speech, and as products of
arbitrary and capricious decisionmaking which violate the
Administrative Procedure Act. Time Warner similarly chal-
lenges the vertical limit. Together with AT&T, Time Warner
also challenges as arbitrary and capricious the rules for
determining what counts as an "attributable interest." Con-
cluding that the FCC has not met its burden under the First
Amendment and, in part, lacks statutory authority for its
actions, we remand for further consideration of both limits.
In addition we vacate specific portions of the attribution rules
as lacking rational justification.
Consumers Union also files a petition for review, which
need not detain us long. It objects to the Commission's
action to the extent that it continued a stay on enforcement of
the horizontal limit. See Implementation of Section 11(c) of
the Cable Television Consumer Protection and Competition
Act of 1992, 14 F.C.C.R. 19098, 19127-28 p p 71-73 (1999)
("Third Report"). The Commission issued the stay after a
district court found the statute underlying that limit unconsti-
tutional, see Daniels Cablevision, Inc. v. United States, 835
F. Supp. 1 (D.D.C. 1993), and provided that in the event of
Daniels's reversal the stay would end. See Implementation
of Sections 11 and 13 of the Cable Television Consumer
Protection and Competition Act of 1992, 8 F.C.C.R. 8565,
8609 p 109 (1993) ("Second Report"). We did reverse Daniels
in Time Warner Entertainment Co. v. United States, 211
F.3d 1313 (D.C. Cir. 2000) ("Time Warner I"), so the stay
ended automatically.1 Thus the stay issue is moot unless the
issue posed is capable of repetition yet evading review. Even
if we assume that the issue evades review, its recurrence is
not probable enough to qualify it as "capable of repetition."
See Spencer v. Kemna, 523 U.S. 1, 17 (1998) (requiring "a
reasonable expectation that the same complaining party [will]
be subject to the same action again") (internal citations
omitted). Although we find here that the regulations fail
constitutional scrutiny, the specific condition that led to the
stay--a pending challenge to the statute's constitutionality--
is highly unlikely to recur. We therefore find Consumers
Union's claim moot and dismiss the petition.
* * *
The horizontal rule imposes a 30% limit on the number of
subscribers that may be served by a multiple cable system
operator ("MSO"). See 47 C.F.R. s 76.503; Third Report 14
F.C.C.R. at 19119 p 55. Both the numerator and denomina-
tor of this fraction include only current subscribers to multi-
channel video program distributor ("MVPD") services. See
id. at 19107-10 p p 20-25. Subscribers include not only users
of traditional cable services but also subscribers to non-cable
MVPD services such as Direct Broadcast Satellite ("DBS"),2 a
__________
1 The cross-appeals of the government and the cable firms from
the district court's decision in Daniels were originally consolidated
with the cable firms' petitions for review of earlier iterations of the
implementing regulations. See Time Warner I, 211 F.3d at 1315-
16. After a date for oral argument was set, the FCC initiated a
new rulemaking as part of its planned quinquennial review of the
horizontal regulations. We therefore severed the Daniels appeals
from the challenges to the regulations, holding the latter in abey-
ance until the completion of the new rulemaking. See id. The
challenge to the new horizontal rules has supplanted that portion of
the earlier challenges.
2 DBS "is a nationally distributed subscription video service that
delivers programming via satellite to a small parabolic 'dish' anten-
na located at the viewer's home." Annual Assessment of the Status
of Competition in the Market for the Delivery of Video Program-
rapidly growing segment of the MVPD market. See id. at
19110-12 p p 26-35. The Commission pointed out that under
this provision the nominal 30% limit would allow a cable
operator to serve 36.7% of the nation's cable subscribers if it
served none by DBS. See id. at 19113 p 37 & n.82.3 In an
express effort to encourage competition through new provi-
sion of cable, the Commission excluded from any MSO's
numerator all new subscribers signed up by virtue of "over-
building," the industry's term for cable laid in competition
with a pre-existing cable operator. See id. at 19112-13 p p 34,
37. Further, subscribers to a service franchised after the
rule's adoption (October 20, 1999) do not go into an MSO's
numerator, even if not the result of an overbuild. See id. at
19112 p 33. As a result, the rule's main bite is on firms
obtaining subscribers through merger or acquisition.
The vertical limit is currently set at 40% of channel capaci-
ty, reserving 60% for programming by non-affiliated firms.
See 47 C.F.R. s 76.504; Second Report, 8 F.C.C.R. at 8593-
94 p 68; Implementation of Section 11(c) of the Cable Televi-
sion Consumer Protection and Competition Act of 1992, 10
F.C.C.R. 7364, 7368 p 14 (1995) ("Reconsideration Order").
Channels assigned to broadcast stations, leased access, and
for public, educational, or governmental uses are included in
the calculation of channel capacity. See id. at 7371-73 p p 20-
27. Capacity over 75 channels is not subject to the limit, so a
cable operator is never required to reserve more than 45
channels for others (.60 x 75 = 45). See id. at 7374-76
p p 31-35.
__________
ming, Seventh Annual Report, CS Docket No. 00-132, FCC 01-01
(rel. Jan. 8, 2001) p 71 (2000) ("Seventh Annual Report").
3 30% of roughly 80 million MVPD subscribers would be about 24
million subscribers, which in turn would be 36.69% of roughly 66
million cable subscribers. Under the Commissions most recent
subscriber estimates, this provision would allow an MSO to serve
37.4% of cable subscribers, or approximately 1.1 million more
customers than when the Third Report was written. See Seventh
Annual Report at p p 6-7.
As cable operators, Time Warner and AT&T "exercise[ ]
editorial discretion in selecting the programming [they] will
make available to [their] subscribers," Time Warner I, 211
F.3d at 1316, and are "entitled to the protection of the speech
and press provisions of the First Amendment," Turner
Broadcasting System, Inc. v. Federal Communications Com-
mission, 512 U.S. 622, 636 (1994) ("Turner I") (quoting
Leathers v. Medlock, 499 U.S. 439, 444 (1991)). The horizon-
tal limit interferes with petitioners' speech rights by restrict-
ing the number of viewers to whom they can speak. The
vertical limit restricts their ability to exercise their editorial
control over a portion of the content they transmit.
In Time Warner I we upheld the statutory provisions
against a facial attack, after finding them subject to interme-
diate rather than, as the cable firms argued, strict scrutiny.
Time Warner I, 211 F.3d at 1316-22. The regulations here
present a related but independent set of questions. Constitu-
tional authority to impose some limit is not authority to
impose any limit imaginable.
In briefs written before the issuance of Time Warner I,
petitioners argued here for strict scrutiny. At oral argument
they withdrew from this position and said, euphemistically,
that they were "happy to stand on intermediate scrutiny."
Because of that concession and, in any event, not seeing any
distinction between the statute and the regulations for level-
of-scrutiny purposes, we apply intermediate scrutiny. Under
the formula set forth in United States v. O'Brien, 391 U.S.
367, 377 (1968), and reaffirmed by Turner Broadcasting
System, Inc. v. Federal Communications Commission, 520
U.S. 180, 189 (1997) ("Turner II"), a governmental regulation
subject to intermediate scrutiny will be upheld if it "advances
important governmental interests unrelated to the suppres-
sion of free speech and does not burden substantially more
speech than necessary to further those interests." Id. (quot-
ing O'Brien, 391 U.S. at 377).
The interests asserted in support of the horizontal and
vertical limits are the same interrelated interests that we
found sufficient to support the statutory scheme in Time
Warner I: "the promotion of diversity in ideas and speech"
and "the preservation of competition." Time Warner I, 211
F.2d at 1319; see also Turner I, 512 U.S. at 662-64 (conclud-
ing that both qualify as important governmental interests).
After a review of the legislative history, we concluded that
Congress had drawn "reasonable inferences, based upon sub-
stantial evidence, that increases in the concentration of cable
operators threatened diversity and competition in the cable
industry." Time Warner I, 211 F.3d at 1319-20. But the
FCC must still justify the limits that it has chosen as not
burdening substantially more speech than necessary. In
addition, in "demonstrat[ing] that the recited harms are real,
not merely conjectural," Turner I, 512 U.S. at 664, the FCC
must show a record that validates the regulations, not just
the abstract statutory authority.
* * *
The FCC asserts that a 30% horizontal limit satisfies its
statutory obligation to ensure that no single "cable operator
or group of cable operators can unfairly impede ... the flow
of video programming from the video programmer to the
consumer," 47 U.S.C. s 533(f)(2)(A), while adequately re-
specting the benefits of clustering4 and the economies of scale
that are thought to come with larger size. See Third Report,
14 F.C.C.R. at 19123-24 p 61. It interpreted this statutory
language as a directive to prohibit large MSOs--either by the
action of a single MSO or the coincidental or collusive actions
of several MSOs--from precluding the entry into the market
of a new cable programmer. See id. at 19116 p 43. In
setting the limit at 30%, it assumed there was a serious risk
of collusion. See id., Part VI, at 19113-25 p p 36-65. But
__________
4 "Clustering" refers to the strategy under which MSOs concen-
trate their operations within a particular geographic region, giving
up scattered holdings around the country. The benefits are
thought to be in achieving economies of both scale and scope,
allowing MSOs to spread fixed investment costs over a larger
customer base and to better compete with telephone companies
owning local loops that are actual or potential substitutes. See
Seventh Report p p 152-53.
while collusion is a form of anti-competitive behavior that
implicates an important government interest, the FCC has
not presented the "substantial evidence" required by Turner
I and Turner II that such collusion has in fact occurred or is
likely to occur; so its assumptions are mere conjecture. See
Turner II, 520 U.S. at 195 (citing Turner I, 512 U.S. at 666).
The FCC alternatively relies on its supposed grant of authori-
ty to regulate the non-collusive actions of large MSOs. Con-
gress may indeed, under certain readings of Turner I and
Turner II, have the power to regulate the coincidental but
independent actions of cable operators solely in the interest of
diversity, but "[w]here an administrative interpretation of a
statute invokes the outer limits of Congress' power, we expect
a clear indication that Congress intended that result." Solid
Waste Agency v. United States Army Corps of Eng'rs, __
U.S. __, 121 S. Ct. 675, 683 (2001). The 1992 Cable Act, as
we shall see, instead expresses the contrary intention.
Part VI of the Third Report lays out the calculations that
lead the FCC to the 30% limit. See Third Report, Part VI,
14 F.C.C.R. at 19113-25 p p 36-65. First the FCC deter-
mines that the average cable network needs to reach 15
million subscribers to be economically viable. See id. at
19114-16 p p 40-42. This is 18.56% of the roughly 80 million
MVPD subscribers, and the FCC rounds it up to 20% of such
subscribers. The FCC then divines that the average cable
programmer will succeed in reaching only about 50% of the
subscribers linked to cable companies that agree to carry its
programming, because of channel capacity, "programming
tastes of particular cable operators," or other factors. Id. at
19117-18 p 49. The average programmer therefore requires
an "open field" of 40% of the market to be viable (.20/.50 =
.40). See id. at 19117-18 p p 46-50.
Finally, to support the 30% limit that it says is necessary to
assure this minimum, the Commission reasons as follows:
With a 30% limit, a programmer has an "open field" of 40% of
the market even if the two largest cable companies deny
carriage, acting "individually or collusively." Id. at 19119
p 53. A 50% rule is inadequate because, if a duopoly were to
result, "[t]he probability of tacit collusion is higher with 2
competitors than 3 competitors." Id. at 19118-19 p 51. Even
if collusion were not to occur, independent rejections by two
MSOs could doom a new programmer, thwarting congression-
al intent as the Commission saw it. See id. A 40% limit is
insufficient for the same reason: "two MSOs, ... represent-
ing a total of 80% of the market, might decline to carry the
new network" and leave only 20% "open," which by hypothe-
sis is not enough (because of the 50% success rate). Id. at
19119 p 52. Although the Commission doesn't spell out the
intellectual process, it is necessarily defining the requisite
"open field" as the residue of the market after a programmer
is turned down either (1) by one cable company acting alone,
or (2) by a set of companies acting either (a) collusively or (b)
independently but nonetheless in some way that, because of
the combined effect of their choices, threatens fulfillment of
the statutory purposes. We address the FCC's authority to
regulate each of these scenarios in turn.
The Commission is on solid ground in asserting authority to
be sure that no single company could be in a position single-
handedly to deal a programmer a death blow. Statutory
authority flows plainly from the instruction that the Commis-
sion's regulations "ensure that no cable operator or group of
cable operators can unfairly impede, either because of the size
of any individual operator or because of joint actions of
operators of sufficient size, the flow of video programming
from the video programmer to the consumer." 47 U.S.C.
s 533(f)(2)(A) (emphasis added). Constitutional authority is
equally plain. As the Supreme Court said in Turner II: "We
have identified a corresponding 'governmental purpose of the
highest order' in ensuring public access to 'a multiplicity of
information sources.' " 520 U.S. at 190 (quoting Turner I,
512 U.S. at 663); see also Time Warner Entertainment Co. v.
Federal Communications Commission, 93 F.3d 957, 969
(D.C. Cir. 1996). If this interest in diversity is to mean
anything in this context, the government must be able to
ensure that a programmer have at least two conduits through
which it can reach the number of viewers needed for viabili-
ty--independent of concerns over anticompetitive conduct.
Assuming the validity of the premises supporting the
FCC's conclusion that a 40% "open field" is necessary (a
question that we need not answer here), the statute's express
concern for the act of "any individual operator" would justify
a horizontal limit of 60%. To reach the 30% limit, the FCC's
action necessarily involves one or the other of two additional
propositions: Either there is a material risk of collusive
denial of carriage by two or more companies, or the statute
authorizes the Commission to protect programmers against
the risk of completely independent rejections by two or more
companies leaving less than 40% of the MVPD audience
potentially accessible. Neither proposition is sound.
First, we consider whether there is record support for
inferring a non-conjectural risk of collusive rejection. Either
Congress or the Commission could supply that record, and we
take them in that order. We give deference to the predictive
judgments of Congress, see Turner II, 520 U.S. at 195-96
(citing Turner I, 512 U.S. at 665), but Congress appears to
have made no judgment regarding collusion. The statute
plainly alludes to the possibility of collusion when it autho-
rizes regulations to protect against "joint actions by a group
of operators of sufficient size." 47 U.S.C. s 533(f)(2)(A) (em-
phasis added). But this phrase, while granting the Commis-
sion authority to take action in the event that it finds collu-
sion extant or likely, is not itself a congressional finding of
actual or probable collusion. Such findings have not been
made. No reference to collusion appears in the Act's findings
or policy, see 1992 Cable Act s 2, 106 Stat. at 1460-63, nor in
the legislative history discussing the horizontal or vertical
limits. See H.R. Rep. No. 102-628, at 40-43 (1992) ("House
Report"); S. Rep. No. 102-92, at 24-29, 32-34, reprinted in
1991 U.S.C.C.A.N. 1133, at 1156-62, 1165-67 ("Senate Re-
port"). It was thus appropriate for the FCC to describe
Congress's reference to "joint" action as merely a "legislative
assumption." Third Report, 14 F.C.C.R. at 19116 p 43 (em-
phasis added).
The Commission's own findings amount to precious little.
It says only:
The legislative assumption [about joint action] is not
unreasonable given an environment in which all the
larger operators in the industry are vertically integrated
so that all are both buyers and sellers of programming
and have mutual incentives to reach carriage decisions
beneficial to each other. Operators have incentives to
agree to buy their programming from one another.
Moreover, they have incentives to encourage one another
to carry the same non-vertically integrated programming
in order to share the costs of such programming.
Id. None of these assertions is supported in the record. The
Commission never explains why the vertical integration of
MSOs gives them "mutual incentive to reach carriage deci-
sions beneficial to each other," what may be the firms'
"incentives to buy ... from one another," or what the proba-
bilities are that firms would engage in reciprocal buying
(presumably to reduce each other's average programming
costs). After all, the economy is filled with firms that, like
MSOs, display partial upstream vertical integration. If that
phenomenon implies the sort of collusion the Commission
infers, one would expect the Commission to be able to point to
examples. Yet it names none. Further, even if one accepts
the proposition that an MSO could benefit from sharing the
services of specific programmers, programming is not more
attractive for this purpose merely because it originates with
another MSO's affiliate rather than with an independent.
The only justification that the FCC offers in support of its
collusion hypothesis is the economic commonplace that, all
other things being equal, collusion is less likely when there
are more firms. See Third Report 14 F.C.C.R. at 19118-19
p 51. This observation will always be true, although margin-
ally less so for each additional firm; but by itself it lends no
insight into the question of what the appropriate horizontal
limit is. Turner I demands that the FCC do more than
"simply 'posit the existence of the disease sought to be
cured.' " Turner I, 512 U.S. at 664 (quoting Quincy Cable
TV, Inc. v. Federal Communications Commission, 768 F.2d
1434, 1455 (D.C. Cir. 1985). It requires that the FCC draw
"reasonable inferences based on substantial evidence." Tur-
ner I, 512 U.S. at 666. Substantial evidence does not require
a complete factual record--we must give appropriate defer-
ence to predictive judgments that necessarily involve the
expertise and experience of the agency. See Turner II 520
U.S. at 196, citing Federal Communications Commission v.
National Citizens Comm. For Broadcasting, 436 U.S. 775,
814 (1978). But the FCC has put forth no evidence at all that
indicates the prospects for collusion.
That having been said, we do not foreclose the possibility
that there are theories of anti-competitive behavior other
than collusion that may be relevant to the horizontal limit and
on which the FCC may be able to rely on remand. See 47
U.S.C. s 533(f)(1). Indeed, Congress considered, among oth-
er things, the ability of MSOs dominant in specific cable
markets to extort equity from programmers or force exclu-
sive contracts on them. See 1992 Cable Act s 2(a)(4)-(5), 106
Stat. at 1460-61; Senate Report at 3, 14, 23-29, 32-34,
reprinted in 1991 U.S.C.C.A.N. at 1135, 1146-47, 1156-62,
1165-67; House Report at 40-43. A single MSO, acting
alone rather than "jointly," might perhaps be able to do so
while serving somewhat less than the 60% of the market (i.e.,
less than the fraction that would allow it unilaterally to lock
out a new cable programmer) despite the existence of anti-
trust laws and specific behavioral prohibitions enacted as part
of the 1992 Cable Act, see 47 U.S.C. s 536, and the risk might
justify a prophylactic limit under the statute. See Time
Warner I, 211 F.3d at 1322-23. So the absence of any
showing of a serious risk of collusion does not necessarily
preclude a finding of a sufficient governmental interest in
preventing unfair competition. (We express no opinion on
whether exploitation of a monopoly position in a specific cable
market to extract rents that would otherwise flow to pro-
grammers alone gives rise to an "important governmental
interest" justifying a burden on speech.) But the FCC made
no attempt to justify its regulation on these grounds.
We pause here to address an aspect of petitioners' statuto-
ry challenge that is relevant to a showing of non-conjectural
harm. Congress required that in setting the horizontal limit,
the FCC "take particular account of the market structure ...
including the nature and market power of the local franchise."
47 U.S.C. s 533(f)(2)(C). Petitioners assert that the Commis-
sion's failure to take adequate account of the competitive
pressures brought by the availability and increasing success
of DBS make the horizontal limit arbitrary and capricious.
Although DBS accounts for only 15.4% of current MVPD
households, the annual increase in its total subscribership is
almost three times that of cable (nearly three million addi-
tional subscribers over the period June 1999 to June 2000, as
against one million for cable). See Seventh Annual Report
p p 6-8. To the extent petitioners argue that the horizontal
limit must fail because market share does not equal market
power, they misconstrue the statutory command. The Com-
mission is not required to design a limit that falls solely on
firms possessing market power.5 The provision is directed to
the Commission's intellectual process, and requires it, in
evaluating the harms posed by concentration and in setting
the subscriber limit, to assess the determinants of market
power in the cable industry and to draw a connection between
market power and the limit set.
It follows naturally from our earlier discussion that we do
not believe the Commission has satisfied this obligation.
Having failed to identify a non-conjectural harm, the Commis-
sion could not possibly have addressed the connection be-
tween the harm and market power. But the assessment of a
real risk of anti-competitive behavior--collusive or not--is
itself dependent on an understanding of market power, and
the Commission's statements in the Third Report seem to
ignore the true relevance of competition. In changing the
calculation of the horizontal limit to reflect subscribers in-
stead of homes at which a service is available, for instance,
the Commission wrote:
[W]hether subscribership or homes passed data is used is
largely a mechanical issue in terms of the market power
issue.... As the market develops in terms of competi-
__________
5 Contrast Congress's requirement that the FCC "make such
rules and regulations reflect the dynamic nature of the communica-
tions marketplace." 47 U.S.C. s 533(f)(2)(E) (emphasis added).
tion we believe ... that an operator's actual number of
subscribers more uniformly and accurately reflects pow-
er in the programming marketplace.
Third Report, 14 F.C.C.R. at 19108 p 22.
But normally a company's ability to exercise market power
depends not only on its share of the market, but also on the
elasticities of supply and demand, which in turn are deter-
mined by the availability of competition. See AT&T Corp. v.
Federal Communications Commission, 236 F.3d 729, 736
(D.C. Cir. 2001). If an MVPD refuses to offer new program-
ming, customers with access to an alternative MVPD may
switch. The FCC shows no reason why this logic does not
apply to the cable industry. Indeed, its most recent competi-
tion report suggests that it does. According to the Commis-
sion, "several very small and rural cable systems have used a
variety of schemes to add digital channels, expand their
program offerings, and take preemptive action against ag-
gressive DBS marketing." Seventh Annual Report p 67.
Given the substantial changes in the cable industry since
publication of the Third Report in 1999 and our reversal on
other grounds, there is little point in our reviewing the
Commission's assessment of then-existing market power of
cable MVPDs. But whatever conclusions are to be drawn
from the new data, it seems clear that in revisiting the
horizontal rules the Commission will have to take account of
the impact of DBS on that market power. Already when the
Third Report was written, DBS could be considered to "pass
every home in the country." Third Report, 14 F.C.C.R. at
19107-08 p 20. The technological and regulatory changes
since then appear only to strengthen petitioners' contention.
See Seventh Annual Report p p 60-82, 140.
With the risk of collusion inadequately substantiated to
support the 30% limit and no attempt to find other anti-
competitive behavior, there remains the Commission's alter-
native ground--that programming choices made "unilateral-
ly" by multiple cable companies, Third Report, 14 F.C.C.R. at
19118-19 p 51; see also id. at 19119 p 53 ("individually"),
might reduce a programmer's "open field" below the 40%
benchmark. The only support the Commission offered for
regulation based on this possibility was the idea that every
additional chance for a programmer to secure access would
enhance diversity:
[T]he 30% limit serves the salutary purpose of ensuring
that there will be at least 4 MSOs in the marketplace.
The rule thus maximizes the potential number of MSOs
that will purchase programming. With more MSOs mak-
ing purchasing decisions, this increases the likelihood
that the MSOs will make different programming choices
and a greater variety of media voices will therefore be
available to the public.
Id. p 54. Petitioners challenge the FCC's authority to regu-
late for this purpose on both constitutional and statutory
grounds.
We have some concern how far such a theory may be
pressed against First Amendment norms. Everything else
being equal, each additional "voice" may be said to enhance
diversity. And in this special context, every additional splin-
tering of the cable industry increases the number of combina-
tions of companies whose acceptance would in the aggregate
lay the foundations for a programmer's viability. But at
some point, surely, the marginal value of such an increment in
"diversity" would not qualify as an "important" governmental
interest. Is moving from 100 possible combinations to 101
"important"? It is not clear to us how a court could deter-
mine the point where gaining such an increment is no longer
important. And it would be odd to discover that although a
newspaper that is the only general daily in a metropolitan
area cannot be subjected to a right of reply, see Miami
Herald Publishing Co. v. Tornillo, 418 U.S. 241 (1974), it
could in the name of diversity be forced to self-divide. Cer-
tainly the Supreme Court has not gone so far.
We need not face that issue, however, because we conclude
that Congress has not given the Commission authority to
impose, solely on the basis of the "diversity" precept, a limit
that does more than guarantee a programmer two possible
outlets (each of them a market adequate for viability). We
analyze the agency action under the familiar framework of
Chevron USA, Inc. v. National Resources Defense Council,
Inc., 467 U.S. 837 (1984). If we find (using traditional tools of
statutory interpretation) that Congress has resolved the ques-
tion, that is the end of the matter. FDA v. Brown &
Williamson Tobacco Corp., 529 U.S. 120, 132 (2000); Nation-
al Resources Defense Council, Inc. v. Browner, 57 F.3d 1122,
1125 (D.C. Cir. 1995). We must place the statutory language
in context and "interpret the statute 'as a symmetrical and
coherent regulatory scheme.' " Brown & Williamson, 529
U.S. at 133.
We begin with the statutory language. The relevant sec-
tion requires the FCC to
ensure that no cable operator or group of cable operators
can unfairly impede, either because of the size of any
individual operator or because of joint actions by a group
of operators of sufficient size, the flow of video program-
ming from the video programmer to the consumer.
47 U.S.C. s 533(f)(2)(A).
The language addresses only "unfair[ ]" impediments to the
flow of programming. The word "unfair" is of course ex-
tremely vague. Certainly, the action of several firms that is
"joint," in the sense of collusive, may often entail unfairness
of a conventional sort. The statute goes further, plainly
treating exercise of editorial discretion by a single cable
operator as "unfair" simply because that operator is the only
game in town. (And Time Warner I authoritatively deter-
mines that the government is constitutionally entitled to
impose limits solely on that ground.) But we cannot see how
the word unfair could plausibly apply to the legitimate, inde-
pendent editorial choices of multiple MSOs. A broad inter-
pretation is plausible only for actions that impinge at least to
some degree on the interest in competition that lay at the
heart of Congress's concern.6 The Commission's reading of
__________
6 The Commission's economic theory--that cable operators have
an incentive to contract with the same programmers in order to
lower the programmers' average costs (see discussion in the collu-
the clause effectively deletes the word "joint" and opens the
door to illimitable restrictions in the name of diversity.
Looking at the statute as a whole does little to support the
FCC's position. The "interrelated interests" of promoting
diversity and fair competition run throughout the 1992 Cable
Act's various provisions. Turner II, 520 U.S. at 189.7 But
despite the duality of interests at work in this section, see
Time Warner I, 211 F.3d at 1319, it is clear from the
structure of the statute that Congress's primary concern in
authorizing ownership limits is "fair" competition. The stat-
ute specifies, after all, that these regulations are to be pro-
mulgated "[i]n order to enhance effective competition." 47
U.S.C. s 533 (f)(1). In only two of the other sections of the
1992 Cable Act does Congress specify a dominant purpose.8
__________
sion context, supra p. 11)--would seem to apply regardless of any
horizontal limit. Putting various special cases aside, any profit-
maximizing firm will have an incentive to lower its costs. In a
market where a cable operator is a monopolist, the resulting benefit
to the firm would be classified as monopoly rents. In a market
where an operator is in competition, it can be expected to pass the
benefits on to its customers. But the FCC has not shown why such
pursuit of lower costs, by the monopolist or the competitive firm, is
by itself "unfair," and the statute allows for regulation only if
unfairness can be shown.
7 The 1992 Cable Act is a wide-ranging statute that includes,
besides the ownership limits, must-carry and leased-access require-
ments, rate regulation, behavioral prohibitions, and privacy protec-
tions. See 1992 Cable Act, 106 Stat. 1460.
8 The leased access provision was amended to add the words "to
promote competition in the delivery of diverse sources of video
programming" to the section's previously stated purpose of assuring
"that the widest possible diversity of information sources are made
available." 1992 Cable Act s 9(a), 106 Stat. at 1484; 47 U.S.C.
s 532(a). The various behavioral rules designed to prevent cable
operators from abusing their market power were passed for the
stated purpose of promoting "the public interest, convenience, and
necessity by increasing competition and diversity in the multichan-
nel video programming market." 1992 Cable Act s 19, 106 Stat. at
1494; 47 U.S.C. s 547.
This statement of purpose supports a reading that sharply
confines the authority to regulate solely in the interest of
diversity.
The FCC points to the statutory findings that the "cable
industry has become highly concentrated" and that "the
potential effects of such concentration are barriers to entry
for new programmers and a reduction in the number of media
voices available to consumers." Third Report, 14 F.C.C.R. at
19118-19 p 51, 1992 Cable Act s 2(a)(4), 106 Stat. at 1460.
But reference to a congressional finding cannot overcome the
clear language and purpose of the actual provision. The
quoted finding stands as little more than support for the
proposition that Congress was concerned with the possibilities
for market failure and the possible impact on new program-
mers. The legislative history also offers little. Again, the
fact that Congress's interest in anti-competitive behavior may
have been animated by an interest in preserving diversity
doesn't give the FCC carte blanche to cobble cable operators
in the name of the latter value alone. After all, Congress also
sought to "ensure that cable operators continue to expand,
where economically justified, their capacity," 1992 Cable Act
s 2(b)(3), 106 Stat. at 1463, and it specifically directed the
FCC, in setting the ownership limit, to take into account the
"efficiencies and other benefits that might be gained through
increased ownership or control." 47 U.S.C. s 533(f)(2)(D).
On the record before us, we conclude that the 30% horizon-
tal limit is in excess of statutory authority. While a 60% limit
might be appropriate as necessary to ensure that program-
mers had an adequate "open field" even in the face of
rejection by the largest company, the present record supports
no more. In addition, the statute allows the Commission to
act prophylactically against the risk of "unfair" conduct by
cable operators that might unduly impede the flow of pro-
gramming, either by the "joint" actions of two or more
companies or the independent action of a single company of
sufficient size. But the Commission has pointed to nothing in
the record supporting a non-conjectural risk of anti-
competitive behavior, either by collusion or other means.
Accordingly, we reverse and remand with respect to the 30%
rule.
* * *
The FCC presents its 40% vertical limit as advancing the
same interests invoked in support of its statutory authority to
adopt the rule: diversity in programming and fair competi-
tion. As with the horizontal rules the FCC must defend the
rules themselves under intermediate scrutiny and justify its
chosen limit as not burdening substantially more speech than
necessary. Far from satisfying this test, the FCC seems to
have plucked the 40% limit out of thin air.
The FCC relies almost exclusively on the congressional
findings that vertical integration in the cable industry could
"make it difficult for non-cable affiliated ... programmers to
secure carriage on vertically integrated cables systems" and
that "vertically integrated program suppliers have the incen-
tive and the ability to favor their affiliated cable operators
... and program distributors." Second Report, 8 F.C.C.R. at
8583 p 41 (citing 1992 Cable Act s 2(a)(5), 106 Stat. at 1460).
Regulatory limits in response to these consequences would
"increase the diversity of voices available to the public."
Second Report, 8 F.C.C.R. at 8583-84 p 42 (citing Senate
Report at 80, reprinted in 1991 U.S.C.C.A.N. at 1213). In
Time Warner I we thought these findings strong enough to
overcome the First Amendment challenge to the relevant
provision of the 1992 Cable Act. In doing so, we held that
such a prophylactic rule was not "rendered unnecessary
merely because preexisting statutes [such as the antitrust
laws and the antidiscrimination provisions of the 1992 Cable
Act] impose behavioral norms." Time Warner I, 211 F.3d at
1322-23. Beyond that we did not assess the appropriateness
of the burden on speech. We upheld no specific vertical
limit--none was before us.
We recognize that in drawing a numerical line an agency
will ultimately indulge in some inescapable residue of arbi-
trariness; even if 40% is a highly justifiable pick, no one
could expect the Commission to show why it was materially
better than 39% or 41%. See Missouri Public Service
Comm'n v. FERC, 215 F.3d 1, 5 (D.C. Cir. 2000). But to pass
even the arbitrary and capricious standard, the agency must
at least reveal " 'a rational connection between the facts found
and the choice made.' " Dickson v. Secretary of Defense, 68
F.3d 1396, 1404-05 (D.C. Cir. 1995) (quoting Motor Vehicle
Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29,
43 (1983). Here the FCC must also meet First Amendment
intermediate scrutiny. Yet it appears to provide nothing but
the conclusion that "we believe that a 40% limit is appropriate
to balance the goals." See Second Report, 8 F.C.C.R. at
8593-95 p 68. What are the conditions that make 50% too
high and 30% too low? How great is the risk presented by
current market conditions? These questions are left unan-
swered by the Commission's discussion.
The FCC argued before us that no MSO has yet com-
plained that the 40% vertical limit has required it to alter
programming. This is no answer at all, as it says nothing
about plans that the rule may have scuttled. Petitioners
responded that their subsidiaries frequently must juggle their
channel lineups to stay within the cap. Furthermore, it
appears uncontested that AT&T's merger with MediaOne
brings the vertical limits into play. See In the Matter of
Applications for Consent to the Transfer of Control of Licens-
es and Section 214 Authorizations from MediaOne Group,
Inc. to AT&T Corporation, 15 F.C.C.R. 9816 (2000).
In fairness, the FCC does make an attempt to review some
relevant conditions. See Second Report, 8 F.C.C.R. at 8583-
85 p p 41-45. The FCC cites the House Report's conclusion
that "some" vertically integrated MSOs favor their affiliates
and "may" discriminate against others. Id. at 8583-84 p 42
(citing House Report at 43). But it also notes a report that
none of the top five MSOs "showed a pattern" of favoring
their affiliates. Id. at 8584 p 43. Indeed, the FCC concludes
that "vertical relationships had increased both the quality and
quantity of cable programming services." Id. p 44. But still
it settled on a limit of 40%. There is no effort to link the
numerical limits to the benefits and detriments depicted.
Further, given the pursuit of diversity, one might expect
some inquiry into whether innovative independent originators
of programming find greater success selling to affiliated or to
unaffiliated programming firms, but there is none.
Quite apart from the numerical limit vel non, petitioners
attack the Commission's refusal to exclude from the vertical
limit cable operators that are subject to effective competition.
The FCC had proposed exempting cable operators who met
the definition of effective competition provided by s 623 of
the Communications Act of 1934. See Implementation of
Sections 11 and 13 of the Cable Television Consumer Protec-
tion and Competition Act of 1992, 8 F.C.C.R. 6828, 6862 p 231
(1993) ("First Report"); see also 47 U.S.C. s 543(l )(1) (defin-
ing the categories of cable operators that are not subject to
rate regulation under that section).9 Of course our decision
in Time Warner I acknowledged the existence of incentives
__________
9 The term "effective competition" means that--
(A) fewer than 30 percent of the households in the franchise
area subscribe to the cable system;
(B) the franchise area is--
(i) served by at least two unaffiliated multichannel video
programming distributors each of which offers comparable
video programming to at least 50 percent of the households
in the franchise area; and
(ii) the number of households subscribing to programming
services offered by multichannel video programming distrib-
utors other than the largest multichannel video programming
distributor exceeds 15 percent of the households in the
franchise area; or
(C) a multichannel video programming distributor operated by
the franchising authority for that franchise area offers video
programming to at least 50 percent of the households in that
franchise area; or
(D) a local exchange carrier or its affiliate (or any multichannel
video programming distributor using the facilities of such carri-
er or its affiliate) offers video programming services ... in the
franchise area of an unaffiliated cable operator which is provid-
ing cable service in that franchise area, but only if the video
programming services so offered in that area are comparable to
to use affiliated programming. 211 F.3d at 1322. For exam-
ple, even where an unaffiliated supplier offered a better cost-
quality trade-off, a company might be reluctant to ditch or
curtail an inefficient in-house operation because of the impact
on firm executives or other employees, or the resulting
spotlight on management's earlier judgment. But petitioners
argue, quite plausibly, that exposure to competition will have
an impact on a cable company's ability to indulge in favorit-
ism for in-house productions. After all, while reliance on in-
house suppliers offering an inferior price-quality trade-off will
reduce a monopolist's profits, it may threaten a competitive
firm's very survival. This analysis is not foreign to the
Commission, which endorsed it when proposing the exemp-
tion:
We believe that this proposal is appropriate since effec-
tive competition will preclude cable operators from exer-
cising the market power which originally justified chan-
nel occupancy limits. Where systems face effective
competition, their incentive to favor an affiliated pro-
grammer will be replaced by the incentive to provide
programming that is most valued by subscribers.
First Report, 8 F.C.C.R. at 6862 p 231.
The FCC makes two arguments to justify its refusal to
exempt MVPDs that are subject to effective competition.
First, it says that the definition of competition provided by 47
U.S.C. s 543 was "not adopted for this specific purpose" but
rather for relief from rate regulation. See Reconsideration
Order 10 F.C.C.R. at 7379 p 47. Indeed, we have recognized
that one of the ways in which the statutory standard is met
may be surprisingly defective as a mark of real competition.
See Time Warner Entertainment Co., L.P. v. Federal Com-
munications Commission, 56 F.3d 151, 166 (D.C. Cir. 1995)
(MVPDs satisfying subsection (A) of 47 U.S.C. s 543(l )(1)
(low penetration) may do so more as a result of geography
than competition). But the Commission is free to carve out
__________
the video programming services provided by the unaffiliated
cable operator in that area.
47 U.S.C. s 543(l )(1).
subsections that are truly pertinent to competition, as it had
proposed. See First Report, 8 F.C.C.R. at 8662-63 p 232;
Second Report, 8 F.C.C.R. at 8602 p 85.
Of course competition that is adequate to justify dispensing
with rate regulation could still leave an undue likelihood of
improper favoritism for affiliated programmers. But the
possible failure of readily available criteria does not itself
justify the use of so blunt a blade. Congress expressly
directed the Commission to take "particular account of the
market structure..., including the nature and market power
of the local franchise." 47 U.S.C. s 533(f)(2)(C) (emphasis
added). Because competition raises the stakes for a firm that
sacrifices the optimal price-quality trade-off in its acquisition
of programming, the issue seems to trigger the legislative
directive. Yet the Commission seems to ignore its own
conclusions about cable companies' incentives and constraints,
and the dynamics of the programming industry. See First
Report, 8 F.C.C.R. at 6862 p 231. If the criteria of
s 543(l )(1) are unsuitable, the Commission can consider con-
cepts of effective competition that it finds more apt for these
purposes.
Second, the FCC comments that if a competing MVPD
favored its own affiliated programmers, the presence of com-
petition would have no tendency to create room for indepen-
dent programmers. See Reconsideration Order 10 F.C.C.R
at 7379 p 47. But this theory seems contradicted by the
Commission's own observation, mentioned earlier, that no
vertically integrated MPVD has complained of reaching the
40% limit. Vertically integrated MVPDs evidently use loads
of independent programming. Further, although cable oper-
ators continue to expand their interests in programmers,
"[t]he proportion of vertically integrated channels ... contin-
ue[d] to decline" for each of the last two years. Sixth
Annual Report, 15 F.C.C.R. at 1058-59 p 181, Seventh Annu-
al Report p 173 (emphasis added). Even if competing MSOs
filled all of their channels with affiliates' products (as unlikely
as that seems), the Commission nowhere explains why, in the
pursuit of diversity, the independence of competing vertically
integrated MVPDs is inferior to the independence of unaffili-
ated programmers. In any event, the Commission's point
here does not respond to the intuition that competition spurs
a firm's search for the best price-quality trade-off.
In its brief the Commission adds the argument that truly
effective competition under s 543(l )(1) existed only for a tiny
fraction of cable systems. Indeed, it said in its Sixth Annual
Report that of the nation's 33,000 cable community units, only
157 satisfy the definition through being in a market offering
more than one wireline MVPD. Sixth Annual Report, 15
F.C.C.R. at 1045-46 p 142. (In the Seventh Annual Report
we learn that now 330, or 1% of the total, meet the competi-
tion standard through exposure to another MVPD; in this
report the qualifier "wireline" is absent. See Seventh Annual
Report p 138.) But in determining whether or not the regula-
tions burden substantially more speech than necessary, it is a
weak move to point to the paucity of MVPDs facing competi-
tion if, as seems the case, it is easy to exempt them from the
limit.
We find that the FCC has failed to justify its vertical limit
as not burdening substantially more speech than necessary.
Accordingly, we reverse and remand to the FCC for further
consideration.
* * *
We turn, finally, to several aspects of the rules for attribut-
ing ownership for purposes of the horizontal and vertical
limits, recently revised by the FCC and challenged by peti-
tioners. See Implementation of the Cable Television Con-
sumer Protection and Competition Act of 1992, 14 F.C.C.R.
19014 (1999) ("Attribution Order"). Petitioners suggest that
these rules affect their ability to "speak" to subscribers
because of their connection to the horizontal and vertical
limits. But petitioners' speech rights are implicated only
where their interest allows them to exercise editorial control,
in which case attribution would be proper and it is the
horizontal or vertical limit that constrains speech. The only
effect of the attribution rules where no control is exercised is
to limit the extent of petitioners' investments in a particular
class of companies. We therefore review the agency actions
under the APA standards, to determine whether they are
"arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law." See 5 U.S.C. s 706(2)(A).
The FCC adopted as its starting point the pre-existing
rules for attributing ownership of broadcast television sta-
tions, finding that the purposes of the rules are the same.
See Attribution Order, 14 F.C.C.R. at 19030 p 35; Second
Report 8 F.C.C.R. at 8577-79, 8593-96 p p 30-35, 56-63. Un-
der that standard, attribution is triggered by ownership of 5%
of the voting shares of a company, with various exceptions.
See Attribution of Ownership Interests, 97 FCC 2d 997
(1984). Because the decisions in the Attribution Order
tracked, to a large degree, similar decisions related to the
broadcast attribution rules, the FCC incorporated by refer-
ence much of the reasoning from the broadcast orders. See
Attribution Order, 14 F.C.C.R. at 19015-16 p 1.
Petitioners challenge the sufficiency and relevance of the
Commission's evidence in support of the 5% attribution rule
and its failure to adopt an alternative proposed by cable
industry interests. They begin by asserting that the FCC
improperly relied on two studies that were mentioned neither
in the FCC's notice nor in any party's submission. See
Notice of Proposed Rulemaking, 13 F.C.C.R. 12990 (1998).
Although it is true that an agency cannot rest a rule on data
" 'that, [in] critical degree, is known only to the agency,' "
Community Nutrition Institute v. Block, 749 F.2d 50, 57
(D.C. Cir. 1984) (quoting Portland Cement Ass'n v. Ruckel-
shaus, 486 F.2d 375, 393 (D.C. Cir. 1973); see also Interna-
tional Union, UAW v. OSHA, 938 F.2d 1310, 1324-35 (D.C.
Cir. 1991) (approving reliance on documents not exposed to
comment if not "vital" to agency's support for rule), obviously
not every cited document is "critical."
Here, although petitioners assert that the studies were the
sole evidence cited by the FCC, the Commission also relied
on a survey, used to support the 1984 broadcast attribution
rules, showing that in widely held corporations, an owner of
5% or more would ordinarily be one of the two or three
largest shareholders. See Attribution Order, 14 F.C.C.R. at
19034 p 46; Block, 749 F.2d at 58 (1984) (new information
"expanded on and confirmed information"). The earlier rule-
making had inferred that with such ownership a holder of 5%
or more would be able "to potentially affect the outcome of
elective or discretionary decisions and to command the atten-
tion of management." Attribution of Ownership Interests, 97
FCC 2d at 1005-06 p 14. This hardly seems implausible.
Presumably an owner of 5% or more typically has enough of
an interest to justify the burden of informing himself about
the company's activities and trying to influence (or supplant)
management, a fact that management would bear in mind in
deciding to whose exhortations it should pay attention. Peti-
tioners have not pointed to any evidence suggesting that the
FCC's survey is no longer accurate, or that the conclusion
they draw from it has been undermined.
Furthermore, in attacking the relevance of the new studies,
the petitioners fail to acknowledge that the FCC sought a
rule that would capture "influence or control," not just con-
trol. Attribution Order, 14 F.C.C.R. at 19015-16 p 1 (empha-
sis added). The Commission specifically noted that a "firm
does not need actual operational control over ... a company
in order to exert influence." Id. at 19030-31 p 36. This
distinction also tends to rebut petitioners' critique of the
Commission's reliance on the Securities and Exchange Com-
mission's requirement that investors report to the SEC when
their holdings exceed 5% of any class of a firm's shares. See
15 U.S.C. s 78m(d)(1). The FCC noted that the purpose of
the SEC's requirement was to alert investors to potential
changes in control, and reasoned that this was similar to its
own purpose in the attribution rules, encompassing not mere-
ly control but influence. See Attribution Order, 14 F.C.C.R.
at 19035 p 49 (citing Securities and Exchange Comm'n v.
Savoy Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978)).
Finally, petitioners contend that it was arbitrary for the
FCC to reject a "control certification" approach, such as it
adopted for partnerships, under which a partner can avoid
attribution if (but only if) it certifies to the absence of certain
relationships that might betoken control. In this argument,
petitioners make a classic apples-and-oranges mix, since the
bases that they proposed for self-certification, see Attribution
Order at 19024 p 22, are quite different from those adopted by
the Commission for partnerships, see id. at 19038 p 57 n.163.
Even if corporations and partnerships were virtually identi-
cal, the Commission would hardly be guilty of self-
contradiction if it rejected certification scheme A for corpora-
tions and accepted certification scheme B for partnerships.
In any event, for corporations the Commission rejected a
case-by-case approach on conventional grounds, observing
that a bright-line rule was to be preferred because it "reduces
regulatory costs, provides regulatory certainty, and permits
planning of financial transactions." Id. at 19035 p 48; see
also id. at 19031 p 38. Given an agency's very broad discre-
tion whether to proceed by way of adjudication or rulemak-
ing, see N.L.R.B. v. Bell Aerospace Co., 416 U.S. 267, 294
(1974), and the reasonableness of the 5% criterion, we doubt
there was need to explain further. The Commission did,
however, observe that the certification proposals offered did
"not take into account the variety of ways that an investor
may exert influence or control over a company." Id. at
19030-31 p 36. And it implicitly distinguished its treatment
of partnerships when it said that a limited partner's influence
may not be proportional to equity interest "because the
extent of its power may be modified by contract." Id. at
19039 p 61. Indeed, the Commission's certification rules for
partnerships require voting restrictions that would not nor-
mally, and perhaps could not, be paralleled in the corporate
world (such as abnegation of any power to remove the general
partner except under extremely limited circumstances, see id.
at 19038 p 57 n.163). We find the Commission's discussion
adequate.
We also uphold the FCC's adoption of an "equity-and-debt"
rule to capture "nonattributable investments that could carry
the potential for influence." Id. at 19047 p 83. The rule
triggers attribution "to an investor that holds an interest that
exceeds 33% of the total asset value (equity plus debt) of the
applicable entity." Id. at 19046-47 p 82.10 Petitioners attack
the sufficiency of evidence to support both the rule itself and
the selection of 33% as limit. They observe in particular that
the Commission's own claims seem to depend on combina-
tions of debt and equity with contractual rights. See, e.g., id.
at 19047 p 83. But the Commission explicitly relied on an
earlier rulemaking, see, e.g., id. at 19047 p 83, citing Review
of the Commission's Regulations Governing Attribution of
Broadcast and Cable/MDS Interests, 14 F.C.C.R. 12559
(1999) ("Broadcast Attribution Order"), which in turn relied
on academic literature, see id. at 12589 p 62 nn.132, 134.
Petitioners offer no critique of that literature's relevance, and
it is not our role to launch one on our own. So we must
accept the Commission's basic finding.
Although petitioners independently attack the Commis-
sion's selection of 33% as the debt-and-equity limit, we are
constrained in our review by the sketchy character of their
attack on the basic theory. The Commission's choice of 33%
certainly has modest support. It recited the numbers offered
by various parties, which ranged from 10% to 50%, in some
cases with variations dependent on the presence of special
contract provisions. Attribution Order, 14 F.C.C.R. at
19048-49 p p 85-86. Obviously 33% is not far off the median,
but, as the Commission says nothing to evaluate the numbers
recited, that tells us little.
The Commission also cited its own past decisions, saying
that it had used the same percentage for the parallel rule in
its broadcast cross-interest policy, and that there it "does not
__________
10 The Commission often writes as if investors owned the assets
of the companies in which they hold stock or bonds. See, e.g.,
Attribution Order, 14 F.C.C.R. at 19047-48 p 84 n.230. No issue is
made here of how its calculations are to be made, e.g., percentage of
book value, percentage of market capitalization, or some other
method, although the Commission has attempted "clarification" in
the broadcast context by allowing applicants to choose their valua-
tion method. See Review of the Commission's Regulations Govern-
ing Attribution of Broadcast and Cable/MDS Interest, MM Docket
No. 94-150, FCC 00-438 (rel. Jan. 19, 2001) p p 26-28 (2001) ("Attri-
bution Clarification Order").
appear to have had a disruptive effect," id. at 19048-49 p 86,
though without indicating what (if any) assessment it had
made. And it referred to two prior adjudications. Id. (citing
Cleveland Television Corp., 91 FCC 2d 1129 (Rev. Bd. 1982),
aff'd, Cleveland Television Corp. v. Federal Communications
Commission, 732 F.2d 962 (D.C. Cir. 1984), and Roy M.
Speer, 11 F.C.C.R. 18393 (1996)). In Cleveland Television it
had simply held that a one-third preferred stock interest
conferred " 'insufficient incidents of contingent control' " un-
der various policies, Attribution Order, 14 F.C.C.R. at 19048-
49 p 86 (emphasis added). In Roy M. Spear, it relied on
Cleveland Television to impose a 33% ownership on a credi-
tor's purchase option, but deferred establishment of any
general rule. See 11 F.C.C.R. 18393 p 126 n.26. These prior
adjudications provide thin affirmative support for the choice
of 33%, though they at least suggest that the Commission has
not indulged in self-contradiction. But given the absence of a
real probe of the Commission's underlying reasoning for
having the restriction at all, the inevitable difficulty in picking
such a number, and the deference due the Commission, we
cannot find the choice of 33% arbitrary. See Cassell v.
Federal Communications Commission, 154 F.3d 478, 485
(D.C. Cir. 1998).
Petitioners also challenge the Commission's elimination of
an exemption that prevailed in the broadcast attribution rules
at the time the cable attribution rules were promulgated. In
the broadcast context, an otherwise covered minority share-
holder in a company with a single majority shareholder was
exempted, on the principle that in such a case the minority
shareholder would ordinarily not be able to direct the activi-
ties of the company.11 See Attribution of Ownership Inter-
ests, 97 FCC 2d at 1008-09 p 21; Attribution Order, 14
F.C.C.R. at 19044-46 p p 74-81. There were contentions in
the Broadcast Attribution Order proceeding that the majority
shareholder exemption was being used evasively. See 14
F.C.C.R. at 12574-75 p 29. The Commission neither rejected
__________
11 The FCC has since eliminated the single majority owner ex-
emption in the broadcast rules to bring it into conformity with the
cable rules. See Attribution Clarification Order at p p 41-44.
nor accepted these claims, but retained the exemption. See
id. at p 36. In dispatching the exemption here, the Commis-
sion cited only its concern that a minority shareholder might
be able to exercise influence even in these circumstances, the
"lack of a record ... that the exemption should be retained,"
and the fact that no one claimed to be using the exemption.
Attribution Order, 14 F.C.C.R. at 19046 p 81.
The Commission argues here that petitioners lack standing
because they have not shown that they are using the exemp-
tion. Again, the FCC disregards the impact the rule can
have on investment plans. Petitioners say that they are
continually reviewing investment opportunities and that they
are constrained by the absence of the single majority exemp-
tion. See supra p. 20. This is an actual "injury in fact" that
is "fairly traceable" to the administrative action. See Lujan
v. Defenders of Wildlife, 504 U.S. 555, 561 (1992); see also
Committee for Effective Cellular Rules v. Federal Communi-
cations Commission, 53 F.3d 1309, 1315-16 (D.C. Cir. 1995).
And of course the absence of current use is no reason to
delete an exemption. Removal of the exemption is a tighten-
ing of the regulatory screws, if perhaps a minor one. It
requires some affirmative justification, cf. State Farm, 463
U.S. at 41-42 (requiring justification for removal of a restric-
tion), yet the Commission effectively offers none. Its "con-
cern" about the possibility of influence would be a basis, if
supported by some finding grounded in experience or reason,
but the Commission made no finding at all. Accordingly,
deletion of the exemption cannot stand.
Finally, petitioners object to one of the seven criteria that a
cable operator must satisfy in order to be exempt from
attribution of limited partnership. The general rule is that
any partnership interest, no matter how small, leads to
attribution, Attribution Order, 14 F.C.C.R. at 19039-40 p 61,
but a limited partner can secure exemption if it certifies
compliance with certain criteria intended to ensure that the
partner "will not be materially involved in the media manage-
ment and operations of the partnership." Id. The Commis-
sion interprets one of these criteria to bar exemption when a
limited partner that is a vertically integrated MSO also sells
programming to the partnership. See id. at 19055 p 106.
This criterion applies even though the limited partner, to
achieve exemption, must have certified that it does not "com-
municate with the licensee or general partners on matters
pertaining to the day-to-day operations of its video-
programming business." Id. at 19040-41 p 64.
We agree with petitioners that the no-sale criterion bears
no rational relation to the goal, as the Commission has drawn
no connection between the sale of programming and the
ability of a limited partner to control programming choices.
Of course a programmer might secure contract terms giving
it some control over a partnership's programming choices,
but, given the independent criterion barring even communica-
tions on the video-programming business, see Attribution
Order, 14 F.C.C.R. at 19040-41 p 64, exercise of that power
would seem to be barred. Even if it weren't, the bargaining
opportunity would depend on the desirability of the partner's
programming, not on its status as a partner. The FCC does
not even offer a hypothetical to the contrary.
* * *
To summarize, we reverse and remand the horizontal and
vertical limits, including the refusal to exempt cable operators
subject to effective competition from the vertical limits, for
further proceedings. We also reverse and remand the elimi-
nation of the majority shareholder exception and the prohibi-
tion on sale of programming by an insulated limited partner.
We uphold the basic 5% attribution rule and the creation of a
33% equity-and-debt rule.
So ordered.