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Malrite T.V. of New York v. Federal Communications Commission

decided: June 16, 1981.

MALRITE T.V. OF NEW YORK, ET AL., PETITIONERS,
v.
FEDERAL COMMUNICATIONS COMMISSION, UNITED STATES OF AMERICA, RESPONDENTS .



Petition to set aside a Report and Order of the Federal Communications Commission repealing cable television rules on distant signal carriage and syndicated program exclusivity. Denied.

Before Newman and Kearse, Circuit Judges, and Metzner,*fn* District Judge.

Author: Newman

In a major reversal of its regulatory policy, the Federal Communications Commission ("FCC" or "Commission") has decided to deregulate cable television by rescinding rules relating to syndicated program exclusivity and distant signal carriage. Television broadcasting and programming interests have petitioned to set aside the FCC's order and to reimpose the regulations, which have been in force since 1972. On November 19, 1980 we stayed the order pending the disposition of the appeal. We now vacate the stay and deny the petition, thereby permitting the exclusivity and distant signal rules to be repealed.

I.

The television broadcasting industry, transmitting video signals free to viewers, is dominated by the three national networks, which contract with local station affiliates to carry network programming, most of which the networks purchase from independent producers. In addition, there are unaffiliated, independent stations which obtain most of their programming in the syndication market.*fn1 The cable television industry consists of various local systems, which transmit broadcast video signals from a central station to individual homes by closed circuit, coaxial cable. Cable subscribers pay a monthly fee to receive a basic set of channels plus an optional fee for special channels (pay cable).

Each of the 1,000 broadcasting stations, affiliate or independent, operates along an electromagnetic frequency established by the FCC on either very high frequency (VHF) or ultra high frequency (UHF) channels. The VHF range produces a higher quality viewing signal than UHF for most viewers. Though the FCC had avidly supported the expansion of UHF channels as a means of providing increased program diversity and expression of local interests, UHF stations have been plagued with financial difficulties due to small audiences and low revenues, stemming in part from their inferior reception, and comprise the least profitable sector of the television industry. See R. Noll, M. Peck & J. McGowan, Economic Aspects of Television Regulation 79-129 (1973) (hereafter "R. Noll, et al."); Revised TV Broadcasting Financial Data 1978, FCC Memo No. 30037 (July 17, 1980). The networks and their affiliates, which operate primarily in the VHF range, account for the largest audience shares and the vast majority of industry revenues and profits. See R. Noll, et al., supra at 3-5, 16-18; Revised TV Broadcasting Financial Data 1978, supra.

Cable television mitigates some of the disadvantages faced by UHF stations by making possible improved reception; to a cable subscriber, the reception quality of a UHF signal is indistinguishable from a VHF signal. But cable provides an additional service by increasing the number of stations available to a viewer through the importation of signals from distant geographic areas using microwave relays or orbiting communications satellites. Cable increases viewers' program choices, offering greater content and time diversity, and consequently it diverts some portion of the viewing audience away from local broadcast stations to more distant ones.

After an initial period in which the FCC declined to exercise regulatory authority over cable television on the grounds that it did not have jurisdiction under the Communications Act, see Frontier Broadcasting Co. v. Collier, 24 F.C.C. 251 (1958), reconsideration denied in Report and Order in Docket No. 12443, 26 F.C.C. 403, 428 (1959), the FCC began to regulate the cable industry directly in 1966.*fn2 See Second Report and Order in Docket Nos. 14895, 15233 and 15971, 2 F.C.C.2d 725 (1966). The Supreme Court upheld the FCC's jurisdiction over cable in United States v. Southwestern Cable Co., 392 U.S. 157, 178, 88 S. Ct. 1994, 2005, 20 L. Ed. 2d 1001 (1968), insofar as the particular regulations were "reasonably ancillary" to the Commission's performance of its statutory duties. These 1966 regulations initiated close to a decade of regulation that can fairly be described as hostile to the growth of the cable industry, as the FCC sought to protect, in the name of localism and program diversity, the position of existing broadcasters, and particularly, the struggling UHF stations. See Besen & Crandall, The Deregulation of Cable Television, 44 Law & Contemp.Prob. 77 (1981); Chazen & Ross, Federal Regulation of Cable Television: The Visible Hand, 83 Harv.L.Rev. 1820 (1970). These rules severely restricted the expansion of cable television services by permitting cable operators in the top 100 markets to import distant signals only after showing in an evidentiary hearing that to do so would be in the public interest and not harmful to UHF broadcast services.*fn3 While the cable industry continued to grow in the 1960's in spite of these restrictions and other costly operating requirements, such as mandatory program origination, access, channel capacity, and other equipment regulations, it entered the 1970's as a small industry, relegated primarily to rural areas and small communities due in large part to the FCC's policies. Besen & Crandall, supra at 79, 93.

In late 1971, the Commission began to consider relaxation of the cable television regulations. See Commission Proposals for Regulation of Cable Television, 31 F.C.C.2d 115 (1971) ("Letter of Intent" to Congress). Shortly thereafter, the 1972 regulations emerged from an industry-wide Consensus Agreement negotiated by the White House and the affected industry interests broadcasters, cable operators, and program producers (copyright owners). Cable Television Report and Order, 36 F.C.C.2d 143 (1972). Though the 1972 rules eased the 1966 restrictions and permitted limited cable expansion, broadcasting interests were still strongly protected. The Report and Order challenged on this appeal, Report and Order in Docket Nos. 20988 and 21284, 79 F.C.C.2d 663 (1980) (hereafter "Report and Order"), abolishes the core of the 1972 regulatory structure by repealing the two main methods of broadcaster protection, the distant signal carriage and syndicated program exclusivity restrictions on cable retransmissions.

The distant signal rules, 47 C.F.R. §§ 76.59(b)-(e), 76.61(b)-(f), and 76.63 (1980), limit the number of signals from distant stations that a cable system can transmit to its subscribers, the limit varying according to market size and the number of available over-the-air signals within the market. While cable systems are required to carry all local stations (defined as within 35 miles of the cable system's community), the number of distant signals that they can carry is limited as follows: in the top 50 markets, cable systems can make available a total of 3 network stations and 3 independents; in the second 50 markets, 3 networks and 2 independents; in the smaller markets, 3 networks and 1 independent; 2 "bonus" independent signals can be carried in major markets where local signals fill the allotted cable complement. By limiting the number of distant signals, the FCC sought to lessen potential adverse impact on the audience shares of local stations, a policy which has the additional effect of lessening the attractiveness of cable to potential subscribers.*fn4

The syndicated program exclusivity rules, 47 C.F.R. §§ 76.151-76.161 (1980), authorize a local television station, which has purchased exclusive exhibition rights to a program, to demand that a local cable system delete that program from distant signals, whether or not the television station was simultaneously showing, or ever planning to show, the program. Copyright holders, in addition to broadcasters, are also protected by the rules and can require deletion of their programs from cable systems. The extent and duration of this protection varies according to market size, program type, and time of showing, with the greatest protection afforded to stations located in the largest markets.*fn5 Cable operators are allowed to substitute other distant signals when they have to delete a program under these rules.

These 1972 rules were fashioned in the context of a continuing policy debate as to whether cable operators should face copyright liability for the programs they retransmitted to subscribers. Prior to Congress' revision of the copyright laws in 1976, the Supreme Court had consistently held that cable systems were not liable under the copyright laws for their use of copyrighted broadcast programs without the owner's consent. Teleprompter Corp. v. Columbia Broadcasting System, Inc., 415 U.S. 394, 94 S. Ct. 1129, 39 L. Ed. 2d 415 (1974); Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390, 88 S. Ct. 2084, 20 L. Ed. 2d 1176 (1968). As a result of these rulings, while the broadcasting industry spent billions of dollars to create and purchase programming,*fn6 cable operators could retransmit those programs at their operating cost without making any payments to program suppliers. Losing in the courts, broadcasters sought FCC protection from what they alleged was a situation of "unfair competition" by cable systems. The FCC rules restricting cable operators' ability to carry distant signals and syndicated programs served, in effect, as proxies for the copyright liability the courts had refused to impose, by restricting cable systems in their use of copyrighted works. See H.R.Rep.No.1476, 94th Cong., 2d Sess. 176-77, reprinted in (1976) U.S.Code Cong. & Ad.News 5659, 5792-93; Comment, Regulatory Versus Property Rights Solutions for the Cable Television Problem, 69 Calif.L.Rev. 527, 536-44 (1981). Indeed, the revision of the cable television rules in 1972 pursuant to the industry-wide compromise was undertaken with a view toward facilitating enactment of legislation imposing copyright liability on cable operators. See Commission Proposals for Regulation of Cable Television, supra, 31 F.C.C.2d at 115-16; Geller v. FCC, 198 U.S. App. D.C. 31, 610 F.2d 973, 974-75 (D.C.Cir.1979) (per curiam ).

The situation changed, however, in 1976, when Congress adopted a system of partial copyright liability for cable television with a compulsory licensing scheme. 17 U.S.C. § 111 (1976). Under the new Copyright Act, cable operators are expressly permitted to retransmit programs without any need to obtain the consent of, or negotiate license fees directly with, copyright owners, but in return they must pay the owners a prescribed royalty fee, based on the number of distant signals the system carries and its gross revenues. Ibid. See generally Nimmer on Copyright § 8.18(E) (1980). After Congress had resolved the copyright issue by a system of compulsory licensing, the FCC commenced an inquiry into the need for maintaining its copyright surrogates, the distant signal and syndicated exclusivity rules. Notice of Inquiry in Docket No. 20988, 61 F.C.C.2d 746 (1976) (announcing review of desirability of syndicated exclusivity rules); Notice of Inquiry in Docket No. 21284, 65 F.C.C.2d 9 (1977) (announcing sweeping review of economic relationship between cable and broadcast television industries).*fn7 These inquiries resulted in two extensive staff reports advocating elimination of the rules, Report in Docket No. 20988, Cable Television Syndicated Program Exclusivity Rules, 71 F.C.C.2d 951 (1979), and Report in Docket No. 21284, Inquiry into the Economic Relationship Between Television Broadcasting and Cable Television, 71 F.C.C.2d 632 (1979) (hereafter "Economic Inquiry Report"). After considering several econometric and case studies concerning the impact of cable television on local station audiences and future cable penetration rates, the Commission found that the impact on broadcasting stations from the deregulation of cable television would be negligible, and that consumers would be decidedly better off due to increased viewing options from the greater availability of expanded cable services.

In conjunction with the release of these reports, the FCC initiated an informal notice-and-comment rulemaking proceeding to eliminate the distant signal and syndicated exclusivity restrictions. Notice of Proposed Rule Making in Docket Nos. 20988 and 21284, 71 F.C.C.2d 1004 (1979). After widespread public comment and administrative reevaluation, it issued the Report and Order, which adopted the proposal for repeal with three commissioners dissenting in whole or in part. The FCC also rejected a suggestion of the National Telecommunications and Information Administration (NTIA) of the United States Department of Commerce that it impose a "retransmission consent" requirement on cable systems if it eliminated the distant signal and syndicated exclusivity rules. Under that proposal, cable operators would need the consent of the originating broadcast station before they could transmit non-network programming to their subscribers.*fn8 Both the United ...


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