April 01, 2020 Feature

The Third Circuit and the FCC’s Media Ownership Rules

By Christian F. Binnig, Christopher S. Comstock, and Elaine Liu

Over the last 15 years, the Federal Communications Commission (FCC or Commission) has repeatedly proposed rules to deregulate media ownership in an effort to help broadcasters better compete with internet content providers and other new competitors through consolidation. But this decade-and-a-half exercise has suffered from more than a bit of what Yogi Berra would call “déjà vu all over again.” The same panel of the U.S. Court of Appeals for the Third Circuit has reviewed the FCC’s proposed rules multiple times, and has stayed and remanded many of the FCC’s proposed rule changes. In particular, the Third Circuit panel repeatedly has held that the FCC’s proposed rules fail to properly prioritize encouraging diversity in broadcast stations’ ownership structures. The panel—made up of Circuit Judges Thomas L. Ambro, Julio M. Fuentes, and Anthony J. Scirica—has taken the unusual step of retaining jurisdiction over the judicial review proceedings throughout the entirety of their 15-year history.

In its most recent opinion, Prometheus Radio Project v. Federal Communications Commission (Prometheus IV), issued on September 23, 2019, the Third Circuit panel yet again ordered the FCC to reassess its rulemaking and rebuked the FCC for failing to sufficiently take into account its mandate to encourage diversity on the airwaves.1

Below, we provide an overview of the long-running dispute and where it stands currently.

Statutory Background

In enacting the Telecommunications Act of 1996 (Act), Congress sought to create a “pro-competitive, deregulatory national policy framework designed to accelerate rapidly private sector development of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition.”2 The Act not only set forth various limits on media ownership, but also directed the FCC under section 202(h) to review its rules periodically—now on a quadrennial basis—to determine whether they remain “necessary in the public interest as the result of competition.”3 If no longer “useful,” “convenient,” or “helpful,” the FCC must repeal or modify its rules “in the public interest and support its decision with a reasoned analysis.”4 The Prometheus line of cases has stemmed from this statutorily mandated review by the FCC of its media ownership rules.

2004 Third Circuit Decision

On June 2, 2003, the FCC adopted a report and order (2003 FCC Order) concluding that new technologies rendered many of its prior rules not “necessary in the public interest” because such rules “inadequately account[ed] for the competitive presence of cable, ignore[d] the diversity-enhancing value of the Internet, and lack[ed] any sound basis for a national audience reach cap.”5 Accordingly, the FCC modified a number of its rules, including its rules regarding broadcast media ownership. Various organizations, including consumer advocacy groups and associations of networks, broadcasters, and newspaper owners, filed petitions for review, and the cases were consolidated for hearing by a Third Circuit panel consisting of Judges Ambro, Fuentes, and Scirica, which issued its Prometheus I opinion on June 24, 2004.

While the Third Circuit panel agreed with the FCC’s decision to modify local media ownership rules in many areas, it found fault with the FCC’s methodology for modifying those rules insofar as they related to the FCC’s mandate for encouraging diversity in broadcast media. The FCC had proposed replacing prior rules that prohibited common ownership of a broadcast television station and a newspaper in the same market and restricted the common ownership of television and radio outlets in the same market.6 But the Third Circuit criticized the FCC’s use of the “diversity index” as a methodological tool to measure the level of viewpoint diversity in local markets in order to identify “at-risk” markets where consolidation would have a deleterious effect—and, thus, where limits on cross-media ownership should be retained. According to the court, not only did the FCC fail to provide adequate notice of this new methodology in its 2003 rulemaking proceedings,7 but the FCC also employed “several irrational assumptions and inconsistencies.”8 The court found that the FCC’s diversity index lacked a rational basis because, instead of using companies’ actual market share, the diversity index assumed that a media outlet provides the same diversity impact in a market regardless of the size of its audience.9 Similarly, the court remanded the numerical limits on common ownership of broadcast television stations due to the FCC’s failure to provide any evidence to justify its assumption of equal market share among stations.10

The Third Circuit panel also remanded the FCC’s repeal of the failed-station solicitation rule—a rule that had required a seller of a failed, failing, or unbuilt television station seeking a waiver of local television duopoly ownership limits to provide notice of such a sale to potential out-of-market buyers before it could sell such a station to an in-market buyer. In addition, the panel ordered the FCC to consider proposals to advance female and minority ownership at the same time as it addressed other remanded issues. Because the FCC had initially created the failed-station solicitation rule for the purpose of “ensur[ing] that qualified minority broadcasters had a fair chance to learn that certain financially troubled—and consequently more affordable—stations were for sale,” and because the FCC has long been mandated to “expand opportunities for minorities and women to enter the broadcast industry,” the court largely found that the FCC’s failure to adequately consider diversity rendered its rulemaking arbitrary and capricious.11

Even so, the Third Circuit rejected as premature a challenge to the FCC’s definition of eligible entities. To encourage minority and female ownership, the FCC provided that broadcast licensees could assign or transfer control of a grandfathered combination of radio and television stations to any eligible entity. The FCC defined eligible entities with reference to the Small Business Administration’s (SBA) definition of small businesses, which focused solely on a company’s revenues.12 While the court suggested that the FCC consider on remand adopting a different definition based on the criteria for “socially and economically disadvantaged businesses” (SDBs), the court also credited the FCC’s contention that, “because of pending legislation, the definition of SDBs is currently too uncertain to be the basis of its regulation.”13

The Third Circuit stayed the rules that it remanded to the FCC. Several media companies then filed a formal appeal seeking review of the Third Circuit’s decision, but the U.S. Supreme Court denied certiorari.14

2011 Third Circuit Decision

Following the Third Circuit’s remand in 2004, the FCC took steps to address the court’s criticisms, including issuing an order overhauling the newspaper/broadcast cross-ownership rule (2008 FCC Order)15 and a separate order adopting a number of measures to address broadcast ownership diversity (2008 FCC Diversity Order).16 Once again, multiple organizations brought challenges to the FCC’s orders, and the Third Circuit issued an opinion dated July 7, 2011, which remanded many of the FCC’s proposed broadcast media ownership rules for further consideration.

On appeal, the Third Circuit in Prometheus II held that the FCC did not satisfy the notice-and-comment requirements of the Administrative Procedure Act (APA) with respect to the 2008 FCC Order, which had repealed the Commission’s ban on national newspaper/broadcast cross-ownership and had instead adopted a case-by-case approach guided by certain presumptions and a four-factor test.17 The court found that the notice provided by the FCC could not have permitted meaningful commentary when it contained only two sentences about the “characteristics of markets,” which, inter alia, was “too open-ended,” excluded “many central elements of the rule,” and did not solicit comment on the overall framework under consideration.18

The Third Circuit did affirm some of the 2008 FCC Order as justified in light of diversity and competition considerations, particularly where the FCC chose to retain pre-2003 rules. For example, in approving of the FCC’s retention of 1999 radio/television cross-ownership limits, the court rejected an argument by certain petitioners that the limits were no longer necessary.19 The court approved of the FCC’s reasoning that cross-ownership rules protect viewpoint diversity while local ownership rules help ensure competition.20 The court also approved of the FCC’s reliance on the fact that, notwithstanding a more diverse media market with cable, internet, and other new media sources, traditional media remains “the most frequently used and most important sources of local and national news.”21

In addition to challenging the 2008 FCC Order, petitioners had challenged a number of provisions in the 2008 FCC Diversity Order as failing to promote minority and female ownership diversity because the FCC continued to use a revenue-based eligible entity definition.22 Going a step beyond where it had gone in its 2004 decision, the Third Circuit panel agreed with these petitioners and concluded that the FCC’s eligible entity definition lacked a “reasoned analysis supported by the evidence before the Commission.”23 After observing that the FCC did not discuss the definition’s impact on minorities and women, the court questioned how the FCC’s definition could increase minority ownership when small businesses are not more likely to be owned by minorities, and faulted the FCC for providing insufficient data on television and radio ownership by minorities and women.24 Finding that the FCC “has in large part punted yet again on this important issue,” the court remanded the FCC’s decision to defer consideration of alternative proposals for eligible entity definitions other than the SBA definition, e.g., using the criteria for socially and economically disadvantaged businesses instead.25

In sum, the Third Circuit remanded the newspaper/broadcast cross-ownership rule and all provisions using the eligible entity definition.26

2016 Third Circuit Decision

The Third Circuit panel issued its next significant opinion in the Prometheus series on May 25, 2016 (Prometheus III).27 A number of organizations filed petitions for review of a combined order and further notice of proposed rulemaking that the FCC issued in 2014 (2014 FCC FNPRM & Order), notwithstanding the fact that the FCC still had not yet completed its 2010 and 2014 quadrennial reviews.

In the 2014 FCC FNPRM & Order, the FCC discussed the possibility of using for its “eligible entity” rules the socially and economically disadvantaged business definition and other definitions that would expressly recognize the race and ethnicity of applicants.28 The FCC tentatively concluded that use of such a definition could require a compelling governmental interest to survive a constitutional strict scrutiny analysis.29 And while it also determined that its “interest in promoting a diversity of viewpoints could be deemed sufficiently compelling,” the FCC found that it lacked the necessary supporting data at that time.30 Similarly, it found that it did not have the data to support the use of either an “overcoming disadvantages preference” standard (which does not mention race or gender but which the FCC believed may still be subject to heightened constitutional scrutiny) or a preference standard based on gender alone (which would trigger intermediate, rather than strict, scrutiny).31 The FCC ultimately did not take any final action.

The Third Circuit panel held that the FCC’s inaction on the eligible entity definition constituted an unreasonable delay, finding that (1) the FCC had a duty to act as early as the Prometheus I decision; (2) promoting minority and female ownership is statutorily mandated and thus an “important aspect of the overall media ownership regulatory framework”; (3) the consequences included preventing several initiatives from taking effect; and (4) the difficulty of collecting data did not justify the delay.32 The court rejected the FCC’s argument that it had not yet violated the Third Circuit’s Prometheus II order because its 2010 quadrennial review was still ongoing; according to the court, that logic would mean that the FCC could “evade [the court’s] remand merely by keeping the 2010 review open indefinitely.”33 The court further rejected the FCC’s reliance on its chairman’s stated commitment to circulating an order taking final action that year, given that the FCC had made such promises before and that such promises are not binding on other commissioners.34 Pursuant to APA section 706(1), the Third Circuit remanded and ordered a mediation between the FCC and the petitioners to set a timetable within 60 days for final agency action.35

Likewise, the court criticized the FCC’s delay in completing the 2010 quadrennial review. It found that not only had the FCC been unable to explain the reason for its delay, but also its delay on five broadcast ownership rules had significant costs—including preventing parties that “would be able, under some of the less restrictive options being considered by the Commission, [from] engag[ing] in profitable combinations,” as well as “hamper[ing] judicial review.”36

However, the court declined to vacate the FCC’s proposed rules in their entirety, finding such complete vacatur to be inappropriate because the FCC could still “conceivab[ly] create a supportable rule” and because vacatur would likely be disruptive.37

The Third Circuit panel further found that the FCC’s new attribution rule for television joint sales agreements was arbitrary and capricious. According to the court, the new attribution rule “modifies the Commission’s ownership rules by making them more stringent”; but the FCC did not analyze the necessity of its preexisting ownership caps, and thus “it cannot logically demonstrate that an expansion is in the public interest.”38 The court rejected the FCC’s argument that its attribution decisions are separate from its ownership rules and are not subject to the requirements of section 202(h) of the Act. The court concluded that the FCC’s position was untenable not only because its decision in Prometheus I described the radio joint sales agreement rule as a “modification to the local radio ownership rule” and upheld the rule as compliant with section 202(h), but also because attribution rules do not exist separately from the ownership rules to which they relate.39

Accordingly, the Third Circuit remanded and ordered mediation on the eligible entity definition, reminded the FCC of its obligation to complete its quadrennial review responsibilities, and vacated and remanded the television joint sales agreement rule.

2019 Third Circuit Decision

In its most recent decision, the Third Circuit panel reviewed various actions taken by the FCC after Prometheus III, including an order taking final action on the 2010 and 2014 quadrennial reviews of cross-media and local ownership rules (2016 FCC Order),40 an order granting certain industry groups’ petition for rehearing (2017 FCC Reconsideration Order),41 and an order following through on the announcement in the 2017 FCC Reconsideration Order that the FCC intended to adopt a radio incubator program to promote diversity (2018 FCC Order).42

To begin, the Third Circuit found that the 2017 FCC Reconsideration Order was not arbitrary and capricious for retaining the FCC’s “top four” local television rule, which prohibits the merger of any two of the top four stations in a given market. Consistent with its finding in Prometheus I, the court concluded that the FCC has the discretion to continue to “draw a line” at four, though the line may be “somewhat arbitrary” and “not perfect” given that it is supported by record evidence showing a “‘cushion’ of audience share between the fourth-ranked and fifth-ranked stations.”43 Similarly, the court found that the FCC’s reasoning in support of its definition of comparable markets in the 2018 FCC Order was adequately noticed and not arbitrary and capricious.44

Nonetheless, the Third Circuit vacated the 2017 FCC Reconsideration Order and the 2018 FCC Order in their entirety, criticizing the FCC’s lack of data to ensure that media ownership rules do not come at the expense of women and minorities in the industry. Likewise, the court vacated the FCC’s proposed eligible entity definition promulgated in the 2016 FCC Order, which the FCC once again based on revenue after concluding that race-based or gender-conscious definitions, including the socially and economically disadvantaged business definition, could not withstand constitutional scrutiny due to a lack of supporting evidence.45

In vacating these rules, the Third Circuit panel found that although the FCC did make a “determination about the effect of the rules on minority and female ownership” as required by the court’s instruction in Prometheus III, “[p]roblems abound with the FCC’s analysis.”46 As an initial matter, the FCC did not cite any evidence regarding gender diversity, which the court equated to a failure to consider the issue entirely.47 The court rejected as insufficient the FCC’s response that “no data on female ownership was available,” that the FCC “reasonably relied on the data that was available,” and that the FCC “was not required to fund new studies.”48 Moreover, the court found the FCC’s analysis of racial minority ownership data to be “so insubstantial that it would receive a failing grade in any introductory statistics class.”49 For example, to justify its conclusions, the FCC treated two data sets “created using entirely different methodologies” as comparable.50 And while the court agreed with the FCC that diversity is “but one” of the FCC’s statutorily required policy goals, the court found that the FCC still failed to provide a “meaningful evaluation” of its proposed rules’ effect on diversity and explain “why it believed the trade-off was justified for other policy reasons.”51

Finally, the Third Circuit found that the FCC did not unreasonably delay action on a proposal to extend cable-procurement rules promoting diversity to broadcast media.52 The court observed that, in contrast to the FCC’s delay relating to the eligible entity definition at issue in Prometheus III, not only was the three-year delay here much shorter but also the consequence of the delay was to “keep the proposal alive, rather than rejecting it outright for lack of support.”53 Nonetheless, the Third Circuit warned that it may reach a different conclusion if the FCC does not take final action on the proposal in the 2018 quadrennial review.54

2019 Petition for Rehearing En Banc and 2020 Extension of Time to Seek Certiorari

On November 7, 2019, the FCC filed a petition with the Third Circuit for a rehearing en banc of the panel decision in Prometheus IV, contending that such a review was warranted on three grounds.55 First, the FCC argued that the panel majority imposed a requirement for “new empirical research” or “in-depth theoretical analysis” that the APA does not require, which consequently also “disregard[ed] deference due to agency predictive judgments.”56 Second, the FCC claimed that the panel majority’s rulings represented “unprecedented oversight” that have “‘impede[d] the [section 202(h)] review process established by Congress,’” causing “the FCC’s rules [to] remain largely the same” in the last 20 years despite major technological changes.57 Third, the FCC argued that the panel majority’s vacatur of the FCC’s revenue-based eligible entity definition not only contradicted the court’s own prior remands but also lacked any “explanation or analysis.”58 The FCC also argued that the Third Circuit panel had focused too narrowly on diversity, notwithstanding the fact that the FCC’s rules are subject to a “broad-ranging public interest analysis.”59

On November 20, 2019, a majority of the judges on the Third Circuit voted to deny the FCC’s petition for rehearing en banc. Thereafter, both the FCC and an intervening party separately sought and were granted extensions of time up to March 19, 2020, to file a petition for a writ of certiorari before the U.S. Supreme Court with respect to the Prometheus IV decision. However, persuading the Supreme Court to grant such a petition may be an uphill battle in light of the Court’s refusal to grant the FCC’s petition for certiorari to review the Third Circuit’s 2004 decision in Prometheus I.

Thus, the story is far from over. As both the Third Circuit and the FCC have observed, even after 15 years, further litigation over the FCC’s broadcast media ownership rules appears likely.

Conclusion

Assuming that the FCC goes back (again) to the drawing board, it remains to be seen whether the FCC’s future efforts at revamping its broadcast media ownership rules will have greater success or will be relegated by the courts to yet another spin of the wheel.

Endnotes

1. 939 F.3d 567 (3d Cir. 2019).

2. S. Rep. No. 104-230, at 1–2 (1996).

3. Telecommunications Act of 1996, Pub. L. No. 104-104, § 202(h) (1996).

4. 373 F.3d 372, 394–95 (3d Cir. 2004).

5. Report and Order and Notice of Proposed Rulemaking, In re 2002 Biennial Regulatory Review, 18 FCC Rcd. 13620, ¶ 4 (2003).

6. Id. ¶ 327.

7. Prometheus I, 373 F.3d at 411–13.

8. Id. at 402.

9. Id. at 408 (“A diversity index that requires us to accept that a community college television station makes a greater contribution to viewpoint diversity than a conglomerate that includes the third-latest newspaper in America also requires us to abandon both logic and reality.”).

10. Id. at 426, 432–33.

11. Id. at 420–21 & n.59, 446.

12. Eligible entity is defined as a small business or “a business with $6 million or less in annual revenue.” Id. at 427 n.68.

13. Id. at 428 n.70.

14. Media Gen., Inc. v. FCC, 545 U.S. 1123 (2005).

15. Report and Order and Order on Reconsideration, 2006 Quadrennial Regulatory Review—Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, 23 FCC Rcd. 2010, 2055–56 (2007).

16. Report and Order and Third Further Notice of Proposed Rulemaking, Promoting Diversification of Ownership in the Broadcasting Services, 2006 Quadrennial Regulatory Review—Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, 23 FCC Rcd. 5922 (2007).

17. Prometheus Radio Project v. FCC (Prometheus II), 652 F.3d 431, 445 (3d Cir. 2011).

18. Id. at 450.

19. Id. at 456.

20. Id. at 457.

21. Id.

22. Id. at 469.

23. Id. at 469–70.

24. Id. at 470–71.

25. Id. at 471–72.

26. Id. at 472.

27. 824 F.3d 33 (3d Cir. 2016).

28. Id. at 46–48.

29. Id. at 46.

30. Id. at 47.

31. Id. at 46–48.

32. Id. at 48 (analyzing factors under the framework established by Oil, Chemical & Atomic Workers Union v. Occupational Safety & Health Administration, 145 F.3d 120, 123 (3d Cir. 1998)).

33. Id. at 49.

34. Id.

35. Id. at 49–50.

36. Id. at 50–52.

37. Id. at 52–54.

38. Id. at 58–59.

39. Id. at 59.

40. Second Report and Order, 2014 Quadrennial Regulatory Review, 31 FCC Rcd. 9864 (2016).

41. Order on Reconsideration and Notice of Proposed Rulemaking, 32 FCC Rcd. 9802 (2017).

42. Report and Order, In re Rules and Policies to Promote New Entry and Ownership Diversity in the Broadcasting Services, 33 FCC Rcd. 7911 (2018).

43. Prometheus IV, 939 F.3d 567, 581–82 (3d Cir. 2019).

44. Id. at 583–84.

45. Id. at 575.

46. Id. at 585.

47. Id. at 585–86.

48. Id. at 585.

49. Id. at 586.

50. Id.

51. Id. at 587.

52. Id. at 588.

53. Id.

54. Id.

55. Prometheus IV, 939 F.3d 567, petition for reh’g en banc, No. 17-1107 (3d Cir. Nov. 7, 2019).

56. Id. at 9–12.

57. Id. at 14 (quoting Prometheus I, 373 F.3d 372, 439 (3d Cir. 2004) (Scirica, J., dissenting)).

58. Id. at 16–17.

59. Id. at 1–2.

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By Christian F. Binnig, Christopher S. Comstock, and Elaine Liu

Christian F. Binnig (cbinnig@mayerbrown.com) and Christopher S. Comstock (ccomstock@mayerbrown.com) are partners and Elaine Liu (eliu@mayerbrown.com) is an associate in the Chicago office of Mayer Brown LLP. Any opinions expressed in this article are entirely their own.