Shades of 2004! Court tosses 2008 version of newspaper/broadcast cross-ownership rule, major elements of 2008 Diversity Order.

Remember in the original Planet of the Apes, when Charlton Heston had gone through years of space travel and wild adventures, only to find after all that that (SPOILER ALERT) he really hadn’t gone anywhere at all and was just back where he’d started from? 

Welcome to the FCC’s media ownership rules, which have just been deposited back at Square One by an opinion of the U.S. Court of Appeals for the Third Circuit.

With one major exception (i.e., the Newspaper/Broadcast Cross-ownership (NBCO) rule), the Court affirmed the Commission’s 2008 Ownership Order. But bear in mind that, in the 2008 Ownership Order, the Commission largely (but not entirely) reversed its own 2003 Ownership Order in response to a 2004 Third Circuit decision. And bear in mind, too, that the 2008 Ownership Order was adopted by a Commission led by Kevin Martin, a Republican. The Third Circuit had stayed the effectiveness of the 2003 Ownership Order, and had continued that stay for the 2008 Order as well.  (Last year the Court lifted that stay, allowing the 2008 revision to the NBCO rule to go into effect temporarily; in light of the new Third Circuit opinion, the issue of the stay is now moot.) In 2009, the Commission – now under new management, i.e., Democrat Julius Genachowski – asked for that stay to remain in place, meaning that the current Commission is not necessarily keen on the 2008 decision which largely reverted to the pre-2003 ownership rules.

Oh yeah – and in a move that could prove very problematic for some, the Court also rejected parts of the Commission’s separate 2008 decision (the Diversity Order) providing enhanced opportunities for certain “eligible entities”.

Confused? Join the club.

Some history might be useful here.

Congress has ordered the FCC to review its ownership rules every four years. In 2002, the Commission (under then-Chairman Powell) started such a review. It was a highly contentious proceeding, with hundreds of thousands (if not millions) of comments filed and much rancorous debate inside and outside the Commission. The upshot was the 2003 Ownership Order. Under that order, the ownership rules generally were abandoned and replaced by a different set of limits (dubbed “Cross-Media Limits”) calculated through a “Diversity Index” applicable to all forms of media cross-ownership. 

Numerous appeals were filed, ending up in the Third Circuit, which promptly stayed the effectiveness of the 2003 Order. In 2004, the Third Circuit shipped a number of aspects of the 2003 Order back to the Commission for further consideration. The Court did agree with the Commission that a complete ban on newspaper/broadcast cross-ownership (in effect since 1975) was no longer necessary. BUT the Court concluded that the new cross-ownership limits as a whole had not been adequately supported by the Commission. So with the stay still in place (and with it, the pre-2003 rules), the Court remanded cross-ownership back to the Commission.

In 2006 the Commission started work on its next quadrennial ownership review. Since the Commission was then still looking at the 2003 rules thanks to the 2004 remand by the Third Circuit, the Commission folded that into its 2006 review. The end result was the 2008 Ownership Order. In that order the Commission ditched its 2003 Cross-Media Limits/Diversity Index approach, opting instead for its pre-2003 rules and standards relative to broadcast ownership. With respect to the NBCO rule, however, it chose not to revert to the pre-2003 absolute ban on newspaper/broadcast cross-ownership. Rather, the 2008 Order permitted such cross-ownership on a case-by-case basis, with a presumption that some limited cross-ownership would be permitted in the largest markets.

Many of the parties who appealed the 2003 Order also appealed the 2008 Order.

In its latest decision, the Third Circuit has again sent the NBCO rule back to the Commission. It’s not that the Court necessarily disagrees with the FCC’s case-by-case approach. The Court’s problem is with the process by which the Commission arrived at that approach: while the Commission had issued a notice of proposed rulemaking generally indicating that it planned to revisit the NBCO rule, the Court felt that that notice didn’t provide the public with enough of a description of the approach ultimately adopted. 

[Wonk Warning: Esoteric Legal Discussion Ahead. Proceed with Caution. This aspect of the Court’s ruling is particularly interesting to administrative lawyers. Agencies are required by the Administrative Procedure Act to describe “either the terms or substance of the proposed rule or description of the subjects and issues involved.” Ordinarily that requirement has not been interpreted to require the agency to spell out its proposals in exhaustive detail; to the contrary, many agency rulemaking actions that don’t conform to the specifics of the underlying notice of proposed rulemaking have been upheld as long as the actions were a “logical outgrowth” of the proposal. The Third Circuit’s rejection of the “logical outgrowth” doctrine here will provide fodder for law review articles and appellate arguments for some time to come.]

The Court’s dissatisfaction with the process leading to the 2008 NBCO rule may have been a reaction to the untidiness of that process. The FCC’s underlying NPRM plainly put everybody on notice that some change to the NBCO rule was on the table. But no specifics surfaced until then-Chairman Martin authored an op-ed piece in the New York Times disclosing what he personally had in mind. That piece appeared barely a month before the 2008 Ownership Order incorporating Martin’s approach was adopted. The Court seemed troubled by this chronology, even though the op-ed was accompanied by a simultaneous invitation for comments on Martin’s suggested NBCO rule. Further complicating matters were the facts that drafts of the 2008 Order were circulating before the comment period relative to Martin’s proposal wrapped up, and the final vote occurred just one week after the close of the comment period.

According to the Court, the FCC was obliged to (a) remain “open-minded” about the issues raised and (b) engage with the substantive responses submitted. As the Third Circuit saw it, the 2008 process fell short of those obligations, at least with respect to the NBCO rule. So back to the Commission goes the 2008 revision to the NBCO rule, with instructions to ensure that the APA is followed in any further revisions. As a result, the Commission’s outright ban on newspaper/broadcast cross-ownership, first adopted in 1975, is now back in force. 

Having sent the NBCO rule back, the Court next addressed the five permanent waivers of that rule that the Commission granted in the 2008 Ownership Order. Despite “several concerns” with these waivers, the Court has left them in place because the folks challenging the waivers in court hadn’t sought reconsideration of the waivers at the FCC first – so the Court doesn’t have jurisdiction to consider them on appeal. 

Despite its unhappiness with the NBCO aspect of the 2008 Order, the Court upheld the Commission’s decision to retain, essentially unmodified, its other primary media ownership rules: the radio/television cross-ownership rule; the local television ownership rule; the local radio ownership rule, including AM/FM subcaps; and the dual network rule. In a very brief discussion, the Court concluded that the FCC adequately justified the retention of each of these rules. Note, though, that these rules are essentially the same that were in effect prior to 2003.

The Court also rejected, almost in passing, constitutional challenges to the cross-ownership rules as a whole.  In particular, the Court adhered to the decades-old “scarcity doctrine” as a justification for broadcast regulation.  Despite the proliferation of new media voices in recent years, the Court concluded that the scarcity rationale – i.e., that “more people would like to access the [spectrum] than can be accommodated” – remains valid. As a result, the broadcast media continue to receive limited First Amendment protections.

Now, about that Diversity Order.

Back in 2004, when the Third Circuit remanded the 2003 Ownership Order, the Court devoted particular attention to what it described as the “the Commission’s obligation to make the broadcast spectrum available to all people ‘without discrimination on the basis of race.’” Among other things, the Court was critical of the FCC’s failure to address a number of minority-oriented proposals that had been advanced by the Minority Media and Telecommunications Council in 2002.

In response to that criticism, on the same day that it adopted the 2008 Ownership Order, the Commission also adopted the Diversity Order in which it adopted 13 proposals intended to enhance minority/female ownership opportunities.  So the Court should be happy, right?

Apparently not. Many of the Diversity Order’s enhanced opportunities were limited to “eligible entities” – a universe defined by reference to revenue factors.  Even though the race/gender-neutral universe of “eligible entities” might logically include a significant number of minorities and women, the Third Circuit rejected rule changes based on that definition of “eligible entities”. According to the Court, the Commission had made no showing that expanding opportunities for “eligible entities” would expand opportunities for women and minorities. The Court is insisting that the Commission explain why it should use the revenue-based “eligible entities” definition rather than a “socially and economically disadvantaged business” (SDB) definition that might “better promote the Commission’s diversity objectives”.

In its 2004 decision the Court had directed the Commission to consider SDB-based regulations in its 2006 quadrennial ownership review (i.e., the proceeding that culminated with the 2008 Ownership Order). The Commission, however, did not do so, opting instead to rely on the “eligible entity” approach. 

But that wasn’t good enough for the Court, which has now concluded that the FCC hasn’t explained how a revenue-based “eligible entity” definition would increase female and minority ownership. (In part, the Court noted that this failure stems from the fact that the Commission simply doesn’t have any reliable data on female and minority ownership, although the Court acknowledges that the Commission is working to address that problem.)

So the Court has vacated and shipped back to the FCC all of the Diversity Order’s provisions based on the “eligible entity” definition. (Still alive and kicking are the Diversity Order provisions that don’t hinge on “eligible entity” status – i.e., the ban on discrimination in broadcast transactions; the “zero tolerance” policy for ownership fraud; non-discrimination provisions in advertising sales contracts; longitudinal research on minority and women ownership trends; local and regional bank participation in SBA guaranteed loan programs; “Access to Capital” conference; and guidebook on diversity.)

The tossing of the “eligible entity”-dependent provisions may place the FCC in an awkward position. A number of “eligible entities” who happen to be minority and/or female have been taking advantage of those provisions for some time, and have applications in the pipeline to continue to do so. The Third Circuit’s decision would appear to put the kibosh on such applications – even though tossing such applications would also appear to be contrary to the Court’s underlying goal. Whether the Commission can come up with a way to save the baby from getting thrown out with the bathwater remains to be seen.

It also remains to be seen how the Court’s insistence on explicit consideration of racial and gender factors can be squared with the Supreme Court’s case law on affirmative action. The Supreme Court did uphold (21 years ago) some earlier FCC policies on minority ownership in the face of an equal protection constitutional attack. But that decision was expressly overruled by the Supremes in Adarand, which imposed very heavy burdens on any federal agency attempting to justify race-based decision making. The Third Circuit acknowledges Adarand but seems to insist that the FCC can and should nonetheless consider race and gender in its licensing policies. At the least, according to the Court, the FCC must do more than cite the difficulty of complying with Adarand in deciding not to consider race and gender factors. Reliance on the race/gender-neutral concept of “eligible entity” was designed to get the Commission around Adarand problems. It will be interesting to see how this issue will now evolve.