Supposedly wrapping up 2006, 2010 and 2014 reviews, FCC leaves most media ownership restrictions in place, adds some new burdens

As we have observed more than once (here and here, for example), the FCC’s quadrennial media ownership review process is Sisyphean in nature: even before the Commission can complete one review, the next begins, and previously completed reviews return thanks to court remands. Now, with the release of a Second Report and Order (2d R&O), the boulder has reached the top of the mountain again.

How long it will stay there this time is anybody’s guess.

In the 2d R&O the Commission has largely left in place media ownership rules that have been on the books since before 2002 (in at least one case, since 1975). It has also reinstated its 2014 decision to treat TV joint sales agreements (JSAs) as attributable ownership interests. (That requirement had been tossed by the U.S. Court of Appeals for the Third Circuit earlier this year.) And, prodded by the Third Circuit into finally resolving the question, the Commission has also re-adopted a revenue-based eligibility standard for certain relaxed ownership policies designed to promote “diversity”. In doing so, however, the FCC refrained from adopting any specifically race or gender-conscious standards.

The quadrennial review process, first mandated by Congress back in 1996, requires the Commission to review all of its media ownership rules every four years to determine if they remain “necessary in the public interest as a result of competition”. What Congress was thinking when it specified a quadrennial process is unclear – after all, pretty much nothing of that scope gets accomplished in Washington in a mere four years.

And sure enough, the FCC’s 2002 review, completed by the FCC in 2003, ended up in the U.S. Court of Appeals for the Third Circuit, which sent the decision back to the FCC in 2004. While the FCC was still working on that remand, the 2006 review rolled around. That one also went up to the Third Circuit which, in 2011, sent it back to the FCC. But before then, the 2010 review had begun, so the remanded issues from the 2006 review got folded into the 2010 review, which was still underway when the 2014 kicked off – so the 2010 review (with the folded-in elements of the 2006 review) got folded into the 2014 review. (Additionally, when the 2014 review got started, the Commission decided to expand the definition of “attributable interests” for TV licensees to include certain JSAs.)

Given the length of time the FCC routinely takes to decide items like this, and the length of time the courts take to review the FCC’s action, and the FCC’s chronic inability to satisfy the courts (leading to remands requiring further FCC action), you can presumably understand the seeming futility of the quadrennial process.

In any event, on review of the then most recent Commission decision, the Third Circuit again shipped things back to the Commission, criticizing it sharply for failing to resolve the pending quadrennial reviews in a timely manner. The Court essentially ordered the Commission to resolve all of the open reviews promptly.  The 2d R&O is the FCC’s effort to do so. Whether the 2d R&O will satisfy the Court remains to be seen.

The 2d R&O sprawls across more than 160 pages. The following are some of the highlights.

Local Television Ownership Rule (Duopoly Rule)
The Commission has retained the existing local television ownership rule, with a couple of modifications. Still in place: The prohibitions against (a) combinations of two top-four television stations, and (b) duopolies in markets where eight independent voices would not remain. And far from loosening any restrictions, the Commission has increased restrictions in at least two respects.

First, JSAs are back to being attributable. They had not been prior to 2014, and the FCC’s 2014 decision to make them attributable had been rejected by the Third Circuit earlier this year. As required by Congress, JSAs entered into prior to March 31, 2014 will remain grandfathered (and transferrable) until September 30, 2025.

Second, the Commission will now expand its local ownership rule to prohibit “affiliation swaps”. “Affiliation swaps” are deals through which a single entity that owns two stations in a market – one top-four, the other non-top-four – acquires from another station in the market a network affiliation, as a result of which both commonly-owned stations become top-four. This prohibition will apply only to situations where two full-power stations enter into an agreement to trade a top-four for a non-top-four affiliation. The prohibition will not apply to situations where an existing duopoly owner obtains a second top-four affiliation from the applicable network without the agreement of the second television station. Nor will it apply to “affiliation swaps” prior to the release of the 2d R&O. Further, the Commission has, at least at this point, refrained from regulating a station’s ability to hold a second top-four affiliation on a multicast channel.

And in a housekeeping amendment, to reflect a technical change arising from the conversion to digital broadcasting, the Commission has also replaced references to a station’s “Grade B” contour with its “noise-limited service contour” (NLSC).

Local Radio Ownership
As with the local television ownership rules, the Commission is retaining, essentially unchanged, its existing local radio ownership rules with two relatively small (although important to those directly affected) changes to the rule.

First, the Commission has formally declared that, for purposes of the local radio ownership rules, Puerto Rico will not be deemed to be a single metro market, even though Nielsen characterizes it as such. As a result, transactions involving Puerto Rico radio stations will need to demonstrate only compliance with the contour overlap methodology. This is a concession to the “unique characteristics”, including its mountainous topography. As a practical matter, this won’t change much, since the Commission has since 2003 regularly waived the Nielsen market-based aspects of the ownership limits vis-à-vis Puerto Rico stations, instead allowing applicants to rely on the contour overlap approach. Going forward, no such waivers will be necessary.

Second, the Commission has modified its policy relating to grandfathered radio clusters (i.e., those that existed before the adoption of Metro markets). Owners of those clusters will now be allowed to make “in-market” community of license changes, and will be given a three-month window after moving a station’s community of license out of a Metro Market to get Nielsen to stop listing the station as “home” to that market.

Newspaper/Broadcast Cross-Ownership
The newspaper/broadcast cross-ownership (NBCO) rule, which has been on the books essentially unchanged since 1975, will remain in place, with some very minor modifications. The Commission believes that this rule is necessary to protect viewpoint diversity. What about all those online sources of information, which would seem to provide plenty of diversity? According to the Commission, social media sites, while popular, tend to aggregate content from traditional sources rather than producing their own. The Commission does acknowledge some evidence that the rule may harm localism and competition, but it finds that these harms are outweighed by the gains in diversity the rule may protect. Although primarily focused on the importance of local television news, the Commission also finds that local broadcast radio continues to contribute to viewpoint diversity, and in particular is relied on for local news and information by some otherwise underserved communities.

In another housekeeping change, the Commission has updated the NBCO rule to reference a station’s its digital principal community contour (PCC), rather than its analog Grade A contour. Under the amended rule, common ownership will be prohibited for a television station and a daily newspaper that are both in the same DMA and where the station’s PCC encompasses the community where the newspaper is published. For radio, common ownership will be prohibited where the station’s contour encompasses the community of publication and both the station and newspaper are in the same Nielsen Metro market. In possible combinations outside of Metro markets, only contour encompassment will be used.

The Commission has also created a limited “exception” that will allow common ownership of local broadcast station and newspaper if either is “failed” or “failing”. (The definitions of “failed” and “failing” are similar to those used in application of the local television and the local radio/TV cross-ownership rules. Note, those, that in the NBCO context, the Commission will view this to be an “exception”, not a “waiver”, situation. As a result, an applicant seeking to invoke this failed/failing facility option will need to show only that it meets the criteria for a failed or failing station or paper and that the resulting combination will produce some public interest benefit. Applicants will not need to show that the benefits outweigh any potential harms to diversity from the combination.

Waivers based on considerations other than failed/failing facilities will be considered on a “pure” case-by-case basis. To obtain a waiver, an applicant will need to show that the proposed combination will not “unduly” harm viewpoint diversity. How any waiver requests will be evaluated in practice remains to be seen.

Finally, the Commission in the order attempts to close the existing “loophole” that allowed a broadcast licensee to buy a daily newspaper and avoid Commission review until the broadcast station’s next license renewal. Going forward, any broadcast owner who wants to purchase (or make an attributable investment in) a daily newspaper that would implicate the NBCO rule will need to obtain Commission approval prior to closing on that purchase (or investment).

Radio/Television Cross-Ownership
As with its other rules, the radio/television cross-ownership rules remains without significant modification. For housekeeping purposes it updates references to (a) a television station’s Grade A contour (which triggers the rule) to refer to the station’s PCC, and (b) the station’s Grade B contour (used for counting independent voices) with its NLSC.

Dual Network Rule
Also still with us is the dual network rule, which prohibits common ownership of any two or more of the “Big Four”networks (Fox, CBS, NBC, and ABC). The Commission figures that, despite increased competition from other sources, the Big Four remain categorically different from their competitors in terms of both viewership and advertising rates.

Diversity Remand
A considerable portion of the 2d R&O is devoted to the “diversity remand”, i.e., the Third Circuit’s remand relative to the FCC’s revenue-based definition of an “eligible entity”, which would be entitled to relaxation of certain of the ownership restrictions.

By way of background, the FCC has long committed itself to promoting broadcast ownership by minorities and women. However, a 1995 Supreme Court decision imposes a very high burden on governmental programs affording preference on the basis of race, a fact which has limited the FCC’s options. As a race/gender-neutral alternative, in 2008 the FCC – like other governmental agencies – established eligibility for preferences based on the applicant’s revenue, the theory being that companies with lower revenues would disproportionately tend to be minority- or female-controlled. But the Third Circuit rejected the FCC’s effort, finding that the Commission hadn’t shown that the revenue-based eligible entity standard would in fact provide assistance to minorities or women. The issue remained unresolved on remand and, in May of this year, the Third Circuit was strongly critical of the Commission for not getting the job done. The 2d R&O purports to take care of this, although it’s not clear that the FCC’s approach will make the Court happy.

That’s because the Commission has largely re-adopted the same revenue-based eligible entity definition as in 2008. Unlike 2008, though, this time around the definition is based on the goal of furthering small business participation (as opposed to the participation of minorities and women) in broadcasting. The Commission expressly concludes that it could not justify any specifically race or gender-conscious rules, because it doesn’t have sufficient evidence to show either that racially diverse ownership leads to viewpoint diversity, or that it has a compelling interest in remedying past discrimination in broadcast ownership.

Nevertheless, the Commission still concludes that it has a valid – and, indeed, statutorily mandated – interest in encouraging small business participation. Accordingly, it readopts the revenue-based eligible entity standard, which will now apply to a number of specific policies that have been stayed since the Court overturned the 2008 diversity order.  Under those policies, eligible entities will be: (a) able to obtain extension of expiring construction permits acquired from other parties; (b) subject to relaxed equity-debt-plus thresholds; (c) able to acquire grandfathered radio clusters that would otherwise violate the ownership rules; and (d) able to acquire licenses in “distress sales” from sellers who have had those licenses designated for hearing on basic qualifications grounds. The Commission also will provide “duopoly priority” to entities that establish incubator programs for eligible entities and will extend divestiture deadlines in larger deals where the parties attempt to sell to eligible entities.

Shared Services Agreements
As expected, while the Commission has not made shared services agreements (SSAs) attributable, it has adopted a requirement that television stations place copies of all SSAs in their public inspection files. Here, the term SSA is defined broadly to include any agreements with other television stations that relate to the sharing of “station-related services”. While broad, the definition of SSAs explicitly excludes agreements related to producing community and charity events, which the Commission does not consider “station-related”. As a result, such arrangements are exempt from the filing requirement. Also exempt is sharing of resources during ad hoc coverage of breaking news, provided that such sharing is not done pursuant to a written agreement.)

Each party to an SSA will now be required to place a copy of the agreement in its online public inspection file. While confidential and proprietary information may be redacted from the public file version, such information must still be made available to the Commission upon request. Existing SSAs will need to be filed within 180 days of OMB approval, and newly-executed SSAs will need to be filed “promptly”.

In adopting this filing requirement, the Commission noted that it currently does not have reliable information on the prevalence of SSAs, or their content. Without this information, which the filing requirement is intended to provide, the Commission did not believe it could justify making SSAs attributable. But the fact that the FCC even mentions this could suggest that the new filing requirement is only a prelude to a determination that SSAs should be deemed, like JSAs, to create attributable interests. That is unlikely to happen until a further quadrennial review, the next one of which is due to commence in two more years.

Not surprisingly, both Commissioners Pai and O’Rielly dissent, strongly, from the 2d R&O. They both accuse the majority of ignoring the realities of the competitive situation faced by local broadcasters and newspapers, and holding on to regulations that cannot be justified in that current situation. Both dissenters also take the Chairman to task for some backroom manipulation of the internal voting process. While the precise details aren’t provided, Pai asserts that a “bipartisan majority” of the Commission was on board to repeal the NBCO rule, but Pai was told that the “[NBCO] rule would not be repealed unless all commissioners agreed”. (The emphasis is Pai’s.) Apparently referring to the same circumstance, O’Rielly mentions that the Chairman “chose to continue his practice of only approving an item if the majority party commissioners are in unison”.

Next steps
So what happens next?

It seems almost certain that most, if not all, of the 2d R&O will be appealed by some parties.  Broadcasters will likely appeal the Commission’s refusal to loosen its ownership regulations, and indeed to tighten them in some ways; public interest groups will likely appeal the Commission’s approach to diversity in ownership. While those appeals may be filed in multiple different circuits, it is likely that they will end up back in the Third Circuit which, if past is prologue, will review the FCC’s latest handiwork closely and critically. However and whenever that may shake out, the fact remains that the next quadrennial review is scheduled for 2018.

And so the rock will start getting rolled up the hill yet again.

To the limited extent that the 2d R&O changes anything, the changes won’t take effect right away. Changes that involve “information collections” will have to be run past the Office of Management and Budget before they can kick in, a process that normally takes several months; that’s also when any revised forms will take effect. The FCC will be letting us all know how that goes. The rest of the changes will be effective 30 days after the 2d R&O appears in the Federal Register. Check back here for updates on all this.