Petition for Writ of Certiorari — Connecticut v. Federal Communications Commission

er-672” [pe

OCT 15 887

No. 87- YOSEPH F. SPANIOL, JR.

In Che

CLERK

Supreme Court Of Che United States

OCTOBER TERM, 1987

STATE OF CONNECTICUT, CITY OF

NEW YORK, NATIONAL LEAGUE OF CITIES,

and AMERICAN CIVIL LIBERTIES UNION,

Petitioners,

V.

FEDERAL COMMUNICATIONS COMMISSION and

UNITED STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

STATE OF CONNECTICUT

Joseph I. Lieberman

Attorney General

William B. Gundling

Assistant Attorney General

Carl J. Schuman

Assistant Attorney General

30 Trinity Street

Hartford, CT 06106

(203) 566-4990

AMERICAN CIVIL LIBERTIES UNION

Michael Botein

Robert T. Perry*

Michael I. Meyerson

Media Law Clinic

New York Law School

57 Worth Street

New York, NY 10013

(212) 431-2160

*Counsel of Record for Petitioners

(Additional Counsel on Inside Cover)

Steven R. Shapiro

C. Edwin Baker

American Civil Liberties Union

132 West 43rd Street

New York, NY 10036

(212) 944-9800

CITY OF NEW YORK

Norman M. Sinel

Paul S. Ryerson

Robert Alan Garrett

Patrick J. Grant

Barbara J. Delaney

Arnold & Porter

1200 New Hampshire Avenue, N.W.

Washington, D.C. 20036

Stephen Kramer

Assistant Corporation Counsel

City of New York

100 Church Street

New York, New York 10007

NATIONAL LEAGUE OF CITIES

Cynthia Pols

General Counsel

Office of Federal Relations

National League of Cities

1301 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

Printed by

Brescia’s Printing Services, Inc.

66 Connecticut Boulev

East Hartford, CT 06108

528-4254

- RIE EET Ot eRe ae

Omi.

QUESTION PRESENTED

Whether under section 623 of the Cable Communications

Policy Act of 1984, the Federal Communications Commission

properly determined that state and local governments may

not regulate basic cable service rates charged by cable systems

in any community where three over-the-air broadcast signals

are theoretically available — a determination that in effect

deregulates such rates in more than 90 percent of the com-

munities in the United States served by cable — on the ground

that such cable systems face “‘effective competition’?

LIST OF ALL PARTIES

In addition to the parties identified in the caption of this

case, there were a number of other petitioners in the United

States Court of Appeals. These were: Cable Television Access

Coalition, Inc.; County of Contra Costa, California; Guam

Cable T-V.; National Federation of Local Cable Programmers

and the New York Citizens’ Committee for a Responsible

Media; Satellite Television Industry Association,

Inc./(SPACE).

The following parties were intervenors in the Court of

Appeals: Adams-Russell Cable Services Division of Adams

Russell; Arizona Cable Television Association; Association

of Independent Television Stations, Inc.; BellSouth Corpora-

tion; Board of Supervisors of Fairfax County, Virginia; Cel-

lular Telecommunications Division of Telocator Network of

America; Centel Corporation; Gary L. Christensen; City of

Athens, Ohio; City of Dubuque, Iowa; City of Los Angeles,

California; City of Miami, Florida; Cities of Sunnyside and

Grandview, Washington and the City of Southfield, Michigan;

Cox Cable Communications, Inc.; Direct Satellite Communi-

cations, Inc.; Gill Industries and Western Communications,

Inc.; Eagle Telecommunications, Inc./Colorado; Harron Com-

munications Corporation; Maximum Service Telecasters, Inc.;

Media General Cable of Fairfax County, Inc.; National Associ-

ation of Broadcasters; National Association of State Cable

Agencies; National Cable Television Association, Inc. and

Community Antenna Television Association; North Carolina

CATV Association; Office of Communication of the United

Church of Christ; Post-Newsweek Cable, Inc.; Tele-

Communications, Inc.; Texas Cable TV Association; Time

Incorporated; and United Cable Television Corporation.

TABLE OF CONTENTS

Page

Fe GR a | er i

Re NY I Es ee cece e eas ii

ps | >, re Vv

EE a eae 2

EE ES 2

ee 2

STATEMENT OF THE CASE ..................... 3

REASONS FOR GRANTING THE WRIT ......... 15

THE FCC COMMITTED PROCEDURAL AND

SUBSTANTIVE ERRORS THAT WILL HAVE

PERVASIVE NATIONWIDE IMPACT, WILL

PREEMPT STATE AND LOCAL GOVERN-

MENTS OF TRADITIONAL CABLE RATE

REGULATION POWERS, AND WILL EX-

POSE CABLE SUBSCRIBERS TO MONO-

re a nace ee eee 15

1. The Opinion Below Sanctions A Significant

Departure From The Accepted And Usual

Doctrine That Requires Agencies To Construe

Statutes In Accordance With The Unambig-

uously Expressed Intent Of Congress ............ 15

2. The Opinion Below Sanctions A Significant

Departure From The Accepted And Usual

Doctrine That Requires Agencies To Consider

All Relevant Factors And Explain Departures

From Longstanding Policies.................... 18

lil

TABLE OF CONTENTS (continued)

Page

3. The Opinion Below Sanctions A Significant

Departure From The Accepted And Usual

Doctrine That Prohibits An Agency From

Relying On Studies Which Are Irrelevant,

Undisclosed, Or Lacking Statistical Validity ...... 20

oe DRT aerereeare: eran se Gece a rena 21

iv

TABLE OF AUTHORITIES

Court Cases: Page

Almay v. Califano, 569 F.2d 674 (DC. Cir. 1978) ...... 20

American Textile Manufacturers Institute, Inc. v.

Donovan, 452 U.S. 490 (1981) .................. 16

Bowman Transportation, Inc. v. Arkansas-Best

Freight System, 419 U.S. 281 (1974) ............ 18

Bowen v. American Hospital Association, 106 S.Ct.

ioe irc es dade ree en: 20

Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d 765

(2d Cir. 1978), cert. denied, 441 U.S. 904 (1979)..... 6

Chevron U.S.A. Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984) ............... 16

Citizens to Preserve Overton Park, Inc. v. Volpe, 401

Be Eons Socaed a Ses oe eee eae 18

Community Cable TV, Inc., 98 FCC 2d 1180 (1980) .... 6

Consumer Product Safety Commission v. GTE

Sylvania, Inc., 447 U.S. 102 (1980)-.............. 16

Cox Cable New Orleans, Inc. v. City of New Orleans,

594 F.Supp. 1452 (E.D. La. 1984), vacated

without opinion (E.D. La. Dec. 16, 1985).......... 6

Direct Marketing Association, Inc. v. United States

Postal Service, 778 F.2d 96 (2d Cir. 1985) ........ 18

Friedman v. Adams Russell Cable Services — New

York, Inc., 624 F.Supp. 1195 (S.D.N-Y. 1986) ....... 5

TABLE OF AUTHORITIES (continued)

Court Cases: Page |

Housatonic Cable Vision v. Dept. of Public Utility,

624 F. Supp. 798 (D. Conn. 1985) ............... 19

Immigration and Naturalization Service v. Cardoza-

Fonseca, 107 S.Ct. 1207 (1987) ................. 17

Motor Vehicle Manufacturers Association of United

States, Inc. v. State Farm Mutual Automobile

Insurance Ca, 463 U.S. 29 (1983) ............... 18

Nachman Corp. v. Pension Benefit Guaranty Corp.,

4 eee Ae 17-18

National Black Media Coalition v. FCC, 791 F.2d

I oo a Vl ie ea eae i hs « 20

Northern Natural Gas Co. v. FPC, 399 F.2d 953 (DC.

an a oO Of ae rg a 18

Portland Cement Association v. Ruckelhaus, 486 F.2d

375 (DC. Cir. 1973), cert. denied, 417 U.S. 921

is SSR SS Cer ye gape ica toey Pay 6) <a ea 20

Reiter v. Sonotone Corp., 442 U.S. 330 (1979)......... 16

St. James Hospital v. Heckler, 760 F.2d 1460 (7th

Cir.) cert. denied, 106 S.Ct. 229 (1985) ........... 20

Steadman v. SEC, 450 U.S. 91 (1981) ............... 16

United States v. Brown Shoe Co., 370 U.S. 294

ae a a a antes dpi Gru' ee 12

United States v. Nova Scotia Food Products Corp.,

ee SD OE OE os wins ccna wt vcanes's 20

United States v. Southwestern Cable Co., 392 US.

CL ois ce Pree ua CH eh eee eee ROO 7

vi

a TT A

TABLE OF AUTHORITIES (continued)

Statutes: Page

Cable Communications Policy Act of 1984, 47 U.S.C.

§ 521 et seg. (Supp. 1987) ................. passim

Section 601(2), 47 U.S.C. § 521(2)............... 8, 9, 19

Section 601(6), 47 U.S.C. § 521(6).................... 8

Section 602(2), 47 U.S.C. § 522(2)........... 9, 13, 14, 16

Section 602(4), 47 U.S.C. § 522(4).............. aaeG 13

Section 602(6), 47 U.S.C. § 522(6).............. 9, 13, 17

Section 621(a)(3), 47 U.S.C. § 541(aX(3)... 2. 8

Section 623, 47 U.SC. §543 ................... passim

Administrative Regulations and Materials:

Report and Order in MM Docket No. 84-1296, 50

Fed. Reg. 18,637 (1985) (released April 19,

ROR ae ees 11, 12, 13

Memorandum Opinion and Order in MM Docket No.

84-1296, 51 Fed. Reg. 21,770 (1985) (released

ST EE, a 4 8.5 canon eerie cours ieiws se oe 13

Notice of Proposed Rulemaking in MM Docket No.

84-1296, 49 Fed. Reg. 48,765 (Dec. 14, 1984)... . 9, 10

Fourth Report and Order, Policy and Rules

Concerning Rates for Competitive Carrier

Services and Facilities Authorization There-

for, 96 FCC 2d 664 (1963) ..................... 19

TABLE OF AUTHORITIES (continued)

Administrative Regulations and Materials: Page

Notice of Proposed Rulemaking, International

Competitive Carrier Policies, 100 FCC 2d

ERIS Sas os a ee 12, 19

Notice of Proposed Rulemaking, Decreased Regulation

of Certain Basic Telecommunications Services, 2

re cet id menses 19

Legislative Materials:

H.R. Rep. No. 934, 98th Cong. 2d Sess. (1984),

reprinted in 1984 U.S. Code Cong. & Admin.

ih hse Ses be 60 GPa s.6 066 60.04% < 7, 8,9, 17

129 Cong. Rec. § 8326 (daily ed. June 14, 1983)....... 17

130 Cong. Rec. H10,435 (daily ed. Oct. 1, 1984)........ 7

130 Cong. Rec. H10,444 (daily ed. Oct. 1, 1984)........ 6

130 Cong. Rec. $14,284 (daily ed. Oct. 11, 1984)....... 7

Miscellaneous:

“Cable Stats;’ Cablevision, Sept. 28, 1987, at 64 ...... 5

“Cable TV;’ Consumer Reports, Sept. 1987,

Llu a cdoe'e eked pb ease SEW Ss coe ceens 4-5

H. Hovenkamp, Economics and Federal Antitrust Law

Meo. a. ean ia aa eon. 6 6 12

Kwoka, ““The Effect of Market Share Distribution

in Industry Performance,’ Review of Economics

& Statistics, Vol. XLI, No. 1, Feb. 1979, pp.

PPP ee rere ere ee eee 12

National League of Cities Comments to FCC

OS 3

Posner & Easterbrook, Antitrust: Cases, Economic

Notes and Other Material (Supp. 1984).. ....... 12

—

~ No. 87-

In The

Supreme Court Of The United States

OCTOBER TERM, 1987

STATE OF CONNECTICUT, CITY OF

NEW YORK, NATIONAL LEAGUE OF CITIES,

and AMERICAN CIVIL LIBERTIES UNION,

Petitioners,

Vv.

FEDERAL COMMUNICATIONS COMMISSION and

UNITED STATES OF AMERICA,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

The petitioners respectfully pray that a Writ of Certiorari

issue to review the judgment of the United States Court of

Appeals for the District of Columbia Circuit entered in the

above-entitled proceeding on July 17, 1987.

OPINIONS BELOW

The opinion of the United States Court of Appeals for

the District of Columbia Circuit upholding, in large measure,

the FCC’s rule deregulating basic cable service rates in most

communities throughout the United States is reported at 823

F.2d 1554 and is reprinted in the Apperdix at page A115.

The FCC’s Report and Order adopting the rule under

review in this proceeding is published at 50 Fed. Reg. 18,637

(May 2, 1985) and is reprinted in the Appendix at page A1.

The Report and Order was later modified by the FCC’s

Memorandum Opinion and Order published at 51 Fed. Reg.

21,770 (June 16, 1986) and reprinted in the Joint Appendix

at page A96.

JURISDICTION

The judgment of the Court of Appeals was entered July

17, 1987. The jurisdiction of the Court is invoked pursuant

to 28 U.S.C. § 1254(1). The petition has been filed within the

time allowed by law.

STATUTORY PROVISIONS

The Cable Communications Policy Act of 1984, Pub. L.

No. 98-549, 98 Stat. 2779 (1984) is codified at 47 U.S.C. § 521

et seq. (Supp. 1987). Relevant portions of the Cable Act are

reprinted in the Appendix at page A186.

STATEMENT OF THE CASE

(1)

This appeal raises the question whether the Federal Com-

munications Commission has the power, after enactment of

the Cable Communications Policy Act of 1984, to deregulate

basic cable service rates in more than 90 percent of the com-

munities in the United States served by cable.

Section 623 of the Cable Act prohibits regulation of basic

cable service rates wherever cable systems are subject to

“effective competition.” 47 U.S.C. § 543(a), (b)(1). In April 1985,

the Federal Communications Commission (FCC) promulgated

a rule defining “‘effective competition’’ for a cable system as

the theoretical availability of three over-the-air broadcast

signals somewhere in the franchise territory served by the

cable system, irrespective of the number and nature of

programming services offered over the cable system. Because

almost every community served by cable has at least three

theoretically available broadcast signals, the FCC’s rule in

effect deregulates basic cable service rates in the over-

whelming majority of cabled communities in the United

States. See National League of Cities Comments to FCC MM

Docket No. 84-1296, Appendix III at 19, ¢ 30-31.

Petitioners, along with other state and local governments

and citizen groups, challenged the FCC’s rule in the United

States Court of Appeals for the District of Columbia Circuit,

contending that it exceeded the FCC’s authority under the

Cable Act and was arbitrary and capricious. With limited

exceptions not relevant here, the Court of Appeals rejected

that challenge. Petitioners here contend that the Cable Act

required the FCC to promulgate a rule defining ‘effective com-

petition’’ for a cable system that at least required considera-

tion of whether competition existed for ‘‘basic cable service’’

as that term is statutorily defined; that the FCC improperly

ignored a relevant factor — antitrust market analysis; and

that it erroneously relied upon three flawed studies in

promulgating its “‘effective competition’ rule. The net result

of these errors, in petitioners’ view, is that the FCC has put

into effect a rule that overlooks unambiguous Congressional

intent and improvidently deprives state and local govern-

ments of their traditional authority to protect cable sub-

scribers from monopoly pricing.

(2)

There are approximately 7800 cable systems in the United

States. ‘“Cable TV;’ Consumer Reports, Sept. 1987, at 547-48.

Improvements in distribution technology over the past decade

have greatly expanded the range of programming services .

available to the average cable subscriber. Most cable sub-

scribers are now served by cable systems offering at least 30

channels of video programming services, many of which are

delivered via satellite from distant sources. Over 50 satellite-

delivered programming services are available to cable systems

throughout the United States. Id. These satellite-delivered

programming services offer video programming largely

unavailable from over-the-air broadcast television, including

channels featuring recent theatrical or made-for-cable movies

(e.g., Home Box Office, Showtime), cultural programming (e.g.,

Bravo, Arts & Entertainment), children’s programming (e.g.,

the Disney Channel, Nickolodeon), musical programming (e.g.,

MTV, the Nashville Network), exclusive sports coverage (e.g.,

ESPN, Home Sports Team), other special-audience program-

ming (e.g., the Discovery Channel, Black Entertainment Tele-

vision), 24-hour news and weather services (e.g., Cable News

Network, the Weather Channel), 24-hour public affairs services

(e.g., C-SPAN), and even distant broadcast signals known as

superstations (eg., WTBS-Atlanta, WGN-Chicago). Id. at

549-50. In addition, about one-fifth of all cable systems also

offer local public, educational, and governmental (‘‘PEG’’)

access channels that televise local government hearings, class-

room instruction, and programs featuring community groups.

Id. at 550. Altogether, cable subscribers typically receive at

least ten channels of programming which cannot be received

from over-the-air broadcast television. Jd. at 548.

The growing importance of cable television is reflected

in the significant growth in the number of cable subscribers

over the past decade. Whereas in 1977 only 18 percent of all

television households subscribed to cable service, by the end

of 1987 more than 50 percent of all television households will

subscribe to cable service. ‘‘Cable Stats,’ Cablevision, Sept.

28, 1987, at 64.

The average cable subscriber may subscribe to ‘“‘basic

cable service’ for one monthly fee and one or more ‘“‘pay”’

services for additional monthly fees. ‘‘Pay’’ services typically

consist of single channels of programming featuring theatrical

and made-for-cable movies and exclusive coverage of sporting

events (e.g., Home Box Office). ‘‘Basic cable service,’ on the

other hand, typically consists of a number of programming

services provided to cable subscribers as a package including

not only local over-the-air broadcast signals, but also a wide

array of satellite-delivered programming services uniquely

available over cable (e.g., Arts & Entertainment, Nickelodeon,

MTV, the Discovery Channel, Cable News Network, WTBS-

Atlanta), and PEG access channels. Basic cable service often

includes more than 25 channels of video programming, and

some cable systems offer basic cable service packages

exceeding 70 channels. ‘‘Cable TV,” supra at 552. In almost

all cases, a pay service may be obtained only if the cable sub-

scriber also takes basic cable service. See Friedman v. Adams

Russell Cable Services — New York, Inc., 624 F. Supp. 1195,

1196 (S.D.N-Y. 1986). Basic cable service is thus the gateway

to the pay services for each cable subscriber.

(3)

Cable television has for many years been regulated at the

federal, state and local levels of government. State and local

governments have regulated cable television through the

process of issuing franchises for a cable system’s use of public

rights-of-way. Because few cable systems face head-to-head

competition for subscribers from other cable systems, fran-

chising authorities have traditionally regulated basic cable

service rates to prevent monopoly pricing.

In the mid-1970s, however, the FCC preempted rate regu-

lation of pay channels even though it declined to regulate such

rates itself. Brookhaven Cable TV, Inc. v. Kelly, 573 F.2d 765

(2d Cir. 1978), cert. denied, 441 U.S. 904 (1979). The FCC’s

preemption-and-deregulation initiatives in the area of cable

television greatly accelerated in the early 1980s. In 1983, for

example, the FCC attempted to deregulate portions of basic

cable service by authorizing cable operators to remove all

programming services, other than local broadcast signals and

access channels, from the basic cable service tier notwith-

standing the contractual requirements of their cable franchises

and promises made to obtain those franchises. Community

Cable TV, Inc., 98 FCC 2d 1180 (1980). But see Cox Cable New

Orleans, Inc. v. City of New Orleans, 594 F. Supp. 1452 (E.D.

La. 1984) (holding that FCC policy did not excuse cable oper-

ators from compliance with franchise requirements governing

basic cable service rates), vacated without opinion (E.D. La.

Dec. 16, 1985).

(4)

Congressional concern about the FCC’s accelerating

preemption-and-deregulation initiatives in the area of cable

television was a major factor in prompting Congress to pass

the Cable Act, the first comprehensive federal legislation for

cable television. As Congressman Markey, a principal

cosponsor of the bill that became the Cable Act, observed:

Everyone. . . should understand that if the House

fails to pass a Federal cable policy, then our cities will

be robbed of their control over cable TV. The era of

deregulation, affirmed by the FCC and the Supreme

Court, has hit cable regulation with a crippling

force. . . . [WJeshould be bold in our stance in sup-

port of the cities and the consumers. We should pass

this compromise since it is good for consumers and

fair to the cities and the cable industry.

130 Cong. Rec. H 10,444 (daily ed. Oct. 1, 1984).

The ‘‘compromise’’ Cable Act resulted from three years

of negotiations among “‘the cities, the cable industry, and

many others.’ 130 Cong. Rec. H 10,435 (daily ed. Oct. 1, 1984)

(statement of Rep. Wirth, who had introduced the bill that

became the Cable Act). The Cable Act was viewed by Con-

gress as ‘‘a reasonable compromise which protects the

interests of not only the cities and the cable industry, but those

of the consumers of cable services as well.’ 130 Cong. Rec.

S14,284 (daily ed. Oct. 11, 1984) (statement of Sen. Gorton).

The heart of the compromise was a clear delineation of

regulatory authority at each level of government — federal,

state and local. H.R. Rep. No. 934, 98th Cong., 2d Sess. 24

(1984), reprinted in 1984 U.S. Code Cong. & Admin. News 4655,

4661 (“House Report’’). Congress expressly departed from the

direction taken by the FCC immediately prior to the Cable

Act by declaring ‘“‘continue/d] reliance on the local franchising

process as the primary means of cable television regulation;

while defining and limiting the authority that a franchising

authority may exercise through the franchise process.” House

Report at 19 (emphasis added), reprinted in 1984 U.S. Code

Cong. & Admin. News at 4656. Simultaneously, Congress

made clear that the FCC could no longer deregulate or

preempt regulation of cable services pursuant to the broad

powers that it had previously exercised under the general pro-

visions of the Communications Act of 1934. Compare United

States v. Southwestern Cable Co., 392 U.S. 157 (1968) with

47 U.SC. § 152(a) (Supp. 1987).

As compromise legislation, the Cable Act reflected a

careful balance of a number of different and often conflicting

considerations. No interest group — cable operators, fran-

chising authorities, or consumers — obtained everything that

it had sought through the legislative process. The Cable Act

thus did not contemplate total deregulation, as is evident from

two of its six stated purposes: to ‘‘establish franchise proce-

dures and standards which encourage the growth and develop-

ment of cable systems and which assure that cable systems

are responsive to the needs and interests of the local

community”’ and to ‘‘promote competition in cable commu-

nications and minimize unnecessary regulation that would

impose an undue economic burden on cable systems.” 47 U.S.C.

§§ 521(2), (6) (emphasis added). To assure that cable systems

are responsive to the needs and interests of the local commu-

nity, the Cable Act both authorizes and requires continuing

regulation of cable systems. For example, “‘a franchising

authority shall assure that access to cable service is not denied

to any group of potential residential cable subscribers because

of the income of the residents of the local area in which such

group resides.” 47 U.S.C. § 541(a)(3). Congress recognized that

such regulation promoted First Amendment interests:

[A]ccess to telecommunications networks has become

increasingly important to full participation in the

political, economic, social and cultural life of the

nation. The First Amendment’s guarantee of a free

flow of diverse ideas will be reduced to an empty

promise if access to information is not available to

all of our citizens.

House Report at 36, reprinted in 1984 U.S. Code Cong. &

Admin. News at 4673.

(5)

This case concerns Section 623 of the Act, 47 U.S.C. § 543,

which establishes and delimits the power of franchising

authorities to regulate cable rates. Section 623 permits fran-

chising authorities to regulate the rates for ‘‘basic cable

service’ in those markets where the ‘‘cable system’’ does not

face ‘‘effective competition.’ 47 U.S.C. § 543(b). The Act does

not itself define ‘‘effective competition’ but instead directs

the Commission to adopt rules that will ‘‘define the circum-

stances in which a cable system is not subject to effective com-

petition.” 47 U:SCC. § 543(b)(2)(A). Congress clarified that direc-

tive in the House Report:

~~

In determining whether [a] cable system is sub-

ject to effective competition for the purpose of regu-

lation of basic cable service, the FCC should consider

the number and nature of services provided, com-

pared with the number and nature of services avail-

able from alternative sources and, if so, at what price.

In establishing the necessary regulations, the FCC

should establish objective nationwide criteria which

are readily applicable for determining on a

community-by-community basis whether a cable

system is subject to effective competition. . . . The

commission may find it relevant to consider factors

in addition to the number of over-the-air broadcast

stations in a market, such as the penetration rate of

the cable system.

House Report at 66, reprinted in 1984 U.S. Code Cong. &

Admin. News at 4703 (emphasis added).

(6)

On December 11, 1984, the FCC released its Notice of Pro-

posed Rulemaking (‘‘Notice’’) to implement several provisions

of the Cable Act, including § 623. 49 Fed. Reg. 48,765 (Dec.

14, 1984). Although Section 623 required it to define “‘effec-

tive competition”’ for a ‘cable system,’ the FCC proposed to

define “‘effective competition”’ for ‘“‘basic cable service’ alone.

Notice at {4 43 and 45.' The FCC, moreover, did not propose

to define ‘‘effective competition’’ for “‘basic cable service’ as

the latter term was defined by the Cable Act, namely, any

service tier that ‘‘includes”’ retransmission of local broadcast

signals. 47 U.S.C. § 522(2). Nor did it propose to do so according

to the economic reality that many cable systems include

numerous nonbroadcast signals in their basic cable service

package. Instead, the FCC observed:

1 “Basic cable service” is defined as “any service tier which includes the

retransmission of local broadcast signals.’ 47 U.S.C. § 522(2). A ‘‘cable

system’”’ is defined in relevant part as ‘‘a facility consisting of a set of

closed transmission paths and associated . . . equipment that is designed

to provide cable service’ but does not include systems only retransmit-

ting broadcast signals. 47 U.S.C. § 522(6).

In essence, basic cable service is the provision of

locally viewed broadcast signals and required access

channels. While basic service can now contain addi-

tional programming (such as superstations or cable

satellite networks) it need not, as a matter of

definition.

Notice at { 43 (emphasis added). Having bypassed the statu-

tory definition of basic cable service as well as the economic

realities under which basic cable service is offered, the FCC ‘

proposed to define “‘effective competition’ for basic cable

service as the theoretical availability of four over-the-air broad-

cast signals. Jd. It sought public comments on the proposed

four-signal ‘‘effective competition’ rule.

In comments and reply comments filed in response to the

Notice, several state and local governments, citizen groups

and other parties — including not only Petitioners here but

also the Antitrust Division of the United States Department

of Justice (“‘DOJ’’) — strongly opposed the FCC’s proposal.

They explained that the presence of a small number of broad-

cast signals in a community was not, by itself, sufficient to

preclude cable operators from charging unreasonable rates for

basic cable service. Relying upon antitrust market analysis,

these parties, most notably DOJ, urged the FCC to recognize

that its proposed definition of “‘effective competition’’ over-

looked at least one source of any cable system’s market power

— the additional signals provided by a cable system within

its basic cable service tier that are unavailable via over-the-

air broadcast television.

By contrast, the cable industry commentors, including

the National Cable Television Association (‘“‘NCTA’’) and the

Community Antenna Television Association (‘“‘CATA’’), urged

the FCC to adopt an ‘“‘effective competition’’ rule defined as

two over-the-air broadcast television signals. In jointly filed

comments, NCTA and CATA offered the results of a limited

empirical study of 88 cable systems whose rates were either

totally or partially deregulated. In reply comments, however,

10

several parties, including DOJ, pointed out a number of

methodological flaws in the NCTA/CATA study that brought

into question the reliability of its results.”

In its Report and Order, released on April 19, 1985, the

FCC adopted a rule defining ‘‘effective competition” as the

availability of three over-the-air broadcast signals. Report and

Order at {99 (App. A45). It relied upon the NCTA/CATA

study, noting that it ‘‘was cited by many as providing fac-

tual support for a standard based on fewer than three signals,’

id. at { 97 (App. A43), without ever addressing the significant

criticisms of that study. It also relied upon an internal staff

study of certain cable subscriber viewing data and an empir-

ical study of certain manufacturing industries, both of which

were mentioned for the first time in the Report and Order.

Id. at ¢ 99 (App. A45-46). The details of the internal staff

study remained undisclosed until the FCC reluctantly released

selective portions of that study pursuant to Freedom of Infor-

mation Act requests. Even then, it continued to withhold crit-

ical details of the study’s methodology, such as how various

cable markets had been ‘‘randomly”’ chosen as samples. The

results of the study, moreover, did not establish that cable

systems had no ability to engage in monopoly pricing in a

community in which three broadcast signals were theoreti-

cally available.* Likewise, the empirical study of certain

? First, 41 percent of the cable systems sampled in the NCTA/CATA study

were not randomly selected, thus creating a potential source of bias.

Second, some unspecified number of sampled systems served multiple

communities, at least one of which regulated basic cable service rates.

For such cable systems, it was unclear whether the basic cable service

rate was determined by market forces in one community or regulation

by another community. These were but two of seven or eight significant

questions raised concerning the NCTA/CATA methodology.

3 The FCC'staff purported to find that in communities having three or more

over-the-air broadcast signals, cable subscribers spent more time watching

those signals than other video programming services available over the

cable. But the fact that basic cable service programming other than local

broadcast signals only commands a particular viewing share in cable

households is irrelevant to the pertinent question whether a cable operator

(continued)

11

manufacturing industries did not establish the absence of such

market power in three signa! communities.‘

In its Report and Order the FCC refused to apply

antitrust market analysis to the problem at hand. It dismissed

DOJ’s antitrust market analysis proposals, noting only that

“several parties” had ‘‘state[d] that DOJ provides little justifi-

cation other than supposition and intuition.’ Id. at { 97.° In

7 (continued)

has market power. ‘‘Market power can be viewed as the ability of a firm

to deviate profitably from marginal cost pricing’ H. Hovenkamp, Eco-

nomics and Federal Antitrust Law 57 (1985). Even if cable households

allot only 20 percent of viewing time to non-broadcast programming, those

households may have such a strong preference for that programming that

they will continue to subscribe to basic cable service despite drastic price

increases.

4 Kwoka, “The Effect of Market Share Distribution in Industry Perfor-

mance,’ Review of Economics & Statistics, Vol. LXI1, No. 1, Feb. 1979,

pp. 101-09. According to the FCC, the Kwoka study ‘‘demonstrated that

the presence of a third competitor of sizable market share may be suffi-

cient to guarantee competition in a given industry.’ Report and Order

at {99 (App. A45). However, Kwoka himself cautioned against gener-

alizing his study results beyond the five manufacturing industries exa-

mined because these industries possessed special characteristics. Kwoka,

supra at 107 n.15. Likewise, other commentators have noted that Kwoka’s

study is ‘“‘more suggestive than * ‘finitive, because of the effects of price

controls during part of the perioa under scrutiny.’ Posner & Easterbrook,

Antitrust: Cases, Economic Notes and Other Material 42 (Supp. 1984).

. Although the comments of DOJ, petitioners and other parties relied on

antitrust market analysis, the FCC never once mentioned that fact.

Interestingly, on the very day that it released the Report and Order, the

FCC released another document in an unrelated proceeding in which it

stated that assessment of market power requires an antitrust market

analysis. Notice of Proposed Rulemaking, International Competitive Car-

rier Policies, 100 FCC 2d 1270, 1275-82 (1985). In that Notice of Pro-

posed Rulemaking, the FCC observed that ‘‘to determine the market

power of a given firm, we must first define the relevant market.” 100 F.C.

2d at 1275 (footnote omitted). Two products are deemed within the same

product market if they are ‘‘functionally similar’’ Jd. Pertinent factors

include “‘substitutability in use.’ Jd. “‘Cross-elasticity of demand can be

used to determine substitutability in use [but] most cases have relied on

practical indicia of this concept such as peculiar characteristics and uses

and reasonable interchangeability. See U.S. v. Brown Shoe Co., 370 U.S.

294 (1962). Jd. at 1275 n.15. By contrast, although the FCC in this case

purported to assess cable operators’ market power, it never even attempted

to define the relevant product market for “‘basic cable service.”

12

lieu of an antitrust market analysis to assess a cable system's

market power, the FCC chose to “favor a presumption that

competition does in fact exist rather than to assume that con-

sumers will make no effort to seek out alternatives to basic

cable service.’ Id. at ¢ 107 (App. at A50). This presumption

apparently derived from the FCC’s belief ‘‘that it was the

intent of the Cable Act to significantly deregulate the provi-

sion of cable service.’ Jd. at { 100 n.69 (App. at A47).

Certain parties sought FCC reconsideration of aspects

of the Report and Order unrelated to rate regulation. On May

30, 1986, the FCC issued its Memorandum Opinion and Order

denying the petitions for reconsideration.

(7)

After reviewing the circumstances leading to enactment

of the Cable Act, the Court of Appeals observed that the Act

reflected a balance of competing considerations:

In establishing regulatory guidelines, Congress was

concerned both with relieving the cable industry from

unnecessary, burdensome regulation and with

ensuring that cable systems remain responsive to the

needs of the public. See § 601(2), (4), (6), 47 U.S.

§ 521(2), (4), (6). Our task in this case is to decide

whether the rules adopted by the FCC have imper-

missibly altered the balance struck by Congress.

(App. A131-32). Although the FCC’s “effective competition’’

rule deregulated basic cable service rates in most communi-

ties in the United States — a fact not mentioned in the Court

of Appeals’ opinion — the Court of Appeals found that the

rule did not impermissibly alter the balance struck by Con-

gress in the Cable Act. The Court of Appeals also observed

that Section 623 required the FCC to “ ‘define the circum-

stances’ in which a cable system is not subject to ‘effective

competition. ”’ (App. A132). But it did not explain why the

FCC could define “‘effective competition” for “‘basic cable

13

service’ alone. Crucially, the Court of Appeals held that the

FCC could not depart from the precise statutory definition

of “‘basic cable service.” 47 U.SC. § 522(2). (App. A155). Indeed,

the Court found error in the FCC’s deviation from that defi-

nition with regard to the agency’s determination of which tiers

of service are subject to regulation. (App. A155). But, curi-

ously, the Court overlooked the FCC’s departure from this

definition with regard to its determination of a standard for

“effective competition.”

The Court of Appeals noted that the three-signal ‘‘effec-

tive competition” rule had been adopted by the FCC “‘[b]jased

on the comments submitted by the various parties, an internal

staff study and materials drawn from the economic litera-

ture. . . ”’ (App. A135). With a few exceptions not relevant

here, it held that: ‘“‘the FCC addressed the significant com-

ments made in the rulemaking proceeding, articulated the

basis for its conclusion, and adopted rules that are at a

minimum ‘reasonable. ’’ (App. A143). The Court, however,

never explained why the comments by DOJ and others

proposing an antitrust market analysis and criticizing the

NCTA/CATA study were so insignificant they need not be

addressed at all by the FCC. Nor did the Court of Appeals

explain why the rule was reasonable despite the FCC’s reli-

ance on two irrelevant studies, neither of which had even been

mentioned in the Notice and one of which remained largely

undisclosed.®

: Having upheld the FCC's “effective competition” rule, the Court of

Appeals remarked that the FCC's “predictive judgment” was “based on

the evidence it had accumulated in the relatively short time frame within

which Congress directed the agency to complete its rulemaking.’ (App.

A144). In fact, although the FCC was required to fashion its rule within

180 days after enactment of the Cable Act, the FCC had an additional

15 months to revisit its rule while it deliberated on various petitions for

reconsideration. (App. A96). The Court of Appeals further observed that

given ‘‘the tentative nature of its predictive judgment,’ the FCC must

“vigilantly monitor the consequences of its rate regulation rules.’ (App.

A145). To date, more than two years after the three-signal rule was

adopted, the FCC has yet to open a formal proceeding to review the effects

of that rule.

14

:

'

:

REASONS FOR GRANTING THE WRIT

THE FCC COMMITTED PROCEDURAL AND SUB-

STANTIVE ERRORS THAT WILL HAVE PERVA-

SIVE NATIONWIDE IMPACT, WILL PREEMPT

STATE AND LOCAL GOVERNMENTS OF TRADI-

TIONAL CABLE RATE REGULATION POWERS,

AND WILL EXPOSE CABLE SUBSCRIBERS TO

MONOPOLY PRICING.

Petitioners submit that in several ways the FCC’s process

of and end result in defining the standard of ‘‘effective com-

petition’’ departed significantly from the proper approach to

implementation of the Cable Act. But this case is not merely

one in which the agency and the court below committed

procedural and substantive errors. Rather, it is one in which

procedural and substantive errors will have sweeping nation-

wide impact, will preempt state and local governments in an

area in which they have traditionally exercised authority, and

will subject cable subscribers to the hazards of a market that

is effectively competitive only according to the FCC. It is in

this context that this Court should consider plenary review

of the errors described below.

1. The Opinion Below Sanctions A Significant Departure

From The Accepted And Usual Doctrine That

Requires Agencies To Construe Statutes In Accor-

dance With The Unambiguously Expressed Intent Of

Congress.

This Court has recently clarified the judicial role in

reviewing the construction of a statute by an agency charged

with its enforcement:

First, always, is the question whether Congress has

directly spoken to the precise question at issue. If the

intent of Congress is clear, that is the end of the

15

matter; for the court, as well as the agency, must give

effect to the unambiguously expressed intent of

Congress.

Chevron U.S.A. Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837, 842-43 (1984) (footnote omitted). ““The

starting point of analysis is the language of the statute itself”’

American Textile Manufacturers Institute, Inc. v. Donovan,

452 US. 490, 508 (1981), citing Steadman v. SEC, 450 US.

91, 97 (1981) and Reiter v. Sonotone Corp., 442 U.S. 330, 337

(1979). “Absent a clearly expressed legislative intention to the

contrary, that language must ordinarily be regarded as con-

clusive.’ Consumer Product Safety Commission v. GTE Syl-

vania, Inc., 447 U.S. 102, 108 (1980).

In the present case, however, the Court of Appeals —

without acknowledging this doctrine — sanctioned the FCC’s

two-fold deviation from unambiguous statutory language.

First, the FCC, instead of defining ‘‘effective competition”

for a ‘‘cable system,’ as required by Section 623 of the Cable

Act, defined “‘effective competition’ for “‘basic cable service”

alone. Second, and perhaps more significantly, the FCC did

not even pause to use the statutory definition of the “‘basic

cable service’ standard upon which it erroneously relied. From

the outset, the FCC defined ‘“‘basic cable service’’ solely in

terms of broadcast signals. It thus excluded all non-broadcast

programming (except access channels) from ‘‘basic cable

service.’ The Cable Act, however, defines ‘‘basic cable service’’

to mean “‘any service tier which includes . . . broadcast

signals.’ 47 U.S.C. § 522(2) (emphasis added). According to this

statutory definition, ‘‘basic cable service’ is not limited to

broadcast signals but includes non-broadcast programming.

In effect, the FCC simply chose to administratively rewrite

the statutory definition of “‘basic cable service’ so as to

include the limiting phrase ‘“‘but excludes non-broadcast

programming.’

7 Given that the Court of Appeals found the FCC to have erred by not fol-

lowing the statutory definition of ‘‘basic cable service’ in determining

which tiers of service are subject to regulation, the Court's failure to find

a similar erroneous deviation from the statutory definition in determining

a standard for ‘‘effective competition’’ is especially puzzling.

16

While Congress expressly delegated the task of defining

“effective competition’ to the FCC, it precisely instructed the

FCC to ‘‘consider the number and nature of [cable] services

provided, compared with the number and nature of services

available from alternative sources and, if so, at what price.’

House Report at 66, reprinted in 1984 U.S. Code Cong. &

Admin. News at 4703. The Court of Appeals nevertheless

deemed that instruction to be virtually nullified by subse-

quent language in the House Report stating that the FCC

‘“‘may find it relevant to consider factors in addition to the

number of over-the-air broadcast stationsina market... ”’

Id. (emphasis added). But the subsequent statement and

earlier instruction are reconcilable: together, they mean that

the FCC should consider the number and nature of cable

services provided, compared with what is available from alter-

native sources and, having done so, may find it relevant, i.e.,

necessary, to fashion an ‘‘effective competition’’ rule based

on factors in addition to the number of available broadcast

signals.®

If there were any doubt that the three-signal ‘‘effective

competition’’ rule was contrary to unambiguous Congres-

sional intent, that doubt is removed by the fact that Congress

specifically rejected a statutory definition of ‘‘effective com-

petition” based on four broadcast signals contained in the

cable bill initially passed by the Senate and later replaced by

the bill that became the Cable Act.® “ ‘Few principles of statu-

tory construction are more compelling than the proposition

that Congress does not intend sub silentio to enact statutory

language that it has earlier discarded in favor of other lan-

guage. ’’ Immigration and Naturalization Service v. Cardoza-

Fonseca, 107 S.Ct. 1207, 1219 (1987), quoting Nachman Corp.

8 Indeed, it seems almost dispositive of the question whether the FCC could

disregard the non-broadcast component of cable service to observe that

a system that only retransmits broadcast signals is not even a ‘‘cable

system” under the Cable Act. 47 U.S.C. § 522(6).

° S66, 98th Cong., Ist Sess. § 607 (1983). See 129 Cong. Rec. § 8326 (daily

ed. June 14, 1983), S. Rep. No. 67, 98th Cong. 1st Sess. 22-23 (1983).

17

| |

uv. Pension Benefit Guaranty Corp., 446 U.S. 359, 392-93 (1980)

(Stewart, J., dissenting). Congressional rejection of the pro-

posed four broadcast signal definition provides strong evi-

dence that Congress did not intend to authorize promulga-

tion of a three broadcast signal rule either.

2. The Opinion Below Sanctions A Significant Departure

From The Accepted And Usual Doctrine That Re-

quires Agencies To Consider All Relevant Factors And

Explain Departures From Longstanding Policies.

Administrative agencies must consider all relevant factors

in fashioning their rules. Motor Vehicle Manufacturers Associ-

ation of United States, Inc. v. State Farm Mutual Insurance

Co., 463 U.S. 29, 43 (1983); Bowman Transportation Inc. v.

Arkansas-Best Freight System, Inc., 419 U.S. 281, 285 (1974);

Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402,

416 (1971). Failure to consider a relevant factor is arbitrary

and capricious. Likewise, administrative agencies must pro-

vide a reasoned analysis when they depart from longstanding

policies, and failure todosois arbitrary and capricious. Motor

Vehicle Manufacturers Association of United States, Inc., 463

U.S. at 57. The Court of Appeals ignored both principles in

upholding the FCC’s three broadcast signal rule.

Antitrust principles were surely a relevant factor for the

FCC to consider in assessing the market power of cable

systems. Direct Marketing Association, Inc. v. United States

Postal Service, 778 F.2d 96, 105 (2d Cir. 1985); Northern

Natural Gas Co. v. FPC, 399 F.2d 953, 959 (D.C. Cir. 1968).

Although various parties suggested that the FCC apply

antitrust market analysis to the ‘‘effective competition”’ issue,

the FCC completely ignored those suggestions. The FCC went

so far as to dismiss, as based upon ‘‘supposition and intui-

tion,’ the analysis of DOJ, the agency recognized as having

greatest expertise at the federal level in evaluating competi-

tion in telecommunications markets. The FCC’s failure in this

regard was especially arbitrary because the FCC has

18

traditionally applied antitrust market analysis to assess the

degree of competition in telecommunications markets. See,

e.g., Fourth Report and Order, Policy and Rules Concerning

rates for Competitive Common Carrier Services and Facili-

ties Authorization Therefor, 95 FCC 2d 554, 557-82 (1983);

Notice of Proposed Rulemaking, International Competitive

Carrier Policies, 100 FCC Sd 1270, 1275-82 (1985); Notice of

Proposed Rulemaking, Decreased Regulation of Certain Basic

Telecommunications Services, 2 FCC Red 645, 647 (1987). The

FCC thus also acted arbitrarily by failing to provide any expla-

nation, let alone a reasoned one, for its departure from its tradi-

tional mode of analysis.

Rather than undertake a principled analysis of the effec-

tive competition question, the FCC relied on a presumption

of competition. This presumption apparently derived from its

erroneous view of the Cable Act as a deregulatory manifesto

— a view that disregarded other important goals of the Cable

Act, including ‘‘maximizing the availability of cable

services. . . ”’ Housatonic Cable Vision v. Dept. of Public

Utility, 622 F. Supp. 798, 811 (D.C. Conn. 1985). As with

antitrust market analysis, the FCC treated this important

statutory goal as simply another irrelevant factor.’°

” Interestingly, the FCC, in selectively quoting from the section of the

Cable Act defining the Act’s purposes, observed that:

‘Foremost among these [purposes] is the intent of the statute

to establish ‘standards which encourage the growth and develop-

ment of cable systems *** assure that cable communications

provide *** the widest possible diversity of information sources

and services to the public’ and ‘promote competition in cable

communications and minimize unnecessary regulation that

would impose an undue economic burden on cable systems. We

believe that we must implement Section 623(b) consistent with

these statutory goals.’ Report and Order at { 116. (deletions in

original) (App. at A55-56).

Apparently because of the seeming conflict with its deregulatory

mindset, the FCC deleted mention of the goal of “‘assur[ing] that cable

systems are responsive to the needs and interests of the local commu-

nity.’ 47 U.SC. § 521(2).

19

3. The Opinion Below Sanctions A Significant Departure

From The Accepted And Usual Doctrine That Pro-

hibits An Agency From Relying On Studies Which Are

Irrelevant, Undisclosed, Or Lacking Statistical

Validity.

‘* “It is not consonant with the purpose of a rulemaking

proceeding to promulgate rules on the basis of inadequate

data, or on data that [in] critical degree, is known only to the

agency. *’ United States v. Nova Scotia Food Products Corp.,

568 F.2d 240, 251 (2d Cir. 1977) (emphasis in original), quoting

Portland Cement Association v. Ruckelhaus, 486 F.2d 375,

393 (DC. Cir. 1973), cert. denied, 417 U.S. 921 (1974); National

Biack Media Coalition v. FCC 791 F.2d 1016, 1023 (2d Cir.

1986). Nor may an agency rely upon a study that has been

criticized in public comments as being statistically unreliable,

without at least addressing the statistical criticisms. St.

James Hospital v. Heckler, 760 F.2d 1460, 1469 (7th Cir.), cert.

denied, 106 S.Ct. 229 (1985). Likewise, an agency may not rely

upon a study to support findings unrelated to the study’s

results. Bowen v. American Hospital Association, 106 S.Ct.

2101, 2115 & n.18 (1986) (Stevens, J., plurality); St. James

Hospital v. Heckler, 760 F.2d at 1468; Almay v. Califano, 569

F.2d 674, 682 (DC. Cir. 1978).

The Court of Appeals entirely ignored the FCC’s viola-

tion of all three of these principles. First, the FCC relied upon

the NCTA/CATA study without ever addressing the signifi-

cant criticisms of that study. Second, it relied upon an internal

study virtually unavailable for public comment. Third, it relied

on two studies, its internal study and the Kwoka study, which

were plainly irrelevant to the pertinent question whether cable

systems possess market power. Had these violations not

occurred, the result of the rule-making process may have been

very different, and state and local governments throughout

the country may have retained their traditional authority to

safeguard cable subscribers against the possibility of

monopolistic cable rate pricing.

20

\

CONCLUSION

For these reasons, the petition for a writ of certiorari

should be granted.

Respectfully Submitted,

STATE OF CONNECTICUT

Joseph I. Lieberman

Attorney General

William B. Gundling

Assistant Attorney General

Carl J. Schuman

Assistant Attorney General

30 Trinity Street

Hartford, CT 06106

(203) 566-4990

CITY OF NEW YORK

Norman M. Sinel

Paul S. Ryerson

Robert Alan Garrett

Patrick J. Grant

Barbara J. Delaney

Arnold & Porter

1200 New Hampshire Avenue, N.W.

Washington, D.C. 20036

Stephen Kramer

Assistant Corporation Counsel

City of New York

100 Church Street

New York, New York 10007

NATIONAL LEAGUE OF CITIES

Cynthia Pols

General Counsel

Office of Federal Relations

National League of Cities

1301 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

21

AMERICAN CIVIL LIBERTIES UNION

Steven R. Shapiro

C. Edwin Baker

American Civil Liberties Union

132 West 43rd Street

New York, NY 10036

(212) 944-9800

Michael Botein

Robert T. Perry*

Michael I. Meyerson

Media Law Clinic

New York Law School

57 Worth Street

New York, NY 10013

(212) 431-2160

*Counsel of Record for Petitioners

22

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—