The FCC's transaction reviews and First Amendment risks.

• Author: Skorup, Brent

INTRODUCTION

In the run-up to the 2004 Presidential election, Pulitzer Prize-and Peabody Award-winning journalist, Carlton Sherwood, made a film featuring Vietnam POWs that cast Democratic nominee Senator John Kerry in an unfavorable light. (1) The Sinclair Broadcast Group, which owns TV stations scattered around the country, announced plans to air the forty-minute film but received significant criticism because of the timing before an election. Democratic politicians complained to the Federal Communications Commission about the film's lack of balance and advocacy groups vowed a multi-year regulatory challenge to Sinclair's airwave license renewals. (2) The Boston Globe and New York Times editorial pages requested the FCC investigate Sinclair for countenancing to air the film. (3) MSNBC television host Deborah Norville captured the mood when she asked a Sinclair vice president on air, "Why would Sinclair Broadcasting, which has a license from the FCC, risk that very, very precious license by going forward with a program like this?" (4) Former FCC Chairman Reed Hundt similarly asked Sinclair executives, "Why should a broadcaster keep its licenses if it behaves in this manner?" (5)

Sinclair got the message. Financial analysts and FCC staff predicted the controversy posed political and financial risks to Sinclair and other FCC-licensed stations--what one analyst report called "the Sinclair payback provision" (6)--and Sinclair stock value quickly dipped 17%. (7) Within days, Sinclair abruptly backed off and chose to broadcast only four minutes of the film. (8)

The Sinclair episode illustrates the power the FCC holds over some media outlets and gives a glimpse into how political actors and activists are able to channel the FCC's regulatory process to chill unwanted speech. Quite simply, many U.S. firms that carry and distribute speech, like Sinclair, must remain in the FCC's good graces--via license renewals and approvals of license transfers--to operate. Over the last twenty years, the FCC has increasingly used its leverage during licensing proceedings as an opportunity to engage in ad hoc merger review that substitutes for formal rulemaking. Through license renewals and--the focus of this Article--through transaction approvals, the agency allows special interest groups to influence media content, business models, and operations.

Neither the FCC nor the courts have put meaningful limits on what the FCC can extract during license transfers, leading to arbitrary and unpredictable results. (9) Today, regulated companies--including broadcast TV and radio, satellite TV and radio, cable TV, and Internet service providers--are the primary producers and distributors of mass media and publications. Increasingly, the FCC extracts nominally voluntary concessions from firms--including programming decisions, hiring practices, and "net neutrality" compliance--via coercive conditions to transaction approvals. In many cases, the FCC is legally barred from enforcing or unwilling to enforce these policies through the normal regulatory process. (10)

Not much has changed in the fifteen years since Bryan Tramont, then-Legal Advisor to Commissioner Harold Furchtgott-Roth, wrote that "procedural loopholes and circumstance create opportunities for the Commission to operate free of the discipline imposed by the statute and administrative procedure" during license transfer approvals and consent decrees. (11) If anything, the severity of the problem may be getting worse. (12) Scholars criticize lawmakers' "jawboning"--a boning"--a term for informal regulation and threats using dubious legal authority--of Internet and media companies outside of transparent regulation. (13) Professor Derek Bambauer notes that "[i]nformal enforcement... cloaks what is in reality state action in the guise of private choice," (14) and such "regulation by transaction" has far-reaching legal and constitutional effects.

Once an acquisition or license transfer is before the Commission, the applicants and the FCC engage in a secretive bargaining over what "voluntary" commitments the applicants must make to remain in the agency's good graces. (15) These negotiated agreements are made pursuant to a consent decree or to gain transaction approval and are, practically speaking, not appealable. (16)

These circumstances eviscerate norms of good governance and rule of law and may also be unconstitutional because of the amount of discretion the FCC has over speakers. The FCC's transaction practices pose the speech infringement risks the Supreme Court warned of in a 1988 case, City of Lakewood v. Plain Dealer Publishing Co., regarding a city's licensing of newspaper racks: "the mere existence of the licensor's unfettered discretion, coupled with the power of prior restraint, intimidates dates parties into censoring their own speech, even if the discretion and power are never actually abused." (17)

The FCC continues down its current path at legal peril. The expansion of FCC authority during license transfers, its ad hoc determinations of the public interest, and the impracticability of timely judicial review have pernicious effects on modern media and the rule of law. Given the immense discretion over media, the FCC's transaction reviews may be subject to facial First Amendment challenges. (18) If the FCC does not voluntarily abandon its de facto merger review, the agency should at least promulgate guidelines for what its public interest standard requires.

1. BACKGROUND ON FCC AUTHORITY OVER COMMUNICATIONS TRANSACTIONS AND THE PUBLIC INTEREST STANDARD

   By statute, the FCC must find that a wireless license transfer serves "the public interest, convenience, and necessity" (19) and there must be similar finding for a transfer of common carrier lines. (20) Parties with transactions subject to FCC jurisdiction bear the burden and must prove by a preponderance of the evidence that the transaction affirmatively provides public interest benefits. (21) Notably, the Communications Act provides no general merger authority but the agency has treated its authority over license transfers as reason to evaluate and approve mergers. As a result, the subsequent transaction action analysis frequently makes only incidental mention of the underlying licenses. (22)

   This regulatory power over speakers exists because the FCC's authority predates changes in the market that created more speakers--for instance, traditional telephone companies now provide television--and predates the expansion in coverage of the First Amendment since the 1970s. (23) The "public interest" standard was first applied to mass media over eighty years ago, with the creation in 1927 of the FCC's predecessor, the Federal Radio Commission, which regulated radio broadcasters. (24)

   This vague standard had little meaning even to the congressmen who promulgated it in the 1920s (25) but contemporaries believed that courts would give meaning to the standard. (26) Courts had, after all, constrained seemingly discretionary antitrust laws via common law-like development. (27) Despite the passage of decades, however, neither the FCC nor the courts have put meaningful limits on what the FCC can do under the public interest standard. (28)

   Since the 1970s, Congress and the FCC have moved away from formal industrial policy in telecommunications and public interest programming mandates in media and moved towards market competition (29) and free speech norms. (30) Old habits die hard, however. Lacking the legal authority or political will to engage in, for instance, formal broadband rate regulation and cable TV programming mandates, the FCC extracts nominally voluntary commitments from merging firms about rates, programming, and other issues like net neutrality. (31) Combined with the FCC's pervasive public interest standard, (32) regulation by transaction commitments "may be the [FCC's] primary and most potent form of regulatory control." (33) As communications scholar Randolph May explains:

   The Commission merely withholds approval of the merger until the parties come forward to propose conditions which the Commission has telegraphed in closed door negotiations that it would find acceptable to meet whatever public interest concerns that opponents, the FCC, and others have raised. (34) Since it lacks merger authority under the Communications Act, (35) the FCC does not have statutory time limits for transaction reviews and reviews often take about a year. (36) This is much longer than competition reviews at the Federal Trade Commission and Department of Justice, which generally take two to four months (37) because of the requirements of the Hart-Scott-Rodino Act. (38)

   Since transaction delays are costly to merging firms and they bear the burden of showing public interest benefits, this gives the agency great leverage over firms and appears designed to extract public interest concessions from firms. The FCC challenges license transfers typically when the underlying value of the transaction is in the billions of dollars. Some firms spend tens or hundreds of millions of dollars on FCC approval-related expenses alone, which presumably are substantially less than the value of the transaction to the firms. (39) In one of the largest recent merger attempts, reporting suggests Comcast and Time Warner Cable collectively spent over $500 million on merger-related expenses, a deal that the FCC rejected. (40) Merging firms who disagree with the need or legality of a merger condition are in no position to challenge the condition. (41)

   There are sensible debates about where voluntary action by a private firm ends and government coercion begins. We do not believe that distinction is relevant here and are aware of no scholarship defending the agency's coercive "regulation by transaction." Law professor Tim Wu wrote perhaps the most prominent defense of informal regulation in fast-moving industries, yet he expressly names the FCC's merger reviews as...