The Federal Communications Commission (FCC) recently adopted sweeping new rules designed to prevent so-called “digital discrimination” in the deployment, access, and adoption of broadband internet services. But an amicus brief filed by the International Center for Law & Economics (ICLE) and the Information Technology & Innovation Foundation (ITIF) with the 8th U.S. Circuit Court of Appeals argues that the rules go far beyond what Congress authorized.

It appears to us quite likely the court will vacate the new rules, because they exceed the authority Congress granted the FCC and undermine the very broadband investment and deployment that Congress wanted to encourage. In effect, the rules would set the FCC up as a central planner of all things broadband-related. In combination with the commission’s recent reclassification of broadband as a Title II service, the FCC has stretched its authority far beyond the breaking point.

Read the full piece here.

STATEMENTS OF INTEREST

The International Center for Law & Economics (“ICLE”) is a nonprofit, non-partisan global research and policy center that builds intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law and economics methodologies and economic learning to inform policy debates and has longstanding expertise evaluating law and policy.

ICLE scholars have written extensively in the areas of telecommunications and broadband policy. This includes white papers, law journal articles, and amicus briefs touching on issues related to the provision and regulation of broadband Internet service.

The FCC’s final rule by Report and Order adopted on January 22, 2024  concerning “digital discrimination” (the Order) constitutes a significant change to an economic policy. Broadband alone is a $112 billion industry with over 125 million customers. If permitted to stand, the FCC’s broad Order will be harmful to the dynamic marketplace for broadband that presently exists in the United States. ICLE urges the Court to vacate the Order and instead require the FCC to adopt rules limited to preventing intentional discrimination in deployment by broadband Internet access service providers.

The Information Technology and Innovation Foundation (“ITIF”) is an independent non-profit, non-partisan think tank. ITIF’s mission is to formulate, evaluate, and promote policy solutions that accelerate innovation and boost productivity to spur growth, opportunity, and progress. To that end, ITIF strives to provide policymakers around the world with high-quality information, analysis, and recommendations they can trust. ITIF adheres to the highest standards of research integrity, guided by an internal code of ethics grounded in analytical rigor, policy pragmatism, and independence from external direction or bias.

ITIF’s mission is to advance public policies that accelerate the progress of technological innovation. ITIF believes that innovation can almost always be a force for good. It is the major driver of human advancement and the essential means for improving societal welfare. A robust rate of innovation makes it possible to achieve many other goals—including increases in median per-capita income, improved health, transportation mobility, and a cleaner environment. In pursuing this goal, ITIF does not hew to a fixed set of ideas; rather, ITIF strives for objective and rational analysis that is guided by critical thinking and a set of core values. ITIF engages in policy and legal debates, both directly and indirectly, by presenting policymakers, courts, and other policy influencers with compelling data, analysis, arguments, and proposals to advance effective innovation policies and oppose counterproductive ones.

The FCC’s Order will have a significant impact on the speed and adoption of technological innovation in the United States. The Order not only raises the cost of deployment investments, but it also increases the risk of liability for discrimination, thereby increasing the uncertainty of the investments’ returns. As a result, the Order will not only stifle new deployment to unserved areas, but also will delay network upgrades and maintenance out of fear of alleged disparate effects. For these reasons ITIF urges the Court to set aside the FCC’s Order.

Pursuant to Federal Rule of Appellate Procedure 29(a)(2), ICLE and ITIF have obtained consent of the parties to file the instant Brief of the International Center for Law & Economics and the Information Technology and Innovation Foundation as Amici Curiae In Support of Petitioners.

INTRODUCTION AND SUMMARY OF ARGUMENT

The present marketplace for broadband in the United States is dynamic and generally serves consumers well. See Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture (ICLE White Paper, Jun. 2021), https://laweconcenter.org/wp-content/uploads/2021/06/A-Dynamic-Analysis-of-Broadband-Competition.pdf. Broadband providers acting in the marketplace have invested $2.1 trillion in building, maintaining, and improving their networks since 1996, including $102.4 billion in 2022 alone. See USTelecom, 2022 Broadband Capex Report (Sept. 8, 2023), https://www.ustelecom.org/research/2022-broadband-capex. The FCC’s own data suggests that 91% of Americans have access to high-speed broadband under its new and faster definition. See 2024 706 Report, FCC 24-27, GN Docket No. 22-270, at paras. 20, 22 (Mar. 18, 2024).

Despite this, there are areas in the country, primarily due to low population density, where serving consumers is prohibitively expensive. Moreover, affordability remains a concern for some lower-income groups. To address these concerns, Congress passed the Infrastructure Investment and Jobs Act (IIJA), Pub. L. No. 117-58, 135 Stat. 429, which invested $42.5 billion in building out broadband to rural areas through the Broadband Equity, Access, and Deployment (BEAD) Program, and billions more in the Affordable Connectivity Program (ACP), which provided low-income individuals a $30 per month voucher. Congress’s passage of the IIJA was consistent with sustaining the free and dynamic market for broadband.

In addition, to address concerns that broadband providers could engage in discriminatory behavior in deployment decisions, Section 60506(b) of IIJA requires that “[n]ot later than 2 years after November 15, 2021, the Commission shall adopt final rules to facilitate equal access to broadband internet access services, taking into account the issues of technical and economic feasibility presented by that objective, including… preventing digital discrimination of access based on income level, race, ethnicity, color, religion, or national origin.” Pub. L. No. 117-58, § 60506(b)(1), 135 Stat. 429, 1246.

The FCC adopted the final rule by Report and Order in the Federal Register on January 22, 2024. See 89 Fed. Reg. 4128 (Jan. 22, 2024) [hereinafter “Order”] attached as the Addendum to Petitioners’ Brief (“Pet. Add.”). But the digital discrimination rule issued in this Order is inconsistent with the IIJA, so expansive as to claim regulatory authority over major political and economic questions, and is arbitrary and capricious. As a result, this Court must vacate it.

The FCC could have issued a final rule consistent with the statute and the dynamic broadband marketplace. Such a rule would have recognized the limited purpose of the statute was to outlaw intentional discrimination by broadband providers in deployment decisions, in a way that would treat a person or group of persons less favorably than others because of a listed protected trait. This rule would be workable, leaving the FCC to focus its attention on cases where broadband providers fail to invest in deploying networks due to animus against those groups.

Instead, the FCC chose to create an expansive regulatory scheme that gives it essentially unlimited discretion over anything that would affect the adoption of broadband. It did this by adopting a differential impact standard that applies not only to broadband providers, but to anyone that could “otherwise affect consumer access to broadband internet access service,” see 47 CFR §16.2 (definition of “Covered entity”), which includes considerations of price among the “comparable terms and conditions.” See Pet. Add. 59, Order at para. 111 (“Indeed, pricing is often the most important term that consumers consider when purchasing goods and services… this is no less true with respect to broadband internet access services.”). Taken together, these departures from the text of Section 60506 would give the FCC nearly unlimited authority over broadband providers, and even a great deal of authority over other entities that can affect broadband access.

To interpret Section 60506 to encompass a “differential impact” standard, as the agency has done here, leads to a situation in which covered entities that have no intent to discriminate or even take active measures to help protected classes could still be found in violation of the rules. Cf. 47 CFR §16.4(b) (“A discriminatory effect occurs when a facially neutral policy or practice differentially impacts consumers’ access to covered services or covered elements of service.”). This standard opens nearly everything to FCC review because of the correlation of profit-maximizing motivations not covered by the statute with things that are covered by the statute.

Income level, race, ethnicity, color, religion, and national origin are often incidentally associated with some other non-protected factor important for investment decisions. Specifically, population density is widely recognized as one of the determinants of expected profitability for broadband deployment. See Eric Fruits & Kristian Stout, The Income Conundrum: Intent and Effects Analysis of Digital Discrimination (ICLE Issue Brief 2022-11-14) available at https://laweconcenter.org/wp-content/uploads/2022/11/The-Income-Conundrum-Intent-and-Effects-Analysis-of-Digital-Discrimination.pdf citing U.S. Gov’t Accountability Office, GAO-06-426, Telecommunications Broadband Deployment Is Extensive Throughout the United States, but It Is Difficult to Assess the Extent of Deployment Gaps in Rural Areas 19 (2006) (population density is the “most frequently cited cost factor affecting broadband deployment” and “a critical determinant of companies’ deployment decisions”). But population density is also correlated with income level, with higher density associated with higher incomes. See Daniel Hummel, The Effects of Population and Housing Density in Urban Areas on Income in the United States, 35 Loc. Econ. 27, Feb. 7, 2020, (showing statistically significant positive relationship between income and both population and housing density). Higher population density is also correlated with greater racial, ethnic, religious, and national origin diversity. See, e.g., Barrett A. Lee & Gregory Sharp, Diversity Across the Rural-Urban Continuum, 672 Annals Am. Acad. Pol. & Soc. Sci. 26 (2017).

Consider a hypothetical provider who eschews discrimination against any of the protected traits in its deployment practices by prioritizing its investments solely on population density, deploying to high-density areas first then lower-density areas later. If higher-density areas are also areas with higher incomes, then it would be relatively easy to produce a statistical analysis showing that lower-income areas are associated with lower rates of deployment. This finding can be used to support a complaint against the provider alleging income discrimination under the Order’s disparate impact standard thereby triggering an FCC investigation. Similarly, because of the relationships between population density and race, ethnicity, color, religion, and national origin, it would be relatively easy to produce a statistical analysis showing disparate impacts across these protected traits.

Because population density is correlated with each of the protected traits, applying an effects-based statistical analysis is likely to produce a false positive concluding the presence of digital discrimination—even when there was none. With so many possible spurious correlations, it is almost impossible for any covered entity to know with any certainty whether its policies or practices could be actionable for differential impacts. Nobel laureate, Ronald Coase, is reported to have said, “If you torture the data long enough, it will confess.” Garson O’Toole, If You Torture the Data Long Enough, It Will Confess, Quote Investigator (Jan. 18, 2021), https://quoteinvestigator.com/2021/01/18/confess. The FCC’s Order amounts to an open invitation to torture the data.

While it is possible that the FCC could determine that the costs of deployment due to population density or another profit-relevant reason go to “technical or economic feasibility,” the burden to prove infeasibility are on the covered entity by a preponderance of the evidence standard. See 47 CFR §16.5(c)-(d). This may include “proof that available, less discriminatory alternatives were not reasonably achievable.” See 47 CFR §16.5(c). In its case-by-case review process, there is no guarantee that the Commission will agree that “technical or economic feasibility” warrants an exception in any given dispute. See 47 CFR §16.5(e). This rule will put a great deal of pressure on covered entities to avoid possible litigation by getting all plans pre-approved by the FCC through its advisory opinion authority. See 47 CFR §16.7. This sets up the FCC to be a central planner for nearly everything related to broadband, from deployment to policies and practices that affect even adoption itself, including price of the service. This is inconsistent with preserving the ability of businesses to make “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” Texas Dep’t of Hous. & Cmty. Affs. v. Inclusive Communities Project, Inc., 576 U.S. 519, 533 (2015). The Order will thus dampen investment incentives because “the specter of disparate-impact litigation” will cause private broadband providers to “no longer construct or renovate” their networks, leading to a situation where the FCC’s rule “undermines its own purpose” under the IIJA “as well as the free market system.” Id. at 544.

Argument

The FCC’s Order is unlawful. First, the Order’s interpretation of Section 60506 is inconsistent with the structure of the IIJA. Second, the Order is inconsistent with the clear meaning of Section 60506. Third, the Order raises major questions of political and economic significance by giving the FCC nearly unlimited authority over broadband deployment decisions, including price. Fourth, the Order is arbitrary and capricious because it fails to adopt a rule that is reasonable insofar as it will end up reducing investment incentives of broadband providers to deploy and improve broadband service, which is inconsistent with the purpose of the IIJA. Finally, the Order’s vagueness leaves a person of ordinary intelligence no ability to know whether they are subject to the law and thus gives the FCC the ability to engage in arbitrary and discriminatory enforcement.

I. The Order’s Interpretation of Section 60506 is Inconsistent with the Structure of the IIJA

“It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” Davis v. Michigan Dept. of Treasury, 489 U.S. 803, 809 (1989). The structure of the IIJA as a whole, as well as the fact that Section 60506, in particular, was not placed within the larger Communications Act (47 U.S.C. §150 et seq.) that gives the FCC authority, suggests that the Order claims authority far beyond what Congress has granted the FCC.

The IIJA divided broadband policy priorities between different agencies and circumscribes the scope of each program or rulemaking it delegates to agencies. Section 60102 addressed the issue of universal broadband deployment by creating the Broadband Equity, Access, and Deployment (BEAD) Program. See IIJA §60102. The statute designated the National Telecommunication and Information Administration (NTIA) to administer this $42.45 billion program with funds to be first allocated to deploy broadband service to all areas that currently lack access to high-speed broadband Internet. See IIJA §60102(b), (h). BEAD is, therefore, Congress’s chosen method to remedy disparities in broadband deployment due to cost-based barriers like low population density. Section 60502 then created the Affordable Connectivity Program (ACP), which provided low-income individuals a $30 per month voucher, and delegated its administration to the FCC. See IIJA §60502. ACP is, therefore, Congress’s chosen method to remedy broadband affordability for households whose low income is a barrier to broadband adoption. Title V of Division F of the IIJA goes on to create several more broadband programs, each with a specific and limited scope. See IIJA § 60101 et seq.

In short, Congress was intentional about circumscribing the different problems with broadband deployment and access, as well as the scope of the programs it designed to fix them. Section 60506’s authorization for the FCC to prevent “digital discrimination” fits neatly into this statutory scheme if it targets disparate treatment in deployment decisions based upon protected status—i.e., intentional harmful actions that are distinct from deployment decisions based on costs of deployment or projected demand for broadband service. But the FCC’s Order vastly exceeds this statutory scope and claims authority over virtually every aspect of the broadband marketplace, including infrastructure deployment decisions due to cost generally and the potential market for the networks once deployed.  Indeed, the FCC envisions scenarios in which its rules conflict with other federal funding programs but nevertheless says that compliance with them is no safe harbor from liability for disparate impacts that compliance creates. See Pet. Add. 69-70, Order at para. 142. The Order thus dramatically exceeds the boundaries Congress set in Section 60506. Congress cannot have meant for section 60506 to remedy all deployment disparities or all issues of affordability because it created BEAD and ACP for those purposes.

Moreover, Section 60506 was not incorporated into the Communications Act, unlike other parts of the IIJA. In other words, the FCC’s general enforcement authority doesn’t apply to the regulatory scheme of Section 60506. The IIJA was not meant to give the FCC vast authority over broadband deployment and adoption by implication. The FCC must rely on Section 60506 alone for any authority it was given to combat digital discrimination.

II. The Order is Inconsistent with the Clear Meaning of the Text of Section 60506

The text of Section 60506 plainly shows that the intention of Congress to combat digital discrimination was through the use of circumscribed rules aimed at preventing intentional discrimination in deployment decisions by broadband providers. The statute starts with a statement of policy in part (a) and then gives the Commission direction to fulfill that purpose in parts (b) and (c).

The statement of policy in Section 60506(a) is exactly that: a statement of policy. Courts have long held that statutory sections like Section 60506(a)(1) and (a)(3) using words like “should” are “precatory.” See Emergency Coal. to Def. Educ. Travel v. U.S. Dep’t of Treasury, 498 F. Supp. 2d 150, 165 (D.D.C. 2007) (“Courts have repeatedly held that such ‘sense of Congress’ language is merely precatory and non-binding.”), aff’d, 545 F.3d 4 (D.C. Cir. 2008). While the statement of policy helps illuminate the goal of the provision at issue, it does not actually give the FCC authority. The goal of the statute is clear: to make sure the Commission prevents intentional discrimination in deployment decisions. For instance, Section 60506(c) empowers the Commission (and the Attorney General) to ensure federal policies promote equal access by prohibiting intentional deployment discrimination. See Section 60506(c) (“The Commission and the Attorney General shall ensure that Federal policies promote equal access to robust broadband internet access service by prohibiting deployment discrimination…”). Moreover, the definition of equal access as “equal opportunity to subscribe,” see 47 U.S.C. §1754(a)(2), does not imply a disparate impact analysis. See Brnovich v. Democratic Nat’l Comm., 141 S. Ct. 2321, 2339 (2021) (“[T]he mere fact there is some disparity in impact does not necessarily mean… that it does not give everyone an equal opportunity.”)

There is no evidence that IIJA’s drafters intended the law to be read as broadly as the Commission has done in its rules. The legislative record on Section 60506 is exceedingly sparse, containing almost no discussion of the provision beyond assertions that “broadband ought to be available to all Americans,” 167 Cong. Rec. 6046 (2021), and also that the IIJA was not to be used as a basis for the “regulation of internet rates.”167 Cong. Rec. 6053 (2021). The FCC argues that since “there is little evidence in the legislative history… that impediments to broadband internet access service are the result of intentional discrimination,” Congress must have desired a disparate impact standard. See Pet. Add. 25, Order at para. 47. But the limited nature of the problem suggests a limited solution in the form of a framework aimed at preventing such discrimination. Given the sparse evidence on legislative intent, Section 60506 should be read as granting a limited authority to the Commission.

With Section 60506(b), Congress gave the Commission a set of tools to identify and remedy acts of intentional discrimination by broadband providers in deployment decisions. As we explain below, under both the text of Section 60506 and the Supreme Court’s established jurisprudence, the Commission was not empowered to employ a disparate-impact (or “differential impact”) analysis under its digital discrimination rules.

Among the primary justifications for disparate-impact analysis is to remedy historical patterns of de jure segregation that left an indelible mark on minority communities. See Inclusive Communities, 576 at 528-29. While racial discrimination has not been purged from society, broadband only became prominent in the United States well after all forms of de jure segregation were made illegal, and after Congress and the courts had invested decades in rooting out impermissible de facto discrimination. In enacting its rules that give it presumptive authority over nearly all decisions related to broadband deployment and adoption, the FCC failed to adequately take this history into account.

Beyond the policy questions, however, Section 60506 cannot be reasonably construed as authorizing disparate-impact analysis. While the Supreme Court has allowed disparate-impact analysis in the context of civil-rights law, it has imposed some important limitations. To find disparate impact, the statute must be explicitly directed “to the consequences of an action rather than the actor’s intent.”  Inclusive Communities., 576 U.S. at 534. There, the Fair Housing Act made it unlawful:

To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.

42 U.S.C. §3604(a) (emphasis added). The Court noted that the presence of language like “otherwise make unavailable” is critical to construing a statute as demanding an effects-based analysis. Inclusive Communities., 576 U.S. at 534. Such phrases, the Court found, “refer[] to the consequences of an action rather than the actor’s intent.” Id. Further, the structure of a statute’s language matters:

The relevant statutory phrases… play an identical role in the structure common to all three statutes: Located at the end of lengthy sentences that begin with prohibitions on disparate treatment, they serve as catchall phrases looking to consequences, not intent. And all [of these] statutes use the word “otherwise” to introduce the results-oriented phrase. “Otherwise” means “in a different way or manner,” thus signaling a shift in emphasis from an actor’s intent to the consequences of his actions.

Id. at 534-35.

Previous Court opinions help parse the distinction between statutes limited to intentional discrimination claims and those that allow for disparate impact claims. Particularly relevant here, the Court looked at language from Section 601 of the Civil Rights Act stating that “[n]o person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance,” 42 U.S.C. §2000d (emphasis added), and found it “beyond dispute—and no party disagrees—that [it] prohibits only intentional discrimination.”  Alexander v. Sandoval, 532 U.S. 275, 280 (2001).

Here, the language of Section 60506” (“based on”) mirrors the language of Section 601 of the Civil Rights Act (“on the ground of”). Moreover, it is consistent with the reasoning of Inclusive Communities that determines when a statute allows for disparate impact analysis. Inclusive Communities primarily based its opinion on the “otherwise make unavailable” language at issue, with a particular focus on “otherwise” creating a more open-ended inquiry. See Inclusive Communities, 576 U.S. at 534 (“Here, the phrase ‘otherwise make unavailable’ is of central importance to the analysis that follows”). Such language is absent in Section 60506. Moreover, the closest analogy for Section 60506’s “based on” language is the “on the ground of” language of Title VI of the Civil Rights Act, which also does not include the “otherwise” language found to be so important in Inclusive Communities. Compare 42 U.S.C. §2000d with Inclusive Communities, 576 U.S. at 534-35 (focusing on how “otherwise” is a catch-all phrase looking to consequences instead of intent). If the Court has found “grounded on” means only intentional discrimination, then it is hard to see how “based on” wouldn’t lead to the same conclusion.

Thus, since Section 60506 was drafted without “results-oriented language” and instead frames the prohibition against digital discrimination as “based on income level, race, ethnicity, color, religion, or national origin,” this would put the rule squarely within the realm of prohibitions on intentional discrimination. That is, to be discriminatory, the decision to deploy or not to deploy must have been intentionally made based on or grounded on the protected characteristic. Mere statistical correlation between deployment and protected characteristics is insufficient.

In enacting the IIJA, Congress was undoubtedly aware of the Court’s history with disparate-impact analysis. Had it chosen to do so, it could have made the requirements of Section 60506 align with the requirements of that precedent. But it chose not to do so.

III. Congress Did Not Clearly Authorize the FCC to Decide a Major Question in this Order

To read Section 60506 of the IIJA as broadly as the FCC does in the Order invites a challenge under the major-questions doctrine. There are “extraordinary cases” where the “history and the breadth of the authority” that an agency asserts and the “economic and political significance” of that asserted authority provide “reason to hesitate before concluding that Congress” meant to confer such authority. See West Virginia v. EPA, 597 U.S. 697, 721 (2022) (quoting FDA v. Brown & Williamson, 529 U.S. 120, 159-60 (2000)). In such cases, “something more than a merely plausible textual basis for agency action is necessary. The agency instead must point to ‘clear congressional authorization’ for the power it claims.” Id. at 723 (quoting Utility Air Regulatory Group v. EPA, 573 U.S. 302, 324 (2014).

Here, the FCC has claimed dramatic new powers over the deployment of broadband Internet access, and it has exercised that alleged authority to create a process for inquiry into generalized civil rights claims. Such a system is as unprecedented as it is important to the political and economic environment of the country. The FCC itself implicitly recognizes this fact when it emphasizes the critical importance of Internet access as necessary “to meet basic needs.” Broadband alone is a $112 billion industry with over 125 million customers. See The History of US Broadband, S&P Global (last accessed May 11, 2023), https://www.spglobal.com/marketintelligence/en/news-insights/research/the-history-of-us-broadband. This doesn’t even include all the entities covered by this Order, which also includes all those who could “otherwise affect consumer access to broadband internet access service.” See 47 CFR §16.2. There is, therefore, no doubt that the Order is of great economic and political significance.

This would be fine if the statute clearly delegated such power to the FCC. But the only potential source of authority for the Order is Section 60506. Since the text of Section 60506 can be (and is better) read as not giving the FCC such authority, it simply can’t be an unambiguous delegation of authority.

As argued above, Congress knows how to write a disparate-impact statute in light of Supreme Court jurisprudence. Put simply, Congress did not write a disparate-impact statute here because there is no catch-all language comparable to what the Supreme Court has pointed to in statutes like the FHA. Cf. Inclusive Communities, 576 U.S. at 533 (finding a statute includes disparate-impact liability when the “text refers to the consequences of actions and not just the mindset of actors”). At best, Section 60506 is ambiguous in giving the authority to the FCC to use disparate impact analysis. That is simply not enough when regulating an area of great economic and political significance.

In addition to the major question of whether the FCC may enact its vast disparate impact apparatus, the FCC claims vast authority over the economically and politically significant arena of broadband rates despite no clear authorization to do so in Section 60506. In fact, in the legislative record, Congress explicitly wanted to avoid the possibility that the IIJA would be used as the basis for the “regulation of internet rates.” 167 Cong. Rec. 6053 (2021). The FCC disclaims the authority to engage in rate regulation, but it does claim authority for “ensuring pricing consistency.” See Pet. Add. 56-57, Order at para. 105. While the act of assessing the comparability of prices is not rate regulation in the sense that the Communications Act contemplates, a policy that holds entities liable for those disparities such that an ISP must adjust its prices until it matches an FCC definition of “comparable” is tantamount to setting that rate. See Eric Fruits & Geoffrey Manne, Quack Attack: De Facto Rate Regulation in Telecommunications (ICLE Issue Brief 2023-03-30), available at https://laweconcenter.org/wp-content/uploads/2023/03/De-Facto-Rate-Reg-Final-1.pdf (describing how the FCC often engages in rate regulation in practice even when it doesn’t call it that).

Furthermore, the Order could also allow the FCC to use the rule to demand higher service quality under the “comparable terms and conditions” language, even if consumers may prefer lower speeds for less money. That increased quality comes at a cost that will necessarily increase the market price of broadband. In this way, the Order would allow the FCC to set a price floor even if it never explicitly requires ISPs to submit their rates for approval.

The elephant of rate regulation is not hiding in the mousehole of Section 60506. Cf. Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001). Indeed, the FCC itself forswears rate regulation in an ongoing proceeding in which the relevant statute would clearly authorize it. See Safeguarding and Securing the Open Internet, 88 Fed. Reg. 76048 (proposed Nov. 3, 2023) (to be codified at 47 CFR pts. 8, 20). Nevertheless, the FCC recognized that rate regulation is inappropriate for the broadband marketplace and has declined its application in that proceeding. Even here, the FCC has denied that including pricing within the scope of the rules is “an attempt to institute rate regulation.” See Pet. Add. 59, Order at para. 111. But despite its denials, the FCC’s claim of authority would allow it to regulate prices despite nothing in Section 60506 granting it authority to do so. The FCC should not be able to recognize a politically significant consensus against rate regulation one minute and then smuggle that disfavored policy in through a statute that never mentions it the next.

Finally, as noted above, since many of the protected characteristics, but especially income, can be correlated with many factors relevant to profitability, it would be no surprise that almost any policy or practice of a covered entity under the Order could be subject to FCC enforcement. And since there is no guarantee that the FCC would agree in a particular case that technical or economic feasibility justifies a particular policy or practice, nearly everything a broadband provider or other covered entities do would likely need pre-approval under the FCC’s advisory opinion process. This would essentially make the FCC a central planner of everything related to broadband. In other words, the FCC has clearly claimed authority far beyond what Congress could have imagined without any clear authorization to do so.

IV. The Order is Arbitrary and Capricious Because it will Produce Results Inconsistent with the Purpose of the Statute

As noted above, the purposes of the broadband provisions of the IIJA are to encourage broadband deployment, enhance broadband affordability, and prevent discrimination in broadband access. Put simply, the purpose is to get more Americans to adopt more broadband, regardless of income level, race, ethnicity, color, religion, or national origin. The FCC’s Order should curtail discrimination, but the aggressive and expansive police powers the agency grants itself will surely diminish investments in broadband deployment and efforts to encourage adoption. We urge the Court to vacate the Order and require the FCC to adopt rules limited to preventing intentional discrimination in deployment by broadband Internet access service providers. More narrowly tailored rules would satisfy Section 60506’s mandates while preserving incentives to invest in deployment and encourage adoption. Cf. Cin. Bell Tel. Co. v. FCC, 69 F.3d 752, 761 (6th Cir. 1995) (“The FCC is required to give [a reasoned] explanation when it declines to adopt less restrictive measures in promulgating its rules.”). But the current Order is arbitrary and capricious because the predictable results of the rules would be inconsistent with the purpose of the IIJA in promoting broadband deployment. See Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43 (1983) (“[A]n agency rule would be arbitrary and capricious if the agency has… offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view of the product of agency expertise”).

The Order spans nearly every aspect of broadband deployment, including, but not limited to network infrastructure deployment, network reliability, network upgrades, and network maintenance. Pet. Add. 58, Order ¶ 108. In addition, the Order covers a wide range of policies and practices that while not directly related to deployment, affect the profitability of deployment investments, such as pricing, discounts, credit checks, marketing or advertising, service suspension, and account termination. Pet. Add. 58, Order ¶ 108.

Like all firms, broadband providers have limited resources with which to make their investments. While profitability (i.e., economic feasibility) is a necessary precondition for investment, not all profitable investments can be undertaken. Among the universe of economically feasible projects, firms are likely to give priority to those that promise greater returns on investment relative to those with lower returns. Returns on investment in broadband depend on several factors. Population density, terrain, regulations, and taxes are all important cost factors, while a given consumer population’s willingness to adopt and pay for broadband are key demand-related factors. Anything that raises the cost of expected cost deployment or reduces the demand for service can turn a profitable investment into an unprofitable prospect or downgrade its priority relative to other investment opportunities.

The Order not only raises the cost of deployment investments, but it also increases the risk of liability for discrimination, thereby increasing the uncertainty of the investments’ returns. Because of the well-known and widely accepted risk-return tradeoff, firms that face increased uncertainty in investment returns will demand higher expected returns from the investments they pursue. This demand for higher returns means that some projects that would have been pursued under more limited digital discrimination rules will not be pursued under the current Order.

The Order will not only stifle new deployment to unserved areas, but also will delay network upgrades and maintenance out of fear of alleged disparate effects. At the extreme, providers will be faced with the choice to upgrade everyone or upgrade no one. Because they cannot afford to upgrade everyone, then they will upgrade no one.

It might be argued that providers could avoid some of the ex post regulatory risk by ex ante seeking pre-approval under the FCC’s advisory opinion process. Such processes are costly and are not certain to result in approval. Even if approved, the FCC reserves to right to rescind the pre-approval. See Pet. Add. 75, Order ¶ 156 (“[A]dvisory opinions will be issued without prejudice to the Enforcement Bureau’s or the Commission’s ability to reconsider the questions involved, and rescind the opinion. Because advisory opinions would be issued by the Enforcement Bureau, they would also be issued without prejudice to the Commission’s right to later rescind or revoke the findings.”). Under the Order’s informal complaint procedures, third parties can allege discriminatory effects associated with pre-approved policies and practices that could result in the recission of pre-approval. The result is an unambiguous increase in deployment and operating costs, even with pre-approval.

Moreover, by imposing liability for disparate impacts outside the control of covered broadband providers, the Order produces results inconsistent with the purpose of the IIJA because parties cannot conform their conduct to the rules. Among the 7% of households who do not use the internet at home, more than half of Current Population Survey (CPS) respondents indicated that they “don’t need it or [are] not interested.” George S. Ford, Confusing Relevance and Price: Interpreting and Improving Surveys on Internet Non-adoption, 45 Telecomm. Pol’y, Mar. 2021. ISPs sell broadband service, but they cannot force uninterested people to buy their product.

Only 2-3% of U.S. households that have not adopted at-home broadband indicate it is because of a lack of access. Eric Fruits & Geoffrey Manne, Quack Attack: De Facto Rate Regulation in Telecommunications (ICLE Issue Brief 2023-03-30) at Table 1, available at https://laweconcenter.org/wp-content/uploads/2023/03/De-Facto-Rate-Reg-Final-1.pdf. And even this tiny fraction is driven by factors such as topography, population density, and projected consumer demand. Differences in these factors will be linked to differences in broadband deployment, but there is little that an ISP can do to change them. If the FCC’s command could make the mountainous regions into flat plains, it would have done so already. It is nonsensical to hold liable a company attempting to overcome obstacles to deployment because they do not do so simultaneously everywhere. And it is not a rational course of action to address a digital divide by imposing liability on entities that cannot fix the underlying causes driving it.

Punishment exacted on an ISP will not produce the broadband access the statute envisions for all Americans. In fact, it will put that access further out of reach by incentivizing ISPs to reduce the speed of deployments and upgrades so that they do not produce inadvertent statistical disparities. Given the statute’s objective of enhancing broadband access, the FCC’s rulemaking must contain a process for achieving greater access. The Order does the opposite and, therefore, cannot be what Congress intended. Cf. Inclusive Communities, 576 U.S. at 544 (“If the specter of disparate-impact litigation causes private developers to no longer construct or renovate housing units for low-income individuals, then the FHA would have undermined its own purpose as well as the free-market system.”).

The Order will result in less broadband investment by essentially making the FCC the central planner of all deployment and pricing decisions. This is inconsistent with the purpose of Section 60506, making the rule arbitrary and capricious.

V. The Order’s Vagueness Gives the FCC Unbounded Power

The Order’s digital discrimination rule is vague because it does not have “sufficient definiteness that ordinary people can understand what conduct is prohibited.” Kolender v. Lawson, 461 U.S. 352, 357 (1983). As a result, the FCC has claimed unbounded power to engage in “arbitrary and discriminatory enforcement.” Id. As argued above, the disparate impact standard means that anything that is correlated with income, which includes many things that may be benignly relevant to deployment and pricing decisions, could give rise to a possible violation of the Order.

While a covered entity could argue that there are economic or technical feasibility reasons for a policy or practice, the case-by-case nature of enforcement outlined in the Order means that no one can be sure of whether they are on the right side of the law. See 47 CFR §16.5(e) (“The Commission will determine on a case-by-case basis whether genuine issues of technical or economic feasibility justified the adoption, implementation, or utilization of a [barred] policy or practice…”).

This vagueness is not cured by the presence of the Order’s advisory opinion process because the FCC retains the right to bring an enforcement action anyway after reconsidering, rescinding, or revoking it. See 47 CFR §16.5(e) (“An advisory opinion states only the enforcement intention of the Enforcement Bureau as of the date of the opinion, and it is not binding on any party. Advisory opinions will be issued without prejudice to the Enforcement Bureau or the Commission to reconsider the questions involved, or to rescind or revoke the opinion. Advisory opinions will not be subject to appeal or further review”). In other words, there is no basis for concluding a covered entity has “the ability to clarify the meaning of the regulation by its own inquiry, or by resort to an administrative process.” Cf. Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S. 489, 498 (1982). The FCC may engage in utterly arbitrary and discriminatory enforcement under the Order.

Moreover, the Order’s expansive definition of covered entities to include any “entities that provide services that facilitate and affect consumer access to broadband internet access service,” 47 CFR § 16.2 (definition of “Covered entity”, which includes “Entities that otherwise affect consumer access to broadband internet access service”), also leads to vagueness as to whom the digital discrimination rules apply. This would arguably include state and local governments and nonprofits, as well as multi-family housing owners, many of whom may have no idea they are subject to the FCC’s digital discrimination rules nor any idea of how to comply.

The Order is therefore void for vagueness because it does not allow a person of ordinary intelligence to know whether they are complying with the law and gives the FCC nearly unlimited enforcement authority.

Conclusion

For the foregoing reasons, ICLE and ITIF urge the Court to set aside the FCC’s Order.

The Federal Communications Commission has voted on yet another round of net neutrality rules. Its vote Thursday reprises the 2015 rules, which resuscitated the 1934 Communications Act for modern, high-speed broadband networks. The agency decided, by a partisan split of 3-2, to end the “abdication of authority over broadband in 2017” and the ensuing years of “no federal oversight.”

Read the full piece here.

With yet another net-neutrality order set to take effect (the link is to the draft version circulated before today’s Federal Communications Commission vote; the final version is expected to be published in a few weeks) and to impose common-carriage requirements on broadband internet-access service (BIAS) providers, it is worth considering how the question of whether online platforms (whether they be social media or internet service providers) have the right to editorial discretion keeps shifting.

Read the full piece here.

The big news in telecommunications policy last week wasn’t really news at all—the Federal Communications Commission (FCC) released its proposed rules to classify broadband internet under Title II of the Communications Act. Supporters frame the proposed rules as “net neutrality,” but those provisions—a ban on blocking, throttling, or engaging in paid or affiliated-prioritization arrangements—actually comprise just a small part of the 435-page document.

Read the full piece here.

I. Introduction

The International Center for Law & Economics (“ICLE”) thanks the Federal Communications Commission (“FCC” or “the Commission”) for the opportunity to offer reply comments to this notice of proposed rulemaking (“NPRM”), as the Commission proposes to require cable operators and direct-broadcast satellite (DBS) providers to grant their subscribers rebates when those subscribers are deprived of video programming they expected to receive during programming blackouts that resulted from failed retransmission-consent negotiations or failed non-broadcast carriage negotiations.[1]

As noted in the NPRM, the Communications Act of 1934 requires that cable operators and satellite-TV providers obtain a broadcast TV station’s consent in order to lawfully retransmit that station’s signal to subscribers. Commercial stations or networks may either (1) demand carriage pursuant to the Commission’s must-carry rules or (2) elect for carriage consent and negotiate for compensation in exchange for carriage. If a channel elects for retransmission consent but is unable to reach agreement for carriage, the cable operator or DBS provider loses the right to carry that signal. As a result, the cable operator or DBS provider’s subscribers typically lose access entirely to the channel’s signal unless and until the parties are able to reach an agreement, a situation that is often described as a “blackout.”

Blackouts tend to generate eye-catching headlines and often annoy affected consumers.[2] This annoyance is amplified when consumers don’t receive a rebate for the loss of signal, especially when they believe that they are merely bystanders in the dispute between the cable operator or DBS provider and the channel.[3] The Commission appears to echo theses concerns, concluding that its proposed rebate mandate would ensure “subscribers are made whole when they face interruptions of service that are outside their control” and would prevent subscribers “from being charged for services for the period that they did not receive them.”[4]

This framing, however, oversimplifies retransmission-consent negotiations and mischaracterizes consumers’ agency in subscribing to and using multichannel-video-programming distributors (“MVPDs”). Moreover, there are numerous questions raised by the NPRM regarding the proposal’s feasibility, including how to identify which consumers would qualify for rebates, how those rebates would be calculated, and how they would be distributed. Several comments submitted in this proceeding suggest that any implementation of this proposal would be arbitrary and unfair to cable operators, DBS providers, and consumers. In particular:

• Blackouts result from a temporary or permanent failure to reach an agreement in negotiations between channels and either cable operators or DBS providers. The Commission’s proposal explicitly and unfairly assigns liability for blackouts to the cable operator or DBS provider. As a result, the proposal would provide channels with additional negotiating leverage relative to the status quo. Smaller cable operators may be especially disadvantaged.
• Each consumer is unique in how much they value a particular channel and how much they would be economically harmed by a blackout. For example, in the event of a cable or DBS blackout, some consumers can receive the programming via an over-the-air antenna or a streaming platform and would suffer close to no economic harm. Other consumers may assign no value to the blacked-out channel’s programming and would likewise suffer no harm.
• Complexities and confidentiality in programming contracts would make it impossible to accurately or fairly calculate the price or cost associated with any given channel over some set period of time. For example, cable operators and DBS providers typically sell bundles of channels, not a la carte offerings, making it impossible to calculate an appropriate rebate for one specific channel or set of channels.
• Even if it were possible to calculate an appropriate rebate, any mandated rebate based on such calculations would constitute prohibited rate regulation.

These reply comments respond to many of the issues raised in comments on this matter. We conclude that the Commission is proposing a set of unworkable and arbitrary rules. Even if rebates could be reasonably and fairly calculated, the amount of such rebates would likely be only a few dollars and may be as little as a few pennies. In such cases, the enormous cost to the Commission, cable operators, and DBS providers would be many times greater than the amount of rebates provided to consumers. It would be a much better use of the FCC’s and MVPD providers’ resources to abandon this rulemaking process and refrain from mandating rebates for programming blackouts.

II. Who Is to Blame for Blackouts?

As discussed above, it appears the FCC’s view is that consumers who experience blackouts are mere bystanders in a dispute, as the Commission invokes “consumer protection” and “customer service” as justifications for the proposed rules mandating rebates.[5] If we believe both that consumers are bystanders and that they are harmed by blackouts, then it is crucial to identify the parties to whom blame should be assigned for those blackouts. A key principle of the law & economics approach is that the party better-positioned to avoid the blackout should bear more—or, in some cases, all—of its costs.[6]

In comments submitted by Dish Network, William Zarakas and Jeremy Verlinda note that: “Programming fees are established through bilateral negotiations between content providers and MVPDs, and depend in large part on the relative bargaining position of the two sides.”[7] This comment illustrates the obvious but important fact that both content providers and MVPD operators must reach agreement and, in any given negotiation, either side may have more bargaining power. Because of this reality, it is impossible to draw general conclusions about which party will be the least-cost avoider of blackouts, as borne out in the submitted comments.

On the one hand, the ATVA argues that programmers are the cause of blackouts: “Blackouts happen to cable and satellite providers and their subscribers.”[8] NTCA supports this claim and reports that “[s]mall providers lack negotiating power in retransmission consent discussions.”[9] On the other hand, the NAB claims the “leading cause of such disruptions” is “the pay TV industry’s desire to use consumers as pawns to push for a change in law” and that MVPDs have a “strategy of creating negotiating impasses” in order to obtain a policy change.[10] Writing in Truth on the Market, Eric Fruits concludes:

With the wide range of programming and delivery options, it’s probably unwise to generalize who has the greater bargaining power in the current system. But if one had to choose, it seems that networks and, to a lesser extent, local broadcasters are in a slightly superior position. They have the right to choose must carry or retransmission and, in some cases, have alternative outlets (such as streaming) to distribute their programming.[11]

Peer-reviewed published research by Eun-A Park, Rob Frieden, and Krishna Jayakar attempts to identify the “predictors” of blackouts using a database of nearly 400 retransmission agreements executed between 2011 and 2018.[12] The authors identify three factors associated with more blackouts and longer blackouts:

1. Cable, satellite, and other MVPDs with larger customer bases are associated with more frequent and longer blackouts;
2. Multi-station broadcaster groups with network affiliations are associated with more frequent but shorter blackouts; and
3. The National Football League (“NFL”) season (g., “must see” real-time programming) has no significant relationship with blackout frequency, but when blackouts occur during the season, they are significantly shorter.

The simplistic takeaway is both that everyone is to blame, and no one is to blame. Ultimately, Park and her co-authors conclude that “the statistical analysis is not able to identify the parties or the tactics responsible for blackouts.”[13] Based on this research, it is not clear which parties in given negotiations are more likely to be the least-cost avoider of blackouts.

Nevertheless, the Commission’s proposal explicitly assigns liability for blackouts to cable operators and DBS providers.[14] Under the proposed rules, not only would cable operators and DBS providers suffer financial consequences, but they also would be made to face reputational harms stemming from a federal agency suggesting the fault for any retransmission-consent or carriage-agreement blackouts falls squarely on their shoulders.

Such reputational damage is almost certain to increase subscriber churn and impose additional subscriber-acquisition and retention costs on cable operators and DBS providers.[15] In comments on the Commission’s proposed rules for cable-operator and DBS-provider billing practices, ICLE reported that these costs are substantial and that, in addition to these costs, churn increases the uncertainty of cable-operator and DBS-provider revenues and profits.[16]

III. Consumers Are Not Bystanders

As noted earlier in these comments, the Commission’s proposal appears to be rooted in the belief that, when consumers experience a blackout, they are mere bystanders in a dispute between channels and cable operators or DBS providers. The Commission further seems to believe that the full force of the federal government is needed for these consumers to be “made whole.”[17] The implication is that consumers lack the foresight to anticipate the possibility of blackouts or the ability to respond to blackouts when they occur.

As the NPRM notes, subscribers are often informed of the risk of blackouts—and their consequences—in their service agreements with cable operators or DBS providers.[18] This is supported in ATVA’s comments:

Cable and satellite carriers make this quite clear in the contracts they offer subscribers—existing contracts which the Commission seeks to abrogate here. This language also makes clear that cable and satellite operators can and do change the programming offered in those bundles from time to time. … Cable and satellite providers add and subtract programming from their offerings to consumers frequently, and subscription agreements do not promise that all channels in a particular tier will be carried in perpetuity, let alone (with limited exception) assign a specific value to particular programming.[19]

The NPRM asks, “if a subscriber initiates service during a blackout, would that subscriber be entitled to a rebate or a lower rate?”[20] The question implicitly acknowledges that, for these subscribers, blackouts are not just a possibility, but a certainty. Yet they nonetheless enter into such agreements, knowing they may not be compensated for the interruption of service.

Many cable operators and DBS providers do offer credits[21] or other accommodations[22] to requesting subscribers affected by a blackout. In addition, many consumers have a number of options to circumvent a blackout by obtaining the programming elsewhere. Comments in this proceeding indicate that these options include the use of over-the-air antennas[23] or streaming services.[24] Given the many alternatives available in so many cases, it is unlikely that a blackout would deprive these consumers of the desired programming and any economic harm to them would be de minimis.

If cable or DBS blackouts are (or become) widespread or pernicious, consumers also have the ability to terminate service and switch providers, including by switching to streaming options. This is demonstrated by the well-known and widespread phenomenon of “cord cutting.” ATVA’s comments note that, in the third quarter of 2023, nearly one million subscribers canceled their traditional linear-television service, with just under 55% of occupied households now subscribing, the lowest share since 1989.[25] NYPSC concludes that, if the current trend of cord-cutting continues, “any final rules adopted here could become obsolete over time.”[26]

Due in part to cord cutting, ATVA reported that last year “several cable television companies either had already shut down their television services or were in the process of doing so.”[27] NTCA reports that nearly 40% of surveyed rural providers indicated they are not likely to continue service or already have plans to discontinue service, with many of them blaming the “difficulty negotiating retransmission consent agreements.”[28]

The fact that so many consumers are switching to alternatives to cable and DBS is a clear demonstration that they have the opportunity and ability obtain programming from a wide range of competitive providers. This places them in the driver’s seat, rather than suffering as helpless bystanders. It is telling that neither the NPRM nor any of the comments submitted to date offer any estimate of the cost to consumers associated with blackouts from retransmission-consent or carriage negotiations. This is likely because any costs are literally incalculable (i.e., impossible to calculate) or so small as to discourage any efforts at estimation. In either case, the Commission’s proposal to mandate and enforce blackout rebates looks to be a costly and time-consuming exercise that would yield little to no noticeable consumer benefits.

IV. Mandatory Rebates Will Increase Programmer Bargaining Power and Increase Prices to Cable and DBS Subscribers

A common theme of comments submitted in this matter is that the proposed rules would “place a thumb on the scale” in favor of channels relative to cable operators and DBS providers.[29] Without delving deeply into the esoteric details of bargaining theory, the comments identify two key factors that have, over time, improved programmers’ bargaining position relative to cable operators and DBS providers:

1. Increased competition among MVPD providers, which has reduced cable and DBS bargaining power;[30] and
2. Consolidation in the broadcast industry, which has increased programmer bargaining power.[31]

The Commission’s proposed rules are intended and designed to impose an additional cost on cable operators and DBS providers who do not reach an agreement with stations and networks, thereby diminishing the providers’ relative bargaining position. As profit-maximizing enterprises, it would be reasonable to expect stations and networks to exploit this additional bargaining power to extract higher retransmission fees or other concessions.

Jeffrey Eisenach notes that the first “significant” retransmission agreement to involve monetary compensation from a cable provider to a broadcaster occurred in 2005.[32] By 2008, retransmission fees totaled $500 million, according to Variety.[33] By 2020, S&P Global reported that annual retransmission fees were approximately $12 billion.[34] This represents an average annual increase of 30% between 2008 and 2020. This is in line with Zarakas & Verlinda’s estimate that retransmission fees charged by local network stations have increased at annual growth rates of 9.8% to 61.0% since 2009.[35] According to information reported by the Pew Research Center, revenues from retransmission fees for local stations now nearly equal those stations’ advertising revenues (Figure 1).

[36]

Dish Network indicated that programmers have been engaged in an “aggressive campaign of imposing steep retransmission and carriage price increases on MVPDs.”[37] Simultaneous with these steep increases in retransmission fees, networks began imposing “reverse transmission compensation” on their affiliates.[38] Previously, networks paid local affiliates for airtime in order to run network advertisements during their programming. The new arrangements have reversed that flow of compensation, such that affiliates are now expected to compensate the networks, as explained in Variety:

Station owners also face increased pressure to secure top fees for their retrans rights because their Big Four network partners now demand that affiliate stations fork over a portion of their retrans windfall to help them pay for pricey franchises like the NFL, “American Idol” and high-end scripted series.[39]

Dish Network concludes: “While MVPDs and OVDs compete aggressively with each other, the programming price increases will likely be passed through to consumers despite that competition. The reason is that all MVPDs will face the same programming price increase.”[40] NCTA further notes that increased programming costs are “borne by the cable operator or passed onto the consumer.”[41]

The most recent research cited in the comments reports that MVPDs pass through approximately 100% of retransmission-fee increases in the form of higher subscription prices.[42] Aaron Heresco and Stephanie Figueroa provided examples of how increased retransmission fees are passed on to subscribers:

On the other side of the simplified ESPN transaction are MVPD ranging from global conglomerates like Spectrum/Time Warner to small local or independent cable carriers. These MVPD pay ESPN $7.21/subscriber/month for the right to carry/transmit ESPN content to subscribing households. MVPD, with a keen eye on profits and shareholder value, pass through the costs to consumers (irrespective of if subscribers actually watch ESPN or any other network) in the form of increased monthly cable bills. Not only does this suggest that the “free lunch” of TV programming isn’t free, it also indicates that the dynamic of revenue generation via viewership is changing. As another example, consider the case of the Weather Channel, which in 2014 asked for a $.01 increase in retransmission fees despite a 20% drop in ratings (Sahagian 2014). Viewers may demand access to the channel in case of weather emergencies but may only tune in to the channel a handful of times per year. Nonetheless, the demand for access to channels drive up retransmission revenue even if the day-to-day or week-to-week ratings are weak.[43]

In some cases, however, increased retransmission fees cannot be passed on in the form of higher subscription prices. As we noted above, NTCA reports that nearly 40% of surveyed rural providers indicated they are unlikely to continue service or already have plans to discontinue service, with many of them blaming the “difficulty negotiating retransmission consent agreements.”[44] The Commission’s proposed rules would not only lead to higher prices for consumers, but they may also reduce MVPD options for some consumers, as cable operators exit the industry.

V. Proposed Rebate Mandate Would be Arbitrary and Unworkable

The NPRM asks for comments on how to implement the proposed rebate mandate. In doing so, the NPRM identifies numerous factors that illustrate the arbitrary and unworkable nature of the Commission’s proposal:[45]

• Should cable operators and DBS providers be required to pay rebates or provide credits?
• Should rebates apply to any channel that is blacked out?
• What if the parties never reach an agreement for carriage? For example, should subscribers be entitled to rebates in perpetuity?
• How should rebates be calculated when terms of the retransmission-consent agreements are confidential?
• Should the rebate be based on the cost that the cable operator or DBS provider paid to the programmer to retransmit or carry the channel prior to the carriage impasse?
• How should rebates account for bundling?
• If a subscriber initiates or renews a contract during a blackout, should the subscriber receive a rebate?
• Should the Commission deem unenforceable service agreements that explicitly specify that the cable operator or DBS provider is not liable for credits or refunds if programming becomes unavailable? Should existing service agreements be abrogated?
• How should rebates account for (g.) advertising time as a component of the retransmission-consent agreement?

As we note above, when blackouts occur, many cable operators and DBS providers offer credits or other accommodations to requesting subscribers affected by a blackout.[46] The NPRM “tentatively concludes” there is no legal distinction between “rebates,” “refunds,” and “credits.”[47] If the Commission approves rules mandating rebates in the event of blackouts, the rules should be sufficiently flexible to allow credits or other accommodations—such as providing over-the-air antennas or programming upgrades—to satisfy the rules.

The NPRM asks whether the proposed rebate rules should apply to any channel that is blacked out,[48] citing to news stories regarding The Weather Channel.[49] The NPRM provides no context for these citations, but the cited articles suggest that The Weather Channel is of minimal value to most consumers. The channel had 105,000 primetime viewers in February 2024, which was slightly less than PopTV and slightly more than Disney Junior and VH1.[50] The Deadline article cited in the NPRM indicates that The Weather Channel averages 13 cents per-subscriber per-month across pay-TV systems.[51] Much of the channel’s content is freely available on its website (weather.com) and app, and similar weather content is freely available across numerous sources and media.

The NPRM’s singling out of the Weather Channel highlights several flaws with the Commission’s proposal. The channel has low viewership, numerous competing substitutes for content, and is relatively low-cost. During a blackout, few subscribers would notice. Even fewer would suffer any harm and, if they did, the harm would be about 13 cents a month. It seems a waste of valuable resources to impose a complex regulatory regime to “make consumers whole” to the tune of pennies a month.

The NPRM asks whether the Commission should require rebates if the parties never reach a carriage agreement and, if so, whether those rebates should be provided in perpetuity.[52] NCTA points out that it would be impossible for any regulator to determine whether any particular blackout is the result of a negotiation impasse or business decision by the cable operator or DBS provider to no longer carry the channel.[53] For example, a channel may be dropped because of changes to the programming available on the channel.[54] Indeed, the programming offered at the beginning of a retransmission-consent agreement may be very different from the content provided at the time of renegotiation.[55] Moreover, it would be impossible to know with any certainty whether any carriage termination is temporary or permanent.[56] Verizon is correct to call this inquiry “absurd,”[57] as it proposes a “Hotel California” approach to carriage agreements, in which cable operators and DBS providers can check out, but they can never leave.

To illustrate the challenges of calculating a reasonable and economically coherent rebate, Dish Network offered a hypothetical set of three options for carriage of a local station and the Tennis Channel, both owned by Sinclair.[58]

1. $4 for the local station on a tier serving all subscribers, no carriage of Tennis Channel;
2. $2 for the local station and $2 for the Tennis Channel, both on tiers serving all subscribers; or
3. $2 for the local station on a tier serving all subscribers and $4 for the Tennis Channel on a tier serving 50% of subscribers.

In this hypothetical, the cable operator or DBS provider is indifferent to the details of how the package is priced. Similarly, consumers are indifferent to the pricing details of the agreement. Under the Commission’s proposal, however, these details become critical to how a rebate would be calculated. In the event of a Tennis Channel blackout, either no subscriber would receive a rebate, every subscriber would receive a $2 rebate, or half of all subscribers would receive a $4 rebate—with the amount of rebate depending on how the agreement’s pricing was structured.

Dish Network’s hypothetical demonstrates another consequence of the Commission’s proposal: the easiest way to avoid the risk of paying a rebate is to forgo carrying the channel. The hypothetical assumes a cable operator “does not particularly want to carry” the Tennis Channel, but is willing to do so in exchange for an agreement with Sinclair for the local station.[59] Under the Commission’s proposed rules, the risk of incurring the cost of providing rebates introduces another incentive to eschew carriage of the Tennis Channel.

One reason Dish Network presented a hypothetical instead of an “actual” example is because, as noted in several comments, carriage agreements are subject to confidentiality provisions.[60] Separate and apart from the impossibility of allocating a rebate across the various terms of an agreement, even if the terms were known, such an exercise would require abrogating these confidentiality agreements between the negotiating parties.

The NPRM asks whether it would be reasonable to require a cable operator or DBS provider to rebate the cost that it paid to the programmer to retransmit or carry the channel prior to the carriage impasse.[61] The NPRM cites Spectrum Northeast LLC v. Frey, a case involving early-termination fees in which the 1^st U.S. Circuit Court of Appeals stated that “[a] termination event ends cable service, and a rebate on termination falls outside the ‘provision of cable service.’”[62] In the NPRM, the Commission “tentatively conclude[s] that the courts’ logic” in Spectrum Northeast “applies to the rebate requirement for blackouts.”[63]

If the Commission accepts the court’s logic that a termination event ends service on the consumer side, then it would be reasonable to conclude that the end of a retransmission or carriage agreement similarly ends service. To base a rebate on a prior agreement would mean basing the rebate on a fiction—an agreement that does not exist.

To illustrate, consider Dish Network’s hypothetical. Assume the initial agreement is Option 2 ($2 for the local station and $2 for the Tennis Channel, both on tiers serving all subscribers). The negotiations stall, leading to a blackout. Assume the parties eventually agree to Option 1, in which the Tennis Channel is no longer carried. Would subscribers be due a rebate for a channel that is no longer carried? Or, if the parties instead agree to Option 3 ($2 for the local station on a tier serving all subscribers and $4 for the Tennis Channel on a tier serving 50% of subscribers), would all subscribers be due a $2 rebate for the Tennis Channel, or would half of subscribers be due a $4 rebate? There is no “good” answer because any answer is necessarily arbitrary and devoid of economic logic.

As noted above, many retransmission and carriage agreements involve “bundles” of programming,[64] as well as “a wide range of pricing and non-pricing terms.”[65] Moreover, ATVA reports that subscribers purchase bundled programming, rather than individual channels, and that consumers are well-aware of bundling when they enter into service agreements with cable operators and DBS providers.[66] NCTA reports that bundling complicates the already-complex challenge of allocating costs across specific channels over specific periods of time.[67] Thus, any attempt to do so with an eye toward mandating rebates during blackouts is likewise arbitrary and devoid of economic logic.

In summary, the Commission is proposing a set of unworkable and arbitrary rules to distribute rebates to consumers during programming blackouts. Even if such rebates could be reasonably and fairly calculated, the sums involved would likely be only a few dollars, and may be as little as a few pennies. In these cases, the enormous costs to the Commission, cable operators, and DBS providers would be many times greater than the rebates provided to consumers. It would be a much better use of the FCC’s and MVPD providers’ resources to abandon this rulemaking process and refrain from mandating rebates for programming blackouts.

[1] Notice of Proposed Rulemaking, In the Matter of Customer Rebates for Undelivered Video Programming During Blackouts, MB Docket No. 24-20 (Jan. 17, 2024), available at https://docs.fcc.gov/public/attachments/FCC-24-2A1.pdf [hereinafter “NPRM”], at para. 1.

[2] See id. at n. 5, 7.

[3] Eric Fruits, Blackout Rebates: Tipping the Scales at the FCC, Truth on the Market (Mar. 6, 2024), https://truthonthemarket.com/2024/03/06/blackout-rebates-tipping-the-scales-at-the-fcc.

[4] NPRM, supra note 1 at para. 10.

[5] NPRM, supra note 1 at para. 13 (proposed rules “provide basic protections for cable customers”) and ¶ 7 (“How would requiring cable operators and DBS providers to provide rebates or credits change providers’ current customer service relations during a blackout?”).

[6] This is known as the “least-cost avoider” or “cheapest-cost avoider” principle. See Harold Demsetz, When Does the Rule of Liability Matter?, 1 J. Legal Stud. 13, 28 (1972); see generally Ronald Coase, The Problem of Social Cost, 3 J. L. & Econ. 1 (1960).

[7] Comments of DISH Network LLC, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/1030975783920/1 [hereinafter “DISH Comments”], Exhibit 1, Declaration of William Zarakas & Jeremy Verlinda [hereinafter “Zarakas & Verlinda”] at ¶ 8.

[8] Comments of the American Television Alliance, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/103082522212825/1 [hereinafter “ATVA Comments”] at i and 2 (“Broadcasters and programmers cause blackouts. This is, of course, true as a legal matter, as cable and satellite providers cannot lawfully deliver programming to subscribers without the permission of the rightsholder. It makes no sense to say that a cable or satellite provider has ‘blacked out’ programming by failing to obtain permission to carry it. A programmer ‘blacks out’ programming by declining to grant such permission.”).

[9] Comments of NTCA—The Rural Broadband Association, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/10308589412414/1 [hereinafter “NTCA Comments”] at 2.

[10] Comments of the National Association of Broadcasters, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/1030894019700/1 [hereinafter “NAB Comments”] at 4-5.

[11] Fruits, supra note 4.

[12] Eun-A Park, Rob Frieden, & Krishna Jayakar, Factors Affecting the Frequency and Length of Blackouts in Retransmission Consent Negotiations: A Quantitative Analysis, 22 Int’l. J. Media Mgmt. 117 (2020).

[13] Id. at 131.

[14] NPRM, supra note 1 at paras. 4, 6 (“We seek comment on whether and how to require cable operators and DBS providers to give their subscribers rebates when they blackout a channel due to a retransmission consent dispute or a failed negotiation for carriage of a non-broadcast channel.”); id. at para. 9 (“We tentatively conclude that sections 335 and 632 of the Act provide us with authority to require cable operators and DBS providers to issue a rebate to their subscribers when they blackout a channel.”) [emphasis added].

[15] See Zarakas & Verlinda supra note 7 at para. 14 (blackouts are costly “in the form of lost subscribers and higher incidence of retention rebates”).

[16] Comments of the International Center for Law & Economics, MB Docket No. 23-405 (Feb. 5, 2024), https://www.fcc.gov/ecfs/document/10204246609086/1 at 9-10 (“In its latest quarterly report to the Securities and Exchange Commission, DISH Network reported that it incurs ‘significant upfront costs to acquire Pay-TV’ subscribers, amounting to subscriber acquisition costs of $1,065 per new DISH TV subscriber. The company also reported that it incurs ‘significant’ costs to retain existing subscribers. These retention costs include upgrading and installing equipment, as well as free programming and promotional pricing, ‘in exchange for a contractual commitment to receive service for a minimum term.’”)

[17] See NPRM, supra note 1 at paras. 4, 8, 10 (using “make whole” language)

[18] See id. at n. 7, citing Spectrum Residential Video Service Agreement (“In the event particular programming becomes unavailable, either on a temporary or permanent basis, due to a dispute between Spectrum and a third party programmer, Spectrum shall not be liable for compensation, damages (including compensatory, direct, indirect, incidental, special, punitive or consequential losses or damages), credits or refunds of fees for the missing or omitted programming. Your sole recourse in such an event shall be termination of the Video Services in accordance with the Terms of Service.”) and para. 6 (“To the extent that the existing terms of service between a cable operator or DBS provider and its subscriber specify that the cable operator or DBS provider is not liable for credits or refunds in the event that programming becomes unavailable, we seek comment on whether to deem such provisions unenforceable if we were to adopt a rebate requirement.”)

[19] ATVA Comments, supra note 8 at 11.

[20] NPRM, supra note 1 at para. 6.

[21] See ATVA Comments, supra note 8 at 3 (“The Commission seeks information on the extent to which MVPDs grant rebates today. The answer is that, in today’s competitive marketplace, many ATVA members provide credits, with significant variations both among providers and among classes of subscribers served by individual providers. This, in turn, suggests that cable and satellite companies already address the issues identified by the Commission, but in a more nuanced and individualized manner than proposed in the Notice.”). See also id. at 5-6 (reporting DIRECTV provides credits to existing customers and makes the offer of credits easy to find online or via customer service representatives). See also id. at 7 (reporting DIRECTV and DISH provide credits to requesting subscribers and Verizon compensates subscribers “in certain circumstances”).

[22] See Zarakas & Verlinda, supra note 7 at para. 21 (“DISH provides certain offers to requesting customers in the case of programming blackouts, which may include a $5 per month credit, a free over-the-air antenna for big 4 local channel blackouts, or temporary free programming upgrades for cable network blackouts.”).

[23] See id. at para. 21.

[24] See ATVA Comments, supra note 8 at 4 (“If Disney blacks out ESPN on a cable system, for example, subscribers still have many ways to get ESPN. This includes both traditional competitors to cable (which are losing subscribers) and a wide array of online video providers (which are gaining subscribers).”); Comments of Verizon, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/10308316105453/1 [hereinafter “Verizon Comments”] at 12 (“In today’s competitive marketplace, consumers have many options for viewing broadcasters’ content in the event of a blackout — they can switch among MVPDs, or forgo MVPD services altogether and watch on a streaming platform or over the air. And when a subscriber switches or cancels service, it is extremely costly for video providers to win them back.”); DISH Comments, supra note 7 at 7 (“[L]ocal network stations have also been able to use another lever: the phenomenal success of over-the-top video streaming and the emergence of several online video distributors (‘OVDs’), some of which have begun incorporating local broadcast stations in their offerings.”); Comments of the New York State Public Service Commission, MB Docket 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/10308156370046/1 [hereinafter “NYPSC Comments”] at 2 (identifying streaming services and Internet Protocol Television (IPTV) providers such as YouTube TV, Sling, and DirecTV Stream as available alternatives).

[25] See ATVA Comments, supra note 8 at 4.

[26] NYPSC Comments, supra note 22 at 2.

[27] ATVA Comments, supra note 8 at 4-5.

[28] NTCA Comments, supra note 9 at 3; see Luke Bouma, Another Cable TV Company Announces It Will Shut Down Its TV Service Because of “Extreme Price Increases from Programmers,” Cord Cutters News (Dec. 10, 2023), https://cordcuttersnews.com/another-cable-tv-company-announces-it-will-shut-down-its-tv-service-because-of-extreme-price-increases-from-programmers (reporting the announced shutdown of DUO Broadband’s cable TV and streaming TV services because of increased programming fees, affecting several Kentucky counties).

[29] ATVA Comments, supra note 8 at note 15; DISH Comments, supra note 7 at 3, 8; NAB Comments, supra note 10 at 5; Comments of NCTA—The Internet & Television Alliance, MB Docket No. 24-20 (Mar. 8, 2024), https://www.fcc.gov/ecfs/document/1030958439598/1 [hereinafter “NCTA Comments”] at 2, 11.

[30] See ATVA Comments, supra note 8 at n. 19 (“With more distributors, programmers ‘lose less’ if they fail to reach agreement with any individual cable or satellite provider.”); Zarakas & Verlinda, supra note 7 at para. 6 (“This bargaining power has been further exacerbated by the increase in the number of distribution platforms coming from the growth of online video distributors. The bargaining leverage of cable networks has also received a boost from the proliferation of distribution platforms.”); id. at para. 13 (“Growth of OVDs has reduced MVPD bargaining leverage”).

[31] See DISH Comments, supra note 7 at 6 (“For one thing, the consolidation of the broadcast industry over the last ten years has exacerbated the imbalance further. This consolidation, fueled itself by the broadcasters’ interest in ever-steeper retransmission price increases, has effectively been a game of “and then there were none,” with small independent groups of two or three stations progressively vanishing from the picture.”); Zarakas & Verlinda, supra note 7 at para. 6 (concluding consolidation among local networks is associated with increased retransmission fees).

[32] See Jeffrey A. Eisenach, The Economics of Retransmission Consent, at 9 n.22 (Empiris LLC, Mar. 2009), available at https://nab.org/documents/resources/050809EconofRetransConsentEmpiris.pdf.

[33] See Robert Marich, TV Faces Blackout Blues, Variety (Dec. 10, 2011), https://variety.com/2011/tv/news/tv-faces-blackout-blues-1118047261.

[34] See Economics of Broadcast TV Retransmission Revenue 2020, S&P Global Mkt. Intelligence (2020), https://www.spglobal.com/marketintelligence/en/news-insights/blog/economics-of-broadcast-tv-retransmission-revenue-2020.

[35] Cf. Zarakas & Verlinda, supra note 7 at para. 6.

[36] Retransmission Fee Revenue for U.S. Local TV Stations, Pew Research Center (Jul. 2022), https://www.pewresearch.org/journalism/chart/sotnm-local-tv-u-s-local-tv-station-retransmission-fee-revenue; Advertising Revenue for Local TV, Pew Research Center (Jul. 13, 2021), https://www.pewresearch.org/journalism/chart/sotnm-local-tv-advertising-revenue-for-local-tv.

[37] DISH Comments, supra note 7 at 4.

[38] Park, et al., supra note 13 at 118 (“With stations receiving more retransmission compensation, a new phenomenon has also emerged since the 2010s: reverse retransmission revenues, whereby networks receive a portion of their affiliates and owned-and-operated stations’ retransmission revenues. As retransmission fees have become more important to television stations, broadcast networks and MVPDs, negotiations over contract terms and fees have become more contentious and protracted.”).

[39] Marich, supra note 33.

[40] DISH Comments, supra note 7 at 11.

[41] NCTA Comments, supra note 29 at 2.

[42] See Zarakas & Verlinda supra note 8 at para. 15 (citing George S. Ford, A Retrospective Analysis of Vertical Mergers in Multichannel Video Programming Distribution Markets: The Comcast-NBCU Merger, Phoenix Ctr. for Advanced L. & Econ. Pub. Pol’y Studies (Dec. 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3138713).

[43] Aaron Heresco & Stephanie Figueroa, Over the Top: Retransmission Fees and New Commodities in the U.S. Television Industry, 29 Democratic Communiqué 19, 36 (2020).

[44] NTCA Comments, supra note 9 at 3.

[45] NPRM, supra note 1 at paras. 6-8.

[46] See supra notes 21-22 and accompanying text.

[47] NPRM, supra note 1 at n. 9.

[48] See id. at para. 6.

[49] See id. at n.12 (citing Alex Weprin, Weather Channel Brushes Off a Blackout, Politico (Feb. 6, 2014) https://www.politico.com/media/story/2014/02/weather-channel-brushes-off-a-blackout-001667); David Lieberman, The Weather Channel Returns To DirecTV, Deadline (April 8, 2014), https://deadline.com/2014/04/the-weatherchannel-returns-directv-deal-711602.

[50] See U.S. Television Networks, USTVDB (retrieved Mar. 28, 2024), https://ustvdb.com/networks.

[51] See Lieberman, supra note 49.

[52] See NPRM, supra note 1 at para. 6.

[53] See NCTA Comments, supra note 29 at 5.

[54] See id. at 3; see also Lieberman, supra note 49 (indicating that carriage consent agreement ending a blackout of The Weather Channel on DIRECTV required The Weather Channel to cut its reality programming by half on weekdays).

[55] See Alex Weprin & Lesley Goldberg, What’s Next for Freeform After Being Dropped by Charter, Hollywood Reporter (Dec. 14, 2023), https://www.hollywoodreporter.com/tv/tv-news/freeform-disney-charter-hulu-1235589827 (reporting that Freeform is a Disney-owned cable channel that currently caters to younger women; the channel began as a spinoff of the Christian Broadcasting Network, was subsequently rebranded as The Family Channel, then Fox Family Channel, and then ABC Family, before rebranding as Freeform).

[56] See NCTA Comments, supra note 29 at 5.

[57] Verizon Comments, supra note 24 at 13 (“Also, as the Commission points out, ‘What if the parties never reach an agreement for carriage? Would subscribers be entitled to rebates in perpetuity and how would that be calculated?’ The absurdity of these questions underscores the absurdity of the proposed regulation.”)

[58] See DISH Comments, supra note 7 at 13.

[59] Id.; see also id. at 22 (“Broadcasters increasingly demand that an MVPD agree to carry other broadcast stations or cable networks as a condition of obtaining retransmission consent for the broadcaster’s primary signal, without giving a real economic alternative to carrying just the primary signal(s).”)

[60] ATVA Comments, supra note 8 at 13 (“here is the additional complication that cable and satellite companies generally agree to confidentiality provisions with broadcasters and programmers—typically at the insistence of the broadcaster or programmer”); DISH Comments, supra note 7 at 21 (reporting broadcasters and programmers “insist” on confidentiality); NCTA Comments, supra note 27 at 6 (“It also bears emphasis that this approach would necessarily publicly expose per- subscriber rates and other highly confidential business information, and that the contracts between the parties prohibit disclosure of this and other information that each find competitively sensitive.”).

[61] NPRM, supra note 1 at para. 8.

[62] Spectrum Northeast, LLC v. Frey, 22 F.4th 287, 293 (1st Cir. 2022), cert denied, 143 S. Ct. 562 (2023); see also In the Matter of Promoting Competition in the American Economy: Cable Operator and DBS Provider Billing Practices, MB Docket No. 23-405, at n. 55 (Jan. 5, 2024), available at https://docs.fcc.gov/public/attachments/DOC-398660A1.pdf.

[63] NPRM, supra note 1 at para. 13.

[64] See supra note 59 and accompanying text for an example of a bundle.

[65] NCTA Comments, supra note 29 at 6.

[66] ATVA Comments, supra note 8 at 11.

[67] NCTA Comments, supra note 29 at 6.

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