DC Circuit’s “Comcast Tennis” and “NLRB Poster” Rulings Improve Verizon’s Odds of Prevailing on Net Neutrality Appeal

by Mike Wendy on June 5, 2013

Last week, the DC Circuit Court of Appeals – the same court that will hear the FCC’s Net Neutrality Order – handed down a ruling that may shed some more light on how it may rule on Verizon’s suit to overturn the FCC’s Net Neutrality rules.

In the ruling (Comcast v. FCC, the Tennis Channel), the Court reversed an FCC determination that Comcast unlawfully discriminated against the Tennis Channel when it refused to move the channel to a better distribution tier.  In particular, a concurring opinion by Judge Brett Kavanaugh sticks out.

In his concurrence, Kavanaugh notes:

This [Comcast Tennis] case involves vertical integration and vertical contracts.  Beginning in the 1970s (well before the 1992 Cable Act), the Supreme Court has recognized the legitimacy of vertical integration and vertical contracts by firms without market power…Vertical integration and vertical contracts become potentially problematic only when a firm has market power in the relevant market.  That’s because, absent market power, vertical integration and vertical contracts are procompetitive.  Vertical integration and vertical contracts in a competitive market encourage product innovation, lower costs for businesses, and create efficiencies – and thus reduce prices and lead to better goods and services for consumers.

He goes on, stating:

…Just as a newspaper exercises editorial discretion over which articles to run, a video programming distributor exercises editorial discretion over which video programming networks to carry and at what level of carriage…[Though the FCC’s rule’s] impact on a cable operator’s editorial control is content-neutral and thus triggers only intermediate scrutiny rather than strict scrutiny…Supreme Court’s case law applying intermediate scrutiny in this context provides that the Government may interfere with a video programming distributor’s editorial discretion only when the video programming distributor possesses market power in the relevant market. (Emphasis added)

Because Comcast did not have market power in video programming distribution, the FCC’s initial determination failed in terms of the guiding statute and the First Amendment.

In castigating the FCC’s actions, Kavanaugh lays out an important marker, writing:

[T]he FCC may think it preferable simply as a communications policy matter to equalize or enhance the voices of various entertainment and sports networks such as the Tennis Channel.  But as the Supreme Court stated in one of the most important sentences in First Amendment history, “the concept that government may restrict the speech of some elements of our society in order to enhance the relative voice of others is wholly foreign to the First Amendment.”

Therefore, under these circumstances, the FCC cannot tell Comcast how to exercise its editorial discretion about what networks to carry any more than the Government can tell Amazon or Politics and Prose or Barnes & Noble what books to sell; or tell the Wall Street Journal or Politico or the Drudge Report what columns to carry; or tell the MLB Network or ESPN or CBS what games to show; or tell SCOTUSblog or How Appealing or The Volokh Conspiracy what legal briefs to feature.

One of the main reasons the FCC instituted its Net Neutrality rule was out of its fear that companies like Verizon could unfairly favor / discriminate its, or its partners’, offerings to the detriment of others, thus unreasonably restraining (in the agency’s view) competition.

To prevent this from happening, the FCC’s Net Neutrality Order virtually bans vertical arrangements between Internet providers like Verizon and content (or other) providers to enable the company to distinguish, differentiate or prioritize its offerings.

Strikingly, the FCC never performed any real market analysis, and instead came up with its prophylactic rule without ascertaining if its main target of the rule – ISPs like Verizon – had market power and could actually restrain competition in the marketplace.

Like Kavanaugh, Verizon sees consumer benefit in vertical arrangements.  It wants to become all it can be, but can’t because of the rule, noting:

Just as a newspaper is entitled to decide which content to publish and where, broadband providers may feature some content over others. Although broadband providers have generally exercised their discretion to allow all content in an undifferentiated manner, they nonetheless possess discretion that these rules preclude them from exercising.

In its view, Net Neutrality regulations unconstitutionally limit its editorial discretion, and because of that (among other reasons), the rules cannot be upheld.

No doubt, it’s a fool’s errand to project from Judge Kavanaugh’s concurrence that the Court will ultimately decide in Verizon’s favor.  Moreover, the judges hearing the case haven’t even been picked yet. Still, it’s important to list out a couple points why this all matters.

With SCOTUS’ recent City of Arlington v. FCC ruling – a case that many believe gives the FCC considerably more leeway in determining how and what it can regulate – it’s likely that all involved will begin paying closer attention to Verizon’s constitutional claims to defeat the Net Neutrality Order.

In this regard, the Comcast Tennis ruling should be helpful to Verizon.  As a whole, it reveals the Court’s willingness to accept that:

  • Reasonable discrimination can in fact occur in communications markets where there are legitimate business reasons to do so (at least in the cable distribution context);
  • Vertical arrangements / contracts are not per se unlawful, but rather should be looked at as procompetitive, especially where market power is absent;
  • And, where market power is lacking, rules that interfere with the editorial discretion of distributors are an affront to the First Amendment and are thus generally infirm.

Now, combine that with the same Court’s NLRB Poster Ruling earlier last month – one which placed heavy reliance on the idea that the government runs afoul of the First Amendment when it seeks to compel the speech of private parties – then it starts to appear that the Court’s general outlook might favor similar arguments as those made by Verizon in its Net Neutrality appeal.

The short of all of this is the FCC’s Net Neutrality regulations must still accord with the Constitution even if the FCC has jurisdiction to issue the regulation (that’s still a big IF). The anti-property press and Susan Crawfords of the world may scoff at this “quaint” idea, but who are they to restrict, define and censor what Verizon may be when the Constitution, as well as the ’96 Act, place no such restrictions on its behavior?

As long as Verizon does not possess market power / act anti-competitively in the relevant market, there is no reason to stop Verizon (or others) from determining on its own the precise way, and with whom, it wants to offer its services.  In this context, exerting true editorial discretion is just another way of saying the company should be allowed to do with its property as it sees fit, free from the intrusive hand of government.

The DC Circuit is a good place for Verizon to be for this case.  The Court’s Comcast Tennis and NLRB Poster rulings make it more likely that Verizon will prevail in that important, first venue.  Importantly, a favorable ruling there, featuring Verizon’s constitutional arguments (should they in fact be reached), will make it harder for SCOTUS, even with its Arlington precedent, to uphold the FCC’s restrictive Net Neutrality regulations.

More to come…

William Van Alstyne June 10, 2013 at 8:06 pm

Congratulations on a well-written and quite effective piece! I very much hope that your forecast re the S.Ct’s likely STRONG view and forthright application of the First Amendment is vindicated in its forthcoming case!
William Van Alstyne
Lee Professor of constitutional law, emeritus
The Marshall-Wythe Law School
The College of William & Mary
Williamsburg, Virginia 23185

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