Nos. 94-1893 and 94-1900 In The Supreme Court of The United States OCTOBER TERM, 1995 UNITED STATES OF AMERICA, ET AL., PETITIONERS v. THE CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF VIRGINIA, ET AL. NATIONAL CABLE TELEVISION ASSOCIATION, INC., PETITIONER v. BELL ATLANTIC CORPORATION, ET AL. ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT SUGGESTION OF MOOTNESS DREW S. DAYS, III Solicitor General Department of Justice Washington, D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether 47 U.S.C. 533(b), which bars local telephone companies from directly providing video programming to subscribers in their telephone service areas, violates the First Amendment. (1) ---------------------------------------- Page Break ---------------------------------------- II PARTIES TO THE PROCEEDINGS Petitioners in No. 94-1893, defendants-appellants below, are the United States, the Federal Communica- tions Commission, and Janet Reno, in her official capacity as the Attorney General of the United States. Petitioner in No. 94-1900, an intervenor-defendant and also an ap- pellant below, is the National Cable Television Associa- tion, Inc. Respondents, plaintiffs-appellees below, are The Chesapeake and Potomac Telephone Company of Virginia, Bell Atlantic Video Services Company, Bell Atlantic Corporation, Chesapeake and Potomac Tele- phone Company, C & P Telephone Company of Mary- land, The Chesapeake and Potomac Telephone Company of West Virginia The Diamond State Telephone Com- pany, The Bell Telephone Company of Pennsylvania, and New Jersey Bell Telephone Company. ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 2 Constitutional and statutory provisions involved . . . . 2 Statement . . . . 2 Introduction and summary of argument . . . . 16 Argument: I. Section 533 (b) does not require strict scrutiny II. Section 533(b) meets the requirements of inter- mediate scrutiny ....19 A. Section 533(b) furthers significant govern- mental interests . . . . 24 B. Section 533(b) is narrowly tailored . . . . 24 C. LECs have ample alternative channels of communication . . . . 27 III. The FCC's Third Report and Order eliminates any doubts about the constitutionality of Section 533 (b) . . . . 37 Conclusion . . . . 39 TABLE OF AUTHORITIES Cases: Amendment of Section 64.702 of the Commission's Rules and Regulations (Second Computer In- quiry), Final Decision, In re, 77 F.C.C.2.d 384 (1980), modified in part on reconsideration, 84 F.C.C.2d 50 (1980), 88 F.C.C.2d 512 (1981), aff'd sub nom. Computer & Communications Indus. Ass'n. V. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983) . . . . . . . American Scholastic TV Programming Founda- tion V. FCC, 46 F.3d 1173 (D.C. Cir. 1995) . . . . (III) ---------------------------------------- Page Break ---------------------------------------- Iv Cases-Continued: Page Ameritech Corp. v. United States, 867 F. Supp. 721 (N.D. III. 1994), appeal pending, No. 95- 1223 (7th Cir.) . . . . 14 Applications of Telephone Companies for Section 214 Certificates for Channel Facilities Furnished to Affiliated Community Antenna Television Systems, 21 F.C.C.2d 307 (1970), aff'd sub nom. General Telephone Co. V. United States, 449 F.2d 846 (5th Cir. 1971) . . . . 5, 6, 7, 20, 35 BellSouth Corp. V. United States, 868 F. Supp. 1335 (N.D. Ala. 1994), appeal pending, No. 94- 7036 (llth.Cir.).... 14 Board of Trustees V. Fox, 492 U.S. 469 (1989) . . . . 28 Bolger v. Youngs Drug Products Corp., 463 U.S. 60 (1983) . . . . 29 California V. FCC: 905 F.2d 1217 (9th Cir. 1990) .... 4, 31 4 F.3d 1505 (9th Cir. 1993) . . . . 5 39 F.3d 919 (9th Cir. 1994) ....5, 37 Chevron U.S.A. Inc. V. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) . . . . 21 City of Renton v. Playtime Theater, Inc., 475 U.S. 41 (1986) . . . . 22, 29 Clark V. Community for Creative Non-Violence, 468 U.S. 288 (1984)....23, 28, 38 Delaware, L. & W.R.R. V. United States, 231 U.S. 363 (1913)....6 FCC v. National Citizens Committee for Broad- casting, 436 U.S. 775 (1978)....3, 20, 25 Frisby v. Schultz , 487 U.S. 474 (1988) . . . . 23, 24 Heffron V. International Society for Krishna Con- seriousness, Inc., 452 U.S. 640 (1981). . . . 38 Illinois Bell Telephone Co. V. FCC, 740 F.2d 465 (7th Cir. 1984) . . . . 4 Implementation of Section 19 of the Cable Tele- vision Consumer Protection and Competition Act of 1992, First Report, In re, 9 F.C.C. Rcd 7442 (1994) . . . . 30 Jean V. Nelson, 472 U.S. 846 (1985) . . . . 22 ---------------------------------------- Page Break ---------------------------------------- v Cases-Continued: Page Members of City Council V. Taxpayers for Vincent, 466 U.S. 789 (1984) . . . . 22, 23, 31, 41 NYNEX Corp. V. United States, No. 93-323-P-C (D. Me. Dec. 8, 1994), appeal pending, No. 95- 1183 (lst Cir.) . . . . 14 National Broadcasting Co. V. United States, 319 Us. 190 (1943) . . . . 3 National Cable Television Ass'n v. FCC, 33 F.3d 66 (D.C. Cir. 1994)....9 National Rural Telecom Ass'n V. FCC, 988 F.2d 174 (D.C. Cir. 1993) . . . . 4, 32 New York Tel. Co., In re: 5 F.C.C. Red 866 (1990) . . . . 34 5 F.C.C. Red 5892 (1990) . . . . 34 Ohralik V. Ohio State Bar Ass'n, 436 U.S. 447" (1978) . . . . 29 Pacific Telesis Group V. United States, 48 F.3d 1106 (9th Cir. 1994) . . . . 14 Policy and Rules Concerning the Furnishing of Customer Premises Equipment, Enhanced Ser- vices and Cellular Communications Services by the Bell Operating Companies, Report and Or- der, In re, 9.5 F.C.C.2d 1117 (1983) . . . . 4, 6 Regan V. Time, Inc., 468 U.S. 641 (1984) . . . . 21 San Francisco Arts & Athletics, Inc. V. United States Olympic Comm., 483 U.S. 522 (1987) . . . . 28 Southern New Engkmd Telephone CO. v. United States, No. 3: 94-CV-80 (DJS) (D. Corm. Apr. 27, 1995), appeal pending, No. 95-6137 (2d Cir.) . . . . 14 Southwestern Bell Corp. V. FCC, 896 F.2d 1378 (D.C. Cir. 1990) . . . . 4 Southwestern Bell Corp. V. United States, No. 3:94- CV-0193-D (N.D. Tex. Mar. 27, 1995), appeal pending, No. 95-10478 (5th Cir.) . . . . 14 Telephone Company-Cable Television Cross- Ownership Rules, Sections 63.54-63.58, First Notice of Proposed Rulemaking, First Report and Order, and Second Further Notice of In- quiry, In re, 7 F.C.C. Red 300 (1991) . . . . 9 ---------------------------------------- Page Break ---------------------------------------- Cases-Continued: Page Telephone Company-Cable" Television Cross- Ownership Rules, Sections 63.54-63.58, Further Notice of Inquiry and Notice of Proposed Rule- making, In re, 3 F.C.C. Red 5849 (1988) . . . . 8. 26,27 Telephone Company-Cable Television Cross Ownership Rules, Sections 63.54-63.58, Notice of Inquiry, In re, 2 F.C.C. Rcd 5092 (1987) . . . . 8 Telephone Company-Cable Television Cross- Ownership Rules, Sections 63.54-63.58, Second Report and Order, Recommendation to Con- gress, and Second Further Notice of Proposed Rulemaking, In re, 7 F.C.C. Rcd 5781 (1992), modified in part on reconsideration, 10 F.C.C. Rcd 244 (1994) . . . . 9,10,21,22,30,32,42 Turner Broadcasting System V. FCC, 114 S. Ct. 2445 (1994) . . . . passim United States v. American Tel. & Tel. Co.: 524 F. Supp. 1336 (D.D.C. 1981) . . . . 4. 6, 25 552 F. SUPP. 131 (D.D.C. 1982), aff'd mem. sub nom. Maryland v. United States, 460 U.S. 1001 (1983) . . . . 5-6, 25 United States v. O'Brien, 391 U.S. 367 (1968) . . . . 19, 23 United States v. Paramount Pictures, Inc., 85 F. SUPP. 881 (S.D.N.Y. 1949), aff'd mem. sub nom. Loew's, Inc. V. United States, 339 U.S. 974 (1950).... 3 United States V. Salerno, 481 U.S. 739 (1987) . . . . 42 United States v. Storer Broadcasting Co., 351 U.S. 192 (1956)....25 United States-v. Western Elec. Co.: 900 F.2d 283 (D.C. Cir.), cert. denied, 498 U.S. 911 (1990) .....4, 31 993 F.2d 1572 (D.C. Cir.), cert. denied, 114 S. Ct. 487 (1993) . . . . 32 United States v. X-Citement Video, Inc., 115 S. Ct. 464 (1994) . . . . 14-15, 40, 41 United States Telephone Ass'n V. United States, No. 1: 94CV01961 (D.D.C. Feb. 14, 1995), ap- peal pending, No. 95-1175 (D.C. Cir.) . . . . 14 ---------------------------------------- Page Break ---------------------------------------- VII Cases-Continued: Page US West, Inc. V. United States, 48 F.3d 1092 (9th Cir. 1994) . . . . 14 Ward V. Rock Against Racism, 491 U.S. 781 (1989) . . . . 11, 19, 20, 22, 23, 24, 28, 30, 37 Constitution, statutes and regulation: U.S. Const. Amend. I . . . . 2, 14, 19, 28, 38, 39, 41 Bank Holding Company Act of 1956, "12 U.S.C. 1841 et seq . . . . 25 Cable Communications Policy Act of 1984, Pub. L. N0. 98-549, 98 Stat. 2779 . . . . 2 2, 98 Stat. 2785 . . . . 2 Cable Television Consumer Protection and Com- petition Act of 1992, Pub. L. No. 102-385, 106 Stat. 1460 . . . . 10 2(a) (6), 106 Stat. 1461 . . . . 10 Interstate Commerce Act, 49 U.S.C. 10746 . . . . 6 Newspaper Preservation Act, 15 U.S.C. 1801- 1804 . . . . 3 Public Utility Holding Company Act of 1935, 15 U.S.C. 79 et seq.: 15 U.S.C. 79a(a) . . . . 25 15 U.S.C, 79a(b) . . . . 25 47 U.S.C. 522(19) (Supp. V 1993) . . . 20. 47 U.S.C. 531 . . . . 3 47 U.S.C. 532 (1988 & Supp. V 1993) . . . . 3, 30 47 U.S.C. 533 (1988 & Supp. V 1993) . . . . 8 47 U.S.C. 533 (a) (1) (1988& Supp. V 1993) . . . . 3 47 U.S.C. 533 (a) (2) (Supp. V 1993) . . . . 10 47 U.S.C. 533 (b) . . . . passim 47 U.S.C. 533 (b) (1) . . . . 7 47 U.S.C. 533 (b) (3) . . . . 8 47 U.S.C. 533 (b) (4) .... 8, 14, 15, 31, 39, 40, 41 47 U.S.C. 534(a) (Supp. V 1693) . . . . 30 47 U.S.C. 534 (b) (Supp. V 1963) . . . . 3 47 U.S.C. 535(b) (SUPP. V 1993) . . . . 3 47 U.S.C. 541 (a) (1) (Supp. V 1993) . . . . 10 47 U.S.C. 543 (Supp. v 1993) . . . . 10 47 C.F.R. 64.601 (1971) . . . . 6 ---------------------------------------- Page Break ---------------------------------------- VIII Miscellaneous: Page Harvey Averch & Leland L. Johnson, Behavior of the Firm Under Regulatory Constraint, 52 Am. Econ. Rev. 1052 (1962) . . . . 4 C. Edwin Baker, Merging Phone and Cable, 17 Hastings Comm. & Ent. L.J. 97 (1994) . . . . 26, 27 Cable-Instructional TV and S. 1200, Communica- tions Competitiveness and Infrastructure Mod- ernization Act of 1991: Hearing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transporta- tion, 102d Cong., 2d Sess. (1992) . . . . 10, 33 Cable TV Consumer Protection Act of 1989: Hear- ings Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 101st Cong., 2d Sess. (1990).... 38 Cable Television Regulation: Hearings Before the Subcomm, on Telecommunications and Finance of the House Comm. on Energy and Com- merce, 102d Cong., 1st Sess. (1991) . . . . 10, 33, 34 Cable Television Regulation (Part 1): Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on- .Energy and Commerce, 10lst Cong., 2d Sess. (1990 ).... 8, 33 Cable Television Regulation (Part 2): Hearing Be- fore the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 10lst Gong., 2d Sess. (1990) . . . . 33 Communications Competitiveness and Infrastruc- ture Modernization Act of 1990: Hearing Be- fore the Subcomm. on Communications of the' Senate Comm. on Commerce, Science, and Trans- portation, 101st Cong., 2d Sees. (1990) . . . . 8, 33, 34 138 Cong. Rec. (1992): p. H6489 (daily ed. July 23) . . . . l0 p. H6492.(daily ed. July 23) . . . . 10 p. H8671 (daily e.d. Sept. 17) . . . . 10 p. H8673 (daily ed. Sept. 17) . . . . 10 p. S14,225 (daily ed. Sept. 21) . . . 10 p. S14,237 (daily ed. Sept. 21) . . . 10 ---------------------------------------- Page Break ---------------------------------------- IX Miscellaneous-Continued: Page pp. S14,246-S14,247 (daily ed. Sept. 21) . . . . 10 p. S14,250 (daily ed. Sept. 21) . . . . 10 pp. S14,255-S14,256 (daily ed. Sept. 21) . . . . 10 p. S16,663 (daily ed. Oct. 5) . . . . 10 pp. S16,665-S16,666 (daily ed. Oct. 5) . . . . 10 141 Cong. Rec. (1995): pp. H8436-H8438 (daiIy ed. Aug. 4) . . . . 16 p. H8437 (daily ed. Aug. 4) . . . . 16 p. H8438 (daily ed. Aug. 4) . . . . 16 p. S8570 (daily ed. June 16) . . . . 16 P. S8577 (daily ed. June 16) . . . . 16 General Accounting Office, Telecommunications: FCC'S Oversight Efforts to Control Cross- Subsidization (Feb. 1993) . . . . 4, 31 General Accounting Office: Telephone Communica- tions: Controlling Cross-Subsidy Between Reg- ulated and Competitive Services (Oct. 1987). .4, 5, 31, 33 H.R. 1555, 104th Cong., 1st Sess. (1995) . . . . 16 H.R. Rep. No. 934, 98th Cong., 2d Sess. (1984) . . . . 3, 8, 20, 21,25,30,33 2 Alfred E. Kahn, The Economics of Regulation (1988) . . . . 4 Office of Plans and Policy, FCC Policy on Cable Ownership: A Staff Report (Nov. 1981) . . . . 7, 35, 36 S. 652, 104th Cong., 1st Sess. (1995) . . . . 16 S. Rep. No. 456, 10lst Cong., 2d Sess. (1990) . . . . 11, 34 S. Rep. No. 92, 102d Cong., 1st Sess. (1991) . . . . 11, 34 Statement of Assistant Attorney General Anne K. Bingaman Before the Senate Commerce Com- mittee (Mar. 2, 1995) . . . . 32 ---------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1995 No. 94-1893 UNITED STATES OF AMERICA, ET AL., PETITIONERS v. THE CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF VIRGINIA, ET AL, No. 94-1900 NATIONAL CABLE TELEVISION ASSOCIATION, INC., PETITIONER v. BELL ATLANTIC CORPORATION, ET AL. ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT BRIEF FOR THE FEDERAL PETITIONERS OPINIONS BELOW The opinion of the court of appeals (Pet. App. la- 52a) is reported at 42 F.3d 181! The opinion of the ___________________(footnotes) 1. "Pet. App." refers to the appendix to the petition in No. 94- 1893. "Pet. Supp. Br." refers to the supplemental brief in support of the petition in No. 94-1893. "Pet. Supp. Apply refers to the appendix to that supplemental brief. "Resp." refers to the response to the petitions for a writ of certiorari, "J.A." refers to the joint appendix. (1) ---------------------------------------- Page Break ---------------------------------------- 2 district court (Pet. App. 53a-108a) is reported at 830 F. Supp. 909. The Federal Communications Commis- sion's Third Report and Order (Pet. Supp. App. 1a-21a), concerning the statutory provision for waivers of the cross-ownership bar, is not yet reported. JURISDICTION The judgment of the court of appeals was entered on November 21, 1994. Petitions for rehearing were denied on January 18, 1995. Pet. App. 109a-112a. On March 24, 1995, the Chief Justice extended the time within which to tile a petition for a writ of certiorari to and including May 18, 1995. The petitions for a writ of certiorari were filed on May 18, 1995, and were granted on June 26, 1995. J.A. 387, 388. The jurisdiction of this Court rests on 28 U.S.C. 1254(1). CONSTITUTIONAL AND STATUTORY PROVISIONS INVOLVED The First Amendment to the United States Constitu- tion provides that "Congress shall make no law * * * abridging the freedom of speech, or of the press." The text of 47 U.S.C. 533(b) is set forth at Pet. App. 167a- 168a. STATEMENT 1. This case involves a First Amendment challenge to 47 U.S.C. 533(b), a regulation of the market for cable television services that bars local telephone companies (local exchange carriers or LECs) from directly provid- ing video programming, by means of a cable system, to subscribers in their telephone service areas. Section 533 (b) was enacted as part of Congress's comprehensive regulation of the cable industry in the Cable Communica- tions Policy Act of 1984, Pub. L. No, 98-54.9, 98 Stat. 2779 (Cable Act or 1984 Cable Act); see 2, 98 Stat. 2785. It is similar to another cross-ownership rule, en- acted at the same time, that prohibits local television broadcast stations from owning cable systems in their ---------------------------------------- Page Break ---------------------------------------- 3 service areas. See 47 U.S.C. 533(a) (1) ( 1988 & Supp. V 1993). It also stands in a long line of congressional and administrative initiatives to promote diversity in media outlets. 2. Section 533 (b) addresses the special potential for anti- competitive conduct by LECs, which are generally regu- lated monopolists within their common carrier telephone service areas, in less regulated markets such as the mar- ket for cable services. LECs' telephone operations are, in general, subject at the state level to rate regulation based on a return on capital and recovery of costs. If LECs entered the cable market, they would have an incentive to allocate the costs of their cable services to their monopoly telephone operations, and to have regula- tors set higher telephone rates based on those shifted costs. Such cost-shifting would allow LECs to impose their cable costs on captive telephone ratepayers without sacrificing telephone service market share, and to sub- sidize their affiliated cable entities with monopoly tele- phone profits. Telephone consumers would suffer higher rates based on distorted costs, and businesses competing with LECs' affiliated cable entities might wither under ___________________(footnotes) 2 See, e.g., FCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775 (1978) (upholding restrictions on cross-ownership of daily newspapers and broadcast stations) ; National Broadcast- ing Co. V. United States, 319 U.S. 190 (1943) (upholding regula- tion prohibiting network ownership of more than one broadcast station in a service area) ; United States v. Paramount Pictures, Inc., 85 F. Supp. 881 (S.D.N.Y. 1949) (antitrust decree requiring separation of production and exhibition of motion pictures), aff'd mem. sub nom. Loew's, Inc. V. United States, 339 U.S. 974 (1950) ; 15 U.S.C. 1801-1804 (Newspaper Preservation Act) ; 47 U.S.C. 531 (municipalities may require public access to cable system) ; 47 U.S.C. 532 (1988 & Supp. V 1993) (cable systems must set aside channels for leased access) ; 47 U.S.C. 534 (b), 535 (b) (Supp. V 1993) (cable systems must carry local broadcast stations). See H.R. Rep. No. 934, 98th Cong., 2d Sess. 33 & n.3 (1984) (placing telephone-cable cross-ownership rule in line of authority holding that "the government can restrict concentrated ownership of com- munications media in a locality, in the interest of diversity"). ---------------------------------------- Page Break ---------------------------------------- 4 unfair competition because of the subsidy from the tele- phone operations.3 The potential for such "cross-subsidization" by LEG is particularly serious in the cable market, which is ad- jacent to, and potentially overlapping with, the telephone market. Affiliated LECs and cable systems could share capital equipment, such as fiber-optic cable, as well as the costs of research and development, administration of the telephone network, and personnel. Also, because the technology has developed for the transmission of video signals over the telephone network, LECs could de- liver video programming over their own wires. Thus, LECs would have substantial opportunities to cross- subsidize their cable operations if they were permitted to operate cable systems in their own service areas. A regu- latory approach to the problem of cross-subsidization ___________________(footnotes) 3 See generally National Rural Telecom Ass'n v. FCC 988 F.2d 174, 178 (D.C. Cir. 1993) ; California V. FCC, 905 F.2d 1217, 1224, 1226-1228, 1233-1238 (9th Cir. 1990) ; United States V. Western .Elec. CO., 900 F.2d 283, 289-290 (D.C. Cir.), cert. denied, 498 U.S. 911 (1990) ; Southwestern Bel1 Corp. v. FCC, 896 F.2d 1378, 1379- 1380 (D.C. Cir. 1990) ; Illinois Bell Tel. Co. v. FCC, 740 F.2d 465, 472 (7th Cir. 1984) ; United States v. American Tel. & Tel. Co., 524 F. Supp. 1336, 1368-1369 (D.D.C. 1981); In re Policy and Rules Concerning the Furnishing of Customer Premises Equip- ment, Enhanced Services and Cellular Communications Services by the Bell Operating Companies, Report and Order, 95 F.C.C.2d 1117, 1129-1131 (1983) (BOC Separation Order) ; In re Amend- ment of Section 6.4.702 of the Commission's Rules and Regulations (Second Computer Inquiry), Final Decision, 77 F. C.C.2d 384, 463- 464 (1980) (Computer H), modified in part on reconsideration, 84 F.C.C.2d 50 (1980), 88 F.C.C.2d 512 (1981), aff'd sub nom. Computer & Communications Indus. Ass'n v. FCC, 693 F.2d 198 (D.C. Cir. 1982), cert. denied, 461 U.S. 938 (1983) ; General Accounting Office, Telephone Communications: controlling Cross- Subsidy Between Regulated and Competitive Services 50 (Oct. 1987) (First GAO Report) (J.A. 92-93) ; General Accounting Office, Telecommunications: FCC's Oversight Efforts to Control Cross-Subsidization 3-4 (Feb.. 1993) (J.A. 122-123) ; Harvey Averch & Leland L. Johnson, Behavior of the Firm Under Regulatory Con- straint, 52 Am Econ. Rev. 1052 (1962) ; 2 Alfred E. Kahn, The Economics of Regulation 54 (1988). ---------------------------------------- Page Break ---------------------------------------- 5 would require extensive supervision and auditing of LEC's use of their capital equipment, deployment of their human resources, and accounting practices? A second problem posed by entry of LECs into the cable market is the threat of discrimination against their competitors in the use of facilities for the transmission of video signals. That discrimination could take at least two forms. First, traditional cable systems transmit pro- gramming to subscribers over wires attached to utility poles or buried underground and brought into sub- scribers' homes through utility service conduits. LECs have had, historically, effective control over poles and conduits necessary to the operation of a cable system, and they could abuse that control to prevent competing cabIe operators from using those poles and conduits, or to make it difficult for competitors to maintain their wires as is necessary to ensure adequate quality 15. Second, LECs wield exclusive control over the wires, switching devices, and other transmission facilities essential to the delivery of video signals over the technically complex modern telephone network. Absent effective regulation, LECs could discriminate against competing video pro- grammers in affording access to that network, by design- ing the system to f aver transmission of their own video signals and providing inferior service and maintenance to competitors using the network. Discrimination un- checked by regulation could cripple competition if LECs were to exceed their traditional role of common carriers of others' signals. 6. ___________________(footnotes) 4. See J.A. 52, 54-55, 57 (1981 FCC staff study), 251-255 (Owen affidavit) ; cf. J.A. 84-85, 88-92 (First GAO Report, discussing similar problems in LEC entry into other lines of business). 5. See In re Applications of Tel. Cos. for Section 214 Certificates for Channel Facilities Furnished to Affiliated Community Antenna Television Systems, 21 F.C.C.2d 307, 324 (1970), aff'd sub nom,. General Tel. CO. V. United States, 449 F.2d 846 (5th Cir. 1971). 6. See California v. FCC, 39 F.3d 919, 929-930 (9th Cir. 1994) ; California V. FCC, 4 F.3d 1505, 1509-1513 (9th Cir. 1993) ; United ---------------------------------------- Page Break ---------------------------------------- 6 2. Section 533(b) has its origins in regulations issued by the Federal Communications Commission (FCC) in 1970 to address the problem of anti-competitive practices by LECs in the cable services market. See 47 C.F.R. 64.601 (197 I); In re Applications Of Tel. Cos. for Sec- tion 214 Certificates for Channel Facilities Furnished to Affiliated Community Antenna Television Systems, 21 F.C.C.2d 307 ( 1970), aff'd sub nom. General Tel. Co. V. United States, 449 F.2d 846 (5th Cir. 1971). The FCC identified "[t]he central problem" as "the anomalous competitive situation between [cable] systems affiliated with the telephone companies, and those which have no such affiliation" (21 F.C.C.2d at 323), and concluded that "[t]he entry by a telephone company * * * into the retailing aspects of [cable] services in the community within which it furnishes communications services can lead to undesirable consequences," including discrimina- tion against unaffiliated cable companies and extension of LECs' telephone monopoly to the cable services market (id. at 324). Intending "to insure against any arbitrary blockage of th[e] gateway" and to preserve "a competi- tive environment for the development and use of broad- band cable facilities and services and thereby avoid undue and unnecessary concentration of control over communi- cations media either by existing carriers or other entities," the FCC determined that "the preservation of such com- petition wiII best be assured by the exclusion of tele- phone companies in their service areas from engaging in ___________________(footnotes) States v. American Tel. & Tel. Co., 552 F. SUPP. 131, 189-190 (D.D.C. 1982), aff'd mem. sub nom. Maryland V. United States, 460 U.S. 1001 (1983) ; United States v. American Tel. & Tel. Co., 524 F. Supp. at 1352-1355; BOC Separation Order, 95 F.C.C.2d at 1134-1135; Computer 11, 77 F.C.C.2d at 463-464. See also Delaware, L. & W.R.R. v. United States, 231 U.S. 363, 370 (1913) (upholding "commodities clause" of Interstate Commerce Act, 49 U.S.C. 10746, which prohibits common carriers from transporting products in which they have a financial interest, and noting potential for dis- crimination if common carriers were permitted to haul for their own benefit as well as others'). ---------------------------------------- Page Break ---------------------------------------- 7 the sale of [cable] service to the viewing public except where no practical alternative exists to make such service available within a particular community." Id. at 325. In 1980, the FCC directed its staff to study several regulatory restrictions on ownership of cable systems, and in November 1981, the Commission's Office of Plans and Policy issued a report recommending that the telephone- cable cross-ownership bar be retained. See FCC Policy on Cable Ownership: A Staff Report 141-178 (J.A. 40- 78). The staff report acknowledged that changes in the cable industry made it "no longer appropriate to think of [cable] as an infant," J.A. 41 n.3, but it nonetheless concluded that there were serious disadvantages in cross- ownership, principally in that "telephone companies are regulated exclusive franchise monopolists in their local area," J.A. 52. The staff was especially concerned about cross-subsidization of cable operations by LECs, and it noted that, because cable and telephone systems may share capital equipment, "allocating shared costs between these capital accounts on the basis of actual cost causa- tion will be difficult or impossible." J.A. 57. The staff did not believe that a structural separation of corporate entities providing cable and telephone services would eliminate the danger of cost-shifting. J.A. 67-71. The staff also could not find a regulatory solution to the problem of discrimination in access to the local exchange network. J.A. 73-76. 3. Congress enacted Section 533 (b) in the 1984 Cable Act, using language borrowed from the FCC's 1970 regu lations. Congress prohibited "any common carrier, sub- ject in whole or in part to subchapter II" of the Communi- cations Act of 1934 (i.e., any LEC ), from "providing] video programming directly to subscribers in its telephone service area." 47 U.S.C. 533(b)(1). Congress also pro- hibited LECs from providing pole or conduit space to any affiliated cable entity for the purpose of provid- ing video programming directly to subscribers. Congress intended "to codify [the] FCC rules concerning the ---------------------------------------- Page Break ---------------------------------------- 8 provision of video programming over cable systems by common carriers." H.R. Rep. No. 934, 98th Cong., 2d Sess. 56 (1984) (1984 House Report). Section 533 as a whole was intended "to prevent the development of local media monopolies, and to encourage a diversity of ownership of communications outlets." Id. at 55. The statute contains several exceptions to the general prohibitions, also derived from the FCC's regulatory regime. Under Section 533 (b) (3), LECs may freely pro- vide video programming to customers who reside in a "rural area," as defined by the FCC. LECs may also seek a waiver of the cross-ownership bar for those areas where cable service "demonstrably could not exist" except if provided through a LEC-affiliated entity. 47 U.S.C. 533 (b) (4). Finally, Congress authorized the FCC to waive the cross-ownership bar "upon other showing of good cause * * * [and] upon a finding that the issuance of such waiver is justified by the particular circumstances demonstrated by the petitioner, taking into account the policy of this subsection." Ibid. 4. Within a few years of the enactment of Section 533 (b), LECs and others began to urge its repeal.' Beginning in 1987, the FCC conducted extensive public inquiry and rulemaking proceedings regarding the costs, benefits, and continued need for the cross-ownership bar.' ___________________(footnotes) 7 See, e.g., Communications Competitiveness and Infrastructure Modernization Act. of 1990: Hearing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 10lst Cong., 2d Sess. 47-60, 143-158, 168-176 (1990); Cable Television Regulation (Part 2): Hearings Before the Subcomm. on Telecommunication and Finance of the House Comm. on Energy and Commerce, 10lst Cong., 2d Sess, 273-276, 311, 339-342, 398-401, 431-436, 452-463 (1990) . 8 See In re Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Notice of Inquiry, 2 F.C.C. Rcd 5092 (1987) ; In re Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-68.58, Further Notice of Inquiry and Notice of Proposed Rulemaking, 3 F.C.C. Rcd 5849 (1988) (Further Notice of In- ---------------------------------------- Page Break ---------------------------------------- 9 In 1992, the FCC again examined the bar in the con- text of its rulemaking proceedings on "video dialtone," a service made possible by technological advances that permit the transmission of video signals over telephone wires, by which LECs may use their wires to transmit video signals from multiple programmers to subscribers on a common carrier basis. See In re Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Second Report and Order, Recommendation to Congress, and Second Further Notice of Proposed Rulemaking, 7 F.C.C. Rcd 5781, 5783 (1992) (Video Dialtone Order), modified in part on reconsideration, 10 F.C.C. Rcd 244 (1994); see also National Cable Television Ass'n v. FCC, 33 F.3d 66 (D.C. Cir. 1994). The FCC recommended that Congress replace the cross- ownership bar with an array of regulatory safeguards to prevent abuses by LECs if they entered the cable market. See Video Dialtone Order, 7 F.C.C. Rcd at 5847-5851. The FCC did not conclude that the potential for anti-competitive conduct by LECs "had disappeared entirely, but it did conclude that the continued risk was outweighed by the potential public interest that would be served by their entry into the cable market. Id. at 5849. The FCC stated that, if LECs were allowed to enter. the market for providing video programming, it would subject them to extensive regulation: [T]he FCC should require that if the benefits exceed the costs, the telephone companies provide video programming through a structurally separated video programming subsidiary; that their video program- ming be through the video dialtone platform that provides service to multiple programmers; and that the extent of local telephone company-provided ___________________(footnotes) quiry) ; In re Tel. Co Cable Television Cross-Ownership Rules, Sections 68,54-63.58, First Notice of Proposed Rulemaking, First Report and Order, and Second Further Notice of Inquiry, 7 F.C.C. Rcd 300 (1991). ---------------------------------------- Page Break ---------------------------------------- 10 programming be limited to a specified percentage of overall capacity. Id. at 5847-5848; see id. at 5850-5851. Congress, however, declined to repeal the cross- ownership bar. In the Cable Television Consumer Pro- tection and Competition Act of 1992, Pub. L. No. 102- 385, 106 Stat. 1460 ( 1992 Cable Act), Congress revised regulation of the cable industry to stimulate competition. See 47 U.S.C. 541(a)(1) (Supp. V 1993) (prohibiting exclusive cable franchises); 47 U.S.C. 543 (Supp. V. 1993 ) (requiring cable rate regulation in areas where there is no effective competition); 47 U.S.C. 533(a) (2) (Supp. V 1993) (adopting cross-ownership rules for new wireless broadcast technologies). By those measures, Congress sought to promote "a substantial governmental and First Amendment interest in promoting a diversity of views." 1992 Cable Act, 2(a) (6), 106 Stat, 1461. But after extensive consideration of the arguments in favor of and against the telephone-cable cross-ownership bar, and several proposals (including those of the FCC and the Departments of Justice and Commerce) to replace the bar with a regulatory approach to the problems of cross-subsidization and discrimination, Congress Ieft the bar in place? The Senate report accompanying the 1992 Cable Act expressed the view that cross-ownership re- strictions like Section 533 (b) "enhance competition." ___________________(footnotes) 9. See note 7, supra; see also Cable Television Regulation: Hear- ings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 102d Cong., 1st Sess. 122-123, 226-227, 524-537, 605-616 (1991) ; Cable-Instructional TV and S. 1200, Communications Competitiveness and Infrastructure Modernization Act of 1991: Hearing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 102d Cong., 2d Sess. 48, 51, 54-55, 95, 96-109, 139-146 (1992) ; 138 Cong. Rec. S16,663, S16,665-S16,666 (daily ed. Oct. 5, 1992) ; id. at S14,225, S14,237, S1.4,246-S14,247, S14,250, S14,255-S14,256 (daily ed. Sept. 21, 1992) ; id. at H8671, H8673 (daily ed. Sept. 17, 1992); id. at H6489, H6492 (daily ed. July 23, 1992). ---------------------------------------- Page Break ---------------------------------------- 11 S. Rep. No. 92, 102d Cong., 1st Sess. 46-47 (1991) (1991 Senate Report); see also S. Rep. No. 456, 10lst Cong., 2d Sess. 9 (1990) (1990 Senate Report) ("[B]e- ause of concerns about the potential for anticompetitive practices by telephone companies and the need to ensure media diversity, the Committee is not now prepared to permit telephone companies to own or control video programming." ). 5. Respondents then brought this action in district court, challenging the constitutionality of Section 533(b). Respondents (or their corporate affiliates) provide local exchange telephone services in six States and the District of Columbia, and they desire to provide video program- ming directly to subscribers in Alexandria, Virginia, where they have a monopoly on local exchange service. Pet. App. 54a, 77a n.17. The district court granted summary judgment for re- spondents. It applied an "intermediate level of scrutiny: as set forth in Ward V. Rock Against Racism, 491 U.S. 781, 791 (1989 ), which requires that a content-neutral regulation of the time, place, and manner of speech be "narrowly tailored to serve a significant governmental interest" and "leav[e] open ample alternative channels for communication" to pass constitutional muster. See Pet. App. 94a. The district court found "little doubt that the statute leaves open ample alternative channels for communication ," since LECs may, inter alia, communi- cate with subscribers by producing video programming and marketing it to broadcasters and cable operators. The district court concluded, however, that Section 533 (b) is not narrowly tailored because, in its view, there is a lack of "fit" between the statute and the objective of preventing anti-competitive conduct by LECs. Pet. App. 102a. The court accepted, arguendo, that regula- tory controls would be insufficient to prevent LECs from cross-subsidizing affiliated cable entities. Id. at 106a. But the court stressed that, notwithstanding Section ---------------------------------------- Page Break ---------------------------------------- 12 533 (b), LECs are permitted to operate systems for the transport of unaffiliated entities' video programming if they do not exercise control over the selection of that programming, and the court believed that the dangers of discrimination and cross-subsidization are also present in that permitted situation. Pet. App, 10la-102a. Although the government argued that incentives to anti-competitive conduct are enhanced if LECs select, as well as transmit, the video programming offered on a cable system, the court rejected that argument because, it believed, LECs have no "inherent advantage" in video programming that would permit them to evade regulation. Id. at 103a-104a. 6. The court of appeals affirmed. Pet. App. 1a-52a. The court of appeals held that Section 533(b) should be subject to intermediate scrutiny because it is not content-based (Pet. App. 28a), it is not intended to regulate or prohibit any speech because of the message that is conveyed (id. at 3la-32a), and it is "justified entirely by the peculiar economic and physical character- istics inherent in the provision of cable service" (id. at 34a) .10. Although the court agreed with the government that the interests served by Section 533(b) are signifi- cant (Pet. App. 38a-39a), it concluded that the statute is unconstitutional because it is not narrowly tailored. In reaching that conclusion, the court remarked that, be- cause the statute contains no specific factual findings about the need for the particular measure enacted, it owed no deference to Congress's judgment on the question of narrow tailoring. Id. at 40a-41a. The court of appeals first concluded that the threat of discrimination by LECs against their competitors in ___________________(footnotes) 10. The court of appeals thus rejected respondents' arguments for application of strict srutiny (Pet, APP. 37a) and the government's arguments for "minimal scrutiny" (id. at 20a-23a). Judge Michael declined to join the panel's rejection of strict scrutiny; he believed that, since the statute failed intermediate scrutiny, the question whether strict scrutiny should be applied was "academic." Id, --------------------------------------- Page Break ---------------------------------------- 13 affording access to utility poles and conduits was insuffi- cient to support the cross-ownership bar. It reasoned that Congress could prohibit such discrimination rather than banning LECs from offering cable services. Pet. App. 42a. The court did not address the separate but related problem of LEC discrimination against competi- tors in access to the telephone network for transmission of video signals. On the issue of cross-subsidization, the court of appeals assumed that regulatory oversight (in place of a cross- ownership bar) would be insufficient to prevent that abuse in the video transport market. It also assumed that the prospect of domination of the video programming market would give LECs an " `irresistible' incentive" to cross- subsidize their video transport operations. Pet. App. 44a- 45a. Nevertheless, the court found dispositive its percep- tion that an "obvious less-burdensome alternative" to Sec- tion 533 (b) exists: "Congress could simply limit [LECs'] editorial control over video programming [on any cable system] to a fixed percentage of the channels available; [LECs] would be required to lease the balance of the channels [to unaffiliated programmers] on a common, car- rier basis." Pet. App. 47a-48a. Finally, the court concluded that Section 533(b) does not leave open ample alternative channels for communi- cation by LECs. Pet. App. 49a-5la. Although the court recognized that LECs may freely arrange for their video programming to be distributed by broadcast stations and unaffiliated cable operators, it held the statute invalid because LECs "cannot guarantee that video programming they wish to transmit to their local audience via cable television * * * will reach their desired audience." Id. at 50a (emphasis added). It believed that Section 533 (b) "ban[s] completely a particular manner of expression" to LECs. Pet. App. 5 la. 7. On May 16, 1995, the FCC issued a Third Report and Order in its video dialtone rulemaking, in which it concluded that, under the "good cause" waiver provision ---------------------------------------- Page Break ---------------------------------------- 14 of Section 533(b) (4) (see p. 8, sup-a), it has "legal authority to grant waivers allowing [LECs] to provide video programming in their telephone service areas on video dialtone networks." Pet. Supp. App. 2a. Under its construction of Section 533(b) (4), the FCC "will routinely grant a waiver of [the cross-ownership bar] where the [LEC] agrees to abide by the regulations [that the FCC] will establish governing its provision of video pro- gramming." Pet. Supp. App. 19a. The FCC also explained that, because "the purpose of the rule is to promote com- petition," it will not grant waivers "to allow a [LEC] to purchase an incumbent monopolist cable operator in the [LEC's] service area" (id. at 16a); its reading of the waiver authority extends only "to permit a [LEC] to provide video programming over video dialtone systems in its telephone service area in competition with existing cable operators" (id. at 17a) (emphasis added). The FCC noted that two courts of appeals and several district courts have concluded that Section 533 (b) vio- lates the First Amendment." It also observed that this Court has instructed that "a statute is to be construed where fairly possible so as to avoid substantial constitu- tional questions." Pet. Supp. App. 6a (quoting United ___________________(footnotes) 11. The Ninth Circuit also declared section 533 (b) unconstitu- tional in two consolidated cases. US West, Inc. V. United States, 48 F.3d 1092 (1994) ; Pacific Telesis Group v. United States, 48 F.3d 1106 (1994). The statute has been held invalid by district courts in NYNEX Corp. V. United States, No. 93-323-P-C (D. Me. Dec. 8, 1994), appeal pending, No. 95-1183 (1st Cir.) ; Ameritech Corp. V. United States, 867 F. Supp. 721 (N.D. 111, 1994), appeal pending, No. 95-1223- (7th Cir. ); BellSouth Corp. V. United States, 868 F. Supp. 1335 (N.D. Ala. 1994), appeal pending, No. 94-7036 (11th Cir.) ; United States Telephone Ass'n V. United States, No. 1 :94CVO1961 (D.D.C. Feb. 14, 1995), appeal pending, No. 95-1175 (D.C. Cir.) ; Southwestern Belt Corp. v. United States, No. 3:94- CV-0193-D (N.D. Tex. Mar. 27, 1995), appeal pending, No. 95- 10478 (5th Cm. ) ; and Southern New England Telephone Co. v. United States, No. 3:94-CV-80 (DJS) (D. Corm. Apr. 27, 1995), appeaI pending, No. 95-6137 (2d Cir.). ---------------------------------------- Page Break ---------------------------------------- 15 States V. X-Citement Video, Inc., 115 S. Ct. 464, 467 (1994) ). The FCC concluded that its interpretation of its waiver authority would "cure [the] constitutional in- firmities" perceived in the cross-ownership bar (Pet. Supp. App. 6a n. 11 ) and make it "unnecessary for [the] courts to decide whether a complete prohibition on video pro- gramming by [LECs] in their exchange areas is consti- tutional" (id. at 7a), for the LECs would henceforth be able to provide video programming directly to sub- scribers in their service areas. The FCC addressed two statutory issues in construing Section 533 (b) (4): whether there is "good cause" to waive the cross-ownership bar, and whether a waiver is "justified by the particular circumstances demonstrated by the petitioner, taking into account the policy of [the bar]," Pet, Supp. App. 9a. The FCC found two reasons to conclude that "good cause" exists to tallow LECs to provide video programming g over video dialtone systems. First, " `[g]ood cause' is a phrase that is commonly asso- ciated with changed circumstances" (id. at 1 la), and the growth in the cable industry from "a fledgling service to a more mature industry" constitutes changed circum- stances since Congress enacted the bar in 1984 (id. at 10a-1la). Second, "significant advances in technology" that now permit the dissemination of video signals over the telephone network "have made it possible for a multi- tude of programmers to reach end user customers and have mitigated to a fair degree the competitive concerns that led the Commission and Congress to adopt the cross- ownership ban." Id, at 11a-12a. The FCC also concluded that waiving the bar to allow LECs to provide video programming on video dialtone networks would advance the policies of Section 533(b), competition and diversity in the market for video pro- gramming. The FCC emphasized that its video dialtone regulatory framework includes a common carnage ele- ment, such that a LEC offering video dialtone must make capacity available to other, unaffiliated video program- --------------------------------------- Page Break ---------------------------------------- 16 mers. Thus, "[t]he common carrier aspect of video dial- tone service promotes both competitive and free speech interests by making room for more than one speaker." Pet. Supp. App. 13a. The FCC also made clear that LECs would be allowed to offer video programming in their service areas only if they agree to abide by reg- ulations that will be adopted to prevent anti-competitive abuses such as cross-subsidization and discrimination against competitors. Id. at 18a-19a. 12. INTRODUCTION AND SUMMARY OF ARGUMENT For more than two decades, there has been spirited debate over the costs and benefits of local telephone com- panies' entry into the market for cable services, as there has been debate over their participation in other lines of business, such as information services and long-distance services. The problems presented by the entry of LECs into other markets are substantial and complex, and the best mix of competition, regulation, and structural separa- tion to address those problems has been the subject of sustained attention by Congress, the agencies that admin- ister telecommunications laws, and the interests affect- ed by regulation. Several participants in the debate, ___________________(footnotes) 12. Congress is also reexamining the cross-ownership bar at this time, On June 16, 1995, the Senate passed a bill that would repeal the cross-ownership bar and would expressly permit LECs to offer video programming through video dialtone systems. See S. 652, 104th Cong., 1st Sess. 202 (1995); 141 Cong. Rec. S8570, S8577 (daily ed. June 16, 1995). On August 4, 1995, the House of Representatives passed a bill that would permit LECs to offer video programming to subscribers in their service areas, through video dialtone platforms operated by separate affiliates. See H.R. 1555, 104th Cong., 1st Sees. 201 (1995) ; 141 Cong. Rec. H8436- H8438 (daily ed. Aug. 4, 1995). The House bill would require the FCC to issue regulations to prevent discrimination in access to the video dialtone system, and would permit state regulator to prevent cross-subsidization. See id. at H8437. The House bill would provide limited authority for LECs to invest in and control incumbent cable operators. Id. at H8438. ---------------------------------------- Page Break ---------------------------------------- 17 including federal agencies, have suggested that consumer welfare would ultimately be increased by freer LEC par- ticipation in the cable market-subject to appropriate regulatory safeguards and in conjunction with removal of barriers to competition in local telephone service. Congress, which is responsible for setting the nation's tele- communications policy, has nonetheless thus far declined to repeal the cross-ownership bar challenged in this case. There are considerable advantages to the simple cross- ownership restriction enacted by Congress over the much more complex system of administrative supervision that would take its place, were the bar repealed or invali- dated. Whether those advantages are outweighed by dis- advantages of inefficiency is, of course, subject to much dispute. But that judgment is for Congress to make, and Congress's choice of a cross-ownership bar, which has un- deniably been effective in preventing discrimination and cross-subsidization by LECs in the cable market was a reasonable one. Whatever the arguments against the wis- dom of the bar or its effectiveness in promoting competi- tion, those arguments are not of institutional dimension. L Section 533(b) does not require strict scrutiny. The cross-ownership bar is content-neutral; it reflects nei- ther disagreement with any idea that would be expressed by LECs, nor any desire to suppress free expression. To the contrary, the bar is intended to keep channels of communication open by preventing private anti-competitive behavior that could choke off speech by LECs' competi- tors, and is justified entirely by reference to the economic consequences of LEC participation in the cable market. Section 533 (b) is therefore subject at most to the inter- mediate scrutiny employed for regulations of the time, place, and manner of speech. IL Section 533(b) survives intermediate scrutiny. The cross-ownership bar advances significant governmental interests in preventing anti-competitive conduct and pro- moting diversity of communications outlets. It accom- plishes those objectives by forestalling LECs' extension of ---------------------------------------- Page Break ---------------------------------------- 18 their telephone monopoly to the cable market through cross-subsidization of their cable affiliates and discrimina- tion against competitors in providing access to essential facilities (utility poles and conduits, and the modem tele phone network) for the transmission of video program- ming. The bar is necessary and narrowly tailored to ac- complish Congress objectives, because it is easily administered and entirely effective. A less restrictive ap- proach would require complex structural and accounting regulations and continual administrative supervision to monitor LECs' compliance with those rules. A regulatory approach also could not assure the same degree of effec- tiveness in preventing discrimination by LECs against competitors. The bar leaves open ample alternative chan- nels of communication to LECs, which may disseminate video programming within their service areas by numer- ous other means (including broadcast television ), operate cable systems outside their service areas, and use all non- video means of communication everywhere. The statute also gives the FCC! authority to waive the bar for good cause to advance the goals of the statute, and in situations where cable service could not be provided except by LECs. The bar therefore applies only in those circum- stances in which Congress reasonably concluded it is needed to prevent anti-competitive conduct by LECs. III. The FCC's recent construction of its waiver au- thority to permit LECs to offer video programming on video dialtone systems removes any constitutional doubts about the statute. That construction permits LECs to provide video programming in their own service areas, in competition with incumbent cable operators. The con- struction therefore advances the statute's goals of diver- sity and competition while making more channels for dissemination of video programming available to LECs. ---------------------------------------- Page Break ---------------------------------------- 19 ARGUMENT I. SECTION 533(b) DOES NOT REQUIRE STRICT SCRUTINY We do not dispute that the dissemination of video pro- gramming by means of a cable system is "speech" pro- tected by the First Amendment. Nevertheless, "not every interference with speech triggers the same degree of scru- tiny under the First Amendment," and so the Court "must decide at the outset the level of scrutiny applicable" to the cross-ownership bar. See Turner Broadcasting Sys. v. FCC, 114 S. Ct. 2445, 2456 (1994). Respondents con- tend (Resp. 10-12) that Section 533(b) is a content- based restriction requiring strict scrutiny. In fact, the cross-ownership rule is a content-neutral regulation of the market for cable services aimed at the economic behavior of LECs, and it regulates only the manner and place in which LECs may disseminate video programming. It is therefore subject to review under the less rigorous, "intermediate" standard applicable to content-neutral time, place, and manner regulations. See Turner, 114 S. Ct. at 2469; Ward v. Rock Against Racism, 491 U.S. 781, 791 (1989); cf. United States v. O'Brien, 391 U.S. 367 (1968). 1. The "principal inquiry" in determining whether a regulation is content-based or content-neutral "is whether the government has adopted a regulation of speech be- cause of disagreement with the message it conveys." Ward, 491 U.S. at 791. Under that inquiry, Section 533 (b) is content-neutral. The restriction on LEC own- ership of cable systems is unrelated to the content of any programming that LECs might offer, were they allowed to operate cable systems in their service areas. It is irrelevant to the statute whether the video programming that would be transmitted is "commercial or noncommer- cial, independent or network-affiliated, English or Spanish language, religious or secular." Turner, 114 S. Ct. at 2460. ---------------------------------------- Page Break ---------------------------------------- 20 Even if a regulation is facially content-neutral, it may also be treated as content-based if the government's "manifest purpose is to regulate speech because of the message it conveys." Turner, 114 S. Ct. at 2461. Sec- tion 533 (b) is not motivated by hostility to any message, however, and the government's interests are entirely un- related to the suppression of free expression. See ibid.; Ward, 491 U.S. at 791. Indeed, the objective of the cross-ownership restriction is to promote free expression through diversity of media outlets. See 1984 House Re- port 33, 55; cf. FCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775, 801 ( 1978) (NCCB). The statute recognizes that LECs, if unrestrained by regula- tion, have the ability and incentive to compete unfairly against other cable operators in the same geographical market, because of their physical control over essential facilities for the transmission of cable signals and their monoply power over local telephone service. That control could enable LECs to impede the dissemination of cable programming by their competitors. Cf. Turner, 114 S. Ct. at 2466 ("[S]imply by virtue of its ownership of the essential pathway for cable speech, a cable operator can * * * silence the voice of competing speakers."). Section 533 (b), like the predecessor FCC rules, was designed "to insure against any arbitrary blockage of the gateway" (21F.C.C.2d at 325), and Congress "[took] steps to ensure that private interests not restrict * * * the free flow of information and ideas" (Turner, 114 S. Ct. at 2466). Respondents maintain that Section 533 (b) is content- based because it regulates only the dissemination of "video programming," and because "video programming" is defined as "programming provided by, or generally considered comparable to programming provided by, a television broadcast station." 47 U.S.C. 522(19) (Supp. V 1993). As the court of appeals correctly observed (Pet. App. 26a-28a), however, the statute's reference to "video programming" distinguishes speech solely "on the ---------------------------------------- Page Break ---------------------------------------- 21 basis of the mode of delivery of the speech" (id. at 28a), and not its content. See Regan v. Time, Inc., 468 U.S. 641, 656 (1984) (plurality opinion) (limitations on reproduction of currency "restrict only the manner in which the illustrations can be presented"). While LECs may not operate their own cable systems in their service areas, they may deliver the same video messages to those communities using broadcast television stations, direct broadcast satellite systems, unaffiliated cable systems, and videocassettes. They may also deliver messages to the public through newspapers, leaflets, and radio stations. The FCC has interpreted the statutory definition of "video programming" to mean that "Congress intended to prohibit only [LEC] provision of programming com- parable to that provided by broadcast television stations in 1984." Video Dialtone Order, 7 F.C.C. Rcd at 5820. As so construed, the statute distinguishes the one-way, non-interactive television technology familiar to Congress in 1984 from other forms of speech that were under development at the time and were preserved for LECs, such as interactive video and videotext. See id. at 5820- 5823; 1984 House Report 57 ("[Nothing in this section shall be construed to limit [LEC] provision of informa- tion services or other non-video programming."). The statutory definition of "video programming" does not, however, contain any reference to the subject matter of television programs, and the FCC has not construed it to include any element of content.13 ___________________(footnotes) 13 Given the "abundant discretion" that television licensees retain over programming choices, as well as the breadth of programming that was disseminated on television in 1984, it would be difficult to interpret the Act's reference to "video programming" to include any element of content. Cf. Turner, 114 S. Ct. at 2464. But even if the statutory reference to "video programming" is ambiguous, the FCC's construction of it to include a technological distinction, but not an element of content, is entitled to deference. See Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844-845 (1984). Deference to the FCC's construction is par- ---------------------------------------- Page Break ---------------------------------------- 22 As multimedia speech develops, instances may arise in which it will be difficult to determine whether a cer- tain series of video images is "comparable to" television broadcasting. See Video Dialtone Order, 7 F.C.C. Rcd at 5820-5821. But even if one must examine the images to determine whether they come within the scope of Sec- tion 533 (b), that would not make the bar content-based. The focus of the inquiry is on the manner in which the message is presented, and not on the ideas expressed in the message. Cf. Ward, 491 U.S. at 792-793 (noting that city had disclaimed "any interest in imposing its own view of appropriate sound mix on performers," and that its interest extended only to "the clearly content-neutral" goal of reducing noise). Finally, as the district court noted. (Pet. App. 88a- 93a), even a regulation of speech that contains an ele- ment of content distinction does not require strict scrutiny if the regulation is "justified without reference to the con- tent of the regulated speech." City of Renton v. Playtime Theaters, Inc., 475 U.S. 41, 48 (1986); Ward, 491 U.S. at 791. In determining whether strict scrutiny is neces- sary, "[t]he government's purpose is the controlling con- sideration. " Ibid. Under that inquiry as well, Section 533 (b) does not require strict scrutiny, for its justifica- tion is unrelated to the content of any message that would be disseminated. The purpose of Section 533(b) is the prevention of certain well-known economic practices that present a danger to free expression and competition-not "[the] suppression] * * * of unpopular views." Renton, 475 U.S. at 48. The statute "is neutral-indeed it is silent-concerning any speaker's point of view." Mem- bers of City Council v. Taxpayers for Vincent, 466 U.S. 789,803-804 ( 1984). ___________________(footnotes) ticularly appropriate in this case because it avoids the constitu- tional questions that would be created if the statute were construed to include a content-based distinction. Cf. Jean V. Nelson, 472 U.S. 846, 855-856 (1985) . ---------------------------------------- Page Break ---------------------------------------- 23 2. Nor is Section 533(b) subject to strict scrutiny on the theory that it is a "direct ban on speech as such." Resp. 10. Content-neutral regulations of speech are sub- ject only to intermediate scrutiny, "even though they di- rectly limit oral or written expression." See Clark V. Community for Creative Non-Violence, 468 U.S. 288, 298 n.8 (1984). For example, in Frisby v. Schultz, 487 U.S. 474 ( 1988), in which the Court upheld an ordi- nance banning picketing in front of residences, the Court observed that the prohibition was content-neutral (id. at 481-482), and it applied the "intermediate" standard of review applicable to content-neutral regulations ( see id. at 482 (inquiring whether the ordinance was "narrowly tailored to serve a significant government interest" and whether it "[left] open ample alternative channels of communication" ); id. at 492-493 (Brennan, J., dissent- ing) (agreeing that the residential picketing ban was "sub- ject to the well-settled time, place, and manner test")). Cf. Ward, 491 U.S. at 791 (applying same test); Clark, 468 U.S. at 293 (same). In Vincent, the Court applied a similar test, drawn from United States v. O'Brien, supra, to the content-neutral prohibition on the posting of signs at issue in that case. See 466 U.S. at 804-805, 808.14 As a content-neutral regulation of the market for cable services, Section 533 (b) must therefore be analyzed under the intermediate standard of scrutiny applicable to time, place, and manner regulations. The statute is not a blan- ket ban on speech by LECs; it prohibits them from oper- ating cable systems only in the areas where they offer local telephone service. In all other areas, where the ___________________(footnotes) 14 Thus, notwithstanding respondents' argument that the O'Brien test "has been reserved exclusively for regulations having only an `incidental' effect" on speech (Resp. 10), it is clear that the O'Brien test "in the last analysis is little, if any, different from the stan- dard applied to time, place, or manner restrictions." Clark, 468 U.S. at 298; see id. at 298 n.8; Turner, 114 S. Ct. at 2469. ---------------------------------------- Page Break ---------------------------------------- 24 dangers of anti-competitive conduct by LECs are not pres- ent, they are free to offer cable service. The statute also regulates only speech in video form, and not the various other modes of speech that could deliver the same mes- sage. Cf. Frisby, 487 U.S. at 484 (observing that, al- though protesters could not engage in residential picket- ing, they could distribute literature and contact residents by telephone). Finally, the statute regulates only video programming delivered by means of cable systems-not video programming disseminated by all other possible means, including broadcast television, satellite television, and videocassettes. The court of appeals correctly con- cluded, therefore, that Section 533 (b) is subject to "in- termediate scrutiny." Pet. App. 38a. II. SECTION 533(b) MEETS THE REQUIREMENTS OF INTERMEDIATE SCRUTINY A. Section 533(b) Furthers Significant Governmental Interests A content-neutral regulation of speech is valid if it is "narrowly tailored to serve a significant governmental interest, and * * * Ieav[es] open ample alternative chan- nels for communication of the information." Ward, 491 U.S. at 791. The court of appeals correctIy concluded that the interests served by Section 533(b) are significant. See Pet. App. 38a-39a. In Turner, this Court made clear that "the Government's interest in eliminating restraints on fair competition is always substantial; as is "assuring that the public has access to a multiplicity of information sources, [which] promotes values central to the First Amendment ." 114 S. Ct. at 2470. With respect to the cable market in particular, Turner also established that the government has a substantial interest in "ensur[ing] that private interests not restrict, through physical con- trol of [the] critical [bottleneck] of [cable] communica- tion, the free flow of information and ideas," id. at 2466, ---------------------------------------- Page Break ---------------------------------------- 25 an interest directly relevant to LECs' control over physical facilities for the transmission of cable signals. Nor can there be doubt that Section 533(b) actually furthers those significant interests. Cross-ownership re- strictions have long been used by regulators to curtail the potential for abuse of market power and to encourage diversity in holdings." The utility of such rules to prevent cross-subsidization by monopolists seeking to enter com- petitive markets has also been borne out by the courts' experience with the antitrust suit that resulted in the breakup of the Bell System. Cross-subsidization by LECs formerly affiliated with the Bell System has been a prin- cipal issue throughout that litigation, in which the district court found that exclusion of those LECs from certain lines of business was necessary to prevent anti-competitive conduct by them.16 Section 533 (b) is also effective at preventing LECs from abusing their control over facili- ties to discriminate against competitors. By completely excluding LECs from cable programming in their service areas, the bar removes the incentive for them to discrim- inate against their competitors in that business. The district court suggested (Pet. App. 102a-104a), however, that Section 533 (b) cannot prevent anti- competitive behavior by LECs because the bar does not prohibit them from transporting video signals over cable systems to subscribers, as long as they do not also par- ticipate in the selection of the video programming ___________________(footnotes) 15 See, e.g., Public Utility Holding Company Act of 1935, 15 U.S.C. 79a(a) and (b) ; Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq.; see also NCCB, supra (upholding FCC restric- tions on cross-ownership of newspapers and broadcast stations in came community) ; United States v. Storer Broadcasting Co., 351 U.S. 192, 193 (1956) (upholding FCC regulation limiting number of broadcast licenses that any one person could acquire). 16 See 1984 House Report 32-33; United States v. American Tel. & Tel. Co., 524 F. Supp. at 1368-1369; United States V. American Tel. & Tel. Co., 552 F. Supp. at 188-191. ---------------------------------------- Page Break ---------------------------------------- 26 transmitted over the cable systems.17 The district court questioned why Congress would have allowed LECs to participate in the video transport market, if it was con- cerned about the misallocation of costs of facilities common to telephone and video transport operations. See Pet. App. 103a-104a & n.31. The district court failed to appreciate several points about the justification for Section 533 (b). First, as the 1981 FCC staff report noted (J.A. 56 n.34), LECs' in- centive and ability to cross-subsidize are significantly diminished when they transport video programming in the manner of common carriers for unaffiliated entities. State regulators can limit LECs' revenues from such operations under traditional rate-of-return principles applicable to common carriers. Second, the lucrative video programming market makes entry into the cable business particularly attractive to LECs. Once in that market, LECs could compete un- fairly through their ability to cross-subsidize their video transport facilities. The evidence presented to the dis- trict court established that LECs' incentives to cross- subsidize and to discriminate would be "greatly enhanced if [they] are also allowed to exploit monopoly control of video transmission by earning excess profits in video programming." J.A. 332 (Owen reply affidavit). See also C. Edwin Baker, Merging Phone and Cable, 17 Hastings Comm. & Ent. L.J. 97, 133 ( 1994) ("If allowed to pro- vide programming, [LECs'] power in the video transport market would allow them to exercise undue power in the ___________________(footnotes) 17 The FCC has consistently taken the position that the cross- ownership bar does not prohibit LECs from offering "channel service," under which LECs may build and operate cable facilities for the physical transport of video signals but play no role in the selection of the video programming offered on those facilities. Further Notice of Inquiry, 3 F.C.C. Red at 5857. In essence, a LEC offering channel service owns the cable system but leases it to unaffiliated cable operators. ---------------------------------------- Page Break ---------------------------------------- 27 video programming market and would increase the value to the phone company of monopolizing transport ." ). The FCC has also recognized that Section 533 (b) protects "competition in the provision of [cable] services and facilities" (i.e., programming and transmission) by "surely reduc[ing] [LECs'] incentive and ability to engage in anti- competitive conduct in `[their] service areas." Further Notice of Inquiry, n.8, supra, 3 F.C.C. Rcd at 5864. Therefore, the fact that Section 533 (b) permits LECs to enter the video transport market without control over pro- gramming is not a flaw in the economic theory underlying the cross-ownership bar, but a recognition that there is less opportunity or incentive for anti-competitive behavior when LECs are confined to carrying others' programming in a role similar to their traditional one as common car- riers. See Baker, supra, at 132 ("As long as the phone company cannot itself offer cable programming, it has no incentive to drive cable companies out of business."). B. Section 533(b) Is Narrowly Tailored 1. The court of appeals invalidated Section 533(b) because it concluded that a less restrictive alternative would be equally effective to prevent anti-competitive behavior by LECs; it suggested that the cross-ownership bar could be replaced by an arrangement under which LECs would be permitted to operate a cable system but would be restricted to editorial control of a fixed per- centage of the channels on that system. Pet. App, 47a- 48a. The court of appeals also criticized Congress and the FCC for not making any "underlying factual find- ings" to support their implicit conclusion that less sweep- ing regulatory alternatives would not effectively achieve the government's interests. Id. at 45a-47a. In the ab- sence of such findings, the court declined to "accede to Congress' judgment" that the bar is necessary to achieve those interests. Id. at 40a-41a. ---------------------------------------- Page Break ---------------------------------------- 28 The court of appeals' disagreement with Congress's choice of a cross-ownership bar cannot be reconciled with this Court's "intermediate scrutiny" decisions, which re- quire considerably more deference to Congress's judgment that the particular approach chosen for the regulation of the cable market is necessary to prevent anti-competitive abuse effectively. See Clark, 468 U.S. at 299. This Court has made clear that a content-neutral regulation "need not be the least restrictive or least intrusive means of [achiev- ing the government's interest]. Rather, the requirement of narrow tailoring is satisfied `so long as the . . . regu- lation promotes a substantial government interest that would be achieved less effectively absent the regulation.'" Ward, 491 U.S. at 798-799 (footnote omitted); Turner, 114 S. Ct. at 2469-2470. The Court has also stressed that it is "loath to second- guess the Government's judgment" of narrow tailoring. See Board of Trustees v. Fox, 492 U.S. 469, 478 (1989). Thus, what narrow tailoring requires in this context is a "` "fit" between the legislature's ends and the means chosen to accomplish those ends,' a fit that is not neces- sarily perfect, but reasonable; that represents not neces- sarily the single best disposition but one whose scope is `in proportion to the interest served[.]' * * * Within those bounds [the courts must] leave it to governmental deci- sionmakers to judge what manner of regulation may best be employed." Id. at 480 (citations omitted).18 Given the difficulty of finding a solution to the economic prob- lems that Congress perceived in LEC participation in the cable market, the First Amendment affords Congress "a ___________________(footnotes) 18 Although Fox was a commercial speech case, that decision states that the requirement of narrow tailoring for regulation of commercial speech is "substantially similar" to the same require- ment for content-neutral time, place, and manner regulations of non-commercial speech. 492 U.S. at 477-478; see San Francisco Arts & Athletics, Inc. v. United States Olympic Comm., 483 U.S. 522, 537 n.16 (1987). --------------------------------------- Page Break ---------------------------------------- 29 reasonable opportunity to experiment with solutions to admittedly serious problems." Renton, 475 U.S. at 52. The courts' obligation not to "second-guess" Congress does not depend on the presence of factual findings in the statute or the legislative history that the bar is neces- sary, as the court of appeals seemed to think (see Pet. App. 40a-41a, 45a). In cases like this one, the question for the courts is whether the regulation of speech is rea- sonably necessary to advance any significant interest of the government, not whether the enacting Congress ex- pressly found it to be necessary. "Congress is not obli- gated, when enacting its statutes, to make a record of the type that an administrative agency or court does to accommodate judicial review." Turner, 114 S. Ct. at 2471 (plurality opinion).19 Therefore, the question of narrow tailoring is not whether Congress expressly found that Section 533 (b) is necessary to achieve the govern- ment's interests effectively, but whether the economic and predictive judgments underlying Section 533 (b) are rea- sonable to support such a conclusion. See id. at 2473 (Stevens, J., concurring in part and concurring in the judgment) ("But the question for us is merely whether Congress could fairly conclude that cable operators' monopoly position threatens the continued viability of broadcast television and that must-carry is an appropriate means of minimizing that risk.") (emphasis added and omitted). 2. Under the proper standards, Section 533 (b) is nar- rowly tailored, and the court of appeals' reliance on what it believed to be a less restrictive alternative was an ___________________(footnotes) 19 Indeed, in arguing that a regulation is narrowly tailored, the government may rely on evidence and arguments that were not presented to the enacting Congress, just as it may advance inter- ests to support a regulation of speech that were not considered when the regulation was enacted. See Bolger v. Youngs Drug Products Corp., 463 U.S. 60, 70-71 (1983) ; Ohralik V. Ohio State Bar Ass'n, 436 U.S. 447, 460 (1978). ---------------------------------------- Page Break ---------------------------------------- 30 inappropriate substitution of its judgment for Congress's policy decision. The restriction is not "substantially broader than necessary" to achieve the government's in- terests. Ward, 491 U.S. at 800. Section 533 (b) restricts LECs' provision of video programming only in the specific situation in which Congress identified a potential for anti-competitive behavior. LECs remain free to speak to subscribers in their service areas by a variety of means that do not present that danger. They may, for example, operate local television broadcast stations, which would be carried over local cable systems, by virtue of the 1992 Cable Act's must-carry rules. See 47 U.S.C. 534(a) (Supp. V 1993); Turner, 114 S. Ct. at 2453. They may produce their own video programming and offer it to local cable operators for transmission, and may also gain access to cable systems for their speech through the "leased access" provisions of the Cable Act (47 U.S.C. 532 ( 1988 & Supp. V 1993)). The Cable Act also does not prevent them from operating traditional cable systems anywhere outside their own service areas. In addition, the Cable Act does not prohibit LECs from operating direct broadcast satellite systems (which can provide hundreds of channels of video programming) or microwave-based multichannel "wireless cable" systems anywhere in the country, including their own service areas. See In re Implementation of Section 19 of the Cable Television Consumer Protection and Competition Act of 1992, First Report, 9 F.C.C. Rcd 7442, 7473- 7478 ( 1994); American Scholastic TV Programming Found. v. FCC, .46 F.3d 1173 (D.C. Cir. 1995). The Cable Act also preserved, for LECs, the potential for dramatically increased speech opportunities in their ser- vice areas and elsewhere through the development of inter- active and multimedia services. Video Dialtone Order, 7 F.C.C. Rcd at 5788, 5822-5823; see also 1984 House Report 57. Finally, the statute permits the FCC to waive the bar in situations in which cable service could not ---------------------------------------- Page Break ---------------------------------------- 31 exist except through LECs, and also for "good cause" to advance the policies of the statute as a whole. 47 U.S.C. 533(b) (4). Congress has therefore done no more than to address "the exact source of the evil it sought to remedy." Vincent, 466 U.S. at 808. 3. Congress reasonably concluded that the cross- ownership bar is necessary to prevent cross-subsidization by LECs in the cable market effectively. The only alternative to a restriction like Section 533(b) would be a complex set of structural and accounting rules imposed and enforced by the FCC to ensure that LECs do not subtly transfer costs from their cable affiliates to their telephone operations.20 Whether or not it would be pos- sible to prevent cross-subsidization through such rules, if the FCC were given adequate resources to monitor LECs effectively, that approach does have significant disadvan- tages, such that Congress could reasonably choose a cross- ownership bar instead. The regulatory task of containing cross-subsidization through accounting rules is decidely complex. The inherent subjectivity of cost accounting issues that would have to be addressed under a regulatory approach, the ongoing possibility of evasion of, and liti- gation over, accounting rules set by the FCC, and the need for substantial auditing resources sufficient to pre- vent evasion all support Congress's choice of a simpler approach to the problem of unfair cost-shifting. See J.A. 54-58 ( 1981 FCC staff study, doubting feasibility of regulatory solution to cost-shifting), 83-85, 88-90 ( Gen- eral Accounting Office (GAO ) Report detailing practical and conceptual difficulties in containing cost-shifting), 124-131 (second GAO Report, stressing need for ade- quate auditing resources), 234-236 (Robinson affidavit, ___________________(footnotes) 20 Cf. California v. FCC, 905 F.2d 1217 (9th Cir. 1990) (review- ing FCC rules to contain such abuse by LECs in information services market) ; United States V. Western Elec. Co., 900 F.2d at 289-290 (considering adequacy of such rules to justify modification of Bell System consent decree). ---------------------------------------- Page Break ---------------------------------------- 32 stressing complexity of accounting rules), 266-268 (Owen affidavit, stressing same).21 Congress drew the "reasonable inference]" that the bar is necessary from "substantial evidence." Turner, 114 S. Ct. at 2471 (plurality opinion). Congress en- acted Section 533(b) in 1984 against a background that included the 1981 FCC staff study and the recent ___________________(footnotes) 21 Respondents have pointed out that the FCC and other agen- cies have recommended that Congress replace the cross-ownership bar with regulatory safeguards such accounting rules and struc- tural separation of telephone and cable affiliates, and have sug- gested that those safeguards would be adequate to prevent cross- subsidization. The FCC and the Department of Justice, relying in part on regulatory safeguards, also supported modification of the Bell System antitrust consent decree to remove the pro- hibition on provision of information services by the former Bell- System LECs. See J.A. 337-360; United States v. Western Elec. Co., 993 F.2d 1572 (D. C. Cir.), cert. denied, 114 S. Ct. 487 (1993). Those agencies have not stated, however, that there would be no risk of discrimination or cross-subsidization if LECs were per- mitted to provide video programming, or that reasonable minds could not differ about the need for exclusion from a market, rather than regulatory safeguards, to prevent anti-competitive abuse effec- tively. Cf. National Rural Telecom Ass'n, 988 F.2d at 180 (noting FCC's acknowledgment that various regulatory alternatives are not "ironclad guarantees against cost shifting"). The FCC has concluded, rather, that the risk of abuse by LECs in the cable market is outweighed by the potential benefits served by their entry into that market (Video Dialtone Order,7 F.C.C. Rcd at 5849), and it continues to believe that some regulatory safeguards would be necessary to contain abuses by LECs (id. at 5847-5851). See also Statement of Assistant Attorney General Anne K. Binga- man Before the Senate Commerce Committee 14-17 (Mar. 2, 1995) (lodged with the Clerk) (stressing that restrictions on LECs' competition with cable systems should be removed in conjunction with restrictions on competition by cable systems and others in provision of local telephone service). Nor is it unusual for federal agencies and Congress to disagree about the costs and benefits of a particular policy. Since the issue in this case is the permissibility of Congress's predictive judgment that exclusion from the cable market is necessary to prevent abuse by LECs, that is the judgment to which the courts owe substantial deference. See pp.27-29, supra. ---------------------------------------- Page Break ---------------------------------------- 33 breakup of the Bell System. Its decision to exclude LECs from the cable market relied on the district court's con- clusion in the Bell antitrust suit that exclusion of the Bell-System LECs from other lines of business was nec- essary to prevent cross-subsidization. See 1984 House Report 33. When Congress returned to the issue in the late 1980s and early 1990s, it had a warning from the GAO about serious practical difficulties in containing cross- subsidization of new lines of business by LECs. See J.A. 79-101. Congressional committees also heard testi- mony from parties opposing repeal of the bar that regula- tion could not effectively prevent LECs from engaging in anti-competitive behavior, and that entry of LECs into the cable services market would exacerbate structural problems with that market.22 Those interests also brought to Congress's attention the first GAO Report and court decisions calling into question the efficacy of alternative ___________________(footnotes) 22 Cable-Instructional TV and S. 1200, Communications Com- petitiveness and Infrastructure Modernization Act of 1991: Hear- ing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 102d Cong., 2d Sess. 115- 139 (1992) ; Cable Television Regulation: Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 102d Cong., let Sess. 206-211, 538-602, 617-635, 699-704, 727-745 (1991) ; Communications Competitiveness and Infrastructure Modernization Act of 1990: Hearing Before the Subcomm. on Communications of the Senate Comm. on Com- merce, Science, and Transportation, 10lst Cong., 2d Sess. 61-84, 89-125, 126-134, 177-194 (1990) ; Cable TV Consumer Protection Act of 1989: Hearings Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 10lst Cong., 2d Sess. 238-239, 341-355, 559-560 (1990) ; Cable Television Regulation (Part 1): Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 101st Cong., 2d Sess. 436-451, 464-474 (1990) ; Cable Television Regulation (Part 2): Hearing Before the Sub- comm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 101st Cong., 2d Sess. 98-99, 114-121 (1990). ---------------------------------------- Page Break ---------------------------------------- 34 safeguards such as accounting rules.28 The Senate Com- merce Committee, which in 1990 examined in detail the arguments for and against repeal of Section 533 (b), con- cluded it "could not at the present time support repeal[,] * * * because of concerns about the potential for anti- competitive practices by telephone companies and the need to ensure media diversity." 1990 Senate Report 8-9; see also 1991 Senate Report 46-47.24 Given the difficulties in monitoring cost-shifting by LECs, the court of appeals understandably accepted, arguendo, that accounting safeguards would not be suffi- cient to prevent that abuse. Pet. App. 45a; see id. at 106a (same assumption by district court). Nevertheless, the court of appeals suggested that "Congress could sim- ply limit [LEC's] editorial control over video program- ming to a fixed percentage of the channels available; [LECs] would be required to lease the balance of the channels on a common carrier basis to various video pro- grammers, without regard to content." Id. at 47a-48a. That suggestion does not solve the problem identified by Congress, however, because LECs could still transfer the ___________________(footnotes) 23 Cable Television Regulation: Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 102d Cong., 1st Sess. 743 (1991) ; Communi- cations Competitiveness and Infrastructure Modernization Act of 1990: Hearing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 101st Cong., 2d Sess. 62, 69, 96-97, 119-120 (1990). 24 Regulators continue to find evidence of cost-shifting by LECs. A 1988 FCC audit tentatively concluded that NYNEX Corporation had engaged in a pattern of cross-subsidization of unregulated affiliates involving more than $100 million. In re New York Tel. Co., 5 F.C.C. Rcd 866, 866-869 (1990). NYNEX later entered into a consent decree with the FCC, in which it admitted no liability but agreed to make adjustments to its books and to make a voluntary contribution of $1,419,000 to the United States Treasury. In re New York Tel. Co., 5 F.C.C. Rcd 5892 (1990). See also J.A. 260- 262 (Owen affidavit, describing similar findings of LEC's cross- subsidization by state utility regulators). ---------------------------------------- Page Break ---------------------------------------- 35 costs of their cable operations to their monoply telephone operations. See J.A. 68-69 (FCC staff report). Their incentive to do so would grow in proportion to their edi- torial control over programming carried over their cable system. See ibid. ("[T]he higher the level [of LEC con- trol over cable channels], the greater is the danger from telephone monopoly power." ). The court's suggestion would actually magnify the complexity of the accounting problems, because LECs would have to separate their costs attributable to their telephone and cable operations, and also their costs attributable to the portions of the cable system over which they did, and did not, maintain editorial control. Finally, choosing the precise percentage of editorial control over a cable system that would simul- taneously contain LECs' incentive to cross-subsidize but also ensure them adequate channels of communication would be difficult, and the court's suggestion would rele- gate Congress and the FCC to a process of continual trial and error to accommodate those concerns. 4. It is also reasonable to conclude that the cross- ownership bar is necessary to prevent LECs from abusing their control over the poles and conduits essential to the operation of a cable system (as the FCC concluded in 1970) ,25 and from discriminating against competitors using the modern telephone network to transmit video pro- gramming. The court of appeals rejected the govern- ment's interest in preventing discrimination as a justifi- cation for the bar, reasoning that Congress could pass legislation to prohibit discrimination by LECs. Pet. App. 42a. Prohibiting discrimination is hardly the same thing as effectively preventing it, however. Even if Congress did replace Section 533 (b) with the legislation suggested ___________________(footnotes) 25 When it implemented the cross-ownership bar, the FCC noted that "numerous parties" had complained about discriminatory con- duct by LECs in providing access to utility poles for the construc- tion of cable television systems. 1970 FCC Rules, 21 F.C.C.2d at 324. ---------------------------------------- Page Break ---------------------------------------- 36 by the court of appeals, LECs' control over the facilities used in transmitting video programming would still give them great economic power over competitors needing those facilities that could be abused. It could be diffi- cult for regulators to prove discrimination, and even to develop less restrictive prophylactic rules to prevent it. See J.A. 73-74 (FCC staff study); 231-233 (Robinson affidavit, discussing difficulties in preventing discrimina- tion by LECs in access to their facilities). For example, a typical licensing agreement between respondents' Virginia LEC and a cable carrier granting access to the LEC's poles and conduits gives the telephone company discretion to determine whether space is avail- able on a pole and conduit system for cable attachments, to refuse access if it would interfere with the quality of telephone communications or other utility facilities al- ready in place, and to decide exactly where cable attach- ments should be placed. The cable operator is also re- quired to obtain the LEC's permission to carry out main- tenance of the cable attachments. J.A. 104, 108, 109- 110. LECs could abuse such provisions to frustrate their competitors' ability to reach their customers and to keep their equipment -adequately maintained, even though the provisions might appear proper to allow LECs to main- tain the quality of their own equipment. In the case of access to the telephone network for trans- mission of video programming the threat of LEC dis- crimination against competitors could be even more severe and elusive, for LECs have much greater expertise in the operation of that technically complex network than do their competitors. LECs could use their control over the network to ensure that the quality of their own video signals is better than that of their competitors. Also, because programmers intending to use the telephone net- work to transmit video signals must coordinate their use of the network with the LEC that controls it, the LEC could use its position to learn its competitors' marketing - --------------------------------------- Page Break ---------------------------------------- 37 plans and other proprietary information. See J.A. 268- 269 (Owen affidavit); cf. California v. FCC, 39 F.3d 919, 927-931 (9th Cir. 1994) (stressing danger of such discrimination in LECs' participation in information serv- ices market). While a law prohibiting discrimination might declare such practices illegal, it could be difficult for competitors or the government to prove that LECs had abused their control over telecommunications facilities in any partic- ular case, and an extensive supervisory administration could be necessary to police LECs' control over the net- work, poles, and conduit space. See J.A. 230-231 (Rob- inson affidavit, noting "formidable complexity" of the task). Even if it is possible to prevent such discrimina- tion through promulgation and enforcement of complex technical specifications, those methods have such disad- vantages in implementation and effectiveness that it was reasonable for Congress to have chosen a cross-ownership bar instead. See Ward, 491 U.S. at 800. A bar on LEC ownership of cable systems in their service areas requires little administrative supervision, and it is completely effec- tive in preventing discrimination. By excluding LECs from the local cable market, it removes entirely their in- centive to discriminate against competitors in the cable business. C. LECs Have Ample Alternative Channels Of Communication As the district court observed, LECs "are by no means `silenced' by the operation of [Section] 533(b)." Pet. App. 94a. While LECs are precluded from operating cable systems within their service areas, they may pur- chase or operate local broadcast television stations (and even national television networks that do not own cable systems in their service areas), establish multichannel direct broadcast satellite systems, and create program- ---------------------------------------- Page Break ---------------------------------------- 38 ming for cablecast on cable channels carried by unaffil- iated cable systems. They may also operate cable systems outside their common-carrier service areas. See pp. 30- 31, supra. The assertion that Section 533(b) excludes LECs from "an entire medium of expression" (Resp. 8 n.9 ) is incorrect. The court of appeals believed, however, that Section 533 (b) is invalid because LECs "cannot guarantee that video programming they wish to transmit * * * will reach their desired audience." Pet. App. 50a (emphasis added). In fact, LECs can effectively reach a broad audience in any community by operating a local broadcast television station, which would be carried over cable systems under the 1992 Cable Act's must-carry rule, or by operating a direct broadcast satellite system. See p. 30, supra. But in any event, the Court has rejected the contention that the First Amendment includes a "guarantee" of reach- ing an audience in a particular way. In Heffron v. Inter- national Society for Krishna Consciousness, Inc., 452 U.S. 640 (198 1), the Court upheld a restriction limiting the dis- tribution of religious literature and solicitation of funds at a fairground to designated locations, even though the religious organization maintained that its proselytizing could be done successfully "only by intercepting fair patrons as they move about." Id. at 653. In light of the "alternative forums for the expression of * * * pro- tected speech" that existed both within and outside the fairgrounds (id. at 654-655), the Court concluded that the restriction was valid. LECs may similarly communi- cate their messages to the general public in video format, both within and outside their service areas; only one mode of delivery in specific places is denied to them, because of the potential anti-competitive economic consequences of their using that mechanism in those places, There is no "barrier to delivering to the media, or to the public by other means" (Clark, 468 U.S. at 295), any message that LECs wish to disseminate. ---------------------------------------- Page Break ---------------------------------------- 39 III. THE FCC'S THIRD REPORT AND ORDER ELIMI- NATES ANY DOUBTS ABOUT THE CONSTITU- TIONALITY OF SECTION 533(b) As we have argued, a restriction on LECs' participation in the cable market in their service areas satisfies the First Amendment, and the court of appeals' decision to the contrary was erroneous. Even if we assume, however, that a flat ban on LECs' provision of video programming on cable systems in their service areas would contravene the First Amendment, the FCC's Third Report and Order (Pet. Supp. App. la-21a), authoritatively construing the waiver authority delegated to it by Congress in Section 533 (b) (4), eliminates the constitutional objections to the statutory regime raised by the court of appeals. The FCC'S construction of Section 533(b) (4), which was not available to the court of appeals,26 makes clear that Sec- tion 533 (b), as a whole, is narrowly tailored and leaves open ample channels of communication to LECs. It therefore provides additional grounds for reversal of the judgment below. 1. In the Third Report and Order, the FCC construed the waiver authority to permit a substantial entry by LECs into the video programming market. See pp. 13-16, supra, Under that construction, LECs may provide their own video programming directly to subscribers in their telephone service areas, if that programming is delivered by means of a video dialtone system in competition with an incumbent cable operator. Pet. Supp. App. 9a, 16a- 17a. The FCC has initiated the process of designing regulatory safeguards to prevent cross-subsidization and discrimination by LECs in video dialtone services, id. at 14a n.35, and it will "routinely" grant waivers of the cross- ownership bar, under Section 533 (b) (4), to LECs that ___________________(footnotes) 26 For that reason, we suggested at the petition stage that the Court vacate the judgment of the court of appeals and remand the case to that court for further consideration (Pet. Supp. Br. 7). ---------------------------------------- Page Break ---------------------------------------- 40 agree to abide by those safeguards in their video dialtone systems, Pet. Supp. App. 19a. The FCC observed that Section 533 (b) (4) gives it authority to grant waivers for "good cause," a phrase that is "commonly associated with changed circumstances." Pet. Supp. App. 1 la. It concluded that the growth of the cable industry and the dramatic technological advances in the delivery of video programming since 1984 are "changed circumstances" sufficient to constitute "good cause," within the meaning of the statute. It also found that those changed circumstances have mitigated the threat to competition that animated the cross-ownership bar to such a degree that greater entry by LECs into the video programming market will not undermine the objectives of the statute as a whole. Id. at 11a-12a. Indeed, the FCC concluded that a construction of Sec- tion 533 (b) (4) to permit LECs to provide video pro- gramming on video dialtone networks will advance the policies of Section 533 (b)-competition and diversity in communications. Pet. Supp. App. 13a. The FCC noted that its video dialtone regulatory framework requires a common carriage element, such that LECs offering video dialtone service must make capacity available to other, unaffiliated programmers. Thus, it concluded, LEC provision of video dialtone "promotes both competitive and free speech interests by making room for more than one speaker." Ibid. The FCC also rested its construction of Section 533 (b) (4) on the fact that the construction obviates the pur- ported constitutional problems that the courts have iden- tified in Section 533 (b). Pet. Supp. App. 14a-16a. Heed- ing this Court's admonition that "a statute is to be con- strued where fairly possible so as to avoid [substantial] constitutional questions," id. at 16a (quoting United States v. X-Citement Video, Inc., 115 S. Ct. 464, 467 ( 1995)), the FCC concluded that its reading of the stat- ute, by permitting greater LEC participation in video ---------------------------------------- Page Break ---------------------------------------- 41 programming, would "eliminate [the constitutional] doubts" that have been suggested but would not be "plainly contrary to the intent of Congress." Ibid. (quot- ing X-Citement Video, 115 S. Ct. at 472). Finally, the FCC noted that its construction does not raise any of the constitutional concerns that have been associated with waiver provisions in other First Amend- ment contexts. See Pet. Supp. App. 17a-18a. It stressed that its construction does not lodge any discretion in any official to grant or deny a waiver based cm the content of the speech, but rather provides blanket author- ization to offer programming by video dialtone, upon compliance with regulations to be published that will be designed to prevent anti-competitive conduct. Accord- ingly, the FCC observed, there is no "threat of censor- ship that by its very existence chills free speech." Id. at 18a-19a. 2. The FCC's authoritative construction of Section 533 (b) (4) removes the constitutional doubts about Sec- tion 533 (b) that were raised by the court of appeals. Under the operation of the statute as a whole, including Section 533 (b) (4) as now interpreted, LECs will "have abundant opportunities to speak." Pet. Supp. App. 15a. The FCC has established that the door is open for LECs to use their video dialtone systems in the manner of a cable system, to distribute multiple channels of their own programming, as well as the programming of others, selected with editorial control. While its construction does not permit LECs to take over incumbent monopolist cable operators (id. at 16a-17a), that limitation does not prevent LECs from offering, on a video dialtone system, the same programming that could be offered on a tradi- tional cable system. LECs therefore have "ample al- ternative modes of communication" at their disposal. Vincent, 466 U.S. at 812. 27 ___________________(footnotes) 27 The limitation is also consistent with the statute's goal of (and Congress's significant interest in) preventing the extension ---------------------------------------- Page Break ---------------------------------------- 42 The FCC's construction also removes any objections to the tailoring of the congressional regime. LECs may enter the market for distribution of multichannel video programming, on the condition that they also set aside a significant portion of the video dialtone network for dis- tribution of other programmers' video speech on a com- mon carriage basis. Pet, Supp. App. 14a-15a. That is precisely the "obvious less-burdensome alternative" iden- tified by the court of appeals as preferable to Congress's exclusion of LECs from the cable market. See Pet. App. 47a-48a. Given their opportunity to disseminate video program- ming on video dialtone networks, respondents cannot, as defenders of the court of appeals' facial invalidation of the statute, "establish that no set of circumstances exists under which [Section 533 (b) ] would be valid." United States v. Salerno, 481 U.S. 739, 745 (1987), Under the FCC's waiver authority, moreover, respondents will obtain their principal objective, the ability to develop a video dialtone system on their own telephone network for the transmission of their own programming. See J.A. 13, 15 (complaint). What LECs have not obtained through the FCC's construction of its waiver authority is the right to purchase incumbent cable operators. But Congress and the FCC have reasonably concluded, after their "lengthy investigation of the relationship between the cable and [telephone] industries" (see Turner, 114 S. Ct. at 2475 (Stevens, J., concurring in part and concurring in the judgment) ), that to permit LECs to do so would involve too great a risk of extending their telephone monopoly to the cable market. Their decision furthers the "basic tenet of national communications policy''-that "the ___________________(footnotes) of LECs' telephone monopolies into the cable market, and with the FCC's policy of promoting diversity in communications media by encouraging the development of video dialtone as mother outlet for video speech. See Video Dialtone Order, 7 F.C.C. Red at 5783. ---------------------------------------- Page Break ---------------------------------------- 43 widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public." Id. at 2470 (opinion of the Court). CONCLUSION The judgment of the court of appeals should be reversed. Respectfully submitted. WILLIAM E. KENNARD General Counsel CHRISTOPHER J. WRIGHT Deputy General Counsel Federal Communications Commission August 1995 DREW S. DAYS, III Solicitor General GEORGE J. PHILLIPS Acting Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General PAUL R.Q. WOLFSON Assistant to the Solicitor General DOUGLAS N. LETTER MARK B. STERN BRUCE G. FORREST Attorneys * U. S. GOVERNMENT PRINTING OFFICE; 1995 387147 20108 ---------------------------------------- Page Break ---------------------------------------- TABLE OF AUTHORITIES Cases: Page Anderson V. Cryovac, Inc., 805 F.2d 1 (lst Cir. 1986) . . . . 17 Application of New Jersey Bell Tel. Co., In re, 9 F.C.C. Rcd 3677 (1994) . . . . 15 Application-s of Ameritech Operating Cos., In re, No. W-P-C 6926 (Oct. 6, 1995) . . . . 15 Boeing Airplane Co. v. Coggeshall, 280 F.2d 654 (D.C. Cir. 1960)....17 City of Ladue V. Gilleo, 114 S. Ct. 2038 (1994) . . . . 1-2 City of Lakewood V. Plain Dealer Publishing Co., 486 U.S. 750 (1988) . . . . 2, 3-4, 12, 15 Delaware, L. & W.R.R. v. United States, 231 U.S. 363 (1913) . . . . 6, 19 Dinko V. Wall, 531 F.2d 68 (2d Cir. 1976). . . . 17 Ehlert V. United States, 402 U.S. 99 (1971) . . . . 13 FCC V. Florida Power Corp., 480 U.S. 245 (1987) . . . .6 Florida Bar v. Went For It, Inc., 115 S. Ct. 2371 (1995).... 12 Forsyth County, Georgia V. Nationalist Movement, 505 U.S. 123 (1992) ...... 12 Frisby V. Shultz , 487 U.S. 474 (1988) . . . . 3 Gitlow V. New York, 268 U.S. 652 (1925) . . . . 8 Heffron V, International Society for Krishna Con- sciousness, Inc., 452 U.S. 640 (1981) . . . . 3 Hurley V. Irish-American Gay, Lesbian and, Bisex- ual Group Of Boston, 115 S. Ct. 2338 (1995) . . . . 3 Law Students Civil Rights Research Council V. Wadmond, 401 U.S. 154 (1971) . . . . 12-13 Leathers V. Medlock, 499 U.S. 439 (1991). . . .3 National Cable Television Association V. FCC, 914 F.2d 285 (D.C. Cir. 1990) . . . . 17 Ohralik. v. Ohio State Bar Ass'n, 436 U.S. 447 (1978) . . . . 8 Pacific Gas & Elec. Co. v. Public Utils. Comm'n, 475 U.S. 1 (1986) . . . . 18 (I) ---------------------------------------- Page Break ---------------------------------------- II Cases-Continued: Page Policy and Rules Concerning Rates for Dominant Carriers, Further Notice of Proposed Rulemak- ing, In re, 3 F.C.C. Rcd 3195 (1988) .....5-6 Policy and Rules Concerning Rates for Dominant Carriers, Second Report and Order, In re, 5 F.C.C. Rcd 6786 (1990), aff'd on reconsideration, 6 F.C.C. Red 2637 (1991), aff'd sub nom. Na- tional Rural Telecom Ass'n V. FCC, 988 F.2d 174 (D.C. Cir. 1993) ..... 5, 6 Poulos V. New Hampshire, 345 U.S. 395 (1953) . ...13, 15 PruneYard Shopping Center V. Robins, 447 U.S. 74 (1980).... 18 Regan v. Time, Inc., 468 U.S. 641 (1984) . . . .4 Rostker V. Goldberg, 453 U.S. 57 (1981) . . . . 9, 10 SEC v. Chenery Corp., 332 U.S. 194 (1947).....16 Schlagenhauf v. Holder, 379 U.S. 104 `(1964 ).....17 Southern Ry. V. Lanham, 403 F.2d 119 (5th Cir. 1968).....17 Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Fourth Further Notice of Proposed Rulemaking, In re, 10 F.C.C. Rcd 4617 (1995) . . . .14 Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Further Notice of Inquiry and Notice of Proposed Rulemaking, In re, 3 F.C.C. Red 5849 (1988)....4 Tel. Co Cable Television Cross-Ownership Rules, Sections 68.5-4-63.58, Second Report and Order, Recommendation to Congress, and Second Fur- ther Notice of Proposed Rulemaking, In re, 7 F.C.C. Rcd 5781 (1990), modified in part on re- consideration, Tel. Co Cable Television Cross- Ownership Rules, Sections 63,54-63.58, Memo- randum Opinion and Order on Reconsideration and Third Further Notice of Proposed Rulemak- ing, In re, 10 F.C.C. Rcd 244 (1994) .....10,19 Turner Broadcasting System V. FCC, 114 S. Ct. 2445 (1994) . . . .3, 18 United States v. Albertini, 472 U.S. 675 (1985) . . . . 8 ---------------------------------------- Page Break ---------------------------------------- III Cases-Continued: Page United States V. Elgin, J. & E. Ry., 298 U.S. 492 (1936) . . . . 6 United States V. Reading CO., 253 U.S. 26 (1920) . . . . 6 United States V. Western Elec. Co., 993 F.2d 1572 (D.C. Cir.), cert. denied, 114 S. Ct. 487 (1993 ) . . . .9 Ward v. Rock Against Racism, 491 U.S. 781 (1989)....4, 8, 10 Wray V. Folsom, 166 F. Supp. 390 (W.D. Ark. 1958) . . . . 17 Constitution, statutes and regulation: Us. const.: Amend. I .....5, 8 Amend. V . . . . 19 Administrative Procedure Act, 5 U.S.C. 553 . . . . 13 Pole Attachments Act of 1978, 47 U.S.C. 224 . . . . 6 47 U.S.C. 533 (b) . . . . passim 47 U.S.C. 533 (b)(4) .... l2,13,15 47 C.F.R. 63.56(b) (2) . . . .16 Miscellaneous: Cable-Instructional TV and S. 1200, Communica- tions Competitiveness and Infrastructure Mod- ernization Act of 1991: Hearing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transporta- tion, 102d Cong., 2d Sess. (1992) . . . . 11 6 Fed. Reg. 31,418 (1981) . . . . 16 Letter from Edward D. Young, III, Vice President and Associate General Counsel of Bell Atlantic Network Services, Inc., to Reed E. Hundt, Chair- man of the FCC (July 21, 1995) . . . .14 S. Rep. No. 381, 10lst Cong., 2d Sess. (1990 ) S. Rep. No, 456, 10lst Cong., 2d Sess. (1990) . . . . 11 S. Rep. No. 92, 102d Cong., 1st Sess. (1991) . . . .11 ---------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1995 No. 94-1893 UNITED STATES OF AMERICA, ET AL., PETITIONERS v. THE CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF VIRGINIA, ET AL. No. 94-1900 NATIONAL CABLE TELEVISION ASSOCIATION, INC., PETITIONER v. BELL ATLANTIC CORPORATION, ET AL. ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT REPLY BRIEF FOR THE FEDERAL PETITIONERS 1. a. Respondents argue (Br. 13) that strict scrutiny extends to "bans * * * that tell speakers * * * , even in a content-neutral way, that they may not provide, at any time or place, speech to the audience and in the manner of their choosing." Even if that somewhat ambiguous formulation accurately states the law, it does not apply here, for 47 U.S.C. 533(b) does not foreclose respondents from an "entire medium of expression." Cf. City of ---------------------------------------- Page Break ---------------------------------------- 2 Ladue v. Gilleo, 114 S. Ct. 2038, 2045 (1994)3 Re- spondents may offer video programming over their own local broadcast television stations (or even a national television network), and they may set up "cable channels" of their own programming, which could be disseminated over independently controlled cable systems. Under those arrangements and several others, respondents could show their own video programming.' See Gov't Opening Br. 30-31, 37-38. Respondents may not (absent a waiver) offer programming over their own cable systems in their service areas because of the regulatory problems with such an arrangement, but that specific and limited restriction is a "manner" regulation properly analyzed under inter- ___________________(footnotes) 1 Respondents rely heavily on Ladue for the application of strict scrutiny. While we do not question that Ladue expressed "partic- ular concern with laws that foreclose an entire medium of ex- pression," 114 S. Ct. at 2045, it is questionable whether Ladue ap- plied strict scrutiny. The bulk of the discussion in Ladue assumed the applicability of intermediate scrutiny and concluded that the ban on residential signs failed that scrutiny. Id. at 2046-2047; see also id. at 2047 (O'Connor, J., concurring). In City of Lake- wood V. Plain Dealer Publishing Co., 486 U.S. 750, 763 (1988), the Court stated, when discussing a hypothetical municipal ban on all newsracks: "Presumably in the case of an ordinance that com- pletely prohibits a particular manner of expression, the law on its face is both content and viewpoint neutral. In analyzing such a hypothetical ordinance, the Court would apply the well-settled time, place, and manner test." That statement is directly contrary to respondents' formulation of the law. In any event, the Court need not decide whether restrictions on an "entire medium of expression" always require strict scrutiny, for, as we explain in the text, no such restriction is at issue in this case. 2 For the same reasons, respondents' argument (Br. 34-36) that Section 533 (b) fails to leave open ample alternative channels of communication is unfounded. Section 533 (b) does not ban local exchange carriers (LEGs) from the video medium, but permits them to gain direct access to audiences through the dominant mode of broadcast television, as well as through direct-broadcast satellite television and "wireless cable." See Gov't Opening Br. 37-38. Through those modes of delivery, LECs can have guaranteed access to their desired audience, without the need to rely on unaffiliated cable-system operators. ---------------------------------------- Page Break ---------------------------------------- 3 mediate scrutiny-just as the ban on ambulatory fairground proselytizing at issue in Heffron v. International Society for Krishna Consciousness, Inc., 452 U.S. 640 ( 1981), and the ban on residence-specific picketing at issue in Frisby V. Shultz, 487 U.S. 474 (1988), were so analyzed. Respondents' reliance on Hurley v. Irish-American Gay, Lesbian and Bisexual Group of Boston, 115 S. Ct. 2338 (1995), is misplaced. There, the Court identified the problem with compelled inclusion in the parade as one of forced association with the content of a particular mes- sage. See id. at 2348, 2350. The Court distinguished Turner Broadcasting System V. FCC, 114 S. Ct. 2445 (1994), in which it applied intermediate scrutiny, on the basis that the must-carry rule at issue. in Turner carried "little risk that cable viewers would assume that the broadcast stations carried on a cable system convey[ed] ideas or messages endorsed by the cable operator." Hurley, 115 S. Ct. at 2348-2349 (quoting Turner, 114 S. Ct. at 2465). Hurley is therefore closer to a case involving regulation of content, albeit in the context of the right not to speak messages of a particular content, than to a case like this one. b. Respondents also argue that Section 533(b) is content-based. The only distinction made by Section 533 (b), however, involves the method by which a mes- sage is disseminated. The distinction is no more content- based than would be (for example) a regulation of live entertainment, but not television, in taverns. We agree that each method of presentation of an idea has its own important qualities, but that point does not convert a regulation of the mode of delivering a message into one governing the content of the message. See Leathers v. Medlock, 499 U.S. 439, 449 (1991) (tax applied only to cable services is not content-based). Section 533 (b) also does not present the threat of administrative discretion over speech. This is not a situa- tion in which there is "unfettered discretion, coupled with the power of prior restraint." City of Lakewood V. Plain ---------------------------------------- Page Break ---------------------------------------- 4 Dealer Publishing Co., 486 U.S. 750, 757 (1988). The Federal Communications Commission (FCC) abjures authority to apply Section 533(b) based on the content of any message presented. See Gov't Opening Br. 21-22. Even if, in rare cases, it will be difficult to determine whether programming is covered by Section 533(b), those cases can be resolved without "need to evaluate the nature of the message being imparted." Regan V. Time, Inc., 468 U.S. 641, 656 (1984). As long as the distinc- tions made are content-neutral, "perfect clarity and pre- cise guidance [are not] required even of regulations that restrict expressive activity." Ward V. Rock Against Racism, 491 U.S. 781, 794 (1989). 2. a. Respondents assert that there is a "mismatch" between the problem of cross-subsidization and the restric- tion enacted by Section 533(b). They question why cross- subsidization does not occur under the current regime, under which local exchange carriers (LECs) may operate video transport services without exercising editorial con- trol. Resp. Br. 23. This is the same error as that made by the district court. See Gov't Opening Br. 25-27. The danger of cross-subsidization in the existing video trans- port market is small because the potential profit from that market is much smaller than the profits that can be derived from offering full cable services. See In re Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54- 63.58, Further Notice of Inquiry and Notice of Proposed Rulemaking, 3 F.C.C. Rcd 5849, 5857 ( 1988). The 1980 FCC staff study that reexamined the FCC's cross- ownership rules reached a similar conclusion, that LECs might not have the incentive to build a cable system un- less they exercised substantial editorial control. J.A. 69. But if LECs were permitted to provide their own video programming over their transport facilities, the prospect of dominating the lucrative video programming market would provide a greater incentive for them to cross- subsidize transport costs. "Simply put, the removal of ---------------------------------------- Page Break ---------------------------------------- 5 533(b) would make a video transmission monopoly more valuable to a telephone company." J.A. 332 (Owen reply affidavit). Congress has, accordingly, tailored the cross-ownership bar to the situation in which the danger of cross-subsidization is much more substantial. Respond- ents' underinclusiveness argument is thus ill-founded, as well as contrary to the principles favoring narrow tailor- ing in First Amendment jurisprudence.3 Respondents also argue (Br. 25-27) that the danger of cross-subsidization is attenuated because the FCC and several States have adopted price-cap regulation for com- mon carrier telephone service. The FCC's price-cap rules, however, cover only interstate services of LECs (provid- ing customers with access to long-distance companies), and do not address the cost to customers of LECs' mo- nopoly local telephone service, which is regulated by the States. See In re Policy and Rules Concerning Rates for Dominant Carriers, Second Report and Order, 5 F.C.C. Red. 6786, 6787 (1990 ) (Price-Cap Order), aff'd on re- consideration, 6 F.C.C. Rcd 2637 (1991), aff'd sub nom. National Rural Telecom Ass'n v. FCC, 988 F.2d 174 (D.C. Cir. 1993). Most States have not adopted "pure" price-cap regulation for LECs; price-cap regulation remains controversial, and many consumer interests and state utility regulators maintain that rate-of-return regulation has advantages for local telephone customers. See In re Policy and Rules Concerning Rates for Dominant Carriers, ___________________(footnotes) 3 Respondents also suggest (Br. 23-24) that LECs would have a strong financial stake in the success of an unaffiliated cable oper- ator since they could obtain rental income from such an operator. But that rental income could be subject to traditional rate regula- tion by the States and would not be calculated as a share of the un- affiliated programmer's profits in the programming market. See Gov't Opening Br. 26. Even on the opposite assumption, the indirect benefits from cross-subsidization that could be obtained from that rental income, or from a five percent ownership share in a cable operator (Resp. Br. 23), are surely minimal compared to the bene- fits that could be gained from cross-subsidization if the LEC fully owned a cable system in its service area. ---------------------------------------- Page Break ---------------------------------------- 6 Further Notice of Proposed Rulemaking, 3 F.C.C. Rcd 3195, 3212, 3217, 3260 (1988). State rate-of-return regulation "in its present form has been with us for some time" (Price-Cap Order, 5 F.C.C. Rcd at 6789), and is not on the verge of. disappearance. b. Respondents argue (Br. 27-29) that Section 533(b) is not necessary to prevent LECs from discriminating against their competitors in affording access to essential facilities for the distribution of video programming. Ex- perience teaches that common carriers have the incentive and opportunity to discriminate against their competitors when they are permitted to carry for their own benefit as well as others'. See Delaware, L. & W.R.R. v. United States, 231 U.S. 363, 370 (191 3); United Stares v. Read- ing Co., 253 U.S. 26, 60-61 ( 1920); United States V. Elgin, J. & E. Ry., 298 U.S. 492, 504 ( 1936) (Stone, J., dissenting); Gov't Opening Br. 5-6 n.6. That probIem has not been obviated in this context by the Pole Attach- ments Act of 1978, 47 U.S.C. 224, as respondents main- tain. While that Act does set up a regulatory regime to mediate disputes between utility companies and cable op- erators over access charges, "nothing in the [Act] * * * gives cable companies any right to occupy space on utility poles, or prohibits utility companies from refusing to enter into attachment agreements with cable operators." FCC V. Florida Power Corp., 480 U.S. 245, 251 (1987). The Act confirms that LECs retain ownership rights in their utility poles, including the right to exclude access to poten- tially competing cable operators, and merely authorizes the regulation of rents charged by utilities that voluntarily} lease pole or conduit space to cable operators. Id. at 251- 252. Although cable operators have not until now faced obstacles in gaining access to LECs' poles and conduits (Resp. Br. 27-28), that point is evidence of the effective- ness of Section 533 (b), not its obsolescence. Because LECs may not compete with cable operators in their serv- ---------------------------------------- Page Break ---------------------------------------- 7 ice areas, they have no incentive to exclude them from poles and conduits. The same would not be true if re- spondents were permitted to operate their own cable systems in their service areas. Respondents' pole attach- ment and conduit agreements typically provide for termi- nation, by either party, on six months' notice (see J.A. 113, 211 ); thus, within six months of entering the cable market (or even anticipating entry), respondents could demand that competing cable operators remove cable wires from their utility poles. Even if LECs did not engage in such an obvious form of discrimination, they could use their control over their poles and conduits to frustrate competitors' ability to maintain the condition of their equipment. See Gov't Opening Br. 36. Respondents suggest (Br. 28-29) that independent video programmers would benefit if LECs could offer another conduit for their programming, in competition with the incumbent cable systems. But it is doubtful that such programmers would benefit substantially if they faced two duopolists rather than one monopolist, or if LECs simply replaced the incumbent cable operators as mo- nopolists. Independent programmers would benefit from a second conduit if they had some right of access, as under the common-carriage video dialtone regime planned by the FCC, but respondents deny that Congress can even require them to carry the voices of others over their video dialtone systems. Resp. Br. 44-45. In their view, the right to editorial controI over video dialtone is an all-or- nothing matter, and they cannot be forced to share their networks with any other programmers. That argument confirms the FCC's insight in 1970 that LECs' control over the system of disseminating video programming could lead to an "arbitrary blockage of th[e] gateway." See Gov't Opening Br. 6. c. Respondents also contend (Br. 29-32) that Section 533 (b) cannot stand because "administrative conveni- ence" is not sufficient to justify a regulation of speech ---------------------------------------- Page Break ---------------------------------------- 8 under intermediate scrutiny. The problem however, is not one of convenience, but of efficacy. Cross-subsidization and discrimination are inherently difficult to detect and to prove. Because of that difficulty, the question for Congress was how to design a system for "the prevention of harm before it occurs." Ohralik v. Ohio State Bar Ass'n, 4.36 U.S. 447, 464 (1978). Congress decided to enact a prophylactic rule that protects video programmers from the threat of LECs' anti-competitive behavior by removing the incentive for that behavior. Absent the prophylactic rule, there will surely be greater incentive and opportunity for anti-competitive conduct by the LECs and greater diffi- culty in detecting that conduct. Congress's decision should therefore be upheld as a reasonable legislative determinat- ion that a prophylactic rule serves the government's im- portant interests more effectively than some other "imagi- nable alternative that might be less burdensome on speech," United States V. Albertini, 472 U.S. 675, 689 (1985), for "[a]bsent this requirement, the [government's] interest would have been served less well." Ward, 491 U.S. at 800.4 The suggestion that courts and agencies have swept aside the accumulated evidence of the danger of anti- competitive behavior by LEGs (Resp, Br. 30-31) is seriously overstated. When the D.C. Circuit approved the removal of the barrier to LECs' entry into the in- ___________________(footnotes) 4 Section 533 (b) is also not subject to attack cm the theory that it penalizes speech with a "bad tendency," as amicus American Civil Liberties Union suggests (Br. 17). In Gitlow v. New York, 268 U.S. 652 (1925), the Court reasoned that the speaker's conviction was valid under the First Amendment because "the legislative body itself has previously determined the danger of substantive evil arising from utterances of a specified character." Id. at 671 (em- phasis added). But in Section 533 (b), Congress was not concerned with utterances of a "specified character," or indeed of any char- acter; the cross-ownership rule is content-neutral. Section 533 (b) is not addressed to speech with a "bad tendency," but to economically motivated ant i-competitive behavior in the market for cable services. ---------------------------------------- Page Break ---------------------------------------- 9 formation services market established in the Bell System modified final judgment, it observed that many "distin- guished economists" had concluded that LEC participa- tion in that market would be anti-competitive, and it acknowledged that those "distinguished experts may * * * be `right'." United States V. Western Elec. Co., 993 F.2d 1572, 1581-1582, cert. denied, 114 S. Ct. 487 (1993). The D.C. Circuit's decision was predicated on principles of deference to the regulatory decision-maker-there, the Department of Justice, which had concluded that, on bal- ance, competition and consumer welfare would be in- creased by provision of information services by the Bell- affiliated LECs. Ibid.5 Here, it is Congress (which is ultimately responsible for setting the nation's telecommuni- cations policy) that has decided that competition in the cable services market requires exclusion of the LECs (in their service areas), and it is that decision that must be upheld as reasonable. Moreover, it cannot be accepted that public statements by an agency expressing doubt about the wisdom or policy of a regulation are conclusive evidence of its unconstitu- tionality. Cf. Rostker v. Goldberg, 453 U.S. 57, 80-81 (198 1). Adoption of that view would chill agencies from urging Congress to reexamine a law that is subject to non- frivolous constitutional doubt. In any event, neither the FCC nor other agencies have concluded that regulatory alternatives to Section 533(b) would eliminate all risk of anti-competitive conduct. The FCC has concluded that regulatory controls short of a cross-ownership bar would be "adequate," in the sense that the costs of effective ___________________(footnotes) 5 The D.C. Circuit did not conclude, as respondents suggest (Br. 31), that any contrary conclusion about the costs and benefits of LEC entry into information services would have been clearly erroneous. It held only that, in light of the deferential standard of review to be applied to the Department of Justice's conclusions, it would have been clearly erroneous for the district court to find that the Department of Justice's conclusion was unreasonable. 993 F.2d at 1582. ---------------------------------------- Page Break ---------------------------------------- 10 regulatory oversight and any residual anti-competitive con- duct that might escape such oversight would be outweighed by the benefits to competition of LEC entry into the cable services market.6 It has not concluded that regulatory controls are equally effective as a cross-ownership bar in preventing all cross-subsidization and discrimination by LECs. Nor has it suggested that a contrary view is unreasonable-which is the standard under intermediate scrutiny. Cf. Ward, 491 U.S. at 799. The Department of Justice has also recommended repeal of Section 533(b), but it has closely tied the policy benefits from that repeal to elimination of LECs' monopoly on local telephone serv- ice, which would be a sea change in this country's tele- communications regulation. See Gov't Opening Br. 32 n,21. d. Respondents stress (Br. 32-33) that Congress made no explicit findings in the statute or legislative history detailing the economic theories underlying Section 533 (b). Since the bar was not controversial in 1984, when Con- gress codified it, there was no reason then for Congress to explain in detail the problems to which the bar was addressed. But before Congress reregulated the cable in- dustry in 1992, the bar was "extensively considered by Congress in hearings, floor debate, and in committee." Rostker V. Goldberg, 453 U.S. at 72. That legislative history is "highly relevant in assessing the constitutional validity" of the statute (id. at 75), for it shows that the case had not been made to Congress's satisfaction that Section 533 (b) was no longer necessary to protect the cable services market. ---------------------------------------- Page Break ---------------------------------------- 6 See Gov't. Opening Br. 32 n.21; In re Tel. Co Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Second Report and Order, Recommendation to Congress, and Second Further Notice of Proposed Rulemaking, 7 F.C.C. Rcd 5781, 5848-5849 (1990) (Video Dialtone Order), modified in part on reconsideration, In re Tel. Co. -Cable Television Cross-Ownership Rules, Sections 63.54-63.58, Memorandum Opinion and Order on Reconsideration and Third Further Notice of Proposed Rulemaking, 10 F.C.C. Rcd 244 (1994) (Video Dialtone Reconsideration Order). ---------------------------------------- Page Break -------------------------------------- 11 In a 1990 report concerning legislation addressed in large part to the cross-ownership bar, the Senate Com- merce Committee noted the substantial disagreement over whether anti-competitive acts would follow from entry of LECs into the cable market. S. Rep. No. 456, 10lst Cong., 2d Sess. 4-8 (1990). It concluded that, because of concerns about "the potential for anticompetitive prac- tices by telephone companies," the time was not ripe for repeal. Id. at 9. The Committee charged the FCC with further consideration of the issue (ibid.), but that charge is fully consistent with its own conclusion that repeal was not yet appropriate.7 A year later, the same Committee decided against tak- ing action on the cross-ownership bar in the bill that eventually became the 1992 Cable Act, but it held hear- ings on another bill that would have repealed Section 533 (b), at which it was provided with detailed reasons why the bar should be retained.' That bill never emerged from the Committee. The issue was also thoroughly aired in hearings in the House of Representatives, and sup- porters of the repeal took the issue to the floor of both Houses, where they expressed opposition to the 1992 Cable Act in part because it made no provision for entry ___________________(footnotes) 7 Respondents note that, in its 1991 report on cable legislation, the Senate Commerce Committee stated that it had previously decided that the cross-ownership bar should be considered "sep- arately." Resp. Br. 33 (quoting S. Rep. No. 92, 102d Cong., 1st Sess. 18 (1991)). Indeed, in a 1990 report on a cable deregulation bill, the Senate Commerce Committee did state that it would consider the matter of LEC entry into the cable market separately. See S. Rep. No. 381, 10lst Cong., 2d Sess. 17 (1990). But the Committee considered that issue separately only two months later, and then decided against repeal of Section 533 (b). See S. Rep. No. 456, 101st Cong., 2d Sess. 8-9 (1990). 8 See Cable-Instructional TV and S. 1200, Communications Com- petitiveness and Infrastructure Modernization Act of 1991: Hear- ing Before the Subcomm. on Communications of the Senate Comm. on Commerce, Science, and Transportation, 102d Cong., 2d Sess. 115 -139 (1992). ---------------------------------------- Page Break ---------------------------------------- 12 of LECs into the cable market. See Gov't Opening Br. 10 n.9, 33-34, nn.22, 23. But the push to repeal Section 533 (b) failed, and in the 1992 Cable Act Congress took a quite different approach to structural problems in the cable market. Instead of opening up cable services to the full play of market forces-by, for example, allowing LECs to compete with incumbent cable operators-Con- gress decided to reestablish rate regulation to protect consumer welfare. Given the wealth of information presented to Congress about the bar before the reregulation of cable in 1992, there can be no doubt that substantial evidence exists to sustain Congress's decision to exclude LECs from the cable market in their service areas. Hence, the statute's prophy- lactic approach to a complex problem is not based on "speculation and conjecture," but "targets a concrete, non- speculative harm." Florida Bar V. Went For It, Inc., 115 S. Ct. 2371, 2377-2378 (1995). It should, accordingly, be upheld. 3. a. In a series of related arguments, respondents con- tend (Br. 36-45) that the Court should disregard the FCC's Third Report and Order, in which the FCC con- cluded that the "good cause" waiver provision of Section 533 (b) (4) provides it with authority to permit LECs to provide video programming directly to subscribers in their service areas over a video dialtone system.9 The Third Report and Order is a definitive administrative con- struction of Section 533 (b)(4), which, under settled principles, must be taken into account when this Court addresses respondents' facial constitutional challenge to Section 533 (b) as a whole. See Forsyth County, Georgia V. Nationalist Movement, 505 U.S. 123, 131 ( 1992); City of Lakewood, 486 U.S. at 770 n. 11; Law Students Civil Rights Research Council V. Wadmond, 401 U.S. . ___________________(footnotes) 9 Although respondents rely on mootness cases (Br. 37 n.32), we have not suggested the Third Report and Order renders their con- stitutional challenge moot. --------------------------------------- Page Break ---------------------------------------- 13 154, 159, 162-163 (1971 ); Poulos v. New Hampshire, 345 U.S. 395, 402 (1953 ). Under those principles, the Court considers the agency's construction of any related provision that bears on the validity of the principal section under legal attack. See Ehlert v. United States, 402 U.S. 99, 106-107 (1971).10 The FCC's construction is not subject to change at the FCC's whim, as respondents imply. The FCC adopted that construction using the notice-and-comment provisions of the Administrative Procedure Act (APA), 5 U.S.C. 553; any modification of the FCC's construction of Sec- tion 533 (b) (4) would also have to be undertaken in con- formity with the APA, and would be subject to judicial review as well. And although respondents suggest that, "[u]nless this Court affirms the judgment below, a princi- pal basis of the FCC'S actions would disappear" (Br. 39), that will not be true if this Court upholds the statute in light of the FCC's construction of Section 533 (b) (4). If the Court upholds the statute as construed by the FCC, any subsequent rescission of that construction would only serve to revive quickly respondents' challenge to the com- plete cross-ownership bar. b. Respondents insist (Br. 41-43) that the Third Re- port and Order should be disregarded because the FCC ___________________(footnotes) 10 In Ehlert, the court rejected the petitioner's challenge to his conviction for failure to submit to induction, which challenge was based on the contention that Selective Service regulations afforded him no opportunity to present a claim of conscientious objection that had "crystallized" after he received the induction notice. Al- though the Court concluded that the regulations under challenge did generally limit draft boards to considering conscientious objection claims filed before the mailing of the induction notice (402 U.S. at 100 n.1, 104-105), it stressed, based on assurances in a letter "from the General Counsel of the Department of the Army to the Department of Justice," that "late crystallizers" could present a claim of conscientious objection to combatant service after tion into the military (id. at 106-107). The Court concluded that the regime as a whole did not bar "late crystallizers" from the opportunity to present their conscientious objection cases. ---------------------------------------- Page Break ---------------------------------------- 14 has not specified the exact terms and conditions under which LECs will be allowed to provide video program- ming on their own video dialtone systems. There is no basis for any accusation against the FCC of undue delay; in fact, respondent Bell Atlantic requested that the FCC postpone issuance of its regulations until Congress com- pletes action on pending telecommunications legislation.11 Moreover, fashioning effective regulatory safeguards to re- place the cross-ownership bar is a major undertaking. When the FCC recognized, in light of the adverse appel- late rulings on Section 533 (b), that provision might have to be made to permit LECs to offer their own video pro- gramming on their video dialtone systems, it quickly opened rulemaking and asked commenters to address the complex regulatory issues raised by such an arrangement.12 Those issues include (a) the respective percentages of programming capacity that should be left under LECs' editorial control and should be open to common carriage; (b) "channel-sharing' mechanisms to ensure broad access to video dialtone systems; (c) protections to prevent LECs from misusing unaffiliated programmers' proprietary information; (d) safeguards against cross-subsidization, including accounting rules, structural separation of LECs' telephone and video affiliates, and rules governing transac- tions between those affiliates; and (e) access for independ- ent programmers to LECs' poles and conduits.13 ___________________(footnotes) 11 See Letter of July 21, 1995, from Edward D. Young, III, Vice President and Associate General Counsel of Bell Atlantic Network Services, Inc., to Reed E. Hundt, Chairman of the FCC [lodged with the Clerk of this Court). 12 The Fourth Circuit denied-rehearing in this case on January 18, 1995. Pet. App. 109a-112a. The FCC opened rulemaking two days later. See In re Tel. Co Cable Television Cross-Ownership Rules, Sections 68.54-63.58, Fourth Further Notice of Proposed Rulemaking, 10 F.C.C. Rcd 4617 (Fourth Further Notice). At that time, the government's petition for rehearing in the Ninth Circuit in a similar case was still pending. 13 See Fourth Further Notice, 10 F.C.C. Rcd at 4629-4641. There is also no basis for respondents' suggestion (Br. 38 n.35) that the ---------------------------------------- Page Break ---------------------------------------- 15 The FCC has also made clear that it will grant waivers to LECs that agree to meet the safeguards that are even- tually established. See Pet. Supp. App. 19a. The waiver authority therefore is not accurately characterized as a "grant of standardless licensing power" (Resp. Br. 42), for the FCC's discretion is strictly limited by its binding construction of its waiver authority. The restrictions on its discretion have been and will be "made explicit by textual incorporation [and] binding * * * administrative construction," City of Lakewood, 486 U.S. at 770, and so the dangers of censorship and self-censorship suggested by respondents do not exist. See also Poulos, 345 U.S. at 404-408. c. On the merits of the FCC's construction of its waiver authority, respondents suggest that the second sen- tence of Section 533(b)(4) precludes the FCC from offering any generally applicable construction of "good cause" and limits it to case-by-case, fact-specific inquir- ies .14 But while Section 533 (b)(4) authorizes the FCC ___________________(footnotes) FCC has acted in bad faith by prohibiting two LECs from provid- ing their own programming over their video dialtone systems, notwithstanding an injunction against enforcement of Section 533 (b). In both the New Jersey Bell and Ameritech cases cited by respondents, the FCC permitted a LEC to construct a video dialtone system in its service area. The FCC noted in both cases that the applicant had not requested permission to offer its own video pro- gramming over the system, and it therefore limited the approval in both cases to construction and operation of a purely common-carrier video dialtone system. See In re Application of New Jersey Bell Tel. Co., 9 F.C.C. Red 3677, 3679 n.27 (1994) ; In re Applications of Ameritech Operating Cos., No. W-P-C 6926, et al., at 5 (Oct. 6, 1995). Those restrictions were reasonable, for dissemination of a LEC's own video programming over its video dialtone system raises much more complicated regulatory problems of cross-subsidization and discriminaiton than those presented by operation of a pure common-carriage system. Those regulatory problems are, of course, the heart of this case, and they are also the subject of the FCC's ongoing video dialtone rulemaking. 14 Section 533(b) (4) provides: In those areas where the provision of video programming directly to subscribers through a cable system demonstrably ---------------------------------------- Page Break ---------------------------------------- 16 to grant waivers on a showing that the "particular cir- cumstances demonstrated by the [applicant]" warrant a waiver, it does not prohibit the FCC from concluding that all cases falling within a certain class, defined in ad- vance to give adequate notice to the public, will meet the requirement of good cause. Cf. SEC' v. Chenery Corp., 332 U.S. 194, 202-203 (1947 ), With respect to the re- lated authorization for waiver based on a showing that cable service in an area "demonstrably could not exist" unless offered by a LEC, the FCC has long had in place a generally applicable rebuttable presumption that such cable service could not exist if the proposed service area has less than a certain household density. See 47 C.F.R. 63.56(b)(2); 46 Fed. Reg. 31,418 (1981). Congress codified that rebuttable presumption by reference in the second sentence of Section 533 (b) (4). See n. 14, supra. Here, the FCC has similarly concluded that, as a rule, the provision of video programming over video dialtone sys- tems, operated in conformity with regulations preventing anti-competitive behavior and in competition with an in- cumbent cable operator, will constitute "particular cir- cumstances" demonstrating good cause. Pet, Supp. App. 13a. The LEC seeking a waiver must still show that its "particular" proposal to offer video programming on a video dialtone meets those requirements and therefore warrants a waiver.15 could not exist except through a cable system owned by, operated by, controlled by, or affiliated with the common car- rier involved, or upon other showing of good cause, the Com- mission may, on petition for waiver, waive the applicability of paragraphs (1) and (2) of this subsection. Any such waiver shall be made in accordance with section 63.56 of title 47, Code of Federal Regulations (as in effect September 20, 1984) and shall be granted by the Commission upon a finding that the issuance of such waiver is justified by the particular circum- stances demonstrated by the petitioner, taking into account the policy of this subsection. 15 Respondents also suggest that the FCC'S construction of "good cause" is too broad (Br. 40 n.37), but "good cause" is not limit ---------------------------------------- Page Break ---------------------------------------- 17 The FCC'S construction is not precluded by National Cable Television Association v. FCC, 914 F.2d 285 (D.C. Cir. 1990), as respondents contend (Br. 40). That case did not involve a situation in which the LEC would have competed with an incumbent cable operator, as will be the case with video dialtone; rather, the LEC would have built the first cable system in the community. Also, that case was decided before the litigation over the constitu- tionality of Section 533(b). The intervening technological developments and the courts' doubts about the constitu- tionality of Section 533(b) justified the FCC's revisiting its waiver authority, as the FCC explained in the Third Report and Order. Pet. Supp. App. 1la, 20a-21a. d. Finally, respondents contend (Br. 43-45) that the Third Report and Order creates constitutional problems because it would require LECs to allow room for others on their video dialtone systems. That assertion is remark- able, for it is a repudiation of the more narrowly tailored alternative that the court of appeals suggested, viz., that ___________________(footnotes) to dire emergencies. In general, "good cause" refers to something more than speculation. See, e.g., Schlagenhauf v. Holder, 379 U.S. 104, 119 (1964) (good cause for ordering physical examinations under Federal Rules of Civil Procedure) ; Anderson v. Cryovac, Inc., 805 F.2d 1, 7-8 (1st Cir. 1986) (good cause for entering pro- tective order) ; Boeing Airplane Co. v. Coggeshall, 280 F.2d 654, 659 (D.C. Cir. 1960) (good cause for enforcement of subpoena). Beyond that, " [t]here is no settled understanding of what `good cause' means" (Southern Ry. V. Lanham, 403 F.2d 119, 126 (5th Cir. 1968)), and the phrase has been aptly described as "a relative and highly abstract term, [such that] its meaning must be determined not only by the verbal context of the statute in which the term is employed, but also by the context of the action and pro- cedures involved and the type of case presented." Wray V. Folsom, 166 F. Supp. 390,394 (W.D. Ark. 1958). See also Dinko V. Wall, 531 F.2d 68, 75 (2d Cir. 1976) (" `Good cause' is an elastic concept, and is often used as a shorthand summary of the underlying policy reasons why a litigant should be able to attain a specified result."). TheFCC therefore has the discretion to interpret "good cause" in light of Congress's overarching policy in Section 533(b), the pro- motion of competition in the cable services market. ---------------------------------------- Page Break ---------------------------------------- 18 Congress could limit LECs to a `fixed percentage of the available channels on a cable system and could require- them to lease the balance on a common-carrier basis to unaffiliated programmers. See Pet. App. 47a-48a. It is also a repudiation of respondents' position in the lower courts, in which they suggested the shared-system arrange- ment as an alternative to Section 533(b).86 But without the alternative proposed by the court of appeals, Section 533 (b) must surely be upheld, for no other "obvious less- burdensome alternative" (Pet. App. 47a) effective to pre- vent anti-competitive conduct has been suggested by the lower courts. In any event, the Third Report and Order's purported constitutional problems are without substance. The danger, in the "compelled speech" cases invoked by respondents is that a speaker "may be: forced either to appear to agree. with [unwelcome] views or to respond." Pacific Gas & Elec. Co. v. Public Utils. Comm'n, 475 U.S. 1, 15 (1986) (plurality opinion). But, as the Court observed in" Turner, must-carry rules in the cable context do not pre- sent the same risk, for the public understands that cable. operators carry others' messages without endorsing the views expressed in those messages. 114 S. Ct. at 2465- 2466; see also PruneYard Shopping Center v. "Robins, 447 U.S. 74, 87 ( 1980). There is even less danger from "compelled speech" in the context of video dialtone sys- tems, which would be operated by entities well known to the public to be common carriers of others' messages, prohibited from discriminating on the basis of the con- tent of those messages. ___________________(footnotes) 16 See Resp. C.A. Br. 65 ("Telephone companies that provide their own video programming over their own common carrier net- works would remain subject to these nondiscrimination obligations. Video Dialtones Order, 7 FCC Rcd at 5850-51 [.]") ; Tr. C.A. Oral Arg. 27 ("[MR. TRIBE:] There are a lot of things that Congress can do. They can require sharing. They can enforce common carrier obligations to which we are subject."). ---------------------------------------- Page Break ---------------------------------------- 19 For similar reasons, respondents' intimation that the FCC's video dialtone regime effects an unconstitutional taking of their property (Br. 44-45) is without merit. The FCC'S plan to allow LECs to speak over their own video dialtone systems does not "take" anything from respondents. To the contrary, it gives them something that they did not previously have, for, at its inception video dialtone was designed to be a pure common-carriage system based on the current telephone network, over which the LECs could not disseminate their own mes- sages.17 Since a prohibition against common carriers' use of their facilities for their own benefit does not "take" their property within the meaning of the Fifth Amend- ment (see Delaware, L. & W.R.R. v. United States, supra), a more lenient rule, allowing, common carriers some use of their own facilities but also requiring them to carry the signals of others, presents no constitutional difficulty. * * * * * For the foregoing reasons, and for the reasons set forth in our opening brief, the judgment of the court of appeals should be reversed. Respectfully submitted. DREW S. DAYS, III Solicitor General NOVEMBER 1995 ___________________(footnotes) 17 See Video Dialtone Order, 7 F.C.C. Rcd at 5783; Video Dialtone Reconsideration Order, 10 F.C.C. Rcd at 258-259. * U.S. GOVERNMENT PRINTING OFFICE; 1995 405017 40007 ---------------------------------------- Page Break ---------------------------------------- Nos. 94-1893 and 94-1900 IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1995 UNITED STATES OF AMERICA, ET AL., PETITIONERS v. THE CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF VIRGINIA, ET AL. NATIONAL CABLE TELEVISION ASSOCIATION, INC., PETITIONER v. BELL ATLANTIC CORPORATION, ET AL. ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT BRIEF FOR THE FEDERAL PETITIONERS WILLIAM E. KENNARD General Counsel CHRISTOPHER J. WRIGHT Deputy General Counsel Federal Communications Commission Washington, D.C. 20554 DREW S. DAYS, III Solicitor General GEORGE J. PHILLIPS Acting Assistant Attorney General LAWRENCE G. WALLACE Deputy Solicitor General PAUL R.Q. WOLFSON Assistant to the Solicitor General DOUGLAS N. LETTER MARK B. STERN BRUCE G. FORREST Attorneys Department of Justice Washington, D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- IN THE SUPREME COURT OF THE UNITED STATES OCTOBER TERM, 1995 No. 94-1893 UNITED STATES OF AMERICA, ET AL., PETITIONERS v. THE CHESAPEAKE AND POTOMAC TELEPHONE COMPANY OF VIRGINIA, ET AL. No. 94-1900 NATIONAL CABLE TELEVISION ASSOCIATION, INC., PETITIONER v. BELL ATLANTIC CORPORATION, ET AL. ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT SUGGESTION OF MOOTNESS On December 6, 1995, the Court heard oral argu- ment in these cases, presenting a First Amend- ment challenge to 47 U.S.C. 533(b), which prohibits local exchange carriers (LECs) from operating cable (1) ---------------------------------------- Page Break ---------------------------------------- 2 television systems within their service areas. On February 8, 1996, the President signed into law the Telecommunications Act of 1996, which, among other things, repeals Section 533(b). See Pub. L. No. 104-104, 302(b) (1996). Section 302(b)(l) specifically states that "[subsection (b) of Section 613 (47 U.S.C. 533(b)) is repealed." The legislation does not contain any specific effective date applicable to that repealing provision, and so it took effect on the date of the President's signature. See Gozlon-Peretz v. United States, 498 U.S. 395,404 (1991). Because the provision under challenge in these cases has been repealed, the cases are now moot. Burke v. Barnes, 479 U.S. 361,363-364 (1987); Hall v. Beak, 396 U.S. 45, 48 (1969). The complaint in these cases requested a declaration that Section 533(b) is unconstitutional and an injunction against its en- forcement the plaintiffs did not request damages or any other relief based on past enforcement of the repealed provision. J.A. 16. Therefore, former Sec- tion 533(b) has no further, continuing effect on the parties before the Court. Under the Communications Act of 1934, as now amended by the Telecommunications Act of 1996, no provision prevents a LEC from establishing a new cable system, in competition with the incumbent cable operator, in its own service area. Section 302(a) of the Telecommunications Act of 1996 does contain some restrictions on acquisition of incumbent cable oper- ators by LECs. Under a new Section 652 of the Communications Act, no LEC or its affiliate may acquire more than a 10% financial interest in any incumbent cable operator offering cable service in its service area; conversely, no cable operator may ac- quire a similar financial interest in any LEC offering ---------------------------------------- Page Break ---------------------------------------- 3 local telephone service within its franchise area. The new legislation also provides several exceptions to these restrictions on acquisitions, for small cable systems, and for cable systems operating in nonurban areas; in addition, a LEC may acquire a cable system in its service area if (among other things) the cable system is not in the top 25 television markets, the market is served by more than one cable operator, and the subject cable operator is not the one with the most subscribers in the market. The legislation further authorizes the FCC to waive the restriction on acquisitions of incumbent cable operators by LECs under certain circumstances. Those pro- visions (which, of course, have not yet been con- sidered by any court) are not at issue in the cases presently before the Court, and so they do not prevent the cases from becoming moot as a result of the enact- ment of the 1996 Telecommunications Act. Because the provision under challenge has been repealed, these cases are now moot. The proper course is for the Court to vacate the judgment of the court of appeals and to remand the cases, with instructions to dismiss them as moot. United States v. Munsingwear, Inc., 340 U.S. 36 (1950); Preiser v. Newkirk, 422 U.S. 395 (1975); Burke v. Barnes, 479 U.S. at 365. For the foregoing reasons, the judgment of the court of appeals should be vacated, and these cases should be remanded with instructions to dismiss them as moot. Respectfully submitted. DREW S. DAYS, III Solicitor General FEBRUARY 1996