Chevron Deference and Regulatory Reform

There may be disagreement among scholars concerning the soundness of the Supreme Court's reasoning in its May 20 City of Arlington v. FCC opinion. Nevertheless, many agree that the Court's decision likely will give federal agencies somewhat more leeway in exercising administrative authority because courts are likely to accord the agencies' actions a broader scope of deference upon judicial review.

For my purposes here, the specifics of the City of Arlington case concerning the FCC's authority to set time limits for localities to act on tower siting applications are not important. What is important is that Justice Scalia, writing for the majority, held that so-called Chevron deference applies to agency interpretations of ambiguous statutory provisions concerning the scope of the agency's authority (or, as some put it, the agency's jurisdiction). According to Justice Scalia, the question "is always whether the agency has gone beyond what Congress has permitted it to do, [and] there is no principled basis for carving out some arbitrary subset of such claims as 'jurisdictional.'"

My own sympathies lie with the view espoused by Chief Justice Roberts in his dissent. According to the Chief Justice, "[a]n agency cannot exercise interpretative authority until it has it; the question whether an agency enjoys that authority must be decided by a court without deference to the agency." In other words, "[a] court should not defer to an agency until the court decides, on its own, that the agency is entitled to deference."

As tempted as I am to provide an explanation of why my sympathies, as a matter of law, lie with the Chief Justice, I resist the urge here. What I want to emphasize is that, putting aside the impact on the outcome of any one particular case, the Chief Justice is almost surely correct that the practical impact of City of Arlington will be to expand the power of the federal agencies. This is because when Chevron deference applies, the agency's interpretation of its statutory authority is entitled by the reviewing to "controlling weight." Unless the court finds the agency's interpretation "unreasonable," it must affirm.

Thus, Chief Justice Roberts has a good point when he declares that City of Arlington must be viewed against the backdrop "whether the authority of the administrative agencies should be augmented even further…."

With regard to the FCC, the agency whose authority was actually at issue in the Arlington case, the worry about "even further" augmentation of agency power is real. To support his expansive articulation of Chevron's domain, Justice Scalia relied heavily on the Communications Act's broad grant of general rulemaking authority to the FCC to "prescribe such rules and regulations as may be necessary in the public interest" to carry out the statute's provisions. You may rest assured that the Commission, and its lawyers, now will rely even more heavily than in the past on this general grant of rulemaking authority as they routinely invoke Chevron deference.

So, what, if anything, reasonably can be done, to serve as a check on such augmentation of agency power resulting from City of Arlington?

The answer lies, I think, in sensible regulatory reform measures. Indeed, such reform measures make sense even absent the potential impact of City of Arlington. This is especially so for the FCC which, despite the dramatic changes that have occurred in the past quarter century with the development of competition in most market segments, too often still is governed by an ingrained pro-regulatory disposition that distrusts the marketplace.

With regard to the FCC, here are some regulatory reform measures that could be adopted. None of these would alter the Communications Act's substantive statutory criteria, such as protecting consumers or the public interest, which govern the Commission's decisions. Rather, they are in the nature of process reforms that would have the effect of altering the Commission's decisionmaking framework in a way that makes it less likely that the agency will regulate absent evidence of market failure or consumer harm.

• Congress could enact legislation along the lines of the "Federal Communications Commission Process Reform Act of 2012," which passed the House in March 2012, but which subsequently died in the Senate. The House bill had many good process reform features, and in testimony at a House hearing in June 2011, I urged adoption of many of the reforms included in the bill that ultimately passed the House. In my view, the most important provisions were the requirements that the Commission analyze any claimed market failure and consumer harm and employ cost-benefit analysis before adopting any new rules. While other measures in the House bill, such as "shot clock" and transparency requirements, were meritorious too, these analytical requirements would force the FCC to engage in a more rigorous economic analysis than it routinely presently does.

• Congress could revise the forbearance and periodic regulatory review requirements added to the Communications Act by the Telecommunications Act of 1996 so that, in effect, the evidentiary burden is shifted to the Commission to deny regulatory relief. As I proposed in an April 2011 Perspectives paper entitled "A Modest Proposal for Regulatory Reform," this shifting of burden through a deregulatory evidentiary presumption could be accomplished with a modest revision to Sections 10 ["Competition in the Provision of Telecommunications Service"] and 11 ["Regulatory Reform"] of the Communications Act.

For example, the following sentence, or a similar one, could be added to the Section 10 forbearance relief provision: "In making the foregoing determinations, absent clear and convincing evidence to the contrary, the Commission shall presume that enforcement of such regulation or provision is not necessary to ensure that a telecommunications carrier's charges or practices are not unreasonable or unreasonably discriminatory or necessary for the protection of consumers and is consistent with the public interest."

Similarly, a sentence could be added to the Section 11 periodic regulatory review provision which says: "In making the foregoing determination, absent clear and convincing evidence to the contrary, the Commission shall presume that such regulation is no longer necessary in the public interest as a result of meaningful competition between providers of such service."

In neither instance would the substantive criteria set forth for considering regulatory relief be changed. Instead, as explained in my "A Modest Proposal for Regulatory Reform Paper," the revisions would simply establish a rebuttable presumption favoring regulatory relief absent clear and convincing evidence to the contrary. And, as I have made clear, regulatory relief under the forbearance and periodic regulatory review provisions should be available to all entities regulated by the Commission.

• Congress could also amend the Communications Act's provision granting the Commission general rulemaking authority that was relied on so heavily by Justice Scalia in City of Arlington. Section 201(b) provides that the Commission "may prescribe such rules and regulations as may be necessary in the public interest to carry out the provisions of this Act." [Query whether this sentence was ever intended to grant the FCC general rulemaking authority beyond Title II ["Common Carriers"] because it is located in a particular section of Title II rather than Title I's general provisions.] In any event, a proviso could be added at the provision's end to the effect that, before adopting a rule, the "the Commission must determine, based on a showing of clear and convincing evidence presented in the rulemaking proceeding, that marketplace competition is not sufficient adequately to protect consumer welfare." This would simply require the Commission to meet a higher evidentiary burden before adopting a new regulation.

• Congress could add a general sunset provision to the Communications Act that provides that all rules will expire automatically after five [or X] years absent a showing by the Commission, based on clear and convincing evidence compiled after public notice, that it is necessary for such rule to remain in effect to accomplish its original objective or objectives.

• Congress could adopt legislation specifying that the independent regulatory agencies, such as the FCC, are not entitled to Chevron deference upon judicial review of their action because they are not politically accountable in the same way as the executive branch agencies, such as the EPA. Chevron itself involved review of an EPA interpretation of the Clean Air Act, and in its decision announcing the Chevron deference doctrine, the Court relied heavily on the fact that EPA, an executive branch agency, was politically accountable to the President. In two separate law review articles published in the Administrative Law Review, I have suggested that the actions of the independent agencies not receive the same degree of deference on review as those of the executive agencies. The articles are here and here.

Again, these are process-oriented regulatory reform measures that should be considered in any event with respect to FCC reform. But the Supreme Court's City of Arlington decision ought to provide an impetus for Congress to take up the reform mantle in a serious way, at least with process-oriented reforms such as those suggested here.

You might say it's too bad Congress needs such an impetus to act. But given one, it should move forward with some urgency.

IP's Growing Contribution to Nation's Economy

We're devoting more attention these days at the Free State Foundation to the protection of Intellectual Property rights. In part -- perhaps principally -- this is because protecting IP rights, like other property rights, is goes hand in hand with safeguarding individual freedom. Indeed, as my colleague Seth Cooper and I showed in our recent Perspectives paper, "The Constitutional Foundations of Intellectual Property," protection of intellectual property rights has a firm grounding in natural law philosophy and a constitutional basis.

But aside from the protection of property rights that inheres in FSF's rule of law and individual liberty emphasis, protection of IP is important, and increasingly so, because of its positive contribution to the nation's economic well-being. On this score, there is an op-ed in today's Wall Street Journal [subscription required] by Osagie Imasogie and Thaddeus Kobylarz which makes this point effectively in the context of noting that the U.S. government is revising the way it calculates the the nation's GDP to include intellectual property expenditures. I commend the entire piece it to you, but in the meantime here are two brief excerpts:

"In the past two decades, intellectual property has emerged as the principal driver of economic growth in the U.S. and other developed countries. IP is now, in many respects, the new global currency. This is largely the result of America's successful effort to internationalize its views regarding the economic importance of IP protection, notwithstanding the continuing challenge of piracy. In short, America's place as a world economic leader depends on its ability to cultivate a sufficiently creative "mint" by which to generate, and profit from, this new global currency."

* * *

"Last year, the U.S. Patent and Trademark Office reported that "IP-intensive" industries supported at least 40 million jobs in the U.S., contributing more than $5 trillion to the economy and accounting for 34.8% of GDP. Given these figures, it is understandable that the Bureau of Economic Analysis would seek to bring the definition of GDP more in line with the actual economy."

So, protecting IP rights is not only important as a matter of law and philosophy, but also as a matter of sound economy policy.

ABA's Homeland Security Institute - June 20-21

Back when I was Chair of the American Bar Association's Section of Administrative Law and Regulatory Practice from 2004-2005, I had a hand in creating the Section's annual Homeland Security Institute program. I am very proud of what this annual program has become under the stellar leadership of Joe Whitley, who has chaired (with Lynne Zusman in the early years) this conference from the beginning. Joe, by the way, is the Ad Law Section's chair-elect, and he will become the chair in August.

Each year, the speaker lineup for the Homeland Security Institute seem to get better and better -- even though topping the previous one gets harder and harder. This year's conference, which will be held on June 20-21 at the Capital Hilton in Washington, DC, is no exception. The program is chock full of good sessions lead by experts in the field, including several current and former high-ranking government officials. The full program brochure is here.

If you are in any way involved in the fileds of homeland security, disaster relief, emergency response, or the like, this upcoming program certainly warrants your attention.

Memorial Day 2013

Regular readers of this space know that each year since the Free State Foundation's founding in 2006, I have written a special Memorial Day message. Over the years, I've been gratified to receive many positive responses. But occasionally I am asked "Why?" As in, why does the leader of a think tank largely, but not exclusively, focused on communications and Internet policy from a free market, property rights, and rule of law perspective take time to write and distribute a Memorial Day message? 

Good question, with an easy answer: Because as important as I know market-oriented communications policy and protection of property rights are, I also know there are more important things. 

Remembering, with proper reverence, those soldiers, sailors, airmen, and marines who have made the ultimate sacrifice to protect our freedoms is one of those things. So, if one more message, or one with a different emphasis, helps us – including me – to make sure to take time to remember, I happily take pen to paper (so to speak). 

That said, having written six Memorial Day messages, I admit it gets more difficult each year to present a new or distinctive one. (This is true for Independence Day and Thanksgiving Day too!) It's not that there are not still wars being waged in faraway places with fresh sacrifices by our brave soldiers. Rather, it is that the meaning of Memorial Day is surely timeless and unchanging in the sense that memory, remembrance, and honor, properly accorded, are timeless and unchanging. 

In reading over the past messages, I still find the words of Civil War veteran and future Supreme Court Justice Oliver Wendell Holmes, delivered in a Memorial Day address in 1884 in Keane, New Hampshire, particularly stirring, and, ultimately, uplifting:

"Such hearts--ah me, how many!--were stilled twenty years ago; and to us who remain behind is left this day of memories. Every year--in the full tide of spring, at the height of the symphony of flowers and love and life--there comes a pause, and through the silence we hear the lonely pipe of death. Year after year lovers wandering under the apple trees and through the clover and deep grass are surprised with sudden tears as they see black veiled figures stealing through the morning to a soldier's grave. Year after year the comrades of the dead follow, with public honor, procession and commemorative flags and funeral march--honor and grief from us who stand almost alone, and have seen the best and noblest of our generation pass away.

But grief is not the end of all. I seem to hear the funeral march become a paean. I see beyond the forest the moving banners of a hidden column. Our dead brothers still live for us, and bid us think of life, not death--of life to which in their youth they lent the passion and joy of the spring. As I listen, the great chorus of life and joy begins again, and amid the awful orchestra of seen and unseen powers and destinies of good and evil our trumpets sound once more a note of daring, hope, and will." 

And, of course, Lincoln's words spoken on the hallowed grounds of Gettysburg are always fitting for Memorial Day. 

"We here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

Here at the Free State Foundation, we believe that free market, limited government, and rule of law principles are foundational prerequisites to maintaining the freedom of which Lincoln spoke and for which so many of our countrymen have paid with their lives.

As we remember those who have paid the ultimate price, and those who continue to serve, best wishes to you for a safe and contemplative Memorial Day!

PS – My past Memorial Day messages are here: 2012, 2011, 2010, 2009, 2008, 2007

International Theft of American Intellectual Property Requires Resolute Action

As philosopher and theologian Augustine once asked, "Justice being taken away, then, what are kingdoms but great robberies?"  Right now several foreign nations are sanctuaries for mass-scale robbery of American intellectual property.

According to the May 22, IP Commission Report, "t[h]e annual losses are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion."

The magnitude of international theft of American IP and the need for bolder action to confront this crisis prompted the report. It was produced by the nonpartisan, independent Commission on the Theft of Intellectual Property. The basic findings of the report and its recommendations are also the subject of a Washington Post op-ed by the Commission's Co-Chairs.

In "Protecting U.S. intellectual property rights," Dennis Blair and Jon Huntsman spotlight the ongoing losses to the American economy in market value and jobs. They also emphasize the risk of unmeasurable but assuredly catastrophic losses to our future economy should international IP rip-offs continue to run rampant. In their words:

Our intellectual property is what provides the new ideas that will keep the U.S. economy vital and productive over the long term. If less innovative foreign companies can reap the profits of U.S. research and development and innovation, we will lose our competitive edge and eventually experience a decrease in incentives to innovate altogether.

Blair and Hunstman briefly summarize the IP Commission's immediate recommendations, which include denying products containing stolen IP access to the U.S. market, restricting use of the U.S. financial system to foreign companies that steal IP, and more.

As the digital age proceeds, the critical role of IP to our prosperity and way of life will grow more dramatically still. Protecting American IP rights from international theft should be a top priority of U.S. foreign and economic policy.

Panelists Take on Intermodal Competition in FSF Conference Transcript

The edited transcript of the FSF Fifth Annual Conference panel on "The Right Regulatory Approaches to Wireless and Wireline Broadband Providers" is now available online.

Discussion in this panel touched on such subjects as the place of the U.S. in international broadband rankings, the IP transition, universal service reform, and the role of state regulators in the broadband era. 

Not to be overlooked are the insights offered by then-Commissioner Robert McDowell regarding wireless and intermodal competition:

If I think back to 10 years ago, exactly right now, I was in the throes of the debate over the unbundled network element platform, "UNE-P," as we called it. That was all about trying to bring residential voice competition to wireline services. The best and the brightest on both sides of that debate did not foresee – did not foresee – the rise of cable telephony or the rise of wireless as a substitute.

That whole concept of wireless substitution was laughed at. It was said: "The quality of wireless isn't any good. Or calls get dropped. And there's not enough build-up in residential areas, not good enough reception. People are never going to substitute – never going to substitute – wireline for wireless or have wireless as a substitute for wireline."  
Now, more than a third of all U.S. households are 30 wireless-only. That's evidenced by a lot of what's pointed out in AT&T's petition. But 10 years ago, nobody saw the rise in rise in wireless competition happening. If you're patient as a regulator, or as a member of Congress, the markets will find a work-around. 

...Consumers are telling us that wireless broadband is a substitute – not in every case, not for every market. But it is a substitute. The fastest growing segment of the broadband market is wireless, with the vast majority of consumers having a choice of at least four wireless broadband providers. And that number will increase as we see the build-out of LTE continue. If LTE continues to spike it will be game changing, as we will get broadband in the car and things like that. We don't know what's coming over the horizon. And the last thing we want is the government to preempt or nip in the bud the innovation coming over the horizon. 

In my Perspectives from FSF Scholars paper, "Convergent Market Calls for Serious Intermodal Competition Assessments," I urged the FCC to look more closely to the effects of wireless substitution and cross-platform competition. An informed regulatory policy demands no less. To be sure, the FCC has opportunity to include a more detailed assessment of intermodal competition in its next Wireless Competition Report. And it should do so.

House-Approved SEC Regulatory Reforms Are Worth Repeating

On May 17, the U.S. House of Representatives passed H.R. 1062. This legislation was the subject of my blog post, "For Independent Agencies, SEC Regulatory Accountability Bill is an Act to Follow." Congratulations are in order for those who supported it.

But don't expect H.R. 1062 to be readily greeted in the U.S. Senate. Last week the White House issued a "Statement of Administration Policy" in opposition to the bill's final passage.

The SEC Regulatory Accountability Act may not make it into law this time around. Still, the legislators who sponsored the bill should be thanked for taking regulatory reform ideas seriously. Legislators should likewise be encouraged to continue pursuing regulatory reforms of this kind. H.R. 1062's cost-benefit analysis and look-back review provisions make the bill a model of reform for all independent agencies. 

A La Carte, Agian

Suppose I wish to purchase only the Sports page of the Washington Post on an a la carte basis on the theory that it ought to be priced less than the whole newspaper? 

Or suppose that I wish to purchase only the interview in Playboy (or centerfold if you prefer) on the theory that it ought to be priced less than the whole magazine. 

No one thinks the government should – or could – mandate that newspapers or magazines be made available on an a la carte basis just because some politician or policymaker thinks that some consumers might prefer to "pick-and-choose" only their favorite sections. 

Yet, in the past, politicians and policymakers have suggested the government should require cable operators to make available the channels on their systems on an a la carte, pick-and-choose basis. 

This was a bad idea when Senator John McCain and others offered it previously over a decade ago. 

It is a worse one now. But Sen. McCain is back at it again, with his newly introduced "Television Consumer Freedom Act" (S. 912). In his May 9^th floor remarks introducing his bill, Sen. McCain said it "is about giving consumers more choices when watching television." 

My gosh! In the history of humankind, consumers never have had so many choices for watching so much diverse video programming offered by so many video providers. 

Whatever the situation over a decade ago when Sen. McCain first urged adoption of an a la carte requirement, it is indisputable that the video programming and distribution marketplace is now competitive. Curiously, despite what should be its obvious relevance to consideration of new regulatory requirements, Sen. McCain does not discuss the current competitive marketplace environment in his floor remarks. 

In the context of this blog, it is impossible and unnecessary to chronicle the remarkable increase in consumer choice in the video marketplace that has occurred over the past decade. For a general picture with lots of data points, I refer the reader to the FCC's Video Programming Competition Report (Fourteenth Report), released in July 2012, even though this report covers marketplace developments only through 2010.

In the Fourteenth Report's very first paragraph, the FCC states that "the most significant trends since the last report relate to the increased deployment of digital technology, consumers’ rising demands for access to video programming anywhere and anytime, and the evolution of online video from a niche service into a thriving industry." Remember, this is as of the end of 2010.     

Today's cable systems typically offer subscribers approximately 900 unique channels, and the two competing satellite operators (Dish Network and DIRECTV) offer nearly the same number of channels. And now, of course, the "telephone companies" compete in the multichannel video market with similar video offerings. Presently, the cable companies have approximately 58% of the multichannel video programming distributor (MVPD) market, the satellite providers 33%, and the telephone companies 9%. 

But as the FCC observed, even as of 2010, the emergence of "over-the-top" online video as a "thriving industry" further altered the marketplace environment in the direction of more consumer choice. Today, Netflix, with 29 million subscribers, is the nation's largest subscription video service, with more subscribers than Comcast (22 million). In addition to the dominant provider Netflix, other major online video programming purveyors include Hulu, Amazon, iTunes, HBOGo, and Apple TV. Not to mention YouTube, which recently announced initiation of a subscription video service. And, of course, in addition to the traditional "television" screen, you can watch all this various video programming on laptops, notebooks, and smartphones. 

We truly do live in the age of "TV Anytime, Everywhere." 

While Sen. McCain did not focus on these competitive developments, it would be difficult to conclude a marketplace failure exists warranting further government regulation of video program providers. In his May 14^th statement at the Senate Subcommittee on Communications, Technology, and the Internet hearing, Sen. McCain summed up this way: "Consumers should not have to pay for television channels they do not watch and have no interest in watching." It is true that the cable and satellite operators do not presently allow consumers to purchase channels on an individual basis, but there are an increasing number of online providers that already offer just such "on demand" business models. 

And the most fundamental point is this: In light of the existing competition among video programming purveyors, it is much more likely that the marketplace will satisfy consumer demand in the most efficient, least costly manner than some government-directed offering. While the idea that all consumers should be able to purchase only the channels they choose to watch from all MVPDs may have superficial appeal, the notion that such a universal a la carte regime really would benefit consumers is highly suspect. 

Numerous previous studies have shown that a government-mandated a la carte regime would not necessarily lower prices for consumers and might well diminish, even substantially, the number of channels available, especially those appealing to minority or specialized tastes. This is only logical. With the unbundling of all channels, the costs for making available certain individual channels would rise as the audience size for particular channels is reduced. Some channels almost certainly never would get off the ground because, absent the opportunity to bundle them with already-popular channels, MVPDs would not risk incurring the costs of carrying a channel with little initial expected audience demand. 

In a 2003 study, "Issues Related to Competition and Subscriber Rates in the Cable Television Industry," the GAO concluded that, under an a la carte regime, cable networks could lose advertising revenue, and, as a result, "some subscribers' bills might decline but others might increase." 

And in their 2008 Perspectives from FSF Scholars, "Bundles of Joy: The Efficiency and Ubiquity of Bundles in New Technology Markets," Stan Liebowitz and Stephen Margolis explained at length why product bundling generally is efficient and ubiquitous throughout the economy. With respect to cable operators, at the time subject to pressure by then-FCC Chairman Kevin Martin to adopt an a la carte model, Professors Liebowitz and Margolis had this to say: "Customers may naïvely believe that the single channel price will be their bundle price divided by the number of channels in the bundle. Regulators may cynically give them pay-by-stations options. But since customers will be unhappy with the likely result, some regulatory alternative will be found, but no alternative is likely to enhance efficiency." 

Again, today's video distribution and programming marketplace is more competitive than ever and, thus, almost certainly responsive to evolving consumer demands. It is foolish to think the government can do a better job of deciding how video programming should be offered than the marketplace. 

I should say that I understand that, strictly speaking, Sen. McCain's bill does not impose a government mandate requiring MVPDs to adopt an a la carte model. Rather, the bill would withhold from MVPDs and broadcasters certain regulatory "benefits" absent adoption of an a la carte model. It is in this sense that Sen. McCain says that his bill is "voluntary." 

Without engaging in a linguistic debate concerning the definition of "voluntary" in the context of a regime in which the government confers and then threatens to withhold certain benefits absent agreement to adopt a government-preferred course of action, I will grant Sen. McCain this: Due to the remarkable changes in the video marketplace that I have already discussed, it is time to begin examining, on a comprehensive basis, jettisoning many of the outdated legacy regulatory requirements he has identified, such as the network non-duplication, syndicated exclusivity, must-carry and retransmission consent, compulsory copyright, and so forth. 

But the existence of such a tangle of legacy requirements in a fast-changing, competitive marketplace should not be a justification for adopting still more government intervention. Rather, I would respectfully urge Sen. McCain to consider it a reason for reducing and eliminating outdated regulations so the free marketplace can be allowed to work. 

One final note: Recall my (hypothetical) desire to purchase only the Washington Post Sports page or the Playboy interview (or centerfold). I said at the outset that no one believes the government should – or could – mandate that the Post or Playboy be required to satisfy my desire. Apart from any others, a reason for this is that the First Amendment would prevent such government intervention with respect to the exercise of the publishers' editorial discretion regarding the way they wish to assemble their content into a package. I argued way back in May 2007 in "The Constitution, A La Carte" that any government requirement that has the effect of imposing an a la carte regime on cable operators and other MVPDs likewise should be found to violate their First Amendment rights because it would infringe upon their editorial discretion to package their program content as they wish. 

I said then that "a la carte constitutionalism simply won't do." I still believe that to be true, of course, and I hope you do as well.