Court Permanently Enjoins Enforcement of Maine's Cable-Only A La Carte Law

Pursuant to a court-approved agreement by the parties to a pending legal challenge, a Maine law that would have forced cable operators to unbundle the programming they offer to customers, but not rival distributors of multichannel programming, will not go into effect.

LD 832 states in its entirety that "[n]otwithstanding any provision in a franchise, a cable system operator shall offer subscribers the option of purchasing access to cable channels, or programs on cable channels, individually."

In the summer of 2019, Comcast of New Hampshire/Maine joined a group of cable programmers (Plaintiffs) to sue the Governor of Maine, the Attorney General, and a number of municipalities (Defendants) in the U.S. District Court of Maine.

Plaintiffs put forth three arguments in support of their request for declaratory and injunctive relief: (1) that LD 832 violates the First Amendment by singling out cable operators for disfavored treatment, (2) that it infringes upon Plaintiffs' constitutionally protected editorial discretion regarding how they choose to package programming, and (3) that it is preempted by Sections 544 and 556 of the Communications Act.

The District Court agreed with the first of these arguments and in December 2019 granted a preliminary injunction.

In "Maine's Cable Unbundling Law Violates the First Amendment," a July 2020 Perspectives from FSF Scholars, Free State Foundation President Randolph J. May and I took issue with the District Court's errant conclusion that cable operators' First Amendment protections, recognized by the Supreme Court in its 1994 Turner I decision, do not extend to the editorial decision to make (1) individual channels available to customers exclusively through tiers, and (2) individual programs available solely as part of channels.

In February 2021, the U.S. Court of Appeals for the First Circuit denied Defendants' appeal of the District Court's decision to grant a preliminary injunction, a development I described in a contemporaneous post to the FSF Blog.

In response, the parties agreed to put an end to their legal dispute, filing with the District Court a Joint Motion for Entry of Stipulated Final Judgment and Order for Declaratory and Permanent Injunctive Relief.

On April 23, the District Court issued an Order (1) declaring that LD 832 violates the First Amendment, and (2) permanently enjoining the Defendants from giving it effect.

Regrettably, the District Court's entry of this Order means that it will not have the opportunity to revisit its incorrect conclusion that the Maine law does not infringe cable operators' constitutionally protected editorial discretion with respect to the packaging of programming. Nor, for that matter, will Plaintiffs have the chance to develop the record more fully on the question of federal preemption.

Nevertheless, it certainly is welcome news that the saga of LD 832 has come to end.

First Circuit Affirms Preliminary Injunction Against Maine's Cable Unbundling Law

On Wednesday, the U.S. Court of Appeals for the First Circuit affirmed a lower court decision barring from going into effect video programming unbundling legislation in Maine that exclusively targets cable operators.

The Maine law (LD 832) requires cable operators to offer individual channels and programs on an a la carte basis. Satellite, Internet-based, and other competing providers of multichannel video programming services remain free to package content, and market it to consumers, however they choose.

Shortly after LD 832 became law in June 2019, Comcast of New Hampshire/Maine and a group of cable programmers sought declaratory and injunctive relief from the U.S. District Court in Maine.

The plaintiffs argued that the Maine law is preempted by federal law and runs afoul of the First Amendment in two ways. First, it singles out cable operators. Second, it infringes upon cable operators' protected editorial discretion regarding how they package programming.

In December 2019, the District Court in Maine granted a preliminary injunction solely on the basis that LD 832 improperly singles out cable operators. It rejected the preemption and editorial-discretion arguments. With respect to the latter, the court's decision hinged upon an inappropriately narrow interpretation of the U.S. Supreme Court's 1994 Turner I decision recognizing that First Amendment protections apply to cable operators' programming decisions.

As Free State Foundation President Randolph J. May and I explained in a July 2020 Perspectives from FSF Scholars, numerous Supreme Court decisions, including Turner II, make plain that cable operators' First Amendment protections do extend to decisions as to how content is packaged. We therefore expressed hope that the appellate court would take up this issue.

The First Circuit affirmed the District Court in Maine's grant of a preliminary injunction, but did so solely on the basis that LD 832 "constitutes a speaker-based regulation that 'singles out' cable operators' speech for special, disfavored treatment." Regrettably, it declined to consider whether the law also infringes cable operators' protected editorial discretion.

Maine must now decide if it wants to pursue the case further. If it does, one threshold issue that the District Court must decide is "whether additional, post-enactment evidence can be offered in support of the law." For as the First Circuit noted, "[t]he state candidly conceded at oral argument that, if the Act triggers the First Amendment at all, the existing record is insufficient to justify the law …."

A copy of the First Circuit decision is available here.

The D.C. Circuit Upholds Removal of Legacy Investment Barriers

A decision by the D.C. Circuit on November 3 sets an important precedent for paring back 25-year-old forced-access regulation of communications networks. The court's ruling in Comptel v. FCC upheld the Commission's 2019 UNE Forbearance Order, which lifts certain legacy unbundling and resale requirements. Wireless and VoIP have long since eclipsed copper wire-based voice services, and the consumer benefits from intermodal competition made the old restrictions unnecessary. The D.C. Circuit's decision provides solid legal support for future agency actions to lift outdated regulations and encourage deployment of next-generation networks. 

The Telecommunications Act of 1996 requires incumbent local exchange carriers (ILECs) to make their facilities available to direct competitors at government-set rates. Back in the early 1990s, ILECs using copper wire-based Time Division Multiplexing (TDM) technologies were the dominant providers of local voice services. The 1996 Act's forced-sharing requirements, it was supposed, would enable competitors to lease capacity from ILEC facilities while building out their own facilities, thus leading to facilities-based competition among wireline voice providers. 

At issue in Comptel v. FCC was the Commission's decision in the 2019 UNE Forbearance Order to cease enforcing unbundling mandates regarding analog loops at government-set rates and to also cease enforcing its avoided-cost resale obligations. Under those obligations, ILECs must resell their retail service at wholesale, and at regulated rates, to their competitors.  

In reviewing the record, the D.C. Circuit observed the stunning difference in the voice service market today compared to more than two decades ago:

Rather than the near-complete monopoly that incumbents had as recently as 1996, now incumbents account for just 12% of all voice connections (both wired and mobile voice plans) and 37% of all wireline telephone connections (the subset of all voice connections that are physical rather than wireless—e.g., TDM copper, cable, and fiber). Lines sold through the unbundled copper loops account for less than 0.5% of all voice connections (less than 2% of wireline connections) and resold lines account for just over 1% of all voice connections (3% of wireline connections). Further, the Commission found that next-generation voice services like mobile phones and Voice Over Internet Protocol (VoIP) services are rapidly growing, whereas traditional copper wire voice services are declining in both market share and in absolute terms. 

Data released since the 2019 UNE Forbearance Order shows that consumers migration to wireless and VoIP services continues. According to an order released by the Commission on October 28 of this year: "Incumbent LECs' wireline voice subscriptions now account for… only 9% of all voice subscriptions across all technologies." Observing further migration in the residential and enterprise services markets away from TDM switched access lines, the order stated that "[t]he widespread deployment of 5G wireless networks will only accelerate this process."

 

Importantly, in Comptel v. FCC, the D.C. Circuit upheld the analytical basis for the Commission's deregulatory action in view of today's voice services market:

The Commission looked, reasonably in our opinion, at the whole national market for voice transmission, and the incumbents' share of that market is declining rapidly. Indeed, from the point of view of the incumbents, alarmingly. Far from the market behemoths the incumbents were in the late 90s, they look more like the sick men of the voice transmission market. Their copper wire advantage is of rapidly declining importance. It is myopic to look at the incumbents' possession of copper loops as giving them meaningful market power in the national voice market. And therefore what earthly economic reason would justify requiring them to provide their copper wire services to competitors at a subsidized price? 

Also important was the D.C. Circuit's unwillingness to limit the Commission's forbearance authority because that agency declined to grant deregulatory relief several years earlier. The D.C. Circuit rejected the notion that the Commission's 2010 Qwest Phoenix MSA Order precluded the grant of relief in the 2019 UNE Forbearance Order. As the court pointed out, the two orders and their contexts were decidedly different. Whereas the 2010 order denied forbearance relief from nationwide regulation in a specific geographic area using a different kind of market power analysis, the 2019 order granted nationwide relief based on an assessment of national market conditions that demonstrated vibrant intermodal competition. 

 

Citing the Supreme Court's decision in NCTA v. Brand X (2005), the D.C. Circuit acknowledged that "agencies are expected to reevaluate the wisdom of their policies in response to changing factual circumstances." According to the D.C. Circuit: "[h]ere, the FCC explained how the market had evolved and concluded—we think reasonably—that intermodal competition is now sufficient to discipline prices." And the court reiterated its precedents that the Section 10 forbearance authority imposes "no particular mode of market analysis or level of geographic rigor," as it leaves the Commission free to "tailor the forbearance inquiry to the situation at hand." 

 

As the D.C. Circuit stated, "our precedent and Commission precedent is clear: the Commission may forbear to encourage the deployment of next-generation facilities." Indeed, the decision in Comptel v. FCC should encourage future exercises of the Commission's unique forbearance authority to clear away legacy telecommunications regulation. The nation's gigabit and 5G future – and consumer welfare – depend on competing communications providers investing in their own facilities rather relying on forced access regulation and government price controls.  

FCC Proposes Order to Remove Old Unbundling and Resale Requirements

The FCC has released the tentative agenda for its October 27 public meeting. Among the items scheduled for a vote, is a draft Report and Order that would eliminate several unbundling and resale requirements. The deregulatory proposal that preceded this order was the subject of my February 2020 Perspectives paper, "FCC Should Go Full Speed Ahead in Removing Unbundling Regulations." As briefly explained in that paper, the rationale for unbundling regulation has long since gone up in smoke, as voice markets are competitive and the retail market share for incumbent local exchange carriers is a fraction of what it was in 1996. The draft order builds upon agency precedent that recognized the market's competitiveness as the basis for removing outdated unbundling regulations. 

The Commission's draft order embodies compromises struck between ILECs and competitive local exchange carriers. If adopted, the Commission's draft order would constitute an important deregulatory achievement in doing away with costly requirements that have outlived any usefulness they once held for consumers and enable communications providers to dedicate additional resources to next-generation broadband networks. Notably, the draft order provides transition periods for eliminating unbundling regulations in competitive areas, and it retains unbundling requirements in areas where there apparently is less competition.

In two paragraphs, the Commission's draft order sums up the competitive and innovative progress that compels the agency's proposed transition to a less-regulatory policy:

22. The communications marketplace has dramatically transformed since Congress passed the 1996 Act. Incumbent LECs controlled 99.7% of the local telephone service market at that time. Incumbent LECs’ wireline voice subscriptions now account for only approximately 39% of all wireline voice subscriptions and only 9% of all voice subscriptions across all technologies. The fixed voice marketplace, once monopolized by incumbent LECs, now includes cable companies offering VoIP, fixed wireless providers, over-the-top VoIP providers, as well as competitive and incumbent LECs. As for fixed broadband, incumbent LECs are just one of many intermodal competitors, providing only about 22% of residential broadband subscriptions at or above 25/3 Mbps, which the Commission has defined as advanced telecommunications capability. As of December 31, 2019, 99% of Americans had access to three providers of mobile voice and broadband. Finally, as the Commission found in the BDS Order, the enterprise market is subject to “intense competition,” with 95% of census blocks with business data services demand in price cap MSAs, representing 99% of business establishments, featuring at least one competitive provider in addition to the incumbent LEC. 

 

23. The communications marketplace has also seen rapid technological change. In the enterprise services marketplace, DS1 and DS3 loops, dominated by incumbent LECs, have been increasingly replaced by packet-based services, provided by a range of providers who benefit from a “considerably more level playing field” compared to TDM-based services. The copper-to-fiber and TDM-to-IP transitions have also increasingly reached residential consumers, as incumbent LECs have been retiring last-mile copper and replacing it with fiber or fixed wireless technologies. And of course, American consumers have themselves transitioned to newer technologies, increasingly moving from fixed legacy voice to fixed or nomadic voice over Internet protocol (VoIP) and mobile voice services, and from DSL to broadband provided over fiber and fixed and mobile wireless. The widespread deployment of 5G wireless networks will only accelerate this process.

US Telecom Report for 2020 Spotlights Booming Broadband

Earlier this month, US Telecom released its report "Industry Metrics and Trends 2020: The Broadband Boom." Among the report's key projections for 2020:

• 84% of U.S. households (109 million) will subscribe to fixed broadband by the end of 2020;

• Wireless will account for 79% of voice connections, compared to 4% for traditional phone lines;

• 6% of U.S. households will use traditional phone lines, while 65% will be wireless-only and 29% will be Internet-based voice service, mostly from cable operators; and

• Traditional switched telephone subscriptions will be 24 million, down from 186 million in 2000. 

US Telecom's report data and projections regarding the decline of switched access lines and the concomitant rise of wireless and VoIP service are particularly striking, yet not at all surprising in light of trends over the last several years. 

A public policy implication of such dramatic declines in traditional voice services should be the elimination of the FCC's unbundling and resale regulations. The Commission has an ongoing proceeding in which it proposes to remove certain unbundling mandates. For more, see my February 13 Perspectives from FSF Scholars paper, "FCC Should Go Full Speed Ahead in Removing Unbundling Regulations."   

FCC Proposes Undoing More of its Unbundling Regulation

At its November 19 public meeting, the FCC is scheduled to vote on a proposed rulemaking that would update and pare back some of its legacy "unbundling" regulation "to reflect [competitive] marketplace realities and to remove unnecessary regulatory burdens that can inhibit the deployment of, and transition to, next- generation networks." This proposal appears to constitute another step in right direction by the Commission in reducing forced-access mandates that date back to the mid-1990s and were supposed to be temporary but have the effect of dis-incentivizing investment in new facilities.  

The FCC is Finally Undoing its Unbundling Regulation

On August 2, the FCC released its order granting forbearance relief from legacy telephone "unbundling" regulation. The order puts an end to requirements that certain legacy telephone companies provide their competitors analog voice-grade copper loops on an unbundled basis at government-set rates. Free State Foundation scholars, including President Randolph May, have long pointed to the disincentive for network investment that results from forced sharing mandates tied to rate regulation, and also have long called for the end of unbundling regulation. 

To the FCC's credit, its order recognizes that market changes have rendered legacy copper-based telephone networks increasingly obsolete. Its order also recognizes that there is no warrant for prolonging the life of unnecessary and costly unbundling regulation. As the order points out, in 1996, Time Division Multiplexing (TDM) using traditional copper wires was the dominant technology for providing voice services, and incumbent local exchange carriers (LECs) were the dominate providers of local voice service. But dramatic market changes, including the rise of interconnected VoIP services offered by traditional cable companies, as well mobile and fixed wireless services, have dramatically altered the voice services market. Residential and business consumers have a number of choices that didn't exist in 1996. According to the order: 

Commission data reflect that between December 2008 and June 2017, the TDM share of all wireline voice telephone connections, including both switched access lines (POTS) and interconnected VoIP, fell from 82% to 37%, while the number of interconnected VoIP connections increased by almost 300% over the same period. Further, residential reliance on traditional switched access services fell by 71%, while residential interconnected VoIP subscriptions increased by 104%. Similarly, over this same time period, business reliance on traditional switched access services fell by 49%, while business interconnected VoIP subscriptions increased by over 1,062%. This is due to a number of factors, including a shift in both consumer and supplier choice to migrate to other types of communications networks such as fiber or wireless.

The order sets a timetable for ending its unbundling mandates, enabling competing providers and those customers still using the older analog copper wire technologies to transition to newer alternatives. Additionally, the order forbears from enforcing against certain legacy telephone providers so-called Avoided-Cost Resale obligations. Under those obligations, legacy providers must resell their retail services at wholesale, and at regulated rates, to their competitors. As the order observes, those obligations largely benefit competitors serving business customers. 

The costs of maintaining analog telephone networks and complying with legacy regulation such as unbundling mandates divert market provider resources away from investment in next-generation networks. At long last, this forbearance decision by the FCC will enable market providers to direct more of their resources to higher quality services for retail and business customers in the Digital Age. 

More on "The Faulty Berkman Report"

In my recent FSF Perspectives piece, "The Faulty Berkman Report: The Fallacy of Overlooking Secondary Consequences," I challenge the Berkman Report’s myopic focus on the touted benefits of a public policy to one segment of beneficiaries to the exclusion of the broader costs associated with that policy. The Report's retelling of the Federal Communications Commission's (FCC) prior attempts to impose "open access" or "forced access" policy through unbundling regulations on incumbent wireline providers is a highly selective and thereby misleading account. It fails to mention the adverse infrastructure investment incentives of mandated access policies that effectively require incumbents to subsidize facilities to be used by their competitors. And the Report nowhere even mentions the telecom disinvestment trends, discussed in my Perspectives, that plagued the industry until the courts and the FCC begun to roll back unbundling regulations.

One aspect of the Report that I left unaddressed was its insistence that the FCC's unbundling regulatory regime failure was attributable in large part to the incumbents' lobby and litigation efforts, and ultimately to the courts' disagreement with FCC policy judgment. The Report asserted that the courts failed by not according proper discretion to regulatory experts. Urging a force-fit of extensive broadband regulatory regimes used by several foreign social democracies on the American broadband marketplace, the Report suggested that the U.S. give more "engaged" regulators greater "professionalism, independence, and power" in order to impose a next generation set of "open access" mandates on broadband network providers.

This argument about the woes of the FCC's unbundling regulations oversimplifies to the point of being totally unhelpful. To say that the courts simply disagreed with the FCC's policy is misleading. Moreover, the Report's trumpeting of regulators' independence and power in foreign nations as an antidote simply doesn’t translate in the U.S. government institutional setting.

The reality is that the FCC and other federal agencies receive a considerable degree of deference from U.S. courts under Administrative Procedures Act and the "Chevron doctrine." Under the former, courts typically decline to second-guess agency judgments or "expertise" on public policy questions. And under the latter, courts routinely acquiesce to agencies' interpretations of ambiguous statutory language unless the interpretation is clearly impermissible.

However, the independence of U.S. courts means that there are constitutional and statutory limits to agency discretion. (Such judicial independence is often lacking in foreign systems of parliamentary supremacy.) Contrary to the Report's claims about judicial disagreement with agency policy judgment, it was the FCC's own contravention of legal limits through its improper sub-delegation of federal agency authority to state regulators and the FCC's implausible readings of the terms of the Telecommunications Act of 1996 that led to judicial invalidation of many of the FCC's unbundling rules. To be sure, the U.S. Court of Appeals for the District of Columbia forthrightly recognized that "[e]ach unbundling of an element imposes costs of its own, spreading disincentive to invest in innovation and creating complex issues of managing shared facilities." But the Court’s observation about the economic drawbacks to the unbundling rules was made in a larger context. The Court was attempting to ascertain whether an expansive unbundling policy with such obvious infrastructure investment disincentives was what Congress conceivably had in mind in passing the Act.

Moreover, Courts are not likely to unilaterally drop existing legal limits on arbitrary and capricious decision making by federal agencies on the grounds that even greater bureaucratic power and independence should alleviate agency capture concerns. Perhaps the Report seeks to trumpet a best-of-all-possible-worlds policy in its implicit calls for judicial retreat from review of any future agency "open access" regulations. But in this world, federal agencies must make do with the constitutional and statutory slack they have been given. In other words, they must act in accord with the rule of law.