TR Daily Court Vacates Two Charter-TWC-BHN Merger Conditions
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Friday, August 14, 2020

Court Vacates Two Charter-TWC-BHN Merger Conditions

In a split decision, the U.S. Court of Appeals for the District of Columbia Circuit today vacated two conditions that the FCC imposed in its 2016 order approving Charter Communications, Inc.'s acquisition of Time Warner Cable, Inc. and Bright House Networks, noting that the FCC has failed to offer a defense of those conditions on the merits.

Specifically, the vacated conditions (1) prohibit Charter from “charging programming suppliers for access to its broadband subscribers,” or settlement-free interconnection, and (2) require Charter “to provide steeply discounted broadband service to needy subscribers,” the court noted in “Competitive Enterprise Institute et al v. FCC” (case 18-1281).

The court found that the Competitive Enterprise Institute and its fellow appellants did not have standing to challenge two other conditions: (1) a prohibition on usage-based pricing and data caps and (2) a broadband buildout commitment.

Meanwhile, Charter has a pending petition (TR Daily, July 23) before the FCC in WC docket 16-197 asking the agency to terminate on May 18, 2021, two of the conditions placed on the merger with Time Warner Cable and Bright House Networks: (1) the prohibition on data caps and usage-based pricing mechanisms, which the court left in place; and (2) the requirement for Charter to offer to connect its Internet protocol (IP) network to any qualifying entity free of charge and on standardized terms, which the court vacated.

CEI and four individuals who became subscribers of “New Charter” services as a result of the merger had filed a petition for reconsideration in 2016. The FCC issued an order on reconsideration in 2017 but did not address the CEI petition. In December 2017, CEI and its fellow petitioners filed a writ of mandamus asking the court to force the FCC to take action.

“One week before oral argument in this Court, the FCC finally denied reconsideration, thus mooting the mandamus action. After waiting for two years to issue an order, the agency offered only four pages of reasoning. It concluded that the petitioners were procedurally barred from challenging the conditions and lacked standing to do so under FCC rules,” Circuit Judge Gregory Katsas recalled in the majority opinion, which Circuit Judge Karen LeCraft Henderson joined.

Judge Katsas wrote that the FCC takes “an expansive view of its authority to review license transfers incident to the merger of telecommunications companies,” looking at “not only whether the merged entity satisfies the requirements for holding radio licenses ‘under section 308,’ id. [section] 310(d), but also whether the merger itself would be in the public interest,” and “further consider[ing] ‘diversity, localism, [and] other public interest considerations’ besides antitrust ones. … It thus seeks to impose conditions that ‘confirm specific benefits or remedy harms likely to arise from transactions under consideration. …. These conditions often regulate the terms of providing cable broadband Internet service, even though cable companies have never had to secure certificates under section 214(a) or licenses under section 301 in order to provide that service.”

Regarding the settlement-free interconnection condition, Judge Katsas wrote that the individual consumers’ allegations that the condition caused a decrease in the quality of their Internet service “do not pass muster” because they did not provide any evidence of a service quality decline.

However, he added, “[b]y requiring New Charter to forgo revenue from edge providers, the condition caused New Charter to raise prices on broadband subscribers. And vacating the condition would redress this injury because New Charter likely would respond by raising revenue from edge providers and lowering charges to subscribers.”

“The FCC and our dissenting colleague note that New Charter might not lower consumer prices even if we set aside the prohibition on paid interconnection agreements. … That is theoretically possible, but all we require is proof of a substantial likelihood,” Judge Katsas wrote.

Regarding the condition requiring Charter to offer a low-price, standalone broadband service to low-income consumers, with a requirement to enroll at least 525,000 households within four years, Judge Katsas wrote, “The appellants have standing to challenge this set of conditions as likely causing higher prices for them. For causation and redressability, the appellants highlight Dr. Crandall’s conclusion that the low-income program will ‘likely’ cause higher prices for other consumers.”

He added, “What remains is a distinct question of redressability—whether there is a substantial likelihood that New Charter would change course if allowed to do so. We think that there is. To begin, consider the past practices of the merging companies. Before the conditions were imposed, Charter and Time Warner offered no discounted services to low-income customers. Bright House did, but its program was much narrower than the one now mandated by the FCC. ... With those facts in mind, the FCC itself found no reason to think that New Charter would voluntarily offer up what the agency compelled it to provide. …

“Moreover, the terms mandated by the FCC sharply depart from industry pricing. Beyond free installation and hardware, the conditions require New Charter to offer broadband service with 30 [megabits per second] speed for only $14.99 a month. Before the merger, Time Warner charged $54.99 and Bright House charged $74 for similarly fast service. … Moreover, the FCC catalogued prices from at least seven different broadband providers, and none offered service anywhere near as fast as Spectrum Internet Assist at anywhere near the same price. … We thus think it unlikely that New Charter would retain the current program voluntarily,” Judge Katsas wrote.

With regard to these conditions which the majority found the appellants had standing to challenge, Judge Katsas noted that “the appellants raise several troubling objections” on the merits, including the FCC’s consideration of issues beyond its statutory authority under section 214(a) of the Communications Act “to consider whether the ‘construction’ or ‘operation’ of a specific communications line is in the public interest at the time of an acquisition” and its authority under section 310(d) “to consider whether a proposed transferee meets the specific criteria for holding a station license under section 308.”

He added that “after broadening its focus to the entire merger, the FCC imposed conditions sweeping even beyond that. For example, the agency readily acknowledged that providing discounted service to needy consumers ‘is not a transaction-specific benefit,’ but it nonetheless required New Charter to do so as a condition of approving the merger.”

“We need not resolve these questions, however, for there is a simpler ground of decision. The lawfulness of the interconnection and discounted-services conditions are properly before us, yet the FCC declined to defend them on the merits. The agency’s only explanation for doing so was its view that we cannot reach the merits. Having lost on that question, the FCC has no further line of defense,” Judge Katsas added.

The majority rejected the appellants’ challenge to the condition prohibiting usage-based pricing or data caps.

“The customers persuasively argue that such pricing forces rare Internet users to subsidize frequent ones. [Then] Commissioner [Ajit] Pai made this objection in dissent. …

“Nonetheless, the consumers have failed to prove causation because there is scant evidence that New Charter would offer usage-based pricing if allowed to do so. Before the merger, its predecessor companies rarely offered it. Charter had specifically rejected it. … Time Warner offered one plan with usage-based pricing, but abandoned efforts to expand the practice after ‘significant public backlash.’ … Bright House never offered it. … Given the lack of evidence that New Charter’s predecessor companies had offered usage-based pricing before the condition was imposed, or that New Charter would offer usage-based pricing if allowed to do so, the appellants have failed to show traceability or redressability,” Judge Katsas wrote.

The majority also rejected the challenge of the buildout condition.

“This condition nicely illustrates our dissenting colleague’s point that traceability on the front end can sometimes diverge from redressability on the back end. By now, more than four years after the condition was imposed, New Charter already has built much of the required infrastructure, and its sunk costs in doing so cannot be recovered. Regardless of whether New Charter would have undertaken to build this infrastructure voluntarily, the consumers offer no reason to think that New Charter will abandon the project if now allowed to. Likewise, the consumers offer no reason to think that if New Charter were to abandon the project at this late date, thus ensuring a wasted investment, the decision to do so would somehow lower the prices for its broadband customers,” Judge Katsas wrote.

In his dissenting opinion, Senior Circuit Judge David B. Sentelle said, “I express no opinion about the merits of this case, and I would not reach the merits at all because CEI lacks standing to challenge any of the proposed conditions. I do concur with the majority’s analysis and conclusion that CEI does not have standing to challenge the condition concerning charging subscribers based on data usage or the condition requiring New Charter buildout its cable infrastructure.”

With regard to the conditions the majority vacated, Judge Sentelle wrote, “The majority is perhaps correct that appellants have demonstrated injury to a legally protected interest, specifically the obtaining of internet services at a lower rate, and may even have shown causation, but they have most assuredly not shown that this injury will be redressed by a favorable decision of the court. After the mandate issues in this case the bills for service will not thereby be diminished in any way nor will they ever, absent the volitional act of a third party.”

The FCC declined to comment on the court’s decision.

Charter did not respond to TR Daily’s request for comment.

In a statement, CEI General Counsel Sam Kazman said, “The D.C. Circuit delivered a victory for consumers and the rule of law by throwing cold water on the FCC's attempt to micromanage the Internet at the public’s expense.”

Melissa Holyoak, president of CEI’s co-litigant Hamilton Lincoln Law Institute, said, “We are pleased that the Court of Appeals agreed with us that the FCC’s exercise of authority was troubling. As the court put it, imposing conditions that are not germane to a merger is simply out-and-out extortion.”

In a statement, Incompas Chief Executive Officer Chip Pickering said, “Streaming customers love lower streaming prices, but the cable giants will stop at nothing to raise prices for companies that deliver over-the-top services. Their desire to block streaming and raise prices run counter to free market principles that have powered the streaming revolution.”

Mr. Pickering added, “It is important to note that this court case was not decided on the merits, but based on whether the appellants had standing, and substantive arguments were not provided as the FCC did not defend the merger's conditions. Ultimately, this stealthy court case simply underscores the need for bolder interconnection clarity and protections from policy makers. To keep the streaming market competitive, creative and affordable we must prevent cable gatekeepers from inflating prices at the point of interconnection.”

In a statement, Free State Foundation President Randolph May said, “Aside from the court’s decision regarding specific merger conditions, I was very pleased to see the court affirm what I’ve been preaching for two decades—the so-called ‘voluntary’ conditions that merger proponents offer up in order to get the FCC to act on their pending merger applications are a not-so-subtle form of unseemly regulatory exhortation. Hopefully, other courts will build on the foundation the opinion has laid for challenging these ‘voluntary' commitments often having nothing to do with the specific merger at hand.”

Mr. May added, “I think the court’s opinion puts the nail in the coffin of the merger order’s interconnection condition that Charter recently asked the Commission to eliminate. The court’s analysis was persuasive in showing how the condition adversely affects the interests of consumers by virtue of raising end user prices. I think the FCC was going to grant Charter’s request to sunset the condition in any event on the merits. Sooner is better than later for a condition that never should have been imposed.” —Lynn Stanton, [email protected]

MainStory: FederalNews Courts FCC MergersAntitrust BroadbandDeployment

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