On August 14, 2020, the Court of Appeals for the District of Columbia Circuit issued an opinion, Competitive Enterprise Institute v. FCC, in which the court criticized, albeit in dicta, an aspect of the FCC's merger review process that I've been decrying for two decades. In short, the FCC’s review process is often tainted by its extraction of so-called “voluntary” conditions from merger applicants during the agency’s consideration of proposed transactions.
In March 2000, I published a Legal Times essay titled, "Any Volunteers?" defending this view. Many times since 2000, I have continued to urge merger-review reform, including, for example, in this congressional testimony.
Most recently, in a piece titled "Involuntary Volunteers at the FCC," published on August 20 by the Yale Journal on Regulation, I examine the phenomenon of "involuntary volunteers" and the relevance of the recent D.C. Circuit's opinion. Here, adapted from the Yale Journal blog, is a somewhat abbreviated version, but please read the original if you wish to take a deeper dive.
Media or telecommunications companies holding spectrum licenses or other forms of authorization must obtain the FCC's prior approval before they may transfer control of such instruments or assign them to another party. So, as a practical matter, for most transactions of any significance, transfer or assignment of the authorizations is crucial to consummation of the deal.
The relevant portions of the Communications Act require the agency to determine that a proposed transaction is in "the public interest."
Of course, the public interest standard is inherently vague. As Justice Felix Frankfurter remarked in the leading case on the subject, FCC v. Pottsville Broadcasting Co., the standard is "as concrete as the complicated factors for judgment in such a field of delegated authority permit." Another way of saying what Justice Frankfurter declared is that the public interest standard is essentially standardless.
Therefore, when the FCC reviews merger applications, the public interest standard's indeterminateness enables the FCC to range far beyond analyzing specific impacts closely related to the proposed transaction. The agency can withhold approval until the applicants agree to "volunteer" merger conditions that the Commission has telegraphed, often in closed door meetings, that it wishes to impose.
On many occasions, the FCC has imposed "volunteered" conditions that have nothing to do with specific merger impacts. Examples include a volunteered commitment for merging broadcast companies to carry more children's television programming, a commitment to cease offshoring a telecom firm's workforce, and a commitment to abide by various net neutrality practices. None of the commitments were mandated at the time by the Communications Act or FCC regulations.
This is not to say that the Commission shouldn't have considered adopting one of more of them on an industry-wide basis as a rule in a generic proceeding. But it is to say the agency should not engage in "regulation by condition."
Now back to the D.C. Circuit's opinion in the Competitive Enterprise Institute case involving the FCC's May 2016 approval of a merger between Charter Communications, Time Warner Cable, and Bright House Networks. CEI challenged four conditions volunteered by the applicants during the review process which were ultimately incorporated into the approval order. The court ruled that CEI had standing to challenge only two of the four conditions. Because the FCC declined to defend any of the conditions on the merits, those two were vacated.
Questions relating to CEI's standing are the most significant aspects of the case from a precedential perspective. Here I just want to spotlight the court's discussion regarding the practice of imposing non-merger specific conditions. Criticizing the FCC for not restricting its review to whether a merger applicant meets the Communications Act criteria for holding a license, the court declared: "[A]fter broadening its focus to the entire merger, the FCC imposed conditions sweeping even beyond that." And the court emphasized that the agency conceded that providing discounted service to low-income consumers, one of the two volunteered conditions imposed, "is not a transaction-specific benefit."
Finally, the court quoted this from the FCC Commissioner Michael O'Rielly's dissent to the Charter merger order: "Once delinked from the transaction itself, such conditions reside somewhere in the space between absurdity and corruption."
And then-Commissioner, now Chairman, Ajit Pai dissented from the Charter order as well, blasting the agency's imposition of non-merger specific conditions. He warned that the Commission "has turned the transaction into a vehicle for advancing its ambitious agenda to micromanage the Internet economy."
In my 2000 Legal Times "Any Volunteers?" essay, in congressional testimony, and in many other venues, I've urged Congress to adopt legislation to reform the FCC's merger review process, including by restricting reviews to a determination as to whether the merged company will be in compliance with all then-existing Communications Act and regulatory requirements.
I also have suggested that the FCC itself could act to reform the merger review process. In a 2008 law review article, "A Modest Plea for FCC Modesty Regarding the Public Interest Standard," I recommended that the Commission "announce that it will refrain from imposing 'voluntary' conditions on merger proponents that are unrelated to compliance with existing statutory or regulatory requirements." In this exercise of self-restraint, "the agency would narrow substantially the application of the public interest standard."
It would be risky to bet your house on Congress legislating merger review reform or the FCC adopting a new policy of self-restraint. A safer bet is that there will be more "volunteers" showing up at the Commission's door whenever telecommunication and media companies seek the agency's approval for a merger.