Cable Television Association of New York, Inc. v. William B. Finneran Theodore E. Mulford Barbara T. Rochman John A. Passidomo Michael E. Russell, Individually and as Members of the New York State Commission on Cable Television, and the New York State Commission on Cable Television

Citations: 954 F.2d 91; 19 Media L. Rep. (BNA) 2043; 70 Rad. Reg. 2d (P & F) 383; 1992 U.S. App. LEXIS 713Docket: 384

Court: Court of Appeals for the Second Circuit; January 15, 1992; Federal Appellate Court

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The case involves the Cable Television Association of New York (CTANY) challenging New York's regulatory authority over downgrade charges that cable companies impose on customers opting for less expensive cable service tiers. CTANY contends that the Cable Communications Policy Act of 1984 preempts state regulation in this context. The District Court ruled in favor of New York, granting summary judgment, a decision that the United States Court of Appeals for the Second Circuit affirmed.

Cable television systems operate by delivering video programming through physical installations that include wires and cable boxes. The cable box functions as both a tuner for selecting channels and a descrambler for encrypted premium channels. Customers cannot buy cable services on an individual channel basis; instead, they must choose from predefined service tiers: economy, standard, and premium, with each tier encompassing the channels of the lower tiers. Downgrading results in the loss of channels without the addition of new ones. Cable companies recover costs through installation fees and monthly service rates, often incentivizing premium subscriptions by waiving installation fees for those tiers.

Cable companies often charge substantial fees, ranging from $40 to $100, to customers wishing to downgrade their service tiers, which significantly diminishes the financial incentive to switch, given that typical savings from downgrading are around $10 monthly. The cost of implementing a downgrade varies by technology: in systems requiring a technician's visit, the cost is $50-$75, while in more advanced systems, it is minimal as the company can adjust settings remotely. In response to consumer complaints, the New York State Commission on Cable Television established regulations in 1990 that limit downgrade charges to the actual cost incurred by the cable company. These regulations also require adequate customer notification and restrict charges for downgrades from services not maintained for at least six months, aiming to curb "churning" behavior where customers frequently switch to premium channels for specific content.

The regulations were finalized on December 3, 1990, with compliance required by May 2, 1991. Subsequently, CTANY filed a lawsuit claiming these regulations were pre-empted by the Cable Communications Act of 1984, which prohibits state regulation of cable service rates. The district court rejected CTANY's claim on April 19, 1991, determining that downgrading constitutes the removal of services rather than their provision, thus the pre-emption clause did not apply. The court subsequently granted summary judgment in favor of New York. The issue of the district court's jurisdiction to hear CTANY's challenge is also raised, noting that jurisdiction cannot be conferred by consent and must be examined if there is any indication of its absence.

CTANY is pursuing declaratory and injunctive relief against a state ban on downgrade charges, claiming that such state regulation is pre-empted by the Cable Act. The jurisdiction for this action is examined under the Declaratory Judgment Act, which does not extend federal court jurisdiction beyond traditional doctrines. To establish federal question jurisdiction, a federal issue must be evident in the well-pleaded complaint; mere anticipation of a federal issue does not suffice. If the suit New York aims to enforce does not involve a federal issue, the federal court cannot gain jurisdiction through declaratory judgment.

Furthermore, CTANY is also seeking an injunction against state regulation. The Supreme Court, in Shaw v. Delta Air Lines, affirmed that federal courts can hear cases seeking to enjoin state officials from enforcing regulations that infringe upon federally protected rights. Thus, since CTANY seeks to prevent enforcement of a state regulation that it claims interferes with federal rights, the district court possesses subject matter jurisdiction.

The determination of whether federal law pre-empts state regulation hinges on Congress's intent when enacting the federal statute. If Congress intended exclusive federal regulation in the relevant area, state law cannot coexist. If such intent is absent, state law can only be invalidated if it conflicts with federal law. Understanding Congress's intended pre-emptive scope under the Cable Act requires a review of the regulatory context in which the Act was developed.

Before 1960, the FCC did not regulate cable television, viewing cable companies as outside the scope of the Communications Act of 1934, as they were not classified as common carriers or broadcasters. As cable TV evolved into a national communications system, the FCC's interest in regulation grew. By 1965, to protect local broadcasters from competition posed by cable companies, the FCC implemented rules limiting the importation of distant broadcast signals. The Supreme Court upheld the FCC's regulatory authority in 1968 but restricted it to matters ancillary to television broadcasting regulation, focusing on protecting local broadcasters.

The FCC initially did not regulate cable rates, with its first attempt at rate regulation occurring in 1974, aiming to pre-empt local regulation of specialized programming charges, a move confirmed by the courts in 1978. In response to the lack of federal rate regulation, municipalities negotiated local rate agreements with cable companies in exchange for exclusive franchises to use city rights of way, leading to a dual regulatory system involving both local and FCC oversight.

In 1972, the FCC sought to clarify the boundaries of federal and state regulation by establishing a dual structure where local governments selected franchises under minimum standards set by the FCC, which retained authority over operational aspects of cable communication. However, in 1978, the FCC abandoned most minimum franchise standards, suggesting states adopt them voluntarily, effectively relinquishing franchising authority to the states.

In the 1970s, two significant Supreme Court decisions reshaped the balance of state and federal regulatory powers over cable television. In *United States v. Midwest Video Corp.*, 406 U.S. 649 (1972), the Court upheld an FCC rule requiring cable companies to produce original programming alongside broadcast signals, broadening the rationale for regulatory authority to include promoting programming diversity. However, in *FCC v. Midwest Video Corp.*, 440 U.S. 689 (1979), the Court limited this rationale by striking down a rule that mandated cable companies to allocate channels for public access, citing that it infringed on the editorial control of cable operators and conflicted with the Communications Act of 1934. Following *Midwest II*, the FCC's regulatory authority was constrained to rules that were ancillary to broadcasting goals without undermining editorial discretion.

As cable technology advanced, the FCC's perspective shifted, recognizing cable as a significant medium rather than merely a threat to traditional broadcasting. Consequently, the FCC began to dismantle its protectionist regulations but remained constrained by *Midwest II* from imposing obligations on cable companies that would compromise their editorial autonomy. By 1983, the FCC had preempted local regulations affecting cable's growth, including local rate controls.

A pivotal change occurred in 1984 with *Capital Cities Cable, Inc. v. Crisp*, 467 U.S. 691, where the Supreme Court ruled that federal regulations preempted a state law banning the retransmission of out-of-state alcohol commercials. The Court acknowledged the incompatibility of state rules with federal regulations and affirmed the FCC's broad authority to regulate cable signal carriage, effectively allowing the FCC to preempt nearly all state regulation of the cable industry. This ruling marked a departure from previous limitations on federal authority, providing the FCC with the discretion to facilitate the cable industry's expansion and programming diversity.

The FCC, utilizing new authority, actively pre-empted local regulations regarding cable service rates and franchise fees, invalidating a locally agreed franchise charge of 11%. In response to the shifting balance of regulatory power between state and federal governments, Congress enacted the Cable Communications Policy Act of 1984 to clarify this authority. The Act enhances state and local regulatory power in certain areas, allowing states to set franchise fees within specified limits, while prohibiting federal regulation of those fees or their use. It establishes procedural guidelines for franchise renewals, leaving substantive decisions to state authorities. States are also empowered to regulate the direct relationship between cable operators and subscribers, covering service interruptions, disconnection policies, customer rebates, and billing information provisions.

Conversely, the Act restricts both states and the FCC from interfering with specific regulations regarding commercial channel capacity and content provision, except as explicitly stated. It largely pre-empts rate regulation, allowing states to regulate rates only where effective competition is absent, specifically for basic cable service. For a two-year period following the Act's passage, states could also regulate basic service rates and certain initial equipment rental rates. Overall, the Cable Act aims to establish a comprehensive framework for cable television regulation while delineating the respective authorities of state and federal governments, with the current appeal focusing on the classification of downgrade charges within this regulatory scheme.

Federal pre-emption requires either an express statement from Congress regarding its scope or an inference of intent to occupy a field exclusively through pervasive regulation. This can occur when state law cannot coexist with federal law or when state law obstructs federal objectives. CTANY argues that downgrade charges are either rates for cable services, thus pre-empted by the Cable Act, or closely related to such rates, implying congressional intent to prevent state regulation. The district court ruled that downgrade charges do not constitute a rate since no service is "provided" when a customer downgrades; instead, programming is removed without replacement. CTANY counters this by asserting that "cable services" encompass both programming and the facilities necessary for receiving such programming, citing section 543(c)(3) of the Act, which allows state regulation of charges for equipment installation. They argue that this regulation would not need to exist if section 543(a) did not generally pre-empt state rate regulation, supported by legislative history that clarifies the scope of regulation concerning necessary equipment for basic cable service.

The term "cable services" encompasses more than just cable programming, but this broader interpretation does not alter the statutory interpretation requirement that all clauses and words of the statute must be considered. Section 543(a) specifically pre-empts "rates for the provision of cable services," not "all rates for cable services." Therefore, CTANY must demonstrate that a customer is "provided" with cable service even when services (including both facilities and programming) are removed, a claim they have not substantiated with evidence from the statute's text or history.

CTANY also argues that the FCC has classified downgrade charges as rates for cable services, citing an FCC interpretation regarding section 543(b). This interpretation states that basic service includes not just monthly charges but also equipment costs and downgrade installation charges. However, this footnote does not address what constitutes "rates for the provision of cable services" in the context of section 543(a) pre-emption. It actually indicates an expansion of state regulation rather than a pre-emption of it.

For an FCC determination to pre-empt state law, it must be shown that the FCC intended such pre-emption and that it acted within its authority. The FCC's statement in footnote 72 lacks any indication of intent to pre-empt state regulation, as it was made in a context that expanded state authority, allowing states to regulate cable companies without effective competition. Consequently, there is insufficient basis to conclude the FCC intended to pre-empt the state regulations in question.

The footnote in question lacks pre-emptive intent, as evidenced by the Michigan Court of Appeals' prior ruling in Comcast Cablevision of Sterling Heights, which determined that the Cable Act does not pre-empt state regulation of downgrade charges. The absence of any mention of this case or topic by the FCC in the footnote indicates that the agency did not intend to reverse that decision or imply pre-emption regarding section 543(a). Agencies typically clarify such intentions explicitly when intending for regulations to be exclusive.

CTANY argues that the term "provision" in the Cable Act implies it applies to both service reductions and enhancements. However, this interpretation overlooks Congress's intent to allow market forces to dictate rates rather than governmental regulation, as noted in legislative reports. Downgrade charges prevent market forces from operating effectively by discouraging customers from downgrading services, thus diminishing responsiveness to declining demand for premium services. Therefore, interpreting "provision" to include only service enhancements aligns with the Congressional goal of promoting market dynamics.

Consequently, since a reduction in service does not constitute a provision of service and the FCC has not explicitly addressed the issue, the Cable Act does not pre-empt state regulation of downgrade charges. CTANY also argues that state regulation of downgrade charges indirectly affects rates for cable services, suggesting that Congress intended to pre-empt such regulation. While acknowledging that state regulation may influence cable rates, the conclusion remains that the inability to recover costs from downgrades could lead cable companies to raise basic and premium service rates instead.

CTANY's argument suggests that any state regulation imposing costs on cable companies would automatically lead to pre-emption, which contradicts the Cable Act's allowance for state regulation and established legal principles that not all state laws affecting a federally regulated field are pre-empted. Examples illustrate that federal statutes do not eliminate all state laws affecting rates, as seen in cases involving the Federal Energy Regulatory Commission and the National Labor Relations Act. The Cable Act specifically permits states to regulate certain charges, such as franchise fees and disconnections, implying that downgrade charges, akin to partial disconnections, also fall under state authority. Furthermore, the language of the pre-emption clause does not indicate a Congressional intent to broadly exclude state regulations. In contrast to statutes like ERISA that clearly pre-empt state laws related to employee benefit plans, the Cable Act lacks similar definitive language, reinforcing the argument against blanket pre-emption of state regulations impacting cable service rates.

The pre-emption clause of the Cable Act is interpreted to not extend to all aspects of rate regulation related to cable services. Congress intended to pre-empt only state rules specifically regulating rates charged by cable companies to consumers. This interpretation is supported by the statute's language, structure, and the legislative history indicating a desire to clarify state and federal authority over cable television amidst prior confusion. Unlike the case of Schneidewind, which involved pre-emption of state securities regulation aimed at indirectly controlling rates for natural gas companies, the state regulation in question here primarily aims to protect consumers rather than regulate rates indirectly. Consequently, there is no evidence that Congress sought to pre-empt state regulation regarding downgrade charges under the Cable Act. The district court’s judgment affirming that the Cable Act does not pre-empt such state regulation is upheld.