Cable Television Ass'n of New York v. Finneran

Citations: 954 F.2d 91; 1992 WL 5614Docket: No. 384, Docket 91-7539

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

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New York's authority to regulate downgrade charges imposed by cable television companies is challenged by the Cable Television Association of New York (CTANY), which claims that the Cable Communications Policy Act of 1984 preempts state regulation. The District Court ruled in favor of New York, granting summary judgment, and this decision has been affirmed. Cable television systems deliver programming through wires and require subscribers to have a cable box that functions as a tuner and descrambler for premium channels. Subscribers cannot purchase channels individually but choose from service tiers—economy, standard, and premium—where each higher tier includes all lower-tier channels. Downgrading to a lower tier disconnects certain channels without adding any, and cable companies impose significant fees (ranging from $40 to $100) for downgrades to discourage subscribers from switching to cheaper options, despite minimal actual costs (between $50 and $75) associated with processing these downgrades.

In technologically advanced cable systems that do not require home visits for service changes, the cost of downgrading service is minimal. In response to consumer complaints about downgrade charges, the New York State Commission on Cable Television enacted regulations (9 NYCRR 590.61, 590.63) in 1990 that limit the imposition of such charges. These regulations define a downgrade charge as a fee for switching to a less expensive service tier and restrict the charge to the cable company’s actual cost, requiring adequate notice to customers and that the customer must have maintained the higher-tier service for at least six months. The regulations aim to prevent "churning," where customers frequently switch to premium channels and then downgrade shortly after. 

Following the enactment of these rules, CTANY filed a lawsuit seeking a declaration that the downgrade regulation was preempted by the Cable Communications Act of 1984, which prohibits state regulation of cable service rates, and sought an injunction against the enforcement of the regulation. The district court ruled against CTANY, determining that downgrading constituted a removal of service rather than a provision of service, thus not triggering the preemption clause of the Cable Act, and granted summary judgment to New York.

The case then raised jurisdictional questions. It is emphasized that parties cannot confer subject matter jurisdiction by consent, and the court must consider jurisdiction sua sponte if there are indications of a lack thereof. CTANY's request for declaratory and injunctive relief relies on the argument that federal law preempts state regulation. However, the Declaratory Judgment Act does not extend federal jurisdiction, and federal question jurisdiction requires a federal issue to be evident on the face of the complaint, not merely anticipated through a defense.

In a declaratory judgment action asserting federal pre-emption, if the underlying state lawsuit does not raise a federal issue, federal courts lack jurisdiction. Specifically, if CTANY sought only declaratory relief regarding New York's cable rate regulation, the court would need to determine if there were sufficient federal issues present. Prior case law, such as Nashoba Communications, indicated that a cable company’s assertion of pre-emption did not present a substantial federal issue. However, CTANY is also pursuing an injunction against state regulation, akin to the situation in Shaw v. Delta Air Lines, where the Supreme Court upheld federal jurisdiction over suits seeking to prevent state officials from enforcing laws that interfere with federal rights. Since CTANY argues that state regulations conflict with federally protected rights, the district court possesses subject matter jurisdiction.

In assessing pre-emption, the court examines Congressional intent behind the relevant federal statute. If Congress intended exclusive federal regulation, state laws cannot prevail. If not, state laws will be invalidated only if they conflict with federal laws. Understanding the context of the Cable Act is crucial, as historically, the FCC did not regulate cable television until the Act was established, recognizing that cable companies were not classified as common carriers or broadcasters under the Communications Act of 1934.

Cable television evolved from serving remote areas with antenna signals to a national communications system, prompting increased regulatory interest from the FCC. In 1965, to protect local broadcasters from cable companies, the FCC implemented rules restricting the importation of distant broadcast signals by cable providers. The Supreme Court upheld the FCC’s regulatory authority in 1968, limiting it to aspects ancillary to television broadcasting regulation. Initially, the FCC did not regulate cable rates, focusing instead on safeguarding local broadcasters. It was not until 1974 that the FCC proposed to preempt local regulation of specialized programming charges, a decision later affirmed by the courts in 1978.

Local municipalities, facing federal inaction on rate regulation, negotiated agreements with cable companies for local oversight in exchange for franchise rights to access city infrastructure. This resulted in a complex regulatory environment involving both local and federal oversight, with unclear boundaries. The FCC's first attempt to delineate these boundaries occurred in 1972, establishing a dual regulatory framework where local governments selected franchises under FCC-set standards, while the FCC maintained authority over operational aspects. However, in 1978, the FCC revised its stance, removing many minimum franchise standards and encouraging states to adopt them voluntarily, effectively transferring most franchising authority to the states.

In the 1970s, two pivotal Supreme Court cases reshaped the dynamics between state and federal regulation of cable television. In *United States v. Midwest Video Corp.* (1972), the Court upheld an FCC rule mandating that cable companies not only carry broadcast signals but also produce their own programming, broadening the rationale for regulatory oversight to include programming diversity. Conversely, in *FCC v. Midwest Video Corp.* (1979), the Court invalidated an FCC rule requiring cable operators to allocate channels for public use, arguing it infringed on the editorial control of cable operators, a principle contrary to the Communications Act of 1934. This ruling established that FCC regulations could only be enforced if they were reasonably related to broadcasting goals without compromising editorial discretion.

As the cable industry evolved, the FCC began to reconsider its regulatory stance, recognizing cable as a significant media player rather than merely a competitor to broadcasting. This resulted in the removal of some protectionist regulations, although the Commission was restricted from imposing rules that interfered with cable operators' editorial autonomy. By 1983, the FCC had preempted certain state regulations that could hinder cable growth.

The regulatory landscape shifted dramatically in 1984 with *Capital Cities Cable, Inc. v. Crisp*, where the Supreme Court ruled that FCC regulations overrode an Oklahoma law that restricted cable retransmissions of out-of-state alcoholic beverage commercials. This decision marked a departure from earlier limitations on federal authority, affirming the FCC's exclusive power to regulate cable signal carriage, and underscoring the necessity of federal preemption to foster growth and diversity in cable programming.

The Court granted the FCC broad discretion to preempt state regulations concerning the cable industry, leading the FCC to invalidate local rate regulations and franchise fees in various cases. In response to the evolving jurisdictional dynamics between state and federal authorities, Congress enacted the Cable Communications Policy Act of 1984 to clarify regulatory powers over cable systems. The Act allows states to set franchise fees with specific limits and establishes that federal agencies cannot regulate these fees or the allocation of funds from them. It entrusts states with the authority to manage the relationship between cable operators and subscribers, covering areas like service interruption and billing information.

However, the Act limits both state and federal regulatory powers in certain respects, such as channel capacity designation and content requirements, and generally prohibits regulation of cable service rates, with some exceptions. Specifically, states may regulate rates for basic cable service only when the FCC determines there is no effective competition. Additionally, states have a two-year window post-enactment to regulate basic service rates and related equipment costs. Overall, the Act seeks to establish a comprehensive framework for cable television regulation, balancing federal and state authorities. The appeal at hand seeks to clarify the application of downgrade charges within this regulatory framework.

Establishing federal pre-emption requires examining Congress's express statements regarding its pre-emptive intent. When Congress explicitly delineates the scope, the focus is whether state actions fall within that federal domain. If no explicit intent is stated, pre-emption may be inferred from the comprehensive nature of federal regulation, its dominant intent, or the objectives of the federal law. Specific state laws may be pre-empted when compliance with both state and federal laws is impossible, or when state laws obstruct federal objectives. CTANY argues that the Cable Act pre-empts state regulation of downgrade charges by asserting that these charges are rates for cable services, thus falling under the Act's express pre-emption. Alternatively, they claim that even if downgrade charges are not classified as rates, their close relationship to such rates implies congressional intent to preclude regulation. The parties concur that if downgrade charges are rates, section 543 of the Cable Act pre-empts state regulation. However, a district court ruled that downgrade charges do not constitute rates because downgrading removes programming without replacement. CTANY counters this by arguing that 'cable services' encompass both programming and the facilities necessary for receiving it, referencing section 543(c)(3), which allows states to regulate installation charges for basic service equipment. They contend that such state regulation authorization implies that section 543(a) broadly pre-empts state regulation of equipment installation rates, supported by legislative history indicating limited regulation under section 543(c).

CTANY contends that "cable service" encompasses both programming and the necessary equipment for its provision. Although there is agreement that "cable services" is not confined to programming alone, this argument does not suffice to support CTANY's position. The court emphasizes the need to interpret statutes in a manner that respects every term and clause. Specifically, Section 543(a) pre-empts "rates for the provision of cable services," not all rates associated with cable services. Therefore, CTANY must demonstrate that customers are provided with cable service even when essential components are absent, a claim unsupported by statutory text or historical context.

Additionally, CTANY references an FCC interpretation relating to downgrade charges as rates for cable services, particularly from a rule that delineates the components of basic service. This interpretation includes both the recurring monthly charges and the costs for necessary equipment and installation. However, the relevant footnote does not address the definition of "rates for the provision of cable services" under section 543(a) and instead appears to expand state regulation, suggesting that it does not preempt state authority over downgrade charges.

For FCC determinations to preempt state law, two conditions must be met: the FCC must intend to preempt state law, and it must act within its delegated authority. In this instance, the FCC's statement lacks evidence of preemptive intent, particularly since it was made in a context that favored expanding state regulation of cable companies without effective competition. This interpretation is further supported by a prior ruling from the Michigan Court of Appeals, which determined that the Cable Act does not preempt state regulation of downgrade charges.

The absence of any reference to the Sterling Heights decision or the topic of section 543(a) in a relevant FCC footnote suggests that the FCC did not intend to preempt state regulation of downgrade charges. Agencies typically clarify their intentions explicitly when they aim for exclusivity in regulations. CTANY argues that the term 'provision' in the Cable Act encompasses both service reductions and enhancements, claiming that this broad interpretation aligns with the purpose of section 543 to limit rate regulation and promote market forces. However, this interpretation overlooks Congress's actual aim, which was to facilitate market control over cable service rates rather than to eliminate regulation entirely. Downgrade charges create barriers for customers wishing to reduce service levels, thus reducing market responsiveness to consumer demand.

The conclusion is that 'provision' should reasonably apply to service enhancements, not reductions, aligning with Congressional intent to allow market dynamics to influence cable rates. Consequently, the Cable Act does not preempt state regulation of downgrade charges. While CTANY acknowledges that state regulation may indirectly impact cable service rates, arguing for preemption based on this effect is excessive. Not all state regulations that affect costs are preempted by federal law, as established in prior case law, reinforcing that not every cost-related state regulation falls under federal preemption.

The National Labor Relations Act does not preempt state minimum wage laws despite their influence on collective bargaining. The core issue is whether Congress intended to preempt state regulation of downgrade charges related to cable service rates. The analysis reveals no clear Congressional intent for such preemption. The Cable Act explicitly allows state regulation affecting cable service pricing, such as franchise fees and disconnection charges, which cable companies can pass on to consumers. This indicates that states maintain regulatory authority over downgrades, akin to partial disconnections. 

The pre-emption clause's language does not suggest an intent to eliminate all state regulations affecting cable service rates. Unlike ERISA, which broadly preempts state laws related to employee benefit plans, the Cable Act's wording implies a more limited scope, aimed only at state regulations directly governing cable service rates. Thus, the conclusion is that Congress intended to preempt only those state regulations that directly affect rates charged by cable companies, a view supported by the statute's structure and the legislative context following previous uncertainties about state and federal authority in cable television regulation.

Congress aimed to clarify the division of state and federal authority in the cable industry by implementing deregulation to enhance market influence on cable rates. The pre-emption clause was crafted with precision, indicating an intention not to pre-empt all state laws regarding cable service rates. Unlike the precedent set in Schneidewind, where the Natural Gas Act pre-empted state regulation related to gas companies, the state's regulation in this case primarily focuses on consumer protection. This regulation does not seek to indirectly control rates but aims to raise them, demonstrating a lack of intent to manipulate cable company pricing. Therefore, the Cable Act does not pre-empt state regulation of downgrade charges, and the district court’s judgment is affirmed. Additionally, the mandatory origination rule was repealed in 1974.