Appeals Court Upholds FCC on CableCARD, Lets Integration Ban Stand

The court ruling capped a busy week in the CableCARD debate. It came 2 days after NCTA asked the FCC to delay the integration ban again -- to Dec. 2009 -- to spare cable the expense of also making set-tops CableCARD-ready as it works on downloadable security deployment (CD Aug 18 p6). The decision clears the way for the Commission to enforce its July 1, 2007 integration ban deadline on all set-tops, unless it grants waivers sought by NCTA, Charter, Comcast and Verizon.

NCTA -- though “disappointed” with the decision -- said it was nevertheless “encouraged” because the court said downloadable security “may moot this entire controversy.” Cable’s progress on downloadable security “is the exact basis of the deferral request NCTA filed earlier this week with the Commission which, if granted, would save consumers millions of dollars every year,” said NCTA Gen. Counsel Neal Goldberg.

CEA, which backed the FCC in the case, was “thrilled” with the outcome, Pres. Gary Shapiro told us. In a written statement, Shapiro called the opinion “a decisive win for consumers.” The court said “enough is enough” to cable’s “nonstop campaign to thwart the will of Congress and the FCC since these rules were enacted in 1998,” Shapiro said: “Today’s opinion sets the record straight: Consumers are entitled to a broad array of products that can connect to cable systems featuring innovative new features for competitive prices. In the wake of the court’s decision, we are hopeful that cable will stop its foot-dragging and comply with the law for the benefit of consumers. We now call on the FCC to deny all cable petitions to further thwart Congress and the FCC.”

In a 24-page opinion, the court rejected cable’s arguments that: (1) The integration ban violates the “plain language” of the 1996 Communications Act. (2) The FCC unreasonably declined to scrap the integration ban despite market changes that obviously made it unnecessary. On the first argument, the court agreed with FCC attorneys that it was barred from judging the merits because the 60-day window for filing such petitions had long since closed. The Commission also had argued that the law affords it a shot at an issue before it can be reviewed in court. Again, the court agreed. It said it “has strictly applied that section” in earlier cases, holding that it may not consider arguments that haven’t been presented to the FCC. Even cable conceded in oral arguments May 11 that “there is not a single page in the voluminous record” of the integration ban proceeding when they raised the specific issues “they now press before this court,” the opinion said. CEA -- to no avail -- had urged the court to dismiss the case because those and other technicalities justified not proceeding to oral arguments.

The court also rejected the allegations the FCC had acted unreasonably in not eliminating the integration ban. “The FCC did not ignore the developments cited by the petitioners, but its assessment both of the current state of the market and of its trajectory differed from that of the cable industry,” the opinion said. Less than 3% of the compatible TVs sold to consumers “were actually being used with CableCARDs,” the court said. “Given this record, there was nothing unreasonable about the FCC’s conclusion” that market developments warranted keeping the integration ban, it said. As the FCC has explained, the integration ban was needed to assure that cable would devote “technical and business energies towards creation of an environment in which competitive markets will develop,” the court said: “It is an explanation that is neither arbitrary nor capricious.”

“It is simply not true” that the FCC refused to consider cable’s arguments that the integration ban put it at a competitive disadvantage to satellite, which wasn’t subject to a ban, the court said. “To the contrary,” the Commission’s 2005 order took note of cable’s concerns, the court said. But the FCC also found that “geographically portable” DBS gear was widely available at retail but cable set-tops weren’t, the court said.

The Commission was within reason when it found that prior justifications for differentiating between cable and DBS remained valid in 2005, the court said: “And that is the rub, since the record reflects that less than 3% of CableCARD-compatible television sets are actually being used with CableCARDs. This means that the vast majority of cable subscribers remain dependent upon non-portable converter boxes available only from their cable companies.” So it wasn’t unreasonable to doubt claims by the cable industry that it fully backs CableCARD deployment, the court said. Moreover, cable has no “quantitative evidence” that the integration ban places it at a serious competitive disadvantage vs. DBS, the court said: “Under these circumstances, it was not unreasonable for the FCC to decline to resolve the DBS-related issues.

Cable’s hopes to keep selling current set-tops lie with the FCC, said 2 lawyers involved in the case and an NCTA spokesman. The group and Comcast are awaiting FCC word on separate requests to waive the Commission’s looming ban on selling integrated devices, they said. “If our request is not granted, it will take considerable time for the industry to implement the ban,” an NCTA spokesman told us: “We asked for it to be pushed back to the end of 2009, or until downloadable security is available.”

The NCTA official said the FCC should decide within 90 days whether to grant its request to extend the deadline to Dec. 31, 2009, or when downloadable security applications are available, whichever comes first. “We're asking for a relatively quick reply on our waiver or deferral request,” said the spokesman.

The Commission is obligated to act on waivers within 90 days, said a lawyer involved in the CableCARD case. But the FCC may believe it has 90 days after deciding to seek public comment to decide on a waiver, the lawyer said. The ruling in the FCC’s favor wasn’t unusual, the lawyer: The appeals court often defers to the agency. The FCC declined to comment.

Cable is concerned that separating set-top functions will raise costs to subscribers as much as $95 a device (CD May 12 p5). “There’s a lot that needs to play out before you impose costs like this on cable subscribers,” the cable lawyer said. Cable operators stand to lose some but not much revenue from selling integrated set-tops when the ban takes effect, Janco analyst Matthew Harrigan told us: “It’s a marginal effect, clearly.”