Document ID: A:\VIACOM.TXT VIACOM INTERNATIONAL INC., Petitioner, against FEDERAL COMMUNICATIONS COMMISSION and UNITED STATES OF AMERICA, Respondents; CBS INC., AMERICAN BROADCASTING COMPANIES, INC., NATIONAL BROADCASTING COMPANY, INC., RCA CORPORATION, OVERSEAS TELE VIDEO CORPORATION, Intervenors. No. 227, Docket 81-4119 UNITED STATES COURT OF APPEALS, SECOND CIRCUIT 672 F.2d 1034; 50 Rad. Reg. 2d (P & F) 1641; 8 Media L. Rep. 2005 November 5, 1981, Argued February 9, 1982, Decided PRIOR HISTORY: Petition for review of order by the Federal Communications Commission interpreting the "fi Petition for review denied. COUNSEL: Daniel M. Armstrong, Associate Gen. Counsel, Washington, D. C. (Stephen A. Sharp, George H. Shapiro, Washington, D. C. (Marilyn D. Sonn, Arent, Fox, Kintner, Plotkin & K Scott H. Robb, New York City, for intervenor Overseas Tele Video Corp. Timothy Dyk, Washington, D. C. (J. Roger Wollenberg, Thomas W. White, Wilmer, Cutler & James A. McKenna, Jr., Washington, D. C. (Thomas N. Frohock, Dennis P. Corbett, McKenna Bernard G. Segal, Philadelphia, Pa. (Jerome J. Shestack, Schnader, Harrison, Segal & Le JUDGES: Before WATERMAN, OAKES and MESKILL, Circuit Judges. OPINIONBY: OAKES OPINION: [*1035] This administrative law case, occurring in an era of deregulation, presents several int national television networks obtained from the Federal Communications Commission (FCC) on oadcast" uses of independently produced television programs-e.g., on cable television, vid m), joined by intervenor Overseas Tele Video Corporation (Overseas), petitions for review ing the rule-making procedures of the Administrative Procedure Act; (2) that the Commissio nterested parties an opportunity to respond; and (4) that in any event the Commission's ru atory powers in compliance with the Administrative Procedure Act and did not abuse its dis BACKGROUND I. The Regulatory History The financial-interest rule was one of three rules proposed by the FCC on March 22, 196 eport prepared for the networks by Arthur D. Little, Inc. (Little Report) setting forth de ation and from foreign distribution of independently produced programs; n4 the "financial e time access" rule limiting the [*1037] time allotted network programs during prime t - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n1. Notice of Proposed Rulemaking, Amendment of Part 73 of the Commission's Rules and R Proposed Rulemaking). n2. See Order for an Investigatory Proceeding, 24 Fed.Reg. 1605 (1959). n3. See Report and Order, Amendment of Part 73 of the Commission's Rules and Regulation n4. 47 C.F.R. @ 73.658(j)(1)(i). This section provides: (j) Network syndication and program practices. (1) Except as provided in paragraph (j) (i) After June 1, 1973, sell, license, or distribute television programs to television d States; or sell, license, or distribute television programs of which it is not the sole e, license, or distribution.... n5. 47 C.F.R. @ 73.658(j)(1)(ii). This section prohibits the networks from, (ii) After August 1, 1972, acquiring any financial or proprietary right or interest in license or other exclusive right to network exhibition within the United States and on fo t to network exhibition within the United States, the grantor of such license or right to m. n6. 47 C.F.R. @ 73.658(k). This section provides in part: (k) Effective September 8, 1975, commercial television stations owned by or affiliated 7-11 p. m. e. t. and p. t., 6-10 p. m. c. t. and m. t.), no more than three hours to the p ilms: Provided, However, That (specified) categories of programs need not be counted towar - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - The three rules, the parties agree, were intended to operate together to promote divers ule, note 6 supra, prohibited network-affiliated television stations in the fifty largest that such stations had at least one hour available each night to broadcast nonnetwork pro The syndication rule, note 4 supra, prohibited the networks from distributing (i.e., sy hibition outside the United States, or participating in profit-sharing arrangements involv presenting the programs. Nonnetwork or syndicated programming, by contrast, is generally dication business, and thus to increase opportunities for independent producers to provide The financial-interest rule prohibited networks from acquiring subsidiary rights or pro acquire any financial or proprietary right or interest in the exhibition, distribution, ight to network exhibition within the United States and on foreign stations regularly incl 47 C.F.R. @ 73.658(j)(1)(ii). In the Report and Order announcing the rules' adoption, the in the syndication market from their existing relations with affiliates. Report and Orde opportunity in television program production if we were to exclude networks from active pa ed in syndication." Id. n7 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n7. Citing this language from the Commission's Report and Order, supra note 3, this cou e-access rules), stated that "(t)he financial interest rule was deemed essential by the Co - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - II. The Origins of This Case Over the last decade, technological developments such as satellite television, video e, the networks' domination of television programming. In November 1980, CBS Inc., one of st uses of a television program," which the network deemed essential to its full participa at it planned to produce and distribute video discs and to offer advertiser-supported perf to programs from outside suppliers including public and foreign television stations. CBS bsequent distribution on cable, video disc, or video cassette. The FCC solicited comments on the CBS petition and eleven parties responded. Additional Company, Inc. (NBC) and its parent corporation RCA Corporation (RCA), joined CBS in suppo television, and in satellite-distributed pay television-as well as Overseas and other vid III. The Commission's Ruling The Commission's order of June 23, 1981 interpreted the financial-interest rule as not emaking, supra note 1, had indirectly mentioned network bargaining for certain nonbroadcas mmission explained, arose "only in the context of a description of the rights and interest ation or hold any financial interest in such syndication." Id. n8 The Commission pointed o ing the syndication rule but not the financial-interest rule, suggesting that the financia - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n8. To support this interpretation, the Commission quoted extensively from the Notice o To be more specific, the proposed rule ... is designed to alleviate the noncompetitive within the United States and from the sale, licensing and distribution of independently p sales of independently produced television programs; and (3) limiting economic and proprie ver, would preserve the right of network corporations to sell or otherwise dispose of synd ute programs of which they are the sole producers in foreign markets. n9. The rules the staff recommended were printed in H.R.Rep.No. 281, 88th Cong., 1st Se - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [*1039] In the subsequent order setting out the issues for oral argument, n10 the Co ohibition intended, according to a March 13, 1967, staff memorandum attached to the propos iary rights in "merchandising and other nonbroadcast activities" as well as in syndication - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n10. Order for Oral Argument and to Invite Further Comment, 33 Fed.Reg. 14470 (1968). - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - Finally, the Commission explained that its Report and Order adopting the financial-inte o those actively engaged in syndication." See id. at 37 (citing 23 F.C.C.2d at 398). Quoti rule as prohibiting network acquisition of nonbroadcast interests would be "to impose a p nterest." 87 F.C.C.2d at 37. n11 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n11. The Commission also noted in a footnote that "since this is an interpretation of a - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - In a se of and competition in the burgeoning nonbroadcast program market," leaving the networks' s ded the Commission's interpretation of the financial-interest rule as correct in light of DISCUSSION I. Interpretative Order or Rulemaking? Viacom argues in this petition for review that the Commission's order is contrary to th rams other than network exhibition. The Commission's interpretation, Viacom argues, is al ause of the networks' extraordinary bargaining leverage), and on the syndication market (b mended the financial-interest rule by exempting rights to nonbroadcast uses, and therefore The FCC and the network intervenors n12 counter that the financial-interest rule does n , the FCC argues, shows that the financial-interest rule was intended solely as an adjunct fied a theretofore unchallenged aspect of the rule, neither expanding nor contracting its - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n12. ABC, NBC, and RCA submitted briefs as intervenors in support of the Commission's o - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - At the outset, we agree with the Commission that the financial-interest rule is suffici uded in the language "any financial or proprietary right or interest in the exhibition, di atute is the best and most reliable index of its meaning, see, e.g., Diamond v. Chakrabart rue that the surest way to misinterpret a statute or a rule is to follow its literal langu ing, 324 U.S. 244, 65 S. Ct. 605, 89 L. Ed. 921 (1945). Nothing in the administrative history of the financial-interest rule indicates concern argues nonetheless that the rule was implicitly intended to apply to nonbroadcast interest oducers, Viacom cites statements, reprinted in the margin, from the Report and Order n13 a prophylactic measure" designed to protect against the "potential for" anticompetitive beha interest in obtaining nonbroadcast rights. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n13. It appears to be, based on the testimony and especially the statistical evidence, en were we not to reach that conclusion, it is clear that the existence of subsidiary inte be served by the elimination of this conflict. Certainly there is a close correlation bet Report and Order, supra note 3, 23 F.C.C.2d at 394 (emphasis added). n14. "Moreover, in this respect as in others, we must consider the potential for abuse Setting Effective Dates, Amendment of Part 73 of the Commission's Rules and Regulations Wi - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - Viewed in context, however, the Commission's statements are not open-ended references t k domination of the syndication market. The Commission stated that the networks' ability interest that "prophylactic" rules were necessary regardless of whether there was clear e To support the argument that the financial-interest rule was intended to extend beyond t the Notice of Proposed Rulemaking, supra note 1, expressed particular concern that the n s broadened when the language of the rule was changed from prohibiting any financial or pr distribution, or other commercial use of" the program, see Appendix I to Report and Order ng networks from acquiring "profit-sharing rights in syndication and foreign sales of inde ing additional rights in programs independently produced and licensed for network showing. We do not read these changes as enlarging the scope of the financial-interest rule. If hough the Report and Order announced substantial modification of the prime-time-access rul ncern about the networks' excessive leverage in the syndication market. See, e.g., Report etworks); id. at 392 (networks obtaining increasing share of syndication market); id. at 3 from domestic syndication and foreign distribution, or both"). The "additional rights" la . n16 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n15. For the reasons set forth below we have decided to adopt our proposed rules with r le). Both our original proposal limiting network produced programs to 50 percent of the e proposal in abeyance for the time being.... Report and Order, supra note 3, 23 F.C.C.2d at 383-84. n16. See, e.g., Order for Oral Argument, and to invite Further Comment, supra note 10, (1) restrict the direct financial and proprietary control exercised by networks over th ng in domestic syndication and from distribution in foreign markets of programs which were rks to divest themselves of the present syndication and foreign distribution rights and in 33 Fed.Reg. at 14470-71. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - In short, we find nothing in the administrative history of the financial-interest rule Inc. v. FCC, 442 F.2d at 486, but was not intended to "prohibit network managers from acqu ing staff report's rebuttal of Little Report). Nor do we find any other Commission interp he rule was supported by the administrative record. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n17. See, e.g., Commercial TV Network Practices, 70 F.C.C.2d 1443, 1446 n.4 (1979) (the ication rule)" (emphasis in original)); Columbia Picture Industries, Inc., 30 F.C.C.2d 9 n rk exhibition" in independently produced programs, with the purposes of freeing the networ onic that the latter decision, on which Viacom now relies, was a decision approving the sp levision. In any event, the footnote was a simplification of the syndication and financia - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - We ther d did not require adherence to the rule-making procedures of the APA, 5 U.S.C. @ 553. See aking or declaratory order is primarily one for the agency regardless of whether the decis ee SEC v. Chenery Corp., 332 U.S. 194, 203, 67 S. Ct. 1575, 1580, 91 L. Ed. 1995 (1947), a U.S. App. D.C. 1, 584 F.2d 982, 992 (D.C.Cir.1978). Certainly interpretation of regulation 607, 612 n.9 (D.C.Cir.1970). Viacom and Overseas did not sustain any prejudice from the FCC's proceeding by way of i (of rule-making) is not required"); Office of Communication of the United Church of Chris Secretary of Labor, 469 F.2d 478, 482 (2d Cir. 1972); whether or not network acquisition o am production is a matter for future factual determination. II. Internal Staff Memorandum Viacom objects to the Commission's failure to make publicly available, before release o in "merchandising and other nonbroadcast activities,' " quoted in Memorandum Opinion and he opinion below, to help ascertain the intent of the drafters of the financial-interest r This reliance, however, did not violate the Administrative Procedure Act, 5 U.S.C. @ 55 "interpretation" that was "adopted by" the FCC, id. @ 552(a)(2) (B), nor a "staff manual o g. n19 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n18. 5 U.S.C. @ 552(a)(2) provides in part: Each agency, in accordance with published rules, shall make available for public inspec (A) final opinions, including concurring and dissenting opinions, as well as orders, ma (B) those statements of policy and interpretations which have been adopted by the agenc (C) administrative staff manuals and instructions to staff that affect a member of the ... A final order, opinion, statement of policy, interpretation, or staff manual or ins (i) it has been indexed and either made available or published as provided by this para (ii) the party has actual and timely notice of the terms thereof. n19. The Commission did make the memorandum available to Viacom after release of the ru .Cir.1978). - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - III. Ex Parte Communications Viacom also contends that ex parte communications between the networks and the Commissi many judges, including the author of this opinion. See Morningside Renewal Council, Inc. 2 (1974). See also id. at 954, 94 S. Ct. at 3082 (Douglas, J., dissenting from the denial t a rule-making or an adjudication but an interpretation of an existing rule. n21 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n20. A page one banner-headlined story in Variety on December 10, 1980 said in part: CBS confirmed that it discussed the move-both for ownership and programming for cable-w .... ... (B)oth CBS and FCC chairman Charles Ferris say there's no sweat, the whole thing's "We've put it on a fast track," said Frank Lloyd, assistant to Ferris. Comments are due Ferris has argued publicly that the webs should be encouraged to program for cable and CBS was not the only party lobbying the Commission, however. A subsequent (June 10, 19 "CBS assured us that everything was locked up," said one web exec. "But they didn't kn The first sign that the fast track had turned to sludge came last April 9 when the comm Ever since then the industry has been in a quandary. Cable companies such as HBO, Tele production companies, fearing that the broadcast and non-broadcast rights clout for the w As for the networks, after a few days of kicking the CBS Washington office around, they .... "We haven't done any lobbying" at the FCC, said CBS Washington veep Bill Lilly, since o n21. The Commission's ex parte prohibitions apply only to rule-making proceedings and t as been filed, id. @ 1.1207, and to specified cable television matters, id. @ 1.1231. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - [*1044] Nor do we find the circumstances of this ruling covered by Home Box Office, as the right of subscription broadcast TV stations and CATV operators to exhibit for a fe ed Home Box Office to cases involving competing claims for a specific valuable privilege u FCC, 183 U.S. App. D.C. 437, 564 F.2d 458, 477 (D.C.Cir.1977). Petitioners and the networ In any case, there is on the record nothing to suggest that the Commission's decision w r parties opposed to the networks' position were equally ardent in their wooing of the Com IV. Arbitrary and Capricious Standard Viacom's last argument-that the Commission's ruling was arbitrary, capricious, and an a have been subject to rule-making, or at least a reasoned opinion demonstrating reasons for did the Commission below, as one involving not a change of policy but an interpretation of Petition to review denied.