A Guide To The Mechanics of the Comcast/TWC Deal. Part III: The Federal Communications Commission.

In Part II, I described how the Department of Justice will conduct its antitrust review of the Comcast/TWC. Here, I describe how the Federal Communications Commission will conduct its review under the Communications Act. While the FCC and the DoJ will coordinate their reviews and work together, the two agencies have very different procedures and operate under very different legal standards. (For those wondering why, you can see this article I wrote on the subject about 15 years ago.)


Details on FCC process below . . .


How Does This Work At The Federal Communications Commission?


The FCC works very differently. Unlike the antitrust agency, the FCC operates under the “public interest” standard of the Communications Act of 1934 (specifically 47 U.S.C. 214(a) and 47 U.S.C. 310(d)). Comcast and Time Warner Cable apply to the FCC to transfer their licenses from Time Warner Cable to Comcast (which is why we refer to them as “Applicants”). Comcast and TWC must not only show that the merger does no harm, but that it actually will affirmatively somehow benefit the public for this transfer to take place.


Critically, unlike in the antitrust case, the burden rests with Applicants Comcast/TWC must show how the merger makes the world a better place, rather than the burden resting on the government to show how the merger would threaten competition. Furthermore, while the FCC must consider the impact of competition, the public interest standard extends beyond traditional competitive concerns. This is why you see Comcast doing things like offering low-cost broadband to families with kids receiving subsidized school meals and partnering with poverty and disabilities groups.


Mind you, the FCC’s public interest authority has limits. Under agency precedent, the FCC will look at public interest benefits and harms that relate to its jurisdiction. Just giving money to charity, for example, doesn’t count. But since the agency has a fairly broad set of issues and goals under the Communications Act, that’s still pretty broad. In addition, the FCC limits its review to “merger specific” issues rather than “broader industry concerns.” I personally find this distinction somewhat artificial (and contrary to the intent of the statute, which views license transfers as one of the ways the FCC regulates the industry), but the law on this is pretty consistent (if inconsistently applied) for the last 20 years.



Application and a Public Record


The relevant FCC rule that outlines this process is 47 C.F.R. 1.945. Comcast and TWC will submit an application to the FCC which details the assets and systems TWC will transfer to Comcast. In addition, the Applicants will include a “Public Interest Statement” explaining why the FCC should grant the application as in the public interest. The Public Interest statement will explain why the proposed transaction (a) what benefits the public can expect as a result of the acquisition; (b) why the acquisition will not actually cause any public interest harms; and (c) to the extent they would cause any public interest harms, what conditions Comcast offers to mitigate these harms.


The FCC will then issue a public notice saying: “hey world, we got this application. Anyone who thinks this matters to them, file in this docket number over here.” Parties will then have some designated period of time to file “Petitions to Deny” the Application for Transfer. Comcast/TWC will have some set period of time to file an “Opposition to Petition To Deny,” and then parties may file “Replies to Opposition.” People supporting the transaction or seeking conditions rather than outright denial can file as well, but they (and other parties that fail to comply with the formal pleading requirements) are designated “informal comments” rather than parties.


Why does this matter? From a legal perspective, what happens at the FCC is very different from what happens with antitrust review. The FCC here is the adjudicator, not the prosecutor. Its job is to make a determination on whether this serves the public interest. The agency has a separate responsibility to independently determine whether the transaction serves the public interest, but it is the parties opposing the transaction that are officially parties and have the right to present evidence and argument against the Applicants. Rather than take the Applicants to court to block the deal, the FCC is the court that decides whether to go ahead with the deal or not.


Because a license transfer is an “adjudication” under the Communications Act, the FCC will make its decision on a public record. When it issues its decision on the Application (more on that below), the FCC must address the arguments made by the parties for or against the deal. Technically, the FCC does not have to address the “informal objections,” but it generally does. Being a formal party, rather than an informal commentor, also impacts your appeal rights.


Although the FCC has set deadlines for Petitions to Deny and other pleadings, it will generally designate a license transfer of this size as a “permit but disclose” proceeding. That means you can file a document or meet with FCC staff on the matter until just about the last minute until they decide. Also, while the record will be public, the FCC will invariably issue protective orders allowing parties to designate their responses as confidential business information – shielding large portions of the record from public examination. (I will save my rant on the abuse of protective orders in FCC proceedings for another time.)


Along the way, the FCC will probably ask Comcast and TWC for more data, but it will not use subpoenas like the DoJ. It’s chief stick to get parties to submit more information is that it will refuse to move forward on the transaction until the parties provide what they want. The scope and nature of these data requests, and whether the FCC is caving to political pressure or “over-reaching” with overly broad information requests is a perennial flashpoint in just about every deal of this size.



How The FCC Decides.


The FCC will have a merger review staff chugging away on all the data and arguments submitted by supporters and opponents of the deal. While the FCC does not officially count up support on one side and opposition on the other side, the FCC (and DoJ and Congress) will look to see general levels of support and opposition. Technically this shouldn’t matter, but as I’ll discuss in the politics section this can matter quite a bit – especially if the record gets lopsided either in favor of a transaction or in opposition.


The FCC generally tries to finish reviewing a merger in 180-days. This “shot clock” is entirely voluntary by the agency and has no basis in either the statute or the regulations (I am old enough to remember when the FCC adopted the ‘shot clock’ under Chairman Bill Kennard in response to Congressional criticism that the FCC wasn’t consolidating the industry fast enough.) Nevertheless, over the course of the merger, you will hear people constantly obsessing about the shot clock and whether the agency will “stop the clock” because of some new development or whether the agency will go past the deadline for decision.


Ultimately, FCC staff will make a recommendation to the Chairman, and the Chairman will circulate a proposed order to the other Commissioners for a vote. Because the FCC is a Commission, the Chairman needs a majority (two other Commissioners) to approve an Order. Accordingly, the Chair may or may not need to negotiate with other Commissioners to get a majority. During the period when the Order is on circulation we generally see a frenzy of activity as parties try to negotiate at the last minute.



How The FCC Order Works.


In theory, because applications to transfer licenses are “adjudications,” the FCC is supposed to refer the matter to an Administrative Law Judge (ALJ) to decide if the Application serves the public interest. However, the Commission may grant the application directly without going to an ALJ if it determines that there are “no issues of material fact” for the ALJ to decide. Over the years, what used to be the exception to allow the FCC to clear out easy cases has become the general rule.


(Technically, the decision can be made in the first instance by the relevant Bureau on ‘delegated authority.’ But that is extremely unlikely to happen here, despite some relatively big transactions being decided at the Bureau level in recent years.)


Almost always, the FCC will find that grant of an application “serves the public interest” and that no issues of material fact remain – allowing the Commission to decide the matter without sending it to an ALJ. Technically, the FCC does not “impose” conditions on the transfer. Rather, the Applicants voluntarily agree to accept conditions to resolve concerns that would otherwise require an ALJ to adjudicate. As part of the license transfer, the FCC incorporates the “voluntary” conditions into the licenses, making them binding as a matter of law and enforceable by the Commission.


Opponents of the transfer who don’t like the approval of the deal can either file a Petition for Reconsideration by the Commission, or file an appeal with the D.C. Circuit. Since the parties can go ahead and merge while the appeal is pending, and such appeals are almost never granted, the show is pretty much over after the FCC decides to grant the application.



What If The FCC Decides To Block The Deal?


On rare occasions, when the FCC decides that conditions won’t cut it, the FCC does not deny the application outright. Instead, the FCC writes a long Order determining that there are “issues of material fact” as to whether the license transfer would serve the public interest and refers the matter to an ALJ for a full evidentiary hearing to resolve the issues outlined in the Order.


In theory, the Applicants can then go to an ALJ. But this never happens. Why? Because the parties to the ALJ proceeding are the parties that filed Petitions to Deny to block the merger. Remember, the FCC is the fact finding judge, not the party trying to block the merger, a situation totally different from the DoJ or FTC (although the FCC has an independent obligation to investigate, it relies on this adversarial process). Worse from the perspective of the Applicants, the parties challenging the deal get to have their own discovery, cross-examine witnesses under oath, cross-examine and challenge the experts employed by the applicants, and bring their own expert witnesses in opposition.


The process can take forever, and puts the merging parties thoroughly under the microscope. Nor can Applicants challenge a referral to a hearing in the D.C. Circuit. The statute only allows parties to appeal from a denial of a license transfer. Under well established principles of administrative law, the merging parties must exhaust their administrative remedies before appealing to a court. That means having the ALJ trial, then appealing the ALJ determination to the relevant Bureau, then appealing that to the full Commission. Only after doing all of that does a party get to the D.C. Circuit.


As a result, referral to an ALJ for a hearing is pretty much considered the kiss of death for a merger.  The two times it has happened in the last 10+ years, the DISH/DIRECTV deal and the ATT/TMO deal, the applicants dropped the deal a few weeks later.



Up next: Congress, The White House and the Public.


Part I: Intro and Summary


Part II: Antitrust Review

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