Patricia F. Lewis
RTV 5702 -- Telecommunications Regulation
6 November 1995

An Analysis of Chesapeake & Potomac Tel. Co. v. US, 42 F.3d 181 (4th Cir. 1994), cert. granted, Nos. 94-1893 & 94-1900

Part One: Case Brief

Cause of Action: Is the government in violation of the First Amendment in prohibiting local exchange carriers (LECs) and their affiliates from providing video programming to subscribers within their service areas?

Facts: Chesapeake & Potomac (C&P) Telephone Company and its video programming affiliate applied for a cable franchise from the City of Alexandria, VA. The city denied the application based on its belief that to grant such a franchise would be in violation of Section 533(b) of the Cable Communications Act of 1984 which prohibits LECs from providing video programming to subscribers in their services areas. In response to its request being denied, C&P brought action against the federal government, the Federal Communications Commission (FCC), and the Attorney General, charging that Section 533(b) violates the First Amendment. The National Cable Television Association (NCTA) was granted permission to intervene as a defendant. Both parties filed motions for summary judgment.

Proceedings Below: The United States District Court for the Eastern District of Virginia, Chesapeake & Potomac Tel. Co. v. US, 830 F.Supp. 909, granted plaintiffs' motion and denied defendants' motion. The defendants appealed.

Issues: There were two issues for the court to decide. What level of First Amendment scrutiny -- minimal, intermediate, or strict -- should be employed in assessing Section 533(b) and using the appropriate test, is Section 533(b) of the Cable Communications Act of 1984 unconstitutional.

Holdings: The court chose to subject Section 533(b) to intermediate scrutiny and affirmed the lower court's ruling in finding that the cable-telco cross-ownership restrictions improperly infringe on the plaintiffs' First Amendment right to freedom of expression.

Reasoning: The court first had to decide whether to subject Section 533(b) to strict, intermediate, or minimal scrutiny. In rejecting minimal scrutiny, the court relied on precedents set in a number of earlier cases, most notably Turner Broadcasting System, Inc. v. FCC, 114 S. Ct. 2445 (1994), FCC v. National Citizens Commission for Broadcasting, 436 U.S. 775 (1978), and Associated Press v. United States, 326 U.S. 1 (1945). The court rejected strict scrutiny on the basis of Section 533(b) being content neutral. The court, therefore, chose to subject Section 533(b) to intermediate scrutiny and isolated the three prongs of the test in finding it unconstitutional:

(1) The interests which Section 533(b) purports to serve must be "significant." The court held that the interests are not significant based on Turner, which said, in part: "Assuring that the public has access to a multiplicity of information sources is a governmental purpose of the highest order, for it promotes values central to the First Amendment." Additionally, it found that restricting the number of video programming outlets would actually hinder serving the public interest.

(2) Section 533(b) must be "narrowly tailored" to serve those interests. Before the court could determine if Section 533(b) is as narrowly tailored as possible, it had to understand precisely how Section 533(b) prevents the anticompetitive practices of pole access discrimination and cross-subsidization. The court found that "the theory behind Section 533(b) [is] far from apparent" and held that:
• If the existing Pole Attachment Act is not sufficient to prevent discrimination, more effective legislation targeting this practice could be implemented. Also, if such discrimination is the sole concern, a ban on providing video programming places more of a burden on speech than necessary.
• A telephone company must have both the ability and the incentive to engage in cross-subsidization. The court determined that Section 533(b) does not prohibit cross-subsidization (while pointing out that the appellants had not argued otherwise) and that it does not eliminate the incentive to cross-subsidize. The court agreed that new legislation could, under the constitution, address these problems, but it was unconvinced that Section 533(b) is as narrowly tailored as possible.

(3) Section 533(b) must "leave open ample alternative channels for communication of the information' the transmission of which Section 533(b) regulates." To satisfy this prong, the "alternative channels must be sufficiently similar to the method foreclosed by the regulation." The court ruled that Section 533(b) does not meet this requirement because it bars, in all cases, telephone companies from offering video programming.

Part Two: Comment

The cable-telco cross-ownership issue is closely related to the concept of video dialtone (VDT). To fully understand the cross-ownership ban, it is critical also to understand VDT and the differences between the two. Video dialtone is the framework developed by the FCC that allows the LECs to compete with the cable companies while remaining within the constraints of the cross-ownership ban. Under the VDT Orders issued by the FCC, LECs are permitted to act as common carriers to video programming providers, but they are not permitted to control the content themselves. The distinguishing features between cable and VDT are: (1) LECs only transport video programming; the LECs do not select, price, or package video programming; cable operators, on the other hand, make editorial decisions; and (2) VDT customers are not cable operators because they do not control the telephone companies' facilities.

The question remains: was the Circuit Court was correct in finding Section 533(b) unconstitutional? Yes. While the author does not believe -- as some in Congress would have it -- that local telephone companies should be allowed to enter the cable and long distance markets unchecked and without any regulation, Section 533(b) clearly failed the intermediate scrutiny test. Additionally, the cross-ownership ban makes competition in the cable market very unlikely as other potential competitors do not have the technical infrastructure or capital needed to effectively compete.

Legislation now being finalized in a joint Senate-House committee will, if signed by the President, will overtake the need for judicial action in this case. The Supreme Court is scheduled to hear oral arguments in the C&P case on December 6 and the final bill should reach the President at about the same time. Although the timetable for entry may not be agreeable to the LECs, the proposed legislation will likely eliminate the cross-ownership ban and establish the much discussed "level playing field" which allow the LECs to compete head-to-head with the cable companies in their service areas.