Northwestern Indiana Telephone Company, Inc., et al., Appellants, v. Federal Communications Commission, Appellee, 824 F.2d 1205 (D.C. Cir. 1987)

This case involves a dispute between the Federal Communications Commission ("FCC"), a telephone company in Indiana owned by an individual named Robert Mussman, and a cable television company owned and managed by Robert Mussman's son Rhys. Northwestern Indiana Telephone Company ("NITCO"), and Northwest Indiana CATV, Inc. ("Northwest"), the cable company, petition this court to review decisions by the FCC holding that the two companies violated the agency's telephone/cable cross-ownership rules, 47 C.F.R. Sec. 63.54 (1986), as well as section 214(a) of the Communications Act of 1934, 47 U.S.C. § 214(a) (1982). The FCC decided that NITCO and Northwest were "affiliates," making NITCO's agreement to construct cable television facilities for Northwest in its telephone service area, and NITCO's lease of telephone pole space to Northwest, violations of the Commission's rules. The FCC also held that NITCO violated the statute by failing to obtain certification from the Commission before constructing the cable television facilities for Northwest. Because the Commission's finding of "affiliation" was based in part on criteria that appear inconsistent with the Commission's own rules and precedent, we remand the case for further explanation.

A cable television operator transmits signals to customers by way of coaxial cable. The cable operator first collects the signals from the airwaves with an antenna or microwave receiver, amplifies and converts them using a "headend" device, and then sends them along a branching series of distribution cables until they ultimately reach the homes of individual subscribers. A cable operator usually gains access to the required distribution cables in one of three ways. The most expensive option is for the cable operator to build its own facilities. Alternatively, it can lease space on existing telephone poles and string its own cables along the poles. Or the telephone company can itself install, own and operate the cables and transmit signals for the cable operator by offering a "channel distribution" service. See General Tel. Co. of California v. FCC, 413 F.2d 390, 393 (D.C. Cir.), cert. denied, 396 U.S. 888, 90 S. Ct. 173, 24 L. Ed. 2d 163 (1969). Northwest, the cable operator in this case, chose what appears to be a combination of the second and third options: although Northwest owns the facilities, NITCO, the local telephone company, not only leased space on its poles, but actually installed the cable lines as well.

A competitor of Northwest complained to the FCC in 1983 that NITCO and Northwest were engaged in conduct prohibited by the Commission's rules governing affiliations between telephone companies and cable operators, and contended that NITCO had improperly constructed the cable facilities for Northwest without obtaining a certificate from the Commission. In response, NITCO and Northwest denied that a certificate was required, and also denied any affiliation. NITCO and Northwest did acknowledge, however, a number of past and current business relations between the two companies (or their principals) in addition to the lease of pole space and construction of the cable facilities. These transactions included: Robert Mussman's lease of office space to Northwest; NITCO's lease of land used as the site of Northwest's antennas and other cable equipment; a paid consulting agreement between Rhys Mussman and NITCO; Robert Mussman's personal guarantee of $450,000 in bank loans made to Northwest, and of Rhys' agreement to indemnify one of the localities served by Northwest against costs arising from litigation involving Northwest; and Northwest's use of NITCO's post office box and mailing address. The two companies also admitted that Rhys had (falsely) represented to various town officials that Robert Mussman was an officer of Northwest.

In an opinion released on March 18, 1985, the Commission determined that NITCO and Northwest were affiliates within the meaning of the FCC's telephone/cable cross-ownership rules. See Comark Cable Fund III, 100 F.C.C.2d 1244 (1985). These rules prohibit a telephone company from furnishing cable television to the public in the telephone company's telephone service area, either directly, or indirectly through an affiliated cable company, including renting pole space to an affiliate. 47 C.F.R. Sec. 63.54.¹  Note 1(a) to the rules defines the term "affiliate" as including "any financial or business relationship whatsoever by contract or otherwise, directly or indirectly, between the carrier and the customer, except only the carrier-user relationship." The Commission stated that five of the interconnections NITCO and Northwest had admitted--the loan guaranty; the guaranty of the indemnification agreement; the consulting contract; the public representations as to Robert Mussman's role in Northwest; and the agreements to construct Northwest's cable television systems--"together with all the other facts set forth" in the decision, led to the conclusion that NITCO and Northwest were affiliates. 100 F.C.C.2d at 1253. Because Northwest was an affiliate, NITCO had violated the FCC rules by leasing pole space to Northwest and by constructing and maintaining the three cable television systems for Northwest. The Commission also decided that NITCO had not legally constructed cable facilities for the transmission of broadcast television signals since it lacked a certificate required by 47 U.S.C. § 214(a),²  and therefore ordered NITCO to terminate all affiliations with Northwest and to divest all the cable facilities.

NITCO asked the Commission to reconsider, arguing, inter alia, that the FCC's reasoning was inconsistent with a FCC opinion, released only weeks earlier, in which the Commission authorized a telephone company to construct channel distribution facilities to be partially owned by a cable operator without finding that the transaction created an affiliation under Note 1(a) of the cross-ownership rules. See The Chesapeake and Potomac Telephone Co., 57 Rad.Reg.2d 1003 (1985) ("C & P "). The Commission denied reconsideration, explaining that unlike the present case the C & P transaction "involved a 'carrier-user relationship' within the meaning of the sole exception to the broad language in Note 1(a)." Comark Cable Fund III, 103 F.C.C.2d 600, 609 (1985). The FCC reiterated four of the five relationships emphasized in the first decision (but not Rhys Mussman's public statements) and added three more to the list: the lease of office space to Northwest; the lease of land for Northwest's cable equipment; and NITCO's lease of telephone pole space to Northwest. Although the FCC's first opinion had based the determination of affiliation on "all of the ... facts" taken together, the opinion denying reconsideration stated that "each of [the seven listed relationships] was and continues to be prohibited by Section 63.54," suggesting that any one of the relationships alone would create an affiliation. 103 F.C.C.2d at 602.³ 

NITCO and Northwest thereafter filed their petition for review in this court and, while the petition was pending, requested that the Commission stay its order. The Commission subsequently issued a third opinion, granting the stay but conditioning it on terms that NITCO and Northwest declined to accept.

The FCC's telephone/cable company cross-ownership rules define "affiliate" in sweeping terms, covering, as we have noted, telephone companies and cable operators that have "any financial or business relationship whatsoever." 47 C.F.R. Sec. 63.54 Note 1(a). The rules contain an exception, however, for the "carrier-user relationship," which apparently refers to the offerings of a common carrier. NITCO and Northwest argue that this "carrier-user" exception is ill-defined and has been interpreted inconsistently by the FCC to authorize certain relationships between favored applicants but prohibit similar relationships between others. In the present case, petitioners argue, several of the transactions between NITCO and Northwest listed by the Commission are almost identical to transactions that fell within the "carrier-user" exception in C & P and other cases. Although an agency's reasonable interpretation of its own rules is normally due deference, Udall v. Tallman, 380 U.S. 1, 16-17, 85 S. Ct. 792, 801, 13 L. Ed. 2d 616 (1965), we agree, in light of C & P, that the Commission's treatment of at least two of those transactions--NITCO's lease of telephone space to Northwest, and NITCO's agreement to construct and maintain Northwest's cable facilities--is in need of further explanation.⁴ 

The Commission's claim that NITCO's lease of pole space to Northwest supports a finding of affiliation between the companies is on its face inconsistent with the very language of the cross-ownership rules. Section 63.54(b) of the rules prohibits a telephone company from renting telephone pole space to an affiliated cable operator. It obviously follows that a telephone company can offer pole space to a cable operator that is unaffiliated. Indeed, a different section of the rules actually requires a telephone company to lease pole space under certain circumstances. See 47 C.F.R. Sec. 63.57. If renting pole space converts the lessee into an affiliate of the lessor, as the Commission's opinion suggests, a telephone company would be prohibited by the rules from ever renting pole space to any cable company at all. We simply cannot understand, then, how the lease of pole space by itself could be evidence of affiliation.

The significance of NITCO's construction of cable facilities for Northwest is more uncertain. We start with the undisputed proposition that a telephone company may construct, maintain and own channel distribution facilities and use them to transmit television signals for independent cable operators without running afoul of the Commission's cross-ownership rules.⁵  That is so because early in the history of cable television regulation the Commission decided that a telephone company undertakes only a common carrier service when it transmits, using its own facilities, television signals for cable operators. See Common Carrier Tariffs for CATV Systems, 4 F.C.C.2d 257, 260 (1966). See also General Tel. Co. of California, 13 F.C.C.2d 448, 454, reconsid. denied, 14 F.C.C.2d 170 (1968), aff'd, 413 F.2d 390, cert. denied, 396 U.S. 888, 90 S. Ct. 173, 24 L. Ed. 2d 163 (1969). The Commission thus treats a channel distribution service as falling within the "carrier-user" exception to the Note 1(a) definition of affiliate.

But judging from the Commission's recent decision in C & P, the carrier-user exception is evidently not limited to the provision of channel distribution services. In that case, the telephone company, C & P, proposed to construct and maintain channel distribution facilities on telephone pole space leased by a cable operator, and to retain legal title to the facilities. The otherwise unaffiliated cable operator agreed to pay C & P for the cost of construction (over a period of four years), assume some of the risks and benefits of ownership, and use the transmission system for substantially all of its useful life. The Commission approved the transaction, explaining that " [d]espite the broad language of [Note 1(a) ] we do not believe that it prohibits C & P, the title owner of the facilities, from granting to [the cable operator] the tax benefits or other economic risks and benefits of ownership. C & P has no control over the cable provider or the cable service nor is there any common control over the two companies." 57 Rad.Reg.2d 1003, 1008 (1985) (emphasis added). In the present case--but not in C & P itself--the Commission described all aspects of the C & P/cable operator relationship as covered by the "carrier-user" exception to Note 1(a), because the transactions "involved a proposed tariff offering comparable to traditional common carrier tariffed channel service offerings." 103 F.C.C.2d at 610 n. 21. Here is our difficulty: in light of C & P, the boundaries of the "carrier-user" exception are not clear. The transaction in C & P included the transfer of certain attributes of ownership in channel distribution facilities, but nevertheless fell within the "carrier user" exception. The Commission has not adequately explained why a transfer of ownership rights in toto--as occurred in the present case--is treated differently.⁶ 

To be sure, the Commission cited factors other than the telephone pole leases and the construction agreements as evidence of affiliation between NITCO and Northwest. If it were apparent from the Commission's opinions that these other factors created an affiliation without regard to the lease and construction agreements, and that the divestiture remedy would have been selected on the basis of those other factors standing alone, we would review that determination without remanding.⁷  But the Commission's opinions are not so clear. See supra p. 1208 and n. 3. Since we are reviewing an administrative agency, and not a district court, we cannot affirm on grounds other than those presented by the Commission itself. See SEC v. Chenery Corp., 318 U.S. 80, 88, 63 S. Ct. 454, 459, 87 L. Ed. 626 (1943). We therefore, unfortunately, must prolong this dispute by remanding the case on this ground.⁸ 

As we noted above, NITCO built three cable television systems, each of which was to be owned and operated by Northwest. NITCO did not obtain a section 214 certificate from the Commission, and the FCC decided that NITCO was prohibited from constructing the channel distribution facilities without such authorization. Although the Commission's brief maintains that NITCO would have needed a section 214 certificate even if Northwest had not been an "affiliate" (the Commission's position on this issue during the proceedings below was somewhat unclear), FCC counsel acknowledges a lack of precedent for this interpretation. Since all parties agree that a certificate would be required if NITCO and Northwestern are properly determined to be affiliated, we think it prudent to reserve judgment on this novel question. If on remand the FCC finds NITCO and Northwest to be affiliated we may not have to reach the issue.

NITCO's and Northwest's final argument is that the Due Process clause of the Fifth Amendment guarantees them an evidentiary hearing before they can be deprived of property by order of the Commission. We disagree. There can be no question that NITCO and Northwest each received notice of the specific charges in the proceedings below and each responded in writing on numerous occasions. See Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 546, 105 S. Ct. 1487, 1495, 84 L. Ed. 2d 494 (1985). Moreover, the Commission explained that it viewed the evidence of affiliation in the light most favorable to petitioners. There was thus no material factual dispute before the agency, but rather, only disagreement as to the legal conclusions to be drawn from the version of the facts provided by petitioners. Due Process does not require a trial-type hearing under these circumstances. See RKO General, Inc. v. FCC, 670 F.2d 215, 231-32 (D.C. Cir. 1981).

This case is remanded for proceedings consistent with our opinion.

So ordered.