Archives For transaction review

The Wall Street Journal dropped an FCC bombshell last week, although I’m not sure anyone noticed. In an article ostensibly about the possible role that MFNs might play in the Comcast/Time-Warner Cable merger, the Journal noted that

The FCC is encouraging big media companies to offer feedback confidentially on Comcast’s $45-billion offer for Time Warner Cable.

Not only is the FCC holding secret meetings, but it is encouraging Comcast’s and TWC’s commercial rivals to hold confidential meetings and to submit information under seal. This is not a normal part of ex parte proceedings at the FCC.

In the typical proceeding of this sort – known as a “permit-but-disclose proceeding” – ex parte communications are subject to a host of disclosure requirements delineated in 47 CFR 1.1206. But section 1.1200(a) of the Commission’s rules permits the FCC, in its discretion, to modify the applicable procedures if the public interest so requires.

If you dig deeply into the Public Notice seeking comments on the merger, you find a single sentence stating that

Requests for exemptions from the disclosure requirements pursuant to section 1.1204(a)(9) may be made to Jonathan Sallet [the FCC’s General Counsel] or Hillary Burchuk [who heads the transaction review team].

Similar language appears in the AT&T/DirecTV transaction Public Notice.

This leads to the cited rule exempting certain ex parte presentations from the usual disclosure requirements in such proceedings, including the referenced one that exempts ex partes from disclosure when

The presentation is made pursuant to an express or implied promise of confidentiality to protect an individual from the possibility of reprisal, or there is a reasonable expectation that disclosure would endanger the life or physical safety of an individual

So the FCC is inviting “media companies” to offer confidential feedback and to hold secret meetings that the FCC will hold confidential because of “the possibility of reprisal” based on language intended to protect individuals.

Such deviations from the standard permit-but-disclose procedures are extremely rare. As in non-existent. I guess there might be other examples, but I was unable to find a single one in a quick search. And I’m willing to bet that the language inviting confidential communications in the PN hasn’t appeared before – and certainly not in a transaction review.

It is worth pointing out that the language in 1.1204(a)(9) is remarkably similar to language that appears in the Freedom of Information Act. As the DOJ notes regarding that exemption:

Exemption 7(D) provides protection for “records or information compiled for law enforcement purposes [which] could reasonably be expected to disclose the identity of a confidential source… to ensure that “confidential sources are not lost through retaliation against the sources for past disclosure or because of the sources’ fear of future disclosure.”

Surely the fear-of-reprisal rationale for confidentiality makes sense in that context – but here? And invoked to elicit secret meetings and to keep confidential information from corporations instead of individuals, it makes even less sense (and doesn’t even obviously comply with the rule itself). It is not as though – as far as I know – someone approached the Commission with stated fears and requested it implement a procedure for confidentiality in these particular reviews.

Rather, this is the Commission inviting non-transparent process in the midst of a heated, politicized and heavily-scrutinized transaction review.

The optics are astoundingly bad.

Unfortunately, this kind of behavior seems to be par for the course for the current FCC. As Commissioner Pai has noted on more than one occasion, the minority commissioners have been routinely kept in the dark with respect to important matters at the Commission – not coincidentally, in other highly-politicized proceedings.

What’s particularly troubling is that, for all its faults, the FCC’s process is typically extremely open and transparent. Public comments, endless ex parte meetings, regular Open Commission Meetings are all the norm. And this is as it should be. Particularly when it comes to transactions and other regulated conduct for which the regulated entity bears the burden of proving that its behavior does not offend the public interest, it is obviously necessary to have all of the information – to know what might concern the Commission and to make a case respecting those matters.

The kind of arrogance on display of late, and the seeming abuse of process that goes along with it, hearkens back to the heady days of Kevin Martin’s tenure as FCC Chairman – a tenure described as “dysfunctional” and noted for its abuse of process.

All of which should stand as a warning to the vocal, pro-regulatory minority pushing for the FCC to proclaim enormous power to regulate net neutrality – and broadband generally – under Title II. Just as Chairman Martin tried to manipulate diversity rules to accomplish his pet project of cable channel unbundling, some future Chairman will undoubtedly claim authority under Title II to accomplish some other unintended, but politically expedient, objective — and it may not be one the self-proclaimed consumer advocates like, when it happens.

Bad as that risk may be, it is only made more likely by regulatory reviews undertaken in secret. Whatever impelled the Chairman to invite unprecedented secrecy into these transaction reviews, it seems to be of a piece with a deepening politicization and abuse of process at the Commission. It’s both shameful – and deeply worrying.

We’re delighted to welcome two new bloggers to Truth on the Market: Gus Hurwitz and Ben Sperry.

Hurwitz-Israel-cropGus is an assistant professor of law at the University of Nebraska. His work looks at the interface between law and technology and the role of regulation in high-tech industries. He has a particular expertise in telecommunications law and technology. His current work focuses on administrative law and the FTC (as you might have noticed from his two contributions to our recent Section 5 UMC Symposium. His SSRN page is here.

Gus was the inaugural Research Fellow at the University of Pennsylvania Law School’s Center for Technology, Innovation and Competition (CTIC), prior to which he was a Visiting Assistant Professor at George Mason University Law School. From 2007–2010 he was a Trial Attorney with the United States Department of Justice Antitrust Division in the Telecommunications and Media Enforcement Section (but I try not to hold that against him).

Gus also has a background in technology, with stints at Los Alamos National Lab and the Naval Research Lab prior to law school. Unique (as far as I know) among the bloggers here, he is also the former holder of a world record (for Internet2 land speed) with the Guinness Book of World Records.

Like others among us at TOTM, Gus earned his JD at the University of Chicago Law School, where he was an articles editor on the Chicago Journal of International Law and received Olin and MVP2 law and economics scholarships. He also holds an MA in Economics from George Mason University. He received his BA from St. John’s College.

sperry square edited

Ben Sperry is the Associate Director of the International Center for Law & Economics. Previously he engaged in technology policy at free market organizations like TechFreedom and the Competitive Enterprise Institute. While in law school, he clerked at the Institute for Justice and served as a summer legal fellow at the Washington Legal Foundation. Sperry graduated from George Mason University School of Law cum laude in 2012, where he was a member of the George Mason Law Review and a research assistant for Todd Zywicki. His areas of expertise include competition policy, telecommunications law, economic freedom and the law and economics of privacy, civil liberties and the First Amendment. He has written most recently on the law and economics of transaction reviews at the FCC and on Section 5 UMC.

We’re delighted to have these excellent new additions to our roster. Look for inaugural posts from each of them this weekend or early next week.

by Larry Downes and Geoffrey A. Manne

Now that the election is over, the Federal Communications Commission is returning to the important but painfully slow business of updating its spectrum management policies for the 21st century. That includes a process the agency started in September to formalize its dangerously unstructured role in reviewing mergers and other large transactions in the communications industry.

This followed growing concern about “mission creep” at the FCC, which, in deals such as those between Comcast and NBCUniversal, AT&T and T-Mobile USA, and Verizon Wireless and SpectrumCo, has repeatedly been caught with its thumb on the scales of what is supposed to be a balance between private markets and what the Communications Act refers to as the “public interest.” Continue Reading…

By Geoffrey Manne, Matt StarrBerin Szoka

“Real lawyers read the footnotes!”—thus did Harold Feld chastise Geoff and Berin in a recent blog post about our CNET piece on the Verizon/SpectrumCo transaction. We argued, as did Commissioner Pai in his concurrence, that the FCC provided no legal basis for its claims of authority to review the Commercial Agreements that accompanied Verizon’s purchase of spectrum licenses—and that these agreements for joint marketing, etc. were properly subject only to DOJ review (under antitrust).

Harold insists that the FCC provided “actual analysis of its authority” in footnote 349 of its Order. But real lawyers read the footnotes carefully. That footnote doesn’t provide any legal basis for the FTC to review agreements beyond a license transfer; indeed, the footnote doesn’t even assert such authority. In short, we didn’t cite the footnote because it is irrelevant, not because we forgot to read it.

First, a reminder of what we said:

The FCC’s review of the Commercial Agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, “Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties.” We (and others) raised this concern in public comments filed with the Commission. Here’s the agency’s own legal analysis — in full: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” There’s not even an accompanying footnote.

Even if Harold were correct that footnote 349 provides citations to possible sources of authority for the FCC to review the Commercial Agreements, it remains irrelevant to our claim: The FCC exceeded its authority under 310(d) and asserted its authority under 310(d) without any analysis or citation. Footnote 349 begins with the phrase, “[a]side from Section 310(d)….” It is no surprise, then, that the footnote contains no analysis of the agency’s authority under that section.

The FCC’s authority under 310(d) is precisely what is at issue here. The question was raised and argued in several submissions to the Commission (including ours), and the Commission is clearly aware of this. In paragraph 142 of the Order, the agency notes the parties’ objection to its review of the Agreements: “Verizon Wireless and the Cable Companies respond that the Commission should not review the Commercial Agreements because… the Commission does not have authority to review the agreements.” That objection, rooted in 310(d), is to the Commission extending its transaction review authority (unquestionably arising under only 310(d)) beyond that section’s limits. The Commission then answers the parties’ claim in the next paragraph with the language we quoted: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” By doing so without reference to other statutory language, it seems clear that the FCC’s unequivocal, unsupported statement of authority is a statement of authority under 310(d).

This is as it should be. The FCC’s transaction review authority is limited to Section 310(d). Thus if the agency were going to review the Commercial Agreements as part of the transfer, the authority to do so must come from 310(d) alone. But 310(d) on its face provides no authority to review anything beyond the transfer of spectrum. If the Commission wanted to review the Commercial Agreements, it needed to provide analysis on how exactly 310(d), despite appearances, gives it the authority to do so. But the Commission does nothing of the sort.

But let’s be charitable, and consider whether footnote 349 provides relevant analysis of its authority to review the Commercial Agreements under any statute.

The Commission did cite to several other sections of the Communications Act in the paragraph (145) that includes footnote 349. But that paragraph relates not to the review of the transaction itself (or even the ability of the parties to enter into the Commercial Agreements) but to the Commission’s authority to ensure that Verizon complies with the conditions imposed on the transaction, and to monitor the possible effects the Agreements have on the market after the fact. Three of the four statutes cited in the footnote (47 U.S.C. §§ 152, 316, & 548) don’t appear to give the Commission authority for anything related this transaction. Only 47 U.S.C. § 201 is relevant. But having authority to monitor a wireless provider’s post-transaction business practices is far different from having the authority to halt or condition the transaction itself before its completion because of concerns about ancillary agreements. The FCC cites no statutes to support this authority—because none exist.

This is not simply a semantic distinction. By claiming authority to review ancillary agreements in the course of reviewing license transfers, the Commission gains further leverage over companies seeking license transfer approvals, putting more of the companies’ economic interests at risk. This means companies will more likely make the “voluntary” concessions (with no opportunity for judicial scrutiny) that they would not otherwise have made—or they might not enter into deals in the first place. As we (Geoff and Berin) said in our CNET article, “the FCC has laid down its marker, letting all future comers know that its bargaining advantage extends well beyond the stack of chips Congress put in front of it.” In merger reviews, the house has a huge advantage, and it is magnified if the agency can expand the scope of activity under its review.

Thus Harold is particularly off-base when he writes that “[g]iven that there is no question that the FCC has authority to entertain complaints going forward, and certainly has authority to monitor how the markets under its jurisdiction are developing, it is hard to understand the jurisdictional argument even as the worship of empty formalism.” This misses the point entirely. The difference between the FCC reviewing the Commercial Agreements in deciding whether to permit the license transfer (or demand concessions) and regulating the Agreements after the fact is no mere “formalism.”

Regardless, if the FCC were actually trying to rely on these other sections of the Communications Act for authority to review the Commercial Agreements, it would have cited them in Paragraph 143, where it asserted that authority—not two paragraphs later in a footnote supporting the agency’s order assigning post-transaction monitoring tasks to the Wireline Competition Bureau. Moreover, none of these alleged assertions of authority amounts to an analysis of the FCC’s jurisdiction. Given the debate that took place in the record over the issue, a simple list of statutes purporting to confer jurisdiction would be utterly insufficient in response. Not as insufficient as an unadorned, conclusory statement of authority without even such a list of statutes (what the FCC actually did) — but awfully close.

We stand by our claim that the Commission failed to cite — let alone analyze — its authority to review the Commercial Agreements in this transaction. The FCC’s role in transaction reviews has been hotly contested, at least partially inspiring the FCC Process Reform Act that passed this spring in the House. Given the controversy around the issue, the Commission should have gone out of its way to justify its assertion of authority, citing precedent and making a coherent argument — in other words, engaging in legal analysis. At least, that’s what “real lawyers” would do.

But in real politik, perhaps it was naïve of us to expect more analysis from the agency that tried to justify net neutrality regulation by pointing to a deregulatory statute aimed at encouraging the deployment of broadband and claiming that somewhere in there, perhaps, hidden between the lines, was the authority the agency needed—but which Congress never actually gave it.

When the FCC plays fast and loose with the law in issuing regulations, someone will likely sue, thus forcing the FCC to justify itself to a court.  On net neutrality, the D.C. Circuit seems all but certain to strike down the FCC’s Open Internet Order for lacking any firm legal basis.  But when the FCC skirts legal limits on its authority in merger review, the parties to a merger have every incentive to settle and keep their legal qualms to themselves; even when the FCC blocks a merger, the parties usually calculate that t isn’t worth suing or trying to make a point about principle.  Thus, through merger review, the FCC gets away with regulation by stealth—footnotes about legal authority be damned.  Groups like the Electronic Frontier Foundation rightly worry about the FCC’s expansive claims of authority as a “Trojan Horse,” even when they applaud the FCC’s ends.  We know Harold doesn’t like this transaction, but why doesn’t he worry about where the FCC is taking us?