FCC v. BEACH COMMUNICATIONS, INC.

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Argument of John F. Manning

Chief Justice Rehnquist: We'll hear argument first Number 92-603, the Federal Communications Commission and the United States v. Beach Communications, Inc.--

Mr. Manning.

Mr. Manning: Thank you, Mr. Chief Justice, and may it please the Court:

A divided panel of the D.C. Circuit took the extraordinary step of invalidating a portion of an act of Congress, the Cable Act of 1984, on rational basis grounds under the Fifth Amendment.

In particular, the court rejected Congress' judgment that there is less reason for imposing a franchise requirement when cable facilities serve only commonly owned, controlled, or managed multiple-unit dwellings.

Instead, the court concluded that the only rational dividing line between franchised and unfranchised facilities in the use of public rights-of-way.

We submit that the court of appeals erred in redrafting the reasonable line drawn by Congress in defining the term, 1984.

The crux of the issue in this case is the proper classification of satellite master antenna television, or SMATV.

Unlike traditional cable systems, which pick up distant signals at a remote antenna and transmit them to the community through wires running under or over the city streets, an SMATV facility typically sets up a rooftop antenna and then transmits programming by wire to units in a building or group of buildings.

In enacting the Cable Act of 1984, Congress had to decide whether and when an SMATV system should be treated like a traditional cable facility and made subject to franchise requirements.

Contrary to the court of appeals' decision, the line drawn by congress was a reasonable one: an SMATV system is exempt from any franchise requirement if the system serves only multiple-unit dwellings under common ownership, control, or management, and uses no public rights of way.

Unknown Speaker: Are they generally free from FCC regulations, as well?

Mr. Manning: Well, the crux of this case is what a cable system is, and a cable system determines... one's status as a cable system determines whether one is subject to franchise requirements, but there are also other Federal requirements that apply to cable systems as well, such as--

Unknown Speaker: There are other--

Mr. Manning: --There are--

Unknown Speaker: --Requirements that these cable operators, that these small cable operators are subject to.

Mr. Manning: --That's right.

There are, for example, technical requirements dealing with signal interference, with the quality of the signal, and there are other requirements pertaining to rate regulation and so forth that apply to cable systems, but the only thing that's at issue here is whether it's constitutional to impose a franchise requirement on an SMATV facility that serves only commonly-owned buildings.

In enacting the so-called private cable exemption with its common-ownership requirement, Congress made the judgment that it did not want to impose franchise requirements on a building owner or condominium association that decides to put a satellite antenna on the building and provide cable television to its residents, perhaps as an amenity.

Unknown Speaker: Mr. Mann, when you are talking about a franchise requirement, are you talking about a requirement imposed by Congress, or a requirement that... franchise that allows local governments to impose?

Mr. Manning: Under 47 U.S.C. section 541, Congress has provided that with the exception of facilities that are grandfathered under subsection (b) of that section, a cable operator... that is, a person who operates a cable system... must obtain a franchise before beginning to provide cable service.

Unknown Speaker: And a franchise from the Federal Government.

Mr. Manning: Franchise... a franchising authority... it's not clear what they mean by franchise.

The act describes a franchise authority as a Federal, State, or local authority that has power to issue a license, but in practice what it means is a State or local franchise, not a Federal franchise, Your Honor.

Unknown Speaker: So although the act may not be clear, that is in practice what happens.

If you're subject to this requirement you must get a franchise from a State or local government.

Mr. Manning: That's correct.

That's correct, it's a State or local... in practice a State or local franchise requirement, and what Congress decided was that if a building owner or a condo association decides to put a satellite dish on the roof of the building and provide cable service to its tenants, then that would not be subject to a local franchise requirement.

Similarly, if the same building owner or condo association ran a couple of buildings, or ran a building complex and put a satellite antenna on the roof to provide cable television to all the residents in the complex, that also would not be subject to a local franchise requirement.

But where a satellite antenna is set up to serve multiple, separately-owned buildings, or if its wires run over or under the city streets, Congress made the determination that the facility looks more like a traditional cable system and should be subject to franchise requirements accordingly.

Unknown Speaker: Mr. Manning, is that the right-of-way criterion, whether it goes over city streets?

Mr. Manning: That's correct, Your Honor.

Unknown Speaker: So in New York City, you could wire up an entire city block without using city rights-of-way.

Mr. Manning: That's correct, and it could be... as your question suggests--

Unknown Speaker: Which is a lot of people.

Mr. Manning: --It could be quite a number of people, and the judgment that Congress made, that the common-ownership requirement in addition to the right-of-way requirement was a rational basis for distinguishing between franchised and unfranchised facilities, was a reasonable line.

The essence of the rational-basis test is that debatable policy judgments are left to Congress, not the Federal courts, and as this Court explained most recently in Sullivan v. Stroop, a classification in a piece of socioeconomic legislation must be sustained if any state of facts may reasonably be conceived to justify it.

Under that standard, the line-drawn by Congress in this case easily passes constitutional muster.

If a satellite antenna serves only a commonly owned building or set of buildings, a plausible legislator could think that it is more likely that the service is being provided as part of the package of services that management provides to its residents, that it's an incident of residency.

Equivalently, a reasonable legislator could conclude that the service provided by such a satellite antenna would be less likely to be run in the nature of an independent business venture, but even if you take a building complex--

Unknown Speaker: What would be the virtue of that conclusion, that it would be less likely to be run as an independent business venture?

Mr. Manning: --Well, you would think that if you were an owner of a building and you were putting up a satellite dish and providing the service to your tenants, that your primary interest would be in keeping your tenants happy, because you are making a lot more money from their rent, or from their condo fee, than you are from providing them with cable service.

So in that situation, you could conclude that there would be less need to interpose a franchising authority to provide consumer protection, when the building itself is really the provider of the service.

But even if you have a situation where the building is making a contract with an outside SMATV company to set up a satellite antenna on the building, to run the wires, own the wires, service the building, arrange for the programming, and bill the tenants separately, that company is still accountable to one set of owners for the service that it provides from that dish.

Every subscriber who gets service off of that satellite antenna can voice his or her complaints or desires to a single set of owners, and the ownership has a strong incentive to keep the subscribers happy, since there is a substantial interest in keeping the rental fees and the condo fees flowing.

Unknown Speaker: Mr. Manning, is it correct, I guess almost as a matter of definition, that on the scenario you're just describing, every unit of buildings is going to have to have its own complete system?

I mean, there's going to have to be an antenna, and so on, so the... what I'm getting at is the investment is going to be much greater in the cases subject to the exception and the cancellation of the business would consequently be far more disastrous.

Mr. Manning: That's correct, Justice Souter.

I mean, it wouldn't necessarily be a single business, but it would be a single... a single building... I'm sorry, a single building, but it would be a building or building complex.

And what you would do is, you would... it would involve the construction of a satellite head end, and it may or may not involve wiring the buildings, because a lot of these buildings have the old mater antenna television system wiring already in place, so you might or might not be able to use that.

So there is a substantial investment in building the satellite head end facility, and if you were serving a single set of buildings, and the ownership cancels that contract, then you've lost out a lot.

Unknown Speaker: You simply have more at stake in keeping them happy.

Mr. Manning: Right, whereas if you're serving 10 different buildings, then no one owner has that degree of leverage over your service.

And what's more, if a satellite antenna is not limited to serving commonly owned buildings, as Justice Scalia pointed out, it may well be expected, or a reasonable legislature could at least think that you would tend to have more subscribers served by that satellite antenna, because you could wire an entire city block in New York by running a wire from building to building.

In that case--

Unknown Speaker: And the owner would have real monopoly power over that... at least over all the people within that block.

Mr. Manning: --The owner would have substantial leverage, because the alternative for any of the buildings on that block--

Unknown Speaker: Is to put up--

Mr. Manning: --Would be to build your own system.

Unknown Speaker: --Right.

Mr. Manning: And now, I would like to--

Unknown Speaker: And therefore greater need for rate regulation, which the franchising authority would do.

Mr. Manning: --That's exactly right, and you could have... a franchise authority with consumer protection jurisdiction could more profitably exercise control over the rates and consumer service of a satellite antenna that serves separately owned buildings.

And what's more, if you assume, as a reasonable legislator could, that the size of the market served by that facility, served by that head end satellite antenna equipment, is larger if the common-ownership requirement is not met, then the costs of franchising could be spread among a greater number of consumers, and so Congress could have reasoned that the cost-benefit ratio of imposing a franchise requirement on a facility that serves separately owned buildings would be more favorable.

Unknown Speaker: There's a lot of reasons you can think of, aren't there?

I mean... but none of these really appears, as far as we know, in any of the debates.

Mr. Manning: Well, Your Honor, this Court has made perfectly clear in a number of cases, most recently Nordlinger v. Hahn, but perhaps most clearly in the case of Railroad Retirement Board v. Fritz, that the rationale for a piece of legislation does not have to appear in the legislative history or even in purposes articulated on the face of the statute.

That issue was raised very clearly in the Fritz case, where the dissent said that the evidence in that case involved a question of line-drawing between those who would be eligible for dual benefits under the social security system and the railroad retirement system and those who would not be eligible for that double-dipping, and Congress drew a line based on whether one was serving in the... to summarize very sketchily, whether one was serving in the railroad industry or had a current connection in 1974.

The dissent said that that line disserved the purposes of the statute as expressed in the legislative history because it didn't provide all of the people who had vested railroad retirement benefits with their ultimate benefits, and this Court said that the purposes of a statute for purposes of the rational-basis test did not have to be reflected in the legislative history, and that it was

"constitutionally irrelevant whether the rational basis was articulated by the legislature at all. "

The Court also stated that the best evidence of the legislative purpose is the text of the statute itself.

Unknown Speaker: Well, lots of times a bill starts out intending to do one thing and amendments are tacked on, so there may be several different purposes not necessarily consistent with one another.

Mr. Manning: That's exactly right, Mr. Chief Justice.

It's very difficult... as this Court has explained many times, it's very difficult to know precisely why a legislator is moved to vote for or against a particular piece of legislation, and if the rationality of a statute were measured in terms of the reasons suggested by some legislators on the floor or by a committee in a report, it would be very difficult indeed to sustain the validity of much legislation, and it would be quite an impingement on the independence of the legislative branch.

In rejecting the rational justification, what we call the consumer welfare rationale, the court of appeals offered very little explanation in this case.

Consumer welfare rationale was suggested by Judge Mikva, Chief Judge Mikva in his concurring opinion, and endorsed by the FCC on remand.

Rather than addressing the substance of that justification, the court of appeals merely dismissed it by saying, we have no basis for assuming its validity, and by calling it a FCC has wholly failed to flesh out.

Unknown Speaker: Mr. Manning, can I ask you a question about the... I'm not quite sure I entirely understand your rationale.

Are you sort of assuming that one of these singly owned complexes is a separate market?

Mr. Manning: That's correct.

Unknown Speaker: But aren't they... aren't there a lot of these condominium associations in a big city like Washington, or New York?

Mr. Manning: There are a number of these condominium associations, but--

Unknown Speaker: Do they each negotiate separately, or is there a rate that generally applies to all of them?

Mr. Manning: --That I'm not certain of, Your Honor.

Unknown Speaker: But if they're just part of a market, why are they a different part of a larger market if 10 buildings are owned by one person on the one hand and they're all owned by 10 separate people on the other?

Mr. Manning: Well, I think the thing that makes them a market is that what you're talking about when you're talking about a facility, which is the unit that you use to measure whether something's a cable system, you're talking about the hardware, the satellite antenna system, and as Justice Scalia pointed out, if you have a building, you have a satellite antenna that's placed on a building, then the people who own that building and--

Unknown Speaker: Well, if it's just one building, I guess it doesn't matter, because if it's one building it would be owned by one person or one association, but isn't the only... doesn't the problem only arise when you've got a complex of buildings on the one hand owned by a single owner and on the other hand by separate owners?

Mr. Manning: --I'm sorry, I'm not sure what you're asking.

If you have a complex of buildings... if you have the same 10 buildings, and in one case it's owned by a single owner--

Unknown Speaker: Right.

Mr. Manning: --You have a satellite dish on building 1.

It serves all 10 buildings.

Unknown Speaker: Right.

Mr. Manning: The same set of 10 buildings are all separately owned.

You have the satellite dish on building 1 and a wire is run among all 10.

Unknown Speaker: Right.

Mr. Manning: Why... that is the same market in each case, but--

Unknown Speaker: Then let's assume that there are 100 parallels throughout the city.

50 of them are singly owned, and 50 of them are owned by the 10 separate owners.

Now, you're saying that if you don't have regulation, they would all get different rates.

Mr. Manning: --Well, I think that it stands to reason... now, the record does not reflect what the actual practice is.

Unknown Speaker: No, but your theory is that this is what Congress must have thought.

Mr. Manning: The theory is that Congress must have thought that when you're putting the satellite dish on your own buildings--

Unknown Speaker: That units that are economically identical would receive different treatment in an unregulated market.

Mr. Manning: --That would have to be the theory, yes, Your Honor.

Unknown Speaker: Do you think that's sound?

Mr. Manning: I think that it's debatable, which is the only thing that's required under the rational-basis test.

I mean, you and I may disagree just as the--

Unknown Speaker: Is there any economic support for that hypothesis at all?

Mr. Manning: --Well, the support is common sense and the way the world works.

I mean, we may differ in what we think the right answer is to whether you'll get a better deal if you're served by a satellite antenna that only serves people in your building or if you're served by a satellite antenna that serves you and 10 other buildings, and we may disagree over whether the person in building 1 has more leverage because it's part of a collection of 10 buildings that negotiate as one for the service as opposed to 10 separate negotiators for the same service--

Unknown Speaker: Well, there are no brokers, there are no people that represent owners in dealing with the franchise companies in this--

Mr. Manning: --Again, the record is not clear, and the crux of the rational-basis test is that Congress is not disabled from legislating unless it can... it is not disabled from legislating at the risk of not being able to prove that its policy judgments are empirically justifiable or even correct.

That is the very clear import--

Unknown Speaker: --Or have any scholarly support whatsoever for them.

Mr. Manning: --Well, I mean, if you just take a case like Railway Express Agency v. New York, in that case New York City passed an ordinance, and the ordinance provided that there was to be a ban on advertising on trucks, but the ordinance also exempted self-advertisements on the same trucks.

The court said... the court upheld that classification on the ground that a legislator may well assume that those who advertise their own wares present less of a traffic safety concern given the nature and extent of the advertisements on their trucks.

There was no record support for that.

They didn't cite any scholarly treatises, they didn't cite any traffic reports, any economic textbooks.

What the court did was, it indulged in the democratic process by accepting plausible although unverified assumptions about the way the world works.

Unknown Speaker: Is it your position that it's plausible in the situation put by Justice Stevens to say that in the case where there's single ownership there is more leverage and therefore the market is different?

Mr. Manning: We think it's very plausible to think that.

We think that a reasonable legislator certainly could assume that when you have a satellite dish that's being put on a building that a) it's more likely that the satellite service is being offered as an amenity to the tenants, that it may not even be a separate market where the SMATV company comes in, puts on the satellite, bills the tenants and runs it separately.

But secondly, we think it's much more likely that when you have the negotiation focused between one set of owners for use of this very expensive piece of hardware and a satellite company, even if it runs a hundred of these satellite dishes around town, that the people who live within that building are more likely to have leverage over the product consumed than if you have the same company putting a dish on and running it to 10 buildings.

Not only is the accountability more focused, but if a satellite dish can only serve multiple-unit dwellings, it is more likely that you are going to have fewer subscribers, and that means that each subscriber is going to have more leverage over the product produced, and that the cost of franchising will be more significant for... per subscriber for subscribers who live in buildings under common ownership.

Unknown Speaker: Now, Mr. Manning, if you prevail on this argument, and in this case it's your position that we should remand to the court of appeals for the determination of whether or not some other more rigorous standard applies?

Mr. Manning: That's correct, Your Honor.

The court of appeals raised the question whether a fundamental rights equal protection analysis should be applied, but the court did not reach that question, and we believe that the Court should leave it for the court of appeals in first... in the first--

Unknown Speaker: Does the FCC have a position as to what standard applies if there is content significance to the regulations?

Mr. Manning: --Well, the... this Court's cases suggest that... no, we... actually, we have not taken a position in that case, and we would prefer that the Court not address that issue because it has not been addressed by the court of appeals and we think it would be preferable to leave it for consideration by the court of appeals on remand.

Unknown Speaker: Well, two answers... number 1, it would be preferable, and number 2, you don't have a position.

Mr. Manning: We don't have a position, no.

In... we believe that the court of appeals' error in this case stemmed largely from the fact that it perceived that the line drawn by Congress was different than the line traditionally applied by the administrative agency in deciding whether the franchise requirement should be applied... namely, the crossing of public rights-of-way.

The FCC's traditional basis for imposing franchise requirements on cable facilities, however, is irrelevant to the constitutional question before this Court.

Congress has no constitutional duty to adhere to agency precedent or even to give a reasoned explanation for departing from it.

In any case, it is wrong to say that the only dividing line for franchise requirements had been the use of public rights-of-way.

Under FCC regulations in the 1970's, a facility that did not satisfy the common-ownership requirement could be classified as a cable system and thus made subject to franchise requirements whether or not it crossed public rights-of-way.

That ruling is reflected in the FCC's Bayhead decision which is cited in footnote 26 of our brief.

In addition, the FCC's 1983 Earth Satellite decision confirms that the Commission never preempted franchise requirements for the type of facility at issue here... SMATV facilities that serve separately owned buildings by wire.

Unknown Speaker: May I ask one other question about the common-ownership requirement?

Mr. Manning: Certainly.

Unknown Speaker: What is it that must be commonly owned?

A condominium, for example, each person living in the building owns his or her own apartment, but what is it they have a... just the satellite dish, or--

Mr. Manning: The common-ownership requirement we use as a shorthand for common-ownership control or management, so that a condominium association that had multiple units that were under the control or management of a condo association would satisfy the common-ownership requirement, as we call it.

Unknown Speaker: --What if a group of neighbors had an association to manage their satellite dish, with--

Mr. Manning: If they had an association--

Unknown Speaker: --Common ownership of the satellite dish?

That would not count.

Mr. Manning: --I think it probably would not count.

I think that what... it's not clear from the FCC's precedents, but I would think that an organization that was formed simply to, in effect, evade the franchise requirement would be insufficient to do so under the FCC's regulations.

Unknown Speaker: Well, to perform all the management functions that the management of the condominium association performs when it's handling television matters.

Mr. Manning: Yes, but the common ownership control and management requirement generally means that you have a bunch of units that are joined by a common economic link, that the management is providing a number of services.

It collects garbage, it may provide plumbing services, it may provide an answering service at the front desk that serves all these units.

So there is an integrated economic unit.

There's something that holds these units together, and when that's the case, I think that what the common-ownership requirement does is, it gives some assurance the cable system is simply--

Unknown Speaker: But common ownership of the television-related facilities would not be sufficient.

Mr. Manning: --Well, if it's simply another incident of a number of services that are provided by the same group in common--

Unknown Speaker: Well, say you have a neighborhood association that handles the collection of garbage for all the homes on the block, and handles some private security force... some neighborhoods have that... and maybe has... and then decides also to buy a satellite dish.

Mr. Manning: --Well, the more... I mean, the question is, when do you have something under common management for purposes of the rule, and certainly the more services that you add on that are handled in common, the more that it looks as if these buildings are under common management for some purposes.

I'm not--

Unknown Speaker: What if you just have garbage, security protection, protest of tax bills, and management of the satellite dish?

Mr. Manning: --I'm not--

Unknown Speaker: Is that enough?

Mr. Manning: --Your Honor, I'm not sure exactly where the line would be drawn, but I think the proper test would be whether one could say that, apart from the cable television services, that there is a substantial and bona fide common management or control of the buildings.

Unknown Speaker: With leverage in the marketplace.

I don't see how that fits with your rationale that people that are watching the television have diffused control where there's single ownership.

Mr. Manning: Well--

Unknown Speaker: If they get together and they have single control, isn't that precisely--

Mr. Manning: --When the--

Unknown Speaker: --The goal that the Government is trying to reach?

Mr. Manning: --Well, I mean the question is not the constitutional question here but the question of how to interpret the regulation, and it's true that perhaps a group of people could get together and in some cases negotiate together to provide for cable services.

But Congress doesn't have to draw perfect classifications, and what it decided was that it was going to use common ownership control and management in general as a proxy for those situations when all the tenants together have sufficient focus and accountability and bargaining power to get the services they want with the proper consumer responsiveness.

If there are no further--

Unknown Speaker: Did this definition just date from '88, 1988?

Mr. Manning: --No, Your Honor.

The definition goes back to 1965.

In the first set of cable rules, there was what was called an apartment house exception that went through some changes that are not material here.

Along the way, they had a common ownership--

Unknown Speaker: Were there satellite dishes in those days?

Mr. Manning: --In those days, the exception applied mainly to what's known as master antenna television, which was an antenna that was put on the roof and wired to buildings to get broadcast signals so that you wouldn't have a forest of antennas.

Satellite antenna... satellite master antenna television was developed in the late 1970's, but in the Earth Satellite decision in 1983 the Commission made very clear that the common ownership exemption clause--

Unknown Speaker: Is this case the first time the distinction has been challenged in court?

Mr. Manning: --There were two other cases that raised statutory questions of whether an SMATV facility would be a cable system.

Those were two district court cases which are cited in the FCC opinion.

This is the first constitutional challenge to that distinction.

Unknown Speaker: And the Congress has revisited this area several times since '65, I take it.

Mr. Manning: Congress passed the Cable Act of 1984, in which it adopted the common ownership exception, and in 1992 it passed another Cable Act in which it left the exemption unchanged.

Unknown Speaker: Where there was testimony before the committees opposing this distinction.

Mr. Manning: The FCC report on remand says that the matter in this case was brought to the attention of the committee, but I'm aware of no testimony that relates to the question whether to retain the common exemption.

Unknown Speaker: Did the Commission have a position on it?

Mr. Manning: The Commission initially took the position in interpreting the 19... you mean in the 1992 legislation?

Unknown Speaker: No.

The first time this distinction appears you said was in 1964.

Mr. Manning: 1965, in the Commission's first set of rules, yes.

Unknown Speaker: '65.

Did the Commission have a position then, or did they propose it?

Mr. Manning: They... I'm not sure, Your Honor.

If there are no further questions--

Unknown Speaker: Thank you, Mr. Manning.

Ms. Costlow, we'll hear from you.

Argument of Deborah C. Costlow

Mr. Costlow: Mr. Chief Justice, and may it please the Court:

Of all interstate media of communications not using the public streets and rights-of-way to deliver their signal, only a single media... that is, an SMATV facility serving separately owned and managed multiple dwelling units by wire has to obtain a franchise from a municipality in order to enter the market and is subjected to treatment as a cable system.

No franchise is required of an SMATV facility serving a single multiple-unit dwelling.

No franchise is required for that same SMATV operator to install a series of separate satellite dishes in order to serve the exact same apartment dwellings throughout the municipality.

No franchise is required if an SMATV operator wishes to interconnect separately owned or managed buildings by means of an 18-gigahertz microwave link.

No franchise is required of an SMATV facility who seeks to interconnect those same separately owned or managed multiple dwelling units by means of an infrared link.

Unknown Speaker: Ms. Costlow, what are the practical consequences when a franchise is required?

Does that mean that a cable operator will be subject to price regulation by the State or local government?

Mr. Costlow: The burdens that would be imposed upon an SMATV facility that would have to obtain a franchise would be the same burdens that would be imposed upon traditional cable operators, but those burdens would not apply to any other interstate media of communications.

Those burdens would include, for example, having to get a license to speak at all.

If the license is denied, then you cannot speak.

Those burdens would include, on the local level, typically a requirement to wire the entire municipality, not simply to obtain a franchise to interconnect the particular separately owned multiple-unit dwellings that the operator wishes to interconnect.

It would also include--

Unknown Speaker: It would include some sort of the price regulation.

Mr. Costlow: --Yes, it would include price regulation as a result of the '92 act, depending upon whether or not under the statute that particular market and the players within that market are subject to effective competition.

They would always be subject to potential regulation on the Federal level by treatment as a cable system because, as a result of the '92 act, any subscriber can bring a complaint to the Federal Communications Commission that the rates of the particular operator are unreasonable, and that kind of price and rate regulation is not imposed upon SMATV facilities serving a single building, serving commonly owned or managed buildings, serving those same buildings by means of microwave or an infrared link, leasing telephone company lines, for example, in order to interconnect those buildings, because you don't have to obtain a franchise to do that.

In other words, the only time a franchise is required to interconnect separately owned and managed buildings is when those separately owned and managed buildings are interconnected by a simple piece of wire, so the exact distinction here is that you cannot cross a public... a private property boundary line in order to serve separately owned or managed buildings by means of a wire, but you can cross that same private property boundary line to interconnect those same separately owned and managed multiple-unit dwellings by means of a wireless facility.

Unknown Speaker: It's a lot more expensive to... both to install and operate, isn't it?

I mean, you get a wire for a couple of dollars.

Mr. Costlow: It is obviously interconnecting separately owned or managed buildings by means of a piece of cable will be cheaper in all instances for any--

Unknown Speaker: Virtually costless.

Virtually costless.

Mr. Costlow: --I think it's 6 or 12 cents a foot, Your Honor, depending on how much cable is used.

The distinguishing characteristics here between the media who are subject to franchising requirements and the media who are not subject to franchising requirements, I do not believe that you should focus simply on an SMATV facility versus another SMATV facility, but must look at the entire interstate media that is potentially regulated as a result of the Communications Act and the Cable Television Acts which were a part of that act.

Unknown Speaker: Well, do you think a State can choose to regulate telephones without regulating cable?

Mr. Costlow: Telephone companies, Your Honor.

Unknown Speaker: Yes.

Yes, I--

Mr. Costlow: There are incidences of telephone companies that are both intrastate and interstate service, and so there has been a dual regulatory scheme adopted for telephones--

Unknown Speaker: --No, but I--

Mr. Costlow: --Precisely because of that.

Unknown Speaker: --Well, let me use another example.

You think that a State or the Federal Government could choose to regulate wire communications without regulating nonwire communications.

Mr. Costlow: I believe that the Feds and the... the Federal Government or the State government cannot discriminate in the circumstances in which they regulate particular speakers.

In other words, if there are no distinguishing characteristics between the various interstate media of communications, then I submit that it is impermissible to apply a particular set of burdens and to single out--

Unknown Speaker: Are you going to answer my question?

Are you going to get to the answer to my question?

Mr. Costlow: --I'm sorry, Your Honor, I thought that I was answering your question.

Unknown Speaker: I don't know--

Mr. Costlow: I must be misunderstanding your question.

Unknown Speaker: --Well, if you have, I don't know whether it's yes or no.

Can a State or the Federal Government choose to regulate wire communications and not regulate nonwire communications, or vice versa?

Can it distinguish between the two media, yes or no?

Mr. Costlow: Yes, but may I offer an explanation?

Unknown Speaker: Okay, sure.

Mr. Costlow: The explanation is that they can distinguish between those two media only if there are distinguishing characteristics that provide a justification for distinguishing between those media.

Unknown Speaker: One's over the air, one isn't over the air.

One's in wire, the other isn't in wire.

Mr. Costlow: But that is a distinction without a difference.

Whether you are operating a multipoint, multichannel distribution service or whether or not you are operating an SMATV service, you are offering news, entertainment, and information on a multichannel system.

You could have exactly the same programming services offered to subscribers, and I submit that the fact that you choose a particular technology, meaning a wire, versus a particular technology, which is microwave, to deliver those exact same services to consumers, is a distinction without a difference.

Unknown Speaker: How about the line of cases from this Court that say that the legislature can confront evils one step at a time and you know, make exceptions if it wants to?

It doesn't have to sweep every piece off the chessboard when it tries.

Mr. Costlow: Your Honor, it is true that Congress can act one step at a time, but if you look at the particular background and history and context of this particular regulation, the... neither the Federal Government nor Congress have ever subjected interstate media of communications operating by wireless, for example, to local franchising regulation.

They have not subjected to local franchising regulation SMATV facilities serving multiple-unit dwellings either singly or under common ownership management or control, so the step here... there is no indication that Congress is moving one step at a time to subject each of these interstate media to some sort of local franchising regulation.

The step is in the opposite direction.

All interstate media have typically been exempt from local regulation and exclusively under Federal jurisdiction and control, and only in a very rare instance has the Federal Government conceded or permitted local jurisdiction and control over an interstate media of communications.

Unknown Speaker: Well, maybe this... maybe Congress is in the process of changing its mind and is beginning to go the other way.

Mr. Costlow: Your Honor, the FCC has never done so.

The FCC's Orth-O-Vision decision was issued in 1978, which specifically preempted local regulation and control--

Unknown Speaker: Yes, but Congress isn't bound by previous FCC decisions.

I mean, Congress may have decided, look, maybe we want to get the States and local governments into some regulation.

Let's try it out in this area and see how it works.

Mr. Costlow: --Your Honor, Congress in 1984 chose to adopt the Orth-O-Vision decision and exempt wireless from regulation.

They just the 1992 Cable Act, and in that act they again did not subject any sort of wireless facilities to local franchising regulation, so that over the course of the entire history of when each of these media have come into the marketplace, Congress has not determined to impose local franchising regulation unless such facilities used a public street or right-of-way, except in this one, single instance.

Unknown Speaker: Counsel, I take it there's just no evidence in the legislative history as to what Congress thought the justification was for this distinction.

Mr. Costlow: No, Your Honor, there is not.

I must admit that there is evidence that the... at least in the context, that the... that Congress' reason for exempting SMATV's facilities serving commonly owned, the exemption itself serving commonly owned or managed facilities was not system size, that the reason for--

Unknown Speaker: Was not what?

Mr. Costlow: --Was not system size, which is the rationale presented by the Government.

What the rationale was is that was based on a decision issued by the Federal Communications Commission, the Earth Satellite decision, directly prior to the passage of the 1984 Cable Act.

And that decision exempted these types of facilities because they did not use a public street or right-of-way, they were indistinguishable from wireless, they were there to promote the open entry and the unfettered development of interstate satellite signals, and the Federal Communications Commission made a specific finding that local franchising jurisdiction and control acted as a barrier and chilled entry and therefore thwarted the FCC's policy in the unfettered development of interstate satellite signals.

Congress in the... that was a 1983 decision.

Unknown Speaker: Do you think that decision was also irrational?

Mr. Costlow: I don't think the decision to exempt SMATV facilities serving commonly owned or managed buildings was irrational.

The FCC did not reach... it specifically did not reach whether or not it would at some point exempt also facilities serving separately owned and managed dwellings.

They didn't say that they couldn't.

They just didn't reach it, and in '84 Congress adopted that same exemption--

Unknown Speaker: So you just think... you think Congress was just thoughtless when they... they just cribbed this out of a Commission decision.

Mr. Costlow: --That is certainly likely, Your Honor.

The other presumption would be that it is irrational simply because those same interests in which they--

Unknown Speaker: You would think that at some point since 1965 there would have been some considerable objections to this discrimination.

Mr. Costlow: --Your Honor, the first time Congres legislated in this area was '84, so when we were speaking of the definition being in existence since 1965--

Unknown Speaker: I thought counsel on the other side said this distinction first came on the books in '65.

Mr. Costlow: --At the Federal Communications Commission level, not on the congressional level.

The first time Congress legislated was in '84.

When it came up at the FCC level, Your Honor, SMATV facilities did not exist.

What existed were master antenna television facilities.

Unknown Speaker: Yes.

Mr. Costlow: SMATV did not really come into existence--

Unknown Speaker: Well, when... has there ever been objections made to Congress in their hearings since '84, because they certainly have been back in this area.

Mr. Costlow: --There's nothing to show anything on the record in the legislative history.

In 1984, this is the first time that Congres legislated this particular distinction.

When Congress was reconsidering the Cable Act in 1992, that is the time at which the lower court here issued its opinion.

That was made known to Congress.

In fact, it was made known that they were considering issuing that opinion, and then after the opinion was issued, that opinion was also made known to Congress, and we would submit, Your Honor, that the fact that Congress in 1992 knew of the decision here and chose to do nothing about it means that in essence that they have adopted the district court ruling here, but there is nothing on the record that explicitly says that.

Unknown Speaker: Even when that ruling was subject to appeal.

Mr. Costlow: Your Honor, I find it implausible that if Congress truly wanted to keep this distinction, and this distinction had been held unconstitutional by the district of columbia circuit, that Congress would have gambled on the fact--

Unknown Speaker: On us.

Mr. Costlow: --That this Court was grant cert--

Unknown Speaker: Would have gambled on us getting it right?

[Laughter]

Mr. Costlow: --No... I'm sure they would have gambled on this Court getting it right, and I submit that getting it right is affirming the decision below, but I don't think that if Congress felt strongly about this, they would have gambled on this Court potentially denying cert and therefore not reaching the issue.

Unknown Speaker: Ms. Costlow, what does an SMATV company do?

They construct the dish, and then they continue... they decide what programming goes through the dish.

Mr. Costlow: It is incorrect to assume that satellite master antenna television systems are always landlord-provided.

In fact, in practice, that is less then 10 percent of the SMATV facilities that are out there.

These are independent suppliers of cable television services and what they do is exactly the same thing that traditional cable does, that multipoint, multichannel distribution services do, that 18-gigahertz services do--

Unknown Speaker: Are they competitive?

Mr. Costlow: --Yes, they are competitive.

Unknown Speaker: Are there a number of competitors that come to buildings and say, we'd like to run an SMATV service?

Mr. Costlow: And I tell you how they compete.

They compete at the property line.

The property owner looks out in the marketplace and says, I can receive services from traditional cable, I can receive them from SMATV, I can receive them from MMDS.

Unknown Speaker: Okay.

Now, if I'm a property owner that owns a whole square block... I own all the buildings in the block... I would assume I have pretty good bargaining power with the various SMATV companies, right?

I can pretty much say, you know, I'd like to get it at such-and-such a price, I assume, if I have a whole city block in New York, who's all commonly owned, I control a whole block.

Mr. Costlow: That property owner has the same bargaining power whether it's a traditional cable, or SMATV, or MMDS.

Whatever bargaining power the owner has--

Unknown Speaker: Sure, that's true, but now let's assume that the block is not all owned by one person.

There are a hundred different buildings on the block.

One of the buildings signs up with a particular SMATV company.

Do you think that there's any chance that the remaining 99 buildings on the block will have a realistic choice which SMATV company they can use?

I mean, doesn't the SMATV company that signs up the first building have a lock on all other 99, because it costs a couple of bucks to just join the next building with a cable?

How can any of the other SMATV companies hope to compete within that block?

Mr. Costlow: --Are we speaking of separately owned buildings, or commonly owned buildings?

Unknown Speaker: I'm talking now of separately owned buildings.

Mr. Costlow: Your Honor--

Unknown Speaker: If they were commonly owned, as I say, there'd be some bargaining power at the outset, but one building gets the system.

How can any of the other companies hope to compete for the other 99?

Your company, if you're the one that gets the first one, you have a lock on the other 99 buildings.

It costs you a couple of feet of cable, that's all.

Mr. Costlow: --If you can interconnect by wire--

Unknown Speaker: Sure.

Mr. Costlow: --That may be potentially true, but I don't think that it gives you a lot more than the traditional cable operator.

The traditional cable operator has already installed its facilities in the public streets or rights-of-way.

All it has to do is run the same cable to serve these buildings.

Unknown Speaker: Well, that's right, but he's--

Mr. Costlow: So their entry costs are no greater than the entry costs--

Unknown Speaker: --But he's regulated.

Mr. Costlow: --Of an SMATV provider.

Unknown Speaker: But he's regulated--

Mr. Costlow: He's regulated--

Unknown Speaker: --And that's all they're trying to do here... regulate the SMATV provider.

Mr. Costlow: --Your Honor, everyone in the market has the potential to serve a separately owned building.

They have only regulated SMATV operators who operate on private property serving a separately owned building.

A wireless operator can serve a separately owned building without becoming regulated on the local level.

An 18-gigahertz operator can serve a separately owned building without being regulated on the local level, so the fact--

Unknown Speaker: It's a lot more expensive.

The monopoly differential is not as great.

It costs them, to serve each additional building, a lot more energy, whereas you just buy a couple of feet of wire and you've got the new building.

Mr. Costlow: --A wireless cable operator can install service to a multiple dwelling unit for somewhere around $300.

I don't see that as a significant entry barrier, so that in competition between a wireless cable operator meeting a multichannel, multipoint distribution service operator competing for access to that building--

Unknown Speaker: Well, that may be, ma'am, but you see, now, I didn't know that, and maybe a reasonably informed legislator wouldn't know that, and would think, gee, if I'm... you know, if I'm a company trying to compete with another company who's gotten one building in the block, I'm just out of competition, because they only have to... I can see a legislator thinking that and saying, that's sort of a monopoly situation that we ought to allow to be regulated.

I may be wrong, but I can't say that it's off the scope.

Mr. Costlow: --Your Honor, the purposes... I would submit that the purposes of the '84 act as confirmed in the 1992 cable act are a deregulatory purpose, and the purpose of... set forth and the objectives set forth in both those acts by Congress are that they sought to promote competition by free entry, not to impose regulations on system or entry barriers to system.

And I would submit that Congress could not have sought to promote competition in these acts by means of singling out only a particular medium for this kind of regulation as opposed to applying whatever justifies regulation of us justifies regulation of other like-situated media.

The system size rationale is the rationale that's relied upon by the Government here, and I would submit that that system size rationale was expressly rejected by Congress when it adopted the 1984 act.

Prior to the 1984 act--

Unknown Speaker: Well, excuse me, the Government's relying on a leverage rationale, not a crude size rationale, isn't that clear?

Mr. Costlow: --The Government is relying upon the fact that Congress intended to regulate systems of larger size, because systems of smaller size would somehow be more subject to consumer control.

Unknown Speaker: Well, it's resting on the assumption that certain systems will more likely be small and other systems will likely be larger, but the rationale ultimately on those assumptions is based on leverage, not a mere crude size cut-off, isn't that correct?

Mr. Costlow: That is the Government's position, you are correct.

I would submit, however, that a consumer has as much leverage over the owner of that building, whether that owner of that building... I mean, owns one building or three buildings.

Unknown Speaker: That may be so, but that's a different argument.

I mean, that is not an argument that Congress expressly rejected, and you started out by arguing that in rejecting the size rationale it had rejected the Government's argument, and I'm saying it's not quite that clear.

Mr. Costlow: The distinctions between different media and who does and does not have to have a franchise, they did not determine that larger systems such as MMDS or DBS or any of the other private property systems would be subject to local franchising regulation.

I would submit that if Congress were concerned that larger, multichannel video programming distributors serving separately owned buildings because there would be less consumer leverage should be subject to local jurisdiction and control, that they would have subjected all larger systems to such regulation and not simply singled out this particular media.

The Government does not respond to that argument.

The Government says, well, what they meant to do there was simply encourage SMATV facilities, these kinds of SMATV facilities, to migrate to wireless spectrum, and I would submit, Your Honor, that it has never been telecommunications policy to encourage migration to scarce frequencies.

Rather, the policy has been to encourage migration away from such scarce frequencies, and the Government has never, in my mind, submitted a justification for the discriminatory classification between wired facilities and wireless facilities, and I submit that basing that on a migration to wireless spectrum analysis simply is implausible.

Unknown Speaker: With wireless, I guess you can... can you get... does wireless use the public right-of-way if you shoot it across a street?

Is that considered to be using the public right-of-way?

It's not really using it.

Mr. Costlow: That's exactly my point.

None of the facilities at issue here use a public street or right-of-way.

Neither do these SMATV facilities.

Unknown Speaker: Why isn't the distinction between wireless and cable simply the distinction that it cost more, that you do not... the single system that has sold its service to one building on the block has... if it can connect by wire, it has a monopoly over all the other buildings on the block.

Other cable systems cannot... other SMATV systems can't hope to get their business.

If, on the other hand, you made them do it by wireless, the other systems might well come in.

Isn't that enough of a distinction?

Mr. Costlow: I find the fact that Congress would have intended to only harm the market entry and growth of SMATV facilities and not somehow... that they just... they wanted to advance and promote some technologies over others, or some speakers over others, not to be a plausible reason for Congress' actions here, because if you assume that Congress meant to impose, on purpose, greater cost on SMATV facilities that they did not mean to impose on other like-situated media, Your Honor, I have problems with that.

I do not believe that Congress meant to impose additional costs, and if, in fact, what Congress' objective was here was to ensure that these particular SMATV facilities had to be regulated if they got larger, then I submit they haven't achieved their purpose, because everyone can evade that regulation, including these SMATV facilities.

It may cost them to evade that regulation, but they can evade it, and they can get as large as they want, and it just simply doesn't make sense to me that if Congress had meant to subject larger systems to franchising regulation, that they wouldn't have subjected all larger systems to franchising regulation, and it wouldn't come down to the ownership of the building served, which isn't even a characteristic of those various interstate media, and it wouldn't have come down to whether or not it's interconnected by wire over a private property boundary line.

To me, that is an impermissible distinction, an impermissible line-drawing between like media of interstate communications.

That line was drawn with respect to traditional cable prior to the Cable Act because of cable's unique use and burden upon the public streets and rights-of-way.

What does a franchise get an SMATV facility here, Your Honor?

A franchise does not give them the right to speak on private property.

All that a franchise does is give them the right to install facilities in public streets and rights-of-way.

They do not seek to install facilities in public streets and rights-of-way.

They do not seek governmental benefits.

All they seek to do is install facilities on private streets and rights-of-way, so the franchise that Congress has dictated that these facilities must obtain does not even give them the right which they seek, which is to speak on private property.

What gives them the right to speak on private property is the private property owner.

Now, let's say the franchise--

Unknown Speaker: I suppose you could... there is such a thing as franchising the ownership of television sets.

I mean, the way public television is supported in England is by... you have to get a franchise to own a television set.

I mean, I don't know that there's any necessary connection between franchising and public property.

You can franchise things that occur only on private property.

You can franchise certain businesses.

You can't run a certain business on private property.

Mr. Costlow: --But when you franchise those businesses, that gives them the right to enter the market.

When... if you... when you franchise an SMATV operator here, that alone does not give the SMATV operator the right to enter the market.

The SMATV operator--

Unknown Speaker: Yes, it does.

It gives you the right to connect other buildings that aren't owned by the same... by common control to connect other buildings with a little piece of cable.

Mr. Costlow: --Not without the permission of the private property owner.

That is an additional act that must occur, so that even if I went and got a franchise which enabled me to interconnect separately owned and managed dwellings, that alone would not give me the right to enter the market.

Unknown Speaker: You can say the same thing about any private business that is franchised.

It doesn't give him the power to sell something.

He has to find somebody who's willing to buy it.

Mr. Costlow: But why--

Unknown Speaker: I mean, of course that's a condition of a franchise.

Mr. Costlow: --But why only harm the competitive entry of a particular interstate media?

Why not place similar franchising entry burdens on all interstate media of communications similarly situated?

Unknown Speaker: I agree.

I think it may be a very bad idea, but one... that isn't the issue, is it?

Mr. Costlow: Well, the issue is whether or not there is some objective here that Congress sought to achieve that this particular regulatory or discriminatory classification actually serves.

Unknown Speaker: May I ask you a factual question just to help me?

When a local community grants the franchise that you're saying they should not have the right to grant, do they grant a general franchise to interconnect all the units in the city, or do they grant them on particular installation by installation?

Mr. Costlow: Typically, in practice, a local franchise grants a franchise to extend cable facilities to extend cable facilities throughout the public streets and rights-of-way in the franchise area, which is usually equivalent to the individual municipality, the boundaries of the individual municipality.

Unknown Speaker: So there isn't a case-by-case determination about whether the... your bargaining power's been abused in a particular apartment complex, or anything like that.

Mr. Costlow: Exactly not, Your Honor.

All that it does is determine that on an overall community basis, and in fact the danger posed here, after passage of the '92 act, Congress in the '92 act tried to eliminate or correct the past franchising practices of municipalities, which were to grant a single franchise for an entire municipality.

Congress realized, or at least found in the Cable Act that that had created undue market power for particular providers of these services in the marketplace.

Unknown Speaker: Ms. Costlow, has your client applied for a franchise?

Mr. Costlow: Your Honor, until the FCC's decision below... the FCC after passage of the '84 act had determined that... had interpreted the language such that we would not have to obtain a franchise.

Unknown Speaker: So your answer is no, it has not.

Mr. Costlow: I'm sorry, Your Honor--

Unknown Speaker: Is that correct?

Mr. Costlow: --My answer is no, it has not, and may I offer an explanation?

Unknown Speaker: Well, no, I don't see that you should have to explain... I mean, if it hasn't, it hasn't.

My point is that you really don't know, then, what requirements any particular franchise you applied for might be... might subject you to.

Mr. Costlow: In the '92 act, which is what I was about to explain--

Unknown Speaker: I... any... I mean, where does your client want to have its services?

I mean, what geographical area?

Mr. Costlow: --The clients in front of this Court have these particular installations throughout the United States.

The... Pacific Cablevision, for example, has one in San Diego, California.

Unknown Speaker: Do you know without having applied for a franchise in San Diego what sort of requirements you would be subject to by that franchise?

Mr. Costlow: Yes, Your Honor.

A State statute in California says to Pacific Cablevision that if you are going to obtain a franchise in San Diego, your franchise has to be the same as the first franchise, which would mean that Pacific Cablevision would have to provide universal service throughout the entire municipality.

Unknown Speaker: How about the other 49 States in which you might want to do business?

Mr. Costlow: There are... with respect to a uniform franchise statute, Your Honor, I believe that there are about nine or ten of those in various States throughout the country.

Chief Justice Rehnquist: Thank you.

The case is submitted.