Manager of the City of Cambridge
Appellant,
v
MediaOne of Massachusetts, Inc.,
MediaOne Group, Inc., and AT&T Corp.,
Appellees,
|
CTV 99-4 |
APPEAL OF THE CITY OF CAMBRIDGE FROM AN ORDER ON MOTION FOR
SUMMARY DECISION
Table of Conents
1. Introduction
2. Procedural Background of the Case
A. The MediaOne/AT&T Merger and Application for Change in Control
B. The Appellant's Hearing and Decision
C. AT&T / MediaOne's Appeal
3. The Open Access Issue Is Central To This Appeal
4. Arguments
A. Application of the Regulations to Preclude Consideration of Open
Access Exceeds the Division's Authority
1. The regulations, as applied, are inconsistent with Congressional
intent and federal law
2. The regulations as applied are inconsistent with the purposes of G.L.
c. 166A.
B. The Changes in Local Authorities’ Discretion Are Unsupported
C. Regulation 4.04 Substantially Impairs the Appellant’s Contractual
Rights
D. Regulation 4.04 Should Not Be Applied Retroactively
E. The Division’s Interpretation of the Regulations is Unlawful
5. Conclusion
The City of Cambridge, (the "Appellant") appeals from the Cable Division's
Order on Motion for Summary Decision granted on May 1, 2000 at the request of MediaOne of
Massachusetts, Inc., MediaOne Group, Inc. (collectively "MediaOne") and AT&T
Corp. ("AT&T") (collectively, the "Appellees").
As explained below, the decision by the Appellant denying AT&T/MediaOne's transfer
application was an appropriate exercise of the power granted to it by federal legislation
and consented to by the Massachusetts Legislature to promote competition in the field of
cable services and to protect consumers. To the extent that the Division's transfer
regulations are interpreted to preclude consideration of the requirement of open access,
and the Commission does not exercise its discretion to accommodate such consideration, the
regulations are inconsistent with the applicable federal and Massachusetts statutes and
must be found invalid.
Further, the application of the regulations to preclude consideration of open access is
contrary to the contractual rights reserved to the Appellant under its franchise
agreement. To so impair the Appellant's license violates constitutional protections and
inappropriately applies later enacted regulations retroactively.
For these reasons, the Commission should overturn the Division’s Order and allow
the Appellant to consider open access in the transfer decision.
A. The MediaOne/AT&T Merger and Application for Change in
Control
On or about July 13, 1999, AT&T simultaneously filed an application for approval of
a change in control (FCC Form 394, with exhibits) with the 175 cities and towns in
Massachusetts that have granted cable television licenses to MediaOne. Under federal and
state law, as well as under the individual franchise agreements, the issuing authorities
must determine after hearings whether the proposed transfers should be approved. To avoid
the need for 175 separate hearings the Division scheduled eleven optional hearings in
which issuing authorities could participate. See Cable Division Transfer Bulletin 99-4
(June 28, 199) attached as Exhibit A in the Exhibit Book submitted to the Division.
The Division appointed Charles J. Beard as the Special Magistrate for the eleven
regional hearings. Following the completion of the regional hearings, Magistrate Beard
issued a twenty page Summary of Proceedings and Magistrate's Report dated September 24,
1999 (the "Magistrate's Report") containing a set of non-binding findings and
recommendations on issues that the Division had specified in the June 28, 1999 Transfer
Bulletin. See Magistrate's Report at 1, attached as Exhibit B in the Exhibit Book
submitted to the Division.
Magistrate Beard considered the scope of his charge to be limited to the four criteria
set forth in 207 CMR 4.04, to wit, -the consideration of the transferee's (a) management
experience; (b) technical expertise; (c) financial capability; and (d) legal ability to
operate a cable system under the existing license. See Magistrate's Report at 2. It is
important to note, however, that Magistrate Beard acknowledged that this narrow
interpretation was based upon Division regulations and decisions that had yet to be
challenged to any court in the Commonwealth. See id.
Magistrate Beard firmly acknowledged the importance of what he characterized as
"public policy" issues in the context of the transfer of MediaOne's cable
television monopoly to AT&T. The Magistrate's Report states, in pertinent part:
It is clear from the record in this proceeding that the transfer of MediaOne's licenses
to AT&T is an event far different from the hundreds, if not thousands, of license
transfers that have taken place to date in the Commonwealth. Never before has a company as
large and as diversified as AT&T, and with so many plans for transforming the delivery
of cable services, sought to enter the Massachusetts cable market. The transfer obviously
raises a host of public policy questions.
See Magistrate's Report at page 20. Foremost among these "public policy"
issues was the question of open access. Magistrate Beard noted that "the [open
access] issue has enormous importance as a public policy issue . . . " Id. In fact,
detailed testimony on the open access issue was presented at several of the regional
hearings and was summarized in the Magistrate's Report.
In the end, while Magistrate Beard perceived his role and authority to make
recommendations following the regional hearings as limited in scope, the Magistrate made
note of the fact that the acquisition of cable monopolies in Massachusetts by AT&T is
an extraordinary event with vast public policy and other considerations and that the open
access issue is central among them. See id. at 3.
Notwithstanding Magistrate Beard's belief that his scope of review was restricted in a
manner that precluded his consideration of the open access issue, the legal implications
of a closed system were specifically addressed at the hearings. In at least eight of the
eleven hearings, residents and representatives of the various issuing authorities raised
the issue of open access. Throughout the hearings, the participants at the hearings
"raised important questions about whether the Road Runner service [MediaOne's captive
Internet service provider] is being provided in a manner that will stifle competition and
limit the growth of broadband services." See id. (emphasis supplied).Various issuing
authorities, consumer groups and other interested parties presented testimony that an
exclusive arrangement between AT&T and the MediaOne Road Runner service was
anti-competitive, including testimony that the arrangement was likely susceptible to
anti-trust challenge. See Weymouth Regional Hearing (September 9, 1999) at 67-68.
In 1997, when the question of open access came before the Canadian cable regulator, the
CRTC, AT&T, which did not have a dominant position in the Canadian cable market,
argued strongly in favor of open access, cogently describing the anti-competitive impact
of a closed system:
[Cable operators and local telephone companies] have the ability to exercise
significant market power through the control which they exercise over bottleneck broadband
access facilities and through the dominance which they enjoy in their respective core
business markets….
The potential for anti-competitive behavior can manifest itself in a number of ways.
One, pricing of Broadband accessing services below cost in some markets so as to preclude
service by other service providers. [Two,] [p]ricing services above costs in uncontested
markets thus providing [a source of profits] with which to subsidize other services.
Three, discriminatory behavior in relation to the terms and conditions for broadcast
access services and refusal to unbundle bottleneck components thus disadvantaging service
providers with whom the access provider competes in downstream markets.
In sum, there was important and extensive discussion in the hearings concerning the
anti-competitive effect of the planned transfer of control of the licenses despite
Magistrate Beard's view that the open access issue was not directly tied to the four
criteria in 207 CMR 4.04. AT&T participated actively in, and in certain instances
initiated, that debate.
There was also substantial discussion during the hearings concerning the adverse effect
of a closed system upon the public interest. As Magistrate Beard described, the
discussions were "frequently vigorous, sometimes contentious … and grew to the
point that AT&T decided to make a special presentation about its views on the 'open
access' question." See Magistrate's Report at 4 (emphasis supplied). AT&T not
only presented its side of the open access debate at length in the ordinary course of the
hearings, see e.g. Foxboro Regional Hearing (September 2, 1999) at 59-66, but, in fact,
introduced what it asserted as a panel of experts to make a formal presentation on the
issue. See Burlington Regional Hearing (September 8, 1999) at 90-127.
B. The Appellant's Hearing and Decision
The Appellant granted the license that AT&T seeks to have transferred to it in
1985. As part of its bargain with the original recipient of the license the Appellant
specifically reserved to itself the ability to take into account the public interest as
one factor when deciding whether or not to approve any license transfer. According to the
Section 2.2(d) of the license:
For the purposes of determining whether it shall consent to such change of control and
ownership, the City may inquire into the qualifications of the prospective controlling or
owning Person, into all matters relative to whether such Person is likely to adhere to the
terms and conditions of the Final License, and whether the proposed change of control and
ownership is in the public interest.
Final Cable Television License, December 30, 1985 attached as Exhibit N in the Exhibit
Book submitted to the Division.
The Appellant did not take part in the Division’s regional hearings. Instead, on
August 19, 1999, Cambridge, under the supervision of its City Manager, Robert Healy, held
a public hearing to address AT&T's transfer request as required by 207 CMR 4.00. See
Cambridge Hearing transcript attached as Exhibit D in the Exhibit Book submitted to the
Division. At that time, Mr. Healy indicated that the record would remain open for public
comment until September 10, 1999. At the meeting, Appellants presented their side of the
debate concerning the issue of "open access." The parties' also discussed the
failure of MediaOne to comply with the license agreement.
As City Manager, it was the responsibility of Mr. Healy to decide whether to grant the
transfer request. Mr. Healy properly considered the information received from the meeting.
In addition, Mr. Healy made no decision prior to the close of the public hearing comment
period.
In his role as City Manager, Mr. Healy determined that any approval of the request must
be conditioned on several factors, i.e. compliance with the license, a showing of the
requisite management experience by AT&T, as well as non-discriminatory access to its
broadband system provided to other ISPs by AT&T. With respect to the latter, Mr. Healy
continued negotiations with AT&T beyond the public comment period, including
correspondence to AT&T consistently maintaining that approval of the request would in
part require this open access commitment from AT&T. See October 20, 1999 Healy
correspondence attached as composite Exhibit E in the Exhibit Book submitted to the
Division.
The Appellant, not having received adequate assurance that the transferee (a) would
comply with the existing license, (b) had sufficient management experience and (c) would
provide access to other ISPs in a non-discriminatory manner, properly rendered its
decision on November 10, 1999. Thus, Cambridge complied with all applicable law regarding
the transfer decision and procedures. See Cambridge Decision attached as composite E in
the Exhibit Book submitted to the Division.
C. AT&T / MediaOne's Appeal
The Appellees filed their appeal from the transfer denial to the Division on November
29, 1999 and requested a summary decision from the Division. The Division considered this
matter along with several similar matters initiated by other issuing authorities relating
to the license transfer requests. On May 1st, 2000 the Division issued an Order on Motion
for Summary Decision that granted, in part, the summary decision requested by the
Appellees. In particular, after considering the case de novo, the Division found that the
only relevant factors which an issuing authority may legally consider in a transfer
preceding are those listed in 207 C.M.R §4.04(1): the transferee’s management
experience, technical expertise, financial capability and legal ability to operate a cable
system under the terms of the license. It found that open access requirements were not
part of the Appellant’s license, and that AT&T’s ability to provide such a
commitment was not relevant to the transfer application. Therefore the Division found that
there was no material question of fact with respect to the open access issue and granted
partial summary decision.
The open access debate is essentially about freedom, not freedom in the sense of
emancipation or liberation from tyranny, but rather freedom in the sense of individual
autonomy and freedom of choice. More specifically, it is about the freedom to choose from
whom you will obtain your Internet access. As Professor Lawrence Lessig has put it, the
open access debate is "about whether customers get to choose the Internet service
provider (ISP) that serves them broadband cable or must take the ISP of their cable
company's choice." At the heart of the matter is the fact that AT&T is seeking to
position itself as “gatekeeper” to the Internet by not only providing access,
but also determining the structure, quality and content of such access. This threatens
three key values which are fundamental to the strength and vitality of the Internet as we
know it today, namely openness, diversity and consumer choice. Insistence on open access
is an effort to preserve these values for the Internet of the future. Cable has been, and
is likely to be into the foreseeable future, the most popular means of broadband access to
the Internet. Broadband cable access offers speed, capacity for new voice, video and data
applications, as well as its “always on, always connected” capability. It will
be the mode of access to an environment in which an increasing amount of our everyday
activities, such as shopping, communicating, entertainment and even learning, will be
conducted online.
Contrary to the phone lines, which have been regulated to ensure that they remain open,
the cable networks have developed as proprietary networks that belong exclusively to one
cable operator. The power of this exclusivity is magnified by the fact that the cable
networks have traditionally been perceived of as a “natural monopoly”, and thus
regulated in such a manner that each cable operator is effectively conferred a local
franchise monopoly. As a consequence of this, each locale is usually serviced by only one
cable provider who is vested, as the owner of that proprietary network, with the exclusive
power to decide how and by whom that network may be used and accessed.
The existence of this monopoly power, if unaltered, will have far reaching implications
as the cable network transforms from a television delivery system to a network for
Internet communication. The cable network owner will be empowered to place various
restrictions on the ways in which people participate and exist in the online world,
restrictions ranging from constraints on the amount and type of data which may cross cable
networks, to limits on the types of Internet applications (e.g. Websites) that a user may
enjoy, to constraints on the sort of content which users may consume and exchange with one
another. The restriction most immediately feared is “service bundling,” or the
tying of Internet access to a collection of other services such as cable TV and email.
AT&T will be able to dictate which ISP people in a particular locale must use if they
wish to have broadband cable access to the Internet, effectively excluding competition
from other ISPs either by refusing to allow them access to the cable network, or by only
permitting access on terms and conditions less favorable than those offered to their
preferred and frequently affiliated ISPs (such as @Home and Roadrunner).
The significance of the open architecture of the Internet is that it enforces a kind of
competitive neutrality, as the network itself is incapable of discriminating against new
applications or content, with such power being placed exclusively in the hands of the end
user. This open end-to-end architecture has been responsible for the massive innovation
that has taken place on the Internet. The ultimate test for the running of new
applications, ideas or content is "not whether the network owner likes it, but
whether the content or application can be coded in an IP protocol. If it can, it will run;
and if it is desired, then it will become dominant." Under a closed model of
broadband cable, however, the converse of this situation will apply. Innovation will be
stifled due to the constraints that the network owner will place on the use of the
network-constraints that are currently absent from the dynamic Internet of today.
Closed access presents all of these dangers because it places control of Internet
content and control of the mechanism of content delivery, the cable network, in the hands
of a single entity. The operator of a closed system is in a position to ensure that its
customers can access content provided by itself or its affiliates more easily and more
swiftly than content from rival providers. Up to now this has not been a great concern
simply because Internet content has been designed to operate over the very slow telephone
network. However, broadband cable connections make it possible to use the Internet to
deliver a wide range of services such as streaming video, streaming audio, and IP
telephony for which speed is of the essence. Soon cable Internet connections will compete
with cable television, videocassette recorders, telephones, and radios. Once such services
become mainstream, the ability to bias network throughput in favor of one service or
service provider will confer market power upon the entity controlling the network. When
the entity controlling the network also controls the content provided over the network it
will have a built-in bias towards exercising this market power to stifle competition in
the market for content and services. If the discrepancy between the access speeds of its
own services and those of its competitors are great enough, such a bias against competing
services might even amount to a form of censorship.
Massachusetts is in a unique position to shape this critical consumer and business
issue. The implications of AT&T's refusal to commit to open access will negatively
impact millions of Massachusetts consumers and hundreds of Massachusetts Internet service
providers and related businesses. The issue of open access is not merely in the profit
interest of ISPs, but also in the public interest of the Internet community at large, the
citizens of Massachusetts and the residents of Cambridge. Nationally, proponents of open
access include the following: the National Association of Counties; Center for Media
Education; Consumer Federation of America; Consumers Union; Media Access Project; OMB
Watch; and the OpenNET Coalition, consisting of more than 900 independent ISP and
technology companies. More than 2.5 million people in approximately 42.1% of Massachusetts
households are "online." There are approximately 55 independent ISPs located in
Massachusetts and another 400 ISPs located outside the Commonwealth that provide services
to Massachusetts homes and residents. Internet service providers and related companies
provide tens of thousands of jobs to Massachusetts residents.
Limitation on consumers' ability to choose their ISPs means less competition among all
ISPs, slower growth and less innovation on the Internet itself. Without the robust
competition that open access provides, AT&T will be in position to exert extraordinary
control over content and access, greatly to the detriment of the residents of Cambridge
and contrary to the public interest.
The regulations here under challenge have yet to be judicially considered. Their scope
is a critical matter of first impression that must be judged in the context shaped by the
Division's summary determination. On appeal from a summary determination the facts must be
construed against the party that sought to have the case determined without consideration
of the facts. Therefore, for the purposes of this appeal, the Commission must assume that
the issue of open access is of the highest public interest; that this transfer application
arises in a novel context of transformative changes in technology, corporate structure,
and the nature of the cable industry; and that the migration of the Internet from an open
telephone network to a closed cable network threatens substantial adverse impact to the
Internet environment of the citizens of Massachusetts and the residents of Cambridge.
A. Application of the Regulations to Preclude Consideration
of Open Access Exceeds the Division's Authority
The Division held that the regulations preclude any consideration of the open access
issue by the Appellant as part of the license transfer process. If the Commission
interprets regulation 4.04 so as to prohibit the Appellant from considering the
anti-competitive effects of closed access, then that regulation, as applied, must be found
invalid. The Commission will have exceeded the authority granted to it by statute and
impermissibly narrowed the rights of the Appellant in a manner contrary to the express
intent of the relevant federal legislation and the enabling statute.
1. The regulations, as applied, are inconsistent with
Congressional intent and federal law
Congress gave express authorization for consideration of competition issues during
transfer proceedings. 47 U.S.C. §533 provides in relevant part,
Nothing in this section shall be construed to prevent any state or franchising
authority from prohibiting the ownership or control of a cable system … in
circumstances in which the state or franchising authority determines that the acquisition
of such a cable system may eliminate or reduce competition in the delivery of cable
service in such jurisdiction.
47 U.S.C. §533(d)(2) (emphasis supplied).
This provision of the Cable Television Consumer Protection and Competition Act of 1992
amended prior legislation in order to promote competition in cable services. See H.R. Rep.
No. 102-628 at 91 attached as Exhibit K in the Exhibit Book submitted to the Division.
Congress explicitly gave the states or franchising authorities the power, and thus the
responsibility, to make license control decisions in a manner intended to promote or
maintain competition. See id. See also AT&T Corp et al v City of Portland et al, 43 F.
Supp. 2d at 1152.
Prior to the 1992 amendment, the legislation generally prohibited a franchising
authority from denying control of a franchise license because of an applicant's ownership
or control of any other media interests. See 47 U.S.C. 533(d). Reading this restriction as
absolute, the court in Cable Alabama Corp. v. City of Huntsville held that the city could
not deny a license transfer because of adverse effects the change in control would have on
competition within the city. See 768 F. Supp. 1484 (N.D. Ala. 1991). Reacting to this
interpretation, Congress amended the legislation explicitly to grant this authority. See
H.R. Rep. No. 102-628 at 91. As explained in the legislative history,
[The Cable Alabama] ruling clearly is inconsistent with the intent of [§533] (c) and
(d). Moreover, it is inconsistent with one of the major purposes of the Cable Act, which
is to "promote competition in cable communications," …. The amendment to
subsection [533] (d) clarifies the right of the franchising authorities to promote
competition by denying a franchise to a person if the grant of the franchise would limit
competitive cable services in a franchise area. The amendment … also overturns the
decision in Cable Alabama Corp." See id.
Thus, a local franchising authority was expressly provided the right to promote
competition by denying a license transfer if such a transfer would limit competitive cable
services in the authority's jurisdiction.
This designation of power to the local franchising authorities by the federal
government is entirely consistent with cable regulation historically. From its first foray
into cable regulation now fifteen years past, Congress maintained that the local
franchising process was to be relied upon as "the primary means of cable television
regulation." See Cable Communications Policy Act; H.R. Rep. No. 98-934 at 19 attached
as Exhibit L in the Exhibit Book submitted to the Division. This reliance was a
continuation of the local authority that had been exercised for decades over cable
operators pursuant to the general police powers over the streets and public ways accessed
by the systems.
Congress's intent to use the franchising authority as the primary means of preserving
competition and protecting the public interest is further evidenced by 47 U.S.C §552(c).
This provision explicitly provides, "[n]othing in this subchapter shall be construed
to prohibit any State or any franchising authority from enacting or enforcing any consumer
protection law, to the extent not inconsistent with this subchapter."
In the decision below the Division dismissed these arguments on the grounds that it is
the Division, and not local authorities that is the “franchising authority” in
Massachusetts. The Division finds that it has been delegated “ultimate authority over
licensing matters generally”. See Order on Motion for Summary Decision at 22-23.
Therefore, the Division concludes that it has the responsibility to protect customer
choice under federal law. In support of this status the Division relies upon a decision of
the FCC in which that body defined the Division as the “franchising authority”.
See Order on Motion for Summary Decision at 23; Implementation of Sections of the Cable
Television Consumer Protection and Competition Act of 1992 Rate Regulation, Report and
Order and Further Notice of Proposed Rulemaking MM Docket No. 92-266, FCC 93-177, 8 FCC
Rcd 5631 (Released May 3, 1993) at 5685-6) However, the FCC was only called upon to decide
this issue for the purposes of cable rate regulation; therefore this finding has limited
value in the present case. In end, the question of whether the Division or local
authorities are the “franchising authority” under federal law for license
renewal purposes depends on the respective powers of each entity over that process, the
very question that the Commission must answer in this appeal. The relative
responsibilities of the Division and the Appellant must be known before one entity can be
designated a “franchising authority”. See Order on Motion for Summary Decision
at 22-24
Massachusetts clearly did not intend to exercise this right to protect competition and
consumer choice at the state level. The Massachusetts Legislature expressly determined
that all authority to approve transfers was to be vested in the local authorities subject
only to the limitation that a transfer decision not be "arbitrary or
unreasonable." See M.G.L. c. 166A, §7. As a result, the federally granted authority
to promote competition and protect consumer choice rests with the Appellant. The
Division’s decision denies local authorities this power, thereby precluding
consideration of the anti-competitive effects of this transfer. The decision is therefore
inconsistent with federal law.
2. The regulations as applied are inconsistent with the purposes
of G.L. c. 166A.
The Division's ruling precluding Appellant from considering the open access issue is
also contrary to the intent of the Massachusetts Legislature and the Division's enabling
act. General Law 166A, §7 requires the Appellant to review any application for a license
transfer and provides that consent thereto, "shall not be arbitrarily or unreasonably
withheld." The Division's interpretation of regulation 4.04 would narrow the
Appellant’s discretion so as to preclude consideration of a factor significant to a
municipal cable license transfer. 207 CMR 4.04. Such a restriction cannot be reconciled
with the purpose of the governing legislation and cannot stand. See Nuclear Metals, Inc.
v. Low-Level Radioactive Waste Mgt. Bd., 421 Mass. 196, 211 (1995).
An administrative agency has no authority to exceed the power conferred upon it by its
enabling statute. See Massachusetts Hospital Assoc. v. Dept. of Medical Security, 412
Mass. 340, 346 (1992) (statute did not empower department to set performance standards for
hospital collection and credit collection practices). It is well established that an
agency's rulemaking power does not include the power to make law. See Loffredo v. Center
for Addictive Behaviors, 426 Mass. 541, 545 (1998) (agency lacked authority to create
private right of action when intent for such not expressed in statute). Instead, an agency
maintains the much more limited power to carry into effect the purposes of the legislature
as expressed by statute. See id. Thus, agency action must be invalidated when it is not
consonant with the purpose of the statute. See Nuclear Metals, 412 Mass. at 211.
The Massachusetts Legislature recognized the need for a town or city to maintain
control over its cable license in order to protect its residents and, by statute, granted
it wide discretion suitable for such supervision. See M.G.L. c. 166A, §7; see also
Campbell CATV Systems Assoc. Part III v. East Bridgewater, Docket No. A-46 (CATV 1984) (to
allow Commissioner's opinion regarding applicant's corporate structure as evidence that
denial of license grant is unjustified would usurp the issuing authority's role in the
licensing process, as it maintains ultimate responsibility for grant.). In support of this
wide discretion the Division has acknowledged that the "arbitrary or
unreasonable" standard of review parallels the "arbitrary or capricious"
review of transfer decisions in other areas of the law. See Rollins Cablevision v.
Somerset, Docket A-64 (1988).
Under the arbitrary or capricious standard, deference should be given to the
considerable expertise and interest of the Appellant, and its judgment should not be
disregarded unless deemed whimsical or not based on logical analysis. See Great Atlantic
& Pacific Tea Co. v. Bd. of License Comm. of Springfield, 387 Mass. 833, 837-38 (1983)
(recognizing degree of expertise of local authority in alcoholic beverage regulation); Cf.
McDonald's Corp. v. East Longmeadow, 24 Mass. App. Ct. 904, 905-06 (local authority
permitted to look at factors not directly connected to food preparation and delivery in
denying food license); Mosey Café, Inc. v. Licensing Bd. for City of Boston, 338 Mass.
199, 205 (1958) (statute without standards for granting entertainment licenses confers
quasi-judicial authority to do so in a manner that is not unreasonable or arbitrary).
Regulation 4.04 purports to restrict the issuing authority's consideration of a license
transfer to only four factors deemed germane by the Division. Such a restriction is
entirely at odds with the Massachusetts Legislature's intent if, as here, a relevant and
reasonable concern cannot be addressed as a result. See Nuclear Metals, Inc., 421 Mass. at
211. Application of regulation 4.04 to prevent the Appellant from considering the issue of
open access in this transfer decision clearly exceeds the Division's mandate to carry into
effect the purposes of the statute and instead constitutes unauthorized lawmaking. See
Loffredo, 426 Mass. at 545. Rather than interpret the meaning of “arbitrary and
unreasonable”, a negative condition, the Division’s regulations promulgate an
exhaustive list of factors a local authority may consider. See Order on Motion for Summary
Decision at 12-13. This transfers the residual discretion to choose relevant factors from
local authorities to the Division, undermining their ability to bring their recognized
expertise in licensing matters to bear. The distinction is subtle but important. Rather
than asking whether the factors selected for consideration by local authorities are
arbitrary in the circumstances, the Division, through its regulations, deems all but a few
factors to be arbitrary in all circumstances. Imposing these limits impermissibly narrows
the ample discretion granted the Appellant pursuant c. 166A, §7 and cannot survive
scrutiny. See Mass. Hospital Assoc., 412 Mass. at 346. Due to the serious competitive
implications of AT&T's closed access policy, the requirement that open access be
provided to customers is certainly not arbitrary or unreasonable and therefore must be
supported by the Commission.
B. The Changes in Local Authorities’ Discretion Are
Unsupported
Prior to any action by the Division to limit the discretion of local authorities, the
Appellant would unquestionably have been able to consider public interest factors outside
of those listed in regulation 4.04 without acting “arbitrarily or unreasonably”.
How was the discretion to act in the public interest in transformative transfer
proceedings lost? In the decision under appeal the Division maintains that this discretion
was removed when it articulated the standards applying to the transfer review process in
Bay Shore Cable TV Assoc. v Weymouth (Docket No. A-55 (1985)). The later regulations are
said to merely codify the result of this case. However, Bay Shore cannot explain the
Appellant’s reduced discretion because in that case the Division did not purport to
make any change to the law. Instead, it merely applied the existing standard to the facts
before it. The Appellant was not a party in the case and the case was never appealed. The
Appellant should not be bound by the interpretations advanced in it. Contrary to what is
advanced by the Division in its decision below, Bay Shore did not articulate an absolute
bar on public interest factors being considered in cases where a license transfer involves
transformative changes in services and service providers. The case involved a very mundane
license transfer between two similar providers of similar services. Therefore, Bay Shore,
by itself, did not remove all discretion to consider the public interest in transfer
proceedings involving transformative changes in technology, corporate structure, and
industry implicating issues of great public interest.
Further, Division regulations 4.04 and 4.06 could not have accomplished that result
because they reflect a two-tiered system in which consideration of public interest factors
is restricted for ordinary transfers, but remains relevant in transformative transfer
proceedings. Regulation 4.04, which is aimed at regular license transfers, adopts the Bay
Shore philosophy of assessing only whether the recipient of the license would be able to
perform the legal, managerial, financial, and technical obligations of the transferor
under the license. The flipside of this restricted approach is regulation 4.06, which
provides the Commission with a broad discretion to “…issue such order as it
deems appropriate to carry out the purpose of 207 CMR 4.00”. Such broad discretion
only makes sense if it is seen as recognition of the need for a flexible response to
transformative cases involving consideration of the public interest beyond the factors in
regulation 4.04. In the Report and Order Relating to the Amendment of Regulations, the
Commission explained the role which Regulation 4.06 was meant to play:
B. Waiver Authority
60. The Commission's role must be flexible given the current trends of the
telecommunications industry. Trying to craft and interpret transfer regulations at a time
when technologies, corporate structures, and industries are changing and converging is
difficult. The Commission has determined, therefore, that it is prudent to establish a
waiver provision in its transfer regulations, similar to the waiver provision included in
other sections of its regulations. This provision will allow the Commission the necessary
flexibility to evaluate novel circumstances surrounding transfer proceedings.
Cable Television Commission, Report and Order: In Re Amendment of 2.07 CMR 4.01 - 4.06,
Docket #: R-24, November 27, 1995.
Together, regulations 4.04 and 4.06 do not eliminate consideration of important issues
of public interest arising in novel and transformative transfer proceedings. At most, they
purport to shift responsibility for initially recognizing the relevance of such issues
away from local authorities and onto the Commission.
The question then becomes whether the transfer of responsibility to consider the public
interest implemented by these regulations should be applied retroactively to eliminate the
Appellant’s specific reservation of its power to address the public interest in the
license in question. As explained in the next two sections the regulations should not be
applied retroactively because to do so would substantially impair the Appellant’s
contractual rights. Moreover, the Division, in this very proceeding, has eliminated the
discretion reserved by the Commission in Regulation 4.06, thus purporting to make the
constraints of Regulation 4.04 absolute.
C. Regulation 4.04 Substantially Impairs the Appellant’s
Contractual Rights
The application of the limitations in regulation 4.04 to the license in question in
this case would substantially impair the Appellant’s contractual rights without
accomplishing any important public purpose. See U.S. Const. Art. I, §10; Allied
Structural Steel Co. v. Spannaus, 438 U.S. 234 (1978).
The Supreme Court has developed a three-step test to determine if subsequent
legislation has impermissibly impaired contractual rights. See Spannaus, 438 U.S. 234
(1978). First, the court must determine that a subsequent law has in fact impaired a
contractual relationship. See id. at 244; Parella v. Retirement Bd. of R.I. Employee's
Retirement System, 173 F.3d 46, 59 (1st Cir. 1999). Second, it must then decide whether
this impairment is substantial. See Spannaus, 438 U.S. at 244; Little v. Comm. of Health
& Hospitals of Cambridge, 395 Mass. 535, 555 (1985). In making this determination, it
should consider how a contract is affected and whether the abridged right is
"replaced by an arguably comparable security provision." See United States Trust
Co. of New York v. New Jersey, 431 U.S. 1, 19 (1977). Finally, the court must then
determine if the substantial impairment is reasonable and necessary to "meet an
important general social problem." See Spannaus, 438 U.S. at 247.
Application of regulation 4.04 to the license agreement in question violates the
Contract Clause. First, a contractual relationship unquestionably exists between the
Appellant and MediaOne, and the Appellant’s contractual rights concerning the
transfer approval process are restricted by regulation 4.04. See Eagerton, 462 U.S. 174,
189 (1983) (state law prohibiting certain tax allocations by company restricted contract
options).
Moreover, these rights are substantially impaired by forcing the Appellant to narrow
its considerations in a transfer proceeding to those provided for in regulation 4.04.
Under its license agreement, Cambridge expressly reserved the supervisory capacity to
inquire into "whether the proposed change of control and ownership is in the public
interest." Cambridge License, §2.2(d) attached as Exhibit N in the Exhibit Book
submitted to the Division.
At the time the contract was executed, an issuing authority in Massachusetts was
entitled to base its transfer decision on any concern as long as it was reasonable and not
arbitrary. See M.G.L. c. 166A, §7. In the decision under appeal the Division asserts that
the applicable standard at the time the license was granted was defined by the Bay Shore
case, which came down shortly before the license was executed, and which the Division
asserts, had been articulated by it as early as 1981. See Order on Motion for Summary
Decision at 19-20. However, the only sources of authority the Division points to as
evidence for the continuity of its policy are two letters from General Counsel Kenneth
Spigle. The Appellant has never seen these letters and was never made aware of their
contents. They are hardly public documents normally associated with a rulemaking activity
and they are certainly not sufficient to affect a sweeping reduction in the
Appellant’s discretion to address license transfers.
Further, the Bay Shore case itself allowed consideration of two factors beyond the four
listed in regulation 4.04: character of the recipient and past performance in other
communities. These factors together allow for significant consideration of the public
interest beyond what regulation 4.04 would permit. It cannot be said that the public
interest was not part of the standard of review at the time the license was executed.
Application of regulation 4.04 to preclude consideration of the open access issue
abolishes the Appellant’s contractual right to consider the effects of the transfer
upon consumer interests and fails to replace it with any comparable security provision.
See United States Trust, 431 U.S. at 19. This clearly constitutes a substantial impairment
of the license agreement; a substantial impairment which is not offset by any
corresponding social benefit. See Spannaus, 438 U.S. at 244, 247. On the contrary,
eliminating the Appellant’s right to consider issues characterized by Magistrate
Beard as of "enormous importance" undermines the Appellant's ability to protect
the interests of its residents. See id. at 249. In such circumstances, the deference
granted the Division as to the necessity and reasonableness of a particular measure
"simply cannot stand." Spannaus, 438 U.S. at 247; Mass. Hospital Assoc., 412
Mass. at 345-46.
D. Regulation 4.04 Should Not Be Applied Retroactively
Even if the Commission finds that application of regulation 4.04 is not a violation of
the Contracts Clause, the regulation and the restrictions imposed thereunder cannot be
applied retroactively to the Appellant’s license agreement. See Salem v. Warner Amex
Cable Communications, Inc. 392 Mass. 663 (1984). The agreement was executed before
regulation 4.04 or any regulation interpreting the relevant statute was adopted, therefore
the applicable law for this appeal must be the unadorned statutory standard-whether
consent to AT&T's license transfer was arbitrarily or unreasonably withheld. See
M.G.L. 166A, §7.
As a general rule, the law in existence at the time an agreement is executed
necessarily becomes part of the agreement, and amendments to the law after execution are
not incorporated unless the contract unequivocally demonstrates the parties' intent to so
incorporate. See Feakes v. Bozyczko, 373 Mass. 633, 636 (1977). In Salem, the Supreme
Judicial Court held that amended procedures for cable rate regulation did not apply to a
cable license signed two years prior because the license did not clearly indicate that the
parties intended to incorporate future amendments of the legislation and regulations. See
392 Mass. at 667-69. The Court found the absence of the words "and amendments
thereto" in the license agreement significant in determining that there was no intent
of the parties to incorporate future changes. See id. at 667.
Regulation 4.04, as interpreted by the Division, unquestionably alters an issuing
authority's scope of considerations in a license transfer decision. The Bay Shore decision
established Division policy for run-of-the-mill transfer cases prior to the execution of
the license. However, as the Supreme Court pointed out, this is "far from
saying… that commands, decisions, or policies announced in adjudication are 'rules'
in the sense that they must, without more, be obeyed by the affected public." NLRB v.
Wyman-Gordon, 394 U.S. 759, 765-66 (1969), especially in clearly distinguishable
circumstances.
The persuasive authority of Bay Shore is further undermined by the fact that in 1988
the Division agreed that an issuing authority was permitted to review factors other than
management, technical expertise, financial capability and character so long as these other
considerations were not arbitrary or unreasonable. See Somerset, Docket A-64 at 4-5,
explaining Bay Shore Cable, Docket A-55. Thus, the Commission Report and Order
promulgating regulation 4.04, if applied as interpreted by the Division, substantively and
in permissibly changed the applicable law concerning the discretion of an issuing
authority in 1995. See In Re Amendment of 207 CMR 4.01-4.06 at 18.
Therefore, the Appellant’s license incorporates a standard of transfer review
substantially the same as the one that was in effect at the time it was executed: refusal
must not be withheld unreasonably or arbitrarily. See Cambridge License §2.2(a).
Moreover, in the absence of defining standards, the parties specified "public
interest " as an appropriate consideration in subsequent transfers of the license.
See Cambridge License §2.2(d). Thus, the alteration of the substantive rights of the
parties under these license agreements would be an unlawful retroactive application of
regulation 4.04. See Salem, 392 Mass. at 668-69.
E. The Division’s Interpretation of the Regulations is
Unlawful
The regulations, as they were interpreted and applied by the Division in the decision
under appeal, are outside the scope of its authority. In the reasons for the Order under
appeal the Division made it very clear that the regulations will be applied so as to
completely prevent the consideration of public interest concerns in even the most novel
and transformative license transfer case. See Order on Motion for Summary Decision at
26-28. Regulation 4.04 prevents issuing authorities from considering public interest
factors, and, according to the Division, regulations 4.06 and 2.04 permit the Division to
waive these limits only to resolve procedural problems. See Id, at 25-29. According to the
Division, to exercise its discretion to expand the substantive standard of review even in
extraordinary transfer cases would not serve the public interests because it would
undermine licensee’s due process rights and the consistency of adjudication which
they have came to expect from the Division in transfer proceedings. See Id, at 28-29. That
is to say, even where a license transfer would work major harm to the interests of
consumers and residents, as must be presumed in this appeal from a summary decision, there
cannot be any consideration of the public interest in a transfer proceeding. It must
necessarily be “arbitrary and unreasonable” for the Appellant when faced with a
novel and transformative transfer decision ever to take into account public interest
concerns, even those of the highest importance and urgency. Issuing Authorities may not
consider even those concerns that implicate major technological change and risk abetting
the growth of monopoly power. By interpreting its discretion under regulations 2.04 and
4.06 to prevent consideration of 4.04 substantive issues even in extreme cases, the
Division is formulating a completely new and unexpected rule. Such an interpretation
amounts to an unlawful fettering of discretion because it prevents the Division from
considering substantive changes in its rules even when the risk to procedural injustice is
limited and the risk of substantive unfairness is great-something which neither the
legislation nor the Division’s own regulations require it to do.
A narrow interpretation of the substantive criteria enumerated in regulation 4.04 does
not accommodate consideration of the extensive and damaging effect upon competition raised
by the transfer at hand. This is exactly the convergence of technology and industries for
which the waiver was enacted. As the Special Magistrate noted, this transfer "is an
event far different from the hundreds, if not thousands of license transfers that have
taken place to date in the Commonwealth …. The transfer obviously raises a host of
public policy questions." See Magistrate's Report at 20. The Commission should waive
the application of regulation 4.04 in order to confront these public policy questions and
to forestall application of its regulations in a situation which will not sustain them.
Despite its radical implications the license transfer scheme implemented by the
Division through its regulations and policies has never been validated by a court of law.
It is the intention of the Appellant to test the validity of this scheme, which threatens
to erode its ability to protect the interests of its residents.
The combined result of the Division’s interpretation of regulations 4.04 and
4.06/2.04 is a sweeping change in the regulatory structure. At the beginning the only
limit on the Appellant’s ability to review transfer decisions was the statutory
language preventing “arbitrary” and “unreasonable” decisions. But now,
solely because of the perspective the Division has chosen to take of its regulations, the
entire system has been restructured. Even in the most extreme and novel situations the
only transfer considerations that will now be deemed reasonable are the four listed in
regulation 4.04.
From a starting position in which the legislature statutorily recognized the expertise
and responsibilities of local authorities like the Appellant to regulate cable issues, the
Division purports to have transformed the legal situation to one in which local
authorities are helpless. They will be judged to have acted arbitrarily and unreasonably
for attempting to protect their residents from concentrated control of broadband cable
communications aggregated into the hands of a single provider with a long history of
monopoly practices.
The Appellant challenges this regulatory scheme that aims absolutely and completely to
foreclose any consideration of an issue of great public importance. The Appellant has been
a proud contributor to the creation and growth of the Internet and it understands that the
Internet has, up to this point, rested fundamentally on a legal and technological
architecture of openness from one end of the network to the other. This open architecture
has separated control of distribution from control of content and has ensured that content
and service providers have had non-discriminatory access to Internet users. The Appellant
is fully aware that this open architecture is at risk as the Internet moves from the open
but narrowband network of telephone to the historically closed architecture of cable. The
fundamental question being decided here is which architecture will win out and dominate
the future of Internet communications.
Based on these concerns, the Appellant’s decision to deny the application for the
license transfer to AT&T was neither arbitrary nor unreasonable. For the foregoing
reasons, the Commission should allow the appeal, and should overturn the summary
determination made by the Division.
Respectfully submitted,
City of Cambridge,
by its counsel,
Charles R. Nesson
1575 Massachusetts Avenue
Cambridge, MA 02138
(617) 495-4609
nesson@law.harvard.edu
____________________________________
Kevin P. Conway
Conway, Crowley & Homer, P.C.,
332 Congress Street, Boston, MA
BBO# 097240.
Dated: May ___, 2000
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