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Focus on Regulation

FCC Commissioners Debate Adjustments to Merger Review Standard

In the first major transaction approval under Ajit Pai’s Chairmanship, the Federal Communications Commission (“FCC”) recently approved, subject to targeted, transaction-specific conditions, license and authorization transfers in connection with CenturyLink’s $34 billion acquisition of Level 3.  The FCC’s recitation of its merger review standard in its order (the “CenturyLink-Level 3 Order”) differed somewhat from the description of the standard used in recent transactions reviewed during the Obama administration.  The Commissioners’ separate statements debated whether the new formulation merely clarified the FCC’s existing standard or constituted a substantial alteration of the standard.

Under the Communications Act, the FCC reviews transfers of certain licenses and authorizations to determine if the transfer will serve the “public interest, convenience, and necessity.”  The FCC has stated that it first reviews a proposed transaction to determine if it would violate a statute or rule, then turns to whether the transaction could result in public interest harms.  This review is grounded in an analysis of the transaction’s competitive effects under long-standing precedents, although the FCC’s public interest standard is somewhat broader than the competitive analysis employed by antitrust agencies.

The CenturyLink-Level 3 Order’s formulation of the standard differed in two key respects from recent Obama-era formulations.  First, the order repeatedly stated that any conditions imposed on a transaction should be “narrowly tailored, transaction specific conditions that address the potential harms of a transaction.”  While this formulation had been used previously, the repeated emphasis on narrow tailoring of conditions to address transaction-specific harms likely reflected concerns that the Obama FCC had imposed wide ranging merger conditions that arguably went beyond transaction-specific harms.  For example, the FCC’s 2011 Comcast-NBC Universal Order imposed many conditions that arguably were only marginally tied to transaction-specific harms, including those related to diversity, localism, and broadcasting issues.  Similarly, last year’s Charter-Time Warner Cable Order imposed an array of conditions purportedly designed to “permit the transaction’s likely efficiencies and benefits,” including requiring settlement-free interconnection, prohibiting usage-based pricing, and requiring a low-income broadband program.  Those conditions prompted then-Commissioner Pai to claim that the agency had used the transaction as “a vehicle for advancing its ambitious agenda to micromanage the Internet economy.”

Second, the CenturyLink-Level 3 Order did not expressly state that the FCC would balance public interest harms against benefits.  Instead, the order stated that if the FCC did not find any public interest harms, or if any harms could be ameliorated by “narrowly tailored conditions,” it would evaluate public interest benefits.  In other words, the order did not explicitly describe a balancing of positive and negative effects.  The order also observed that allowing a licensee or authorization holder to assign or transfer control of its license or authorization “freely” is itself a “clear public interest benefit.”

FCC Commissioner Clyburn asserted that the CenturyLink-Level 3 Order “radically altered the Commission’s long-standing merger review standards” by failing to balance the transaction’s public interest harms against its public interest benefits.  Commissioner Rosenworcel echoed this sentiment, stating that“[i]nstead of using the agency’s decades-old merger review standard, [the order] arbitrarily introduces a new one.”   The three Republican-appointed Commissioners rejected this characterization of the decision, however.  For example, Chairman Pai explained that “[w]e don’t change the standard of review.  But we do make clear what had become hazy in recent years.”  And  Commissioner O’Rielly applauded the clarification because, in his view, recent “merger orders had ventured into murky — and potentially illegal — waters by applying balancing tests and imposing conditions that had no connection to the applications at hand.”

Whether the CenturyLink-Level 3 Order represents a departure from prior FCC merger decisions or merely a clarification of the relevant standard, it suggests potential trends in the agency’s merger analysis under Chairman Pai.  First, the FCC appears less likely to impose merger conditions that are not closely tied to public interest harms created by the transaction itself.  Second, the FCC is less likely to conduct an elaborate balancing that attempts to assess whether applicants have affirmatively demonstrated clear benefits that outweigh any harms.  If a transaction does not generate public interest harms, or if any harms can be addressed by conditions, the FCC is more likely to presume that a transaction proposed by willing parties is in the public interest.