The U.S. Court of Appeals for the D.C. Circuit has declined to overturn the FCC's restoration of the UHF discount on the grounds that the parties challenging it--Free Press, Prometheus Radio--did not have standing to bring the challenge.

That could be a big boost to broadcast M&A, though it might not be the big boost for the Sinclair-Tribune deal given the FCC's other problems with it.

The UHF discount means that only half of a UHF TV station's audience counts towards the 39% national ownership cap. The discount allowed Sinclair to bid for Tribune stations that otherwise would have pushed it to almost double that 39% cap.

“I’m pleased with the court’s decision to reject this challenge to the reinstatement of the UHF discount pending the completion of our comprehensive review of the national ownership cap," said FCC chair Ajit Pai.

During oral argument last April, the judges clearly had concerns about not having statements from individual members of the associations establishing particular harms related to the Sinclair-Tribune deal, which the petitioners used as an example of the harms of the discount. The court wanted the petitioners to have identified at least one Free Press member or Prometheus member in a Sinclair market that would have been affected by the potential merger.

Related: Dems Tell Pai to Wait for UHF Court Decision

The three-judge panel of the court said the argument did not even warrant a published opinion, adding that it did not have to reach the merits of the decision because of that lack of standing.

Those merits were whether it was within the FCC's discretion to reinstate the UHF discount pending “a broader review of the [national ownership] cap” itself after the FCC, under previous chair Tom Wheeler, had concluded it had erred in eliminating the UHF discount before that review.

Since there is no published opinion, it is unclear whether the petitioners could have won on the merits, though two of the three judges appeared inclined to agree with them. Most observers of that oral argument had speculated that, if the standing issue did not derail the challenge, it had a good chance of succeeding and the discount repealed and remanded back to the FCC.

But in a two-page document dismissing the petition to overturn the FCC decision, the three-judge panel said: "Membership organizations may assert standing on behalf of their members, but in order to do so they must show that at least one member “would otherwise have standing to sue in [his or her] own right.”

The court said Prometheus and Free Press did not do that, and it did not accept those showings in a supplement filed after oral argument.

Related: Free Press to Court: Sinclair is Exhibit A on UHF Discount Harms

Now that the court has ruled, Pai is expected to proceed with an item that combines the discount with re-thinking the 39% national audience reach cap to which the discount is tied, perhaps by raising it to 50%, as some broadcasters have asked for, with a review of that move down the line in case it needs some more raising.

Free Press and Prometheus can appeal the three-judge decision to the full court.

Free Press attorney Andrew Schwartzman had no comment on next steps, saying he was still processing the decision and that it was too early to make that call.

"This should remove the cloud hanging over broadcasters, preventing them from further growth. The next, and most important, step is for the Commission to eliminate the national cap altogether," said Adonis Hoffman, former top FCC staffer and currently head of Business in the Public Interest. "Taken together, these actions will give broadcasters the regulatory foundation yo compete in a rapidly changing media market against the likes of FAANG [Facebook, Amazon, Apple, Netflix and Google]."

Equity Research analyst Marci Ryvicker called it a "nice and unexpected positive for the broadcast space."

“This decision is deeply disappointing," said former FCC Chairman and Common Cause Special Advisor Mike Copps. "Rather than decide the merits, the court throws out a major case on a technicality over “standing” that the court itself more than hinted petitioners could easily overcome. On substance, the FCC presented a ludicrous case during oral arguments. There is no defense for maintaining the UHF discount – a technologically obsolete loophole that only allows broadcasters to buy stations beyond ownership limits. It’s more than regrettable that an awful FCC decision that paves the way for more media consolidation is allowed to stand."

“NAB is pleased the court rejected the challenge to the FCC’s decision reinstating the UHF discount," said National Association of Broadcasters SVP Dennis Wharton. "The Wheeler FCC’s decision eliminating the UHF discount without consideration of the national TV ownership cap was inappropriate and ignored the market power of massively deregulated pay TV providers. FCC Chairman Pai deserves enormous credit for righting this wrong, and for providing an opportunity for local broadcasters to better serve our tens of millions of viewers.”

The U.S. Court of Appeals for the D.C. Circuit Friday (April 20) heard oral argument in the Free Press v. FCC challenge to the FCC's reinstatement of the UHF discount.

While the judges appeared to favor Free Press' arguments, which would not bode well for Sinclair, an attorney familiar with the oral argument, speaking on background, said he was not so sure. He suggested the judges had a lot of issues with the standing of the challengers to bring the suit, though added if the court gets past that bar, he liked Free Press' chances. 

According to audio from the argument, the judges clearly had concerns about not having statements from individual members of the associations challenging the rule establishing particular harms, though one judge suggested Free Press et. al could still submit them. But the judges also clearly had issues with the FCC's restoration of a discount that seemed to have clearly outlived its usefulness.

A politically divided FCC under chair Ajit Pai voted back in April 2017 to reverse the previous Democratic majority's decision to eliminate the discount. That discount meant TV station group owners only had to count half of the audience to their UHF stations towards the 39% national audience reach cap. It dated from the days of analog TV when UHFs were weaker than VHFs, and its restoration paved the way for Sinclair to try and buy the Tribune stations.

Pai has long opposed repealing the discount without also considering adjusting the audience reach cap in the same proceeding. The FCC reinstated it in response to a petition to do so by Ion Media, a major UHF station group.

A coalition of nonprofit media consolidation critics including Free Press, Common Cause, the National Hispanic Media Coalition and Prometheus Radio Project, laid out the case to the D.C. appeals court in their opening brief last September for why the decision to reinstate the discount was arbitrary and capricious and not in the public interest.

Related: Prometheus: Court Should Deny Broadcaster Motions

They said the decision to reinstate the cap is arbitrary and capricious—and thus violates the Administrative Procedure Act—because it is premised on a move—reconsidering the 39% cap—that the FCC does not have the authority to make because the 39% figure was established by Congress.

The previous Democratic-led FCC had eliminated the discount as an outmoded artifact of the analog TV era. The FCC responded in its brief that it was reasonable to reinstate the UHF discount immediately while it considers adjusting the national audience reach cap, that it has the authority to adjust that cap, and that the discount and the cap have to be considered together because the UHF discount is meaningless except in relation to the cap.

The FCC’s decision to restore temporarily a settled framework that had previously been in place for three decades rests well within its discretion under the Administrative Procedure Act, other Congressional enactments, and its own rules," the FCC told the court in asking it to reject the various groups' challenges.

The case could throw a wrench into the Sinclair-Tribune deal given that without the discount a Sinclair-Tribune combo would far exceed the 39% national ownership cap. According to sources, Justice is vetting Sinclair's latest spin-off proposal, but the deal can't get a final decision until the FCC has put the latest iteration of the deal out for public comment of at least 30 days, with at least seven days more for responses to those comments, then renders its decision. Justice vets it for antitrust issues, while the FCC looks beyond competition to a deal's positive or negative impact on the public interest. 

So, if the deal did not close before the court rendered a decision, and the decision reversed the FCC and eliminated the discount, the deal could not get done. But if the deal closed before a decision eliminating the discount, it could not be unwound by a court decision vacating the FCC's reinstatement of the cap--unless the FCC had conditioned the deal on the outcome of the court case.

Oral argument was 15 minutes per side--beginning at 9:30 a.m. It was the first case on the docket for the three-judge panel of Judges Patricia Millett, Cornelia Pillard, and Gregory Katsas. 

Coincidentally, this week also marked the deadline for comments in the FCC's review of the 39% cap and UHF discount. The fact that the discount helped Sinclair was one of the talking points of MVPDs opposed to raising the 39% cap, including de facto raising it via the discount.

Rep. Tony Cárdenas (D-Calif.), no fan of the proposed merger, says the FCC should wait until the court renders a decision before it renders its decision on Sinclair-Tribune, arguing that to allow the deal if the court then eliminates the discount would create "FCC-sanctioned" dominance of the broadcast space by Sinclair.

The National Association of Broadcasters has again told the FCC that the agency needs to extend the UHF discount from the 39% national audience reach cap to all VHF stations as well, saying even that overstates their actual audience reach.

But while it said the FCC should reject the pay TV industry's "self-serving arguments supporting the disparate regulation of TV broadcasters," it does not address many of its own members' call for disparate treatment in a separate filing.

In its reply comments on the FCC's inquiry into the cap and 50% UHF discount, the NAB focused on pay TV industry comments that the cap should be retained and the UHF discount eliminated, but did not address the broadcast TV affiliate associations' request that the FCC effectively double the cap for them, but not for network-owned stations. The last time affiliates and network-owned stations squared off over the cap, it fractured the association.

But the NAB has plenty of other targets -- cable operators, satellite operators -- and stuck with taking aim at various pay TV arguments.

The NAB said, for example, that the pay TV industry's allegations of excessive retrans bargaining power are misplaced, suggesting that highly concentrated MVPDs, with their dual control of the pay TV pipeline and broadband access, are the real power brokers.

"[R]ather than TV stations being able to play multiple distributors against one another, as Dish asserts, in reality TV stations prefer to -- indeed must –- reach retransmission agreements with all major pay TV providers to ensure their accessibility to as many viewers as possible," the NAB said.

And to the Writers Guild of America comment that consolidation equates to a decline in diversity of content, and that broadcasters are the dominant provider, the NAB said that is from an alternative universe.

The NAB said TV stations have limited effective reach and only a fraction of the potential audience. Given that changed landscape, even discounting half of the "theoretical 100% audience reach...overstates their effective audience," the organization added.

And while the NAB conceded local TV news is a trusted news source relied on by "many," it said that reliance has declined in the face of competition from many other news sources, particularly digital ones that other commenters failed even to take into account.

The FCC's Inspector General late last year agreed to open an investigation into FCC chair Ajit Pai's handling of the Sinclair Broadcasting-Tribune Media merger and related media ownership deregulatory decisions.

That is according to Rep. Frank Pallone (D-N.J.), ranking member of the House Energy & Commerce Committee, who sought the IG investigation last fall.

Pallone was concerned that Pai had improperly pushed for various deregulatory moves, such as restoring the UHF discount and loosening local ownership restrictions, to benefit Sinclair, whose Tribune purchase was a big beneficiary. He said the IG is also investigating whether the dereg was "coordinated" with Sinclair.

Related | broadcastingcable.com: FCC Seeks More Evidence of Sinclair Deal Claims

Pai has said the review has been by the book, and he has long argued for deregulating broadcasting and that the UHF discount should be looked at in tandem with the 39% ownership cap, including whether an analog discount should replace it, though he has also suggested the UHF discount was an anachronism.

"For months I have been trying to get to the bottom of the allegations about chairman Pai’s relationship with Sinclair Broadcasting,” Pallone said in a statement and to The New York Times, which first reported of his confirmation of the investigation. “I am particularly concerned about reports that Chairman Pai may have coordinated with Sinclair to time a series of Commission actions to benefit the company. I am grateful to the FCC’s Inspector General that he has decided to take up this important investigation.”

Related: Demand Progress Wants FCC IG to Investigate Pai Over Sinclair Deal

FCC spokespeople were not available to comment on the status of that investigation or what the threshold for investigating a complaint is, though the FCC website outlines the factors the IG considers in agreeing to investigate.

Back in November, joined by Overnight and Government Reform Ranking Member Elijah Cummings (D-Md.), Pallone asked FCC inspector general David Hunt to investigate whether Pai had "taken improper actions to benefit Sinclair Broadcast Group."

At the time, an FCC spokesperson called the request part of an effort by Democrats to target Sinclair over its perceived conservative political views, and branded the allegations a baseless attempt to distract from the merits of the deal.

It is something of a chicken and egg issue. Did Pai help Sinclair by deregulating as expected, or did Sinclair anticipate that deregulation and time its Tribune deal to capitalize on it?

Pai's spokesperson said back in November of the request for an investigation: “Unfortunately, this request appears to be part of many Democrats’ attempt to target one particular company because of its perceived political views, an effort that dates all the way back to 2004 when Ranking Member Pallone, Ranking Member Cummings, and other Democrats demanded that the FCC investigate Sinclair based solely on the content of a documentary they didn’t like and that hadn’t even aired. Any claim that chairman Pai is modifying the rules now to benefit one particular company is completely baseless. For many years, chairman Pai has called on the FCC to update its media ownership regulations -- one of which dates back to 1975. The Chairman is sticking to his long-held views, and given the strong case for modernizing these rules, it's not surprising that those who disagree with him would prefer to do whatever they can to distract from the merits of his proposals.”

Related: Wheeler Says FCC Bent Rules to Help Sinclair

Pai has rolled back a number of decisions of his predecessor, Tom Wheeler, that he opposed and criticized at the time they were approved, including 2014 guidance on how the FCC would treat joint sales agreements and sharing arrangements between noncommonly owned stations; restoring the FCC's UHF discount; and two proposals scheduled for a vote this week (Nov. 16) -- potentially eliminating or loosening some media ownership limits, and allowing for the rollout of ATSC 3.0 transmissions. The FCC also recently eliminated the main studio rule, which required broadcasters to maintain a studio in their community of license.

Pallone and Cummings pointed to the timing of decisions that impact Sinclair deals (such as its purchase of Bonten stations) and proposed deals (the Tribune acquisition), and said they wanted some answers.

Meanwhile, the FCC has stopped the informal shot clock on its vetting of the proposed Sinclair-Tribune merger while it awaits action by the Department of Justice. Sinclair has modified the deal in light of the FCC's deregulatory moves and in an effort to retain more stations. Likely if and when Justice signs off on that, or its modification of Sinclair's modification, it will need to be refiled with the FCC and put out for public comment.

Free Press and the other challengers to the FCC's decision to reinstate the UHF discount have told a federal court that it makes no sense for the FCC to reinstate a rule it concedes is obsolete "based on the mere possibility that the Commission will, in the future, open a proceeding to consider something that, as of now, a majority of the Commission believes it cannot or should not do."

That came in their filing in support of a request for an emergency stay of the implementation of the UHF discount, which was scheduled to happen June 5 but was delayed by the U.S. Court of Appeals for the D.C. Circuit to allow more time to consider the stay request and the FCC's response. The filing was also in response to Sinclair's intervention in support of the FCC and in opposition to Free Press' motion for the stay.

The discount means that a station group only has to count half the audience of its UHFs toward the 39% ownership cap, which dates from the pre-digital TV days when UHFs were the weaker signals. Staying the FCC decision would put a crimp in Sinclair's proposal to buy Tribune, which without the discount would push Sinclair's national reach past 70%.

In defending the stay to the court, Free Press attorneys pointed out that even in voting for returning the discount, Republican commissioner Michael O'Rielly said he did not think the FCC had the authority to adjust the statutorily-set 39% cap on a TV station group owner's national audience reach, the reconsideration of which FCC chair Ajit Pai had given as a reason for reinstating the discount he conceded was likely obsolete and instead reviewing the discount along with the 39% cap.

Related > Sinclair to Senate Dems: Let's Talk

With Democrat Mignon Clyburn voting against restoring the discount, that made the two of three commissioners the Free Press filing referred to, and potentially changing the cap was the thing Free Press is saying the FCC could or should not do, according to O'Rielly and Clyburn.

Sinclair argued that eliminating the discount did not guarantee the FCC would approve its transaction or other future deals, but Free Press said Sinclair did not point to a single example "this century." Free Press also said that while Sinclair said that if the court were to reverse the commission it could mean the divestiture of stations bought "during the pendency" of the case's outcome, that flew "in the face of the reality that no mandated television divestiture has been effectuated in decades."

"Reinstating the discount now, rather than awaiting the outcome of this hypothetical future proceeding, will usher in a wave of media consolidation that undermines the agency’s core statutory objectives," Free Press said. "This consolidation will harm the public by reducing the diversity of voices in the national marketplace of ideas and limiting competition in program production and procurement, thereby lowering the quality and quantity of programming available to the public.

"Unless this Court stays the FCC’s order, the nation’s television ownership structure will be significantly and irreparably altered well before this Court will have time to reach a determination on the merits," Free Press continued. "Granting a stay would maintain the status quo pending judicial review, would not harm broadcasters, and would protect the public interest during the course of this proceeding."

FCC Chairman Ajit Pai will reportedly circulate an item soon rolling back yet another Tom Wheeler era regulatory change, according to a report in the Wall Street Journal. The move was widely expected.

Broadcasters were looking for that to happen given the chairman's opposition to the discount's elimination and his signal he would be reviewing that change and the fact that the FCC did not loosen media ownership regs in last year's quadrennial media ownership rule review.

Up until the vote last fall to eliminate the discount, the FCC had counted only 50% of a UHF station's audience reach toward the 39% ownership cap given that UHF had traditionally been the weaker signal vis a vis VHF. That changed after the digital switch, when their fortunes were reversed and UHF became the more desirable channel position given those signals superior propagation characteristics.

Wheeler circulated an item eliminating the discounts back in the summer of 2016. It was approved in September.

The timing of the order's circulation would give broadcasters gathering in Las Vegas for the annual NAB Show something to cheer when the chairman makes his appearance there.

Under then FCC chair Mignon Clyburn, the commission back in 2013 voted to propose eliminating the discount.

The UHF discount item grandfathered existing ownership groups that would be over the 39% cap once the discount was scrapped. But it did not propose replacing it with a VHF discount, which the FCC had asked for input on.

With the discount gone, UHFs had to count all their audience, which was in effect yet another limit on ownership and would not allow groups including Ion and Tribune to be sold in their entirety.

The National Association of Broadcasters has argued that the FCC should not treat the discount in a vacuum but in relation to the goals of the national ownership caps.

Pai dissented from the September 2016 vote to scrap the cap. While he acknowledged that it was probably time to eliminate the cap, he said that should not happen without also reviewing the 39% national cap.

The FCC's Media Bureau has extended the comment period for those weighing in on a challenge by TV station owners ION Media and Trinity Christian Center to the FCC's decision to eliminate the UHF discount.

The commission historically counted only half the reach of a UHF station in terms of the national audience reach cap of 39%, dating from the analog era when UHF signals were weaker and less desirable than UHF, a table that was turned in digital.

FCc Chairman Tom Wheeler circulated an item eliminating the discounts back in the summer. It was approved in September.

ION and Trinity filed their petition to reconsider that decision Nov. 23 and the FCC set the comment deadlines for due Dec. 27 and Jan. 6 (reply comments).

Related: ION Has Its Eye on Keeping UHF Discount

Last week, Free Press, Common Cause, the Media Alliance and the United Church of Christ jointly filed a motion for an extension of those deadlines to Jan. 10 and Jan. 23, respectively, citing the holidays and the difficulty counsel Andrew Schwartzman would have consulting with clients to develop a full and complete record, as well as the timing given the transition to a new Administration.

The bureau said that developing a complete record was good cause for granting the extension.

ION and Trinity used the UHF discount to build their portfolios beyond what VHF owners could accumulate.

The FCC had already sunset the discount for the Big Four broadcast groups but not for other groups.

The commission did grandfather existing combos as well as any deals in the works.

It was a busy day on the media ownership front at the FCC Monday (June 28).

At the same time Chairman Tom Wheeler was circulating the FCC's quadrennial review of media ownership rules, which retain and even tighten some rules, he separately circulated an order eliminating the UHF discount, an FCC source confirms, which would be an additional cap on ownership.

Under then-FCC chair Mignon Clyburn, the commission back in 2013 voted to propose eliminating the discount given that in the digital age UHF stations are now more robust than VHF, a reversal of fortune from the analog days. The UHF discount means that TV station owners only have to count one-half of the audience reach of those stations toward the 39% national ownership cap. But no final vote was held on the proposal.

The UHF discount item grandfathers existing ownership groups that would be over the 39% cap once the discount is scrapped. But it does not propose replacing it with a VHF discount, which the FCC had asked for input on. Like the quadrennial review, it must still be voted by the full commission.

With the discount gone, UHFs would have to count all their audience, which will be yet another new limit on ownership and would not allow groups including Ion and Tribune to be sold in their entirety.

The National Association of Broadcasters has argued, and did so again in a letter to the FCC last week, that the FCC should not treat the discount in a vacuum, but in relation to the goals of the national ownership caps