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Set-top set-to goes to court

Two years ago, the government decided that one way to create more choice in TV accessories was to restrict the kinds of channel-surfing devices that cable operators could sell. Ironically, that federal dictate may be struck down if judges determine regulators unjustly diminished consumer options.

The cable industry last week argued before a three-judge panel of the federal appeals court in Washington that the FCC misinterpreted federal law when it banned cable systems from selling digital set-top boxes that feature both channel-surfing and security components.

The suit was filed by General Instrument, a leading maker of cable decoders for multiple system operators, and the National Cable Television Association. Joining the FCC in defending the rules are the Consumer Electronics Association and electronics retailers.

The judges seemed skeptical of the cable industry's claim that rule is a clear violation of the law. Judge David Sentelle said provisions of the 1996 Telecommunications Act mandating that cable operators allow consumers to use channel-surfing equipment purchased from outside vendors, such as Circuit City, are "facially ambiguous." Because the law was vague about how far the FCC could go, the court may have no choice but to allow regulators to impose the separation requirement, Sentelle said.

Despite the court's reservations, however, the prohibition's survival is no sure thing. The judges appear to be mulling instead whether the FCC provided adequate justification for the rule, said sources who heard the oral arguments.

The FCC ordered the ban on integrated set-top boxes, which goes into effect in 2005, in hopes that competition for channel-surfing devices will lead to lower prices and development of new on-screen program guides. If cable systems were allowed to sell integrated boxes, consumers would have little incentive to buy the new devices at retail stores, the FCC said.

But the justices noted that the FCC rules deny consumers the convenience of an all-in-one device that provides both channel surfing and decoding/ security functions. Without adequate justification for limiting consumer choice, the rules could be considered "arbitrary and capricious" and struck down, said Judge Stephen Williams. "Consumers make a tradeoff between cost and convenience," he told CEA attorney David Nall. "What you're saying is that tradeoff is to be thwarted."

It is impossible to tell on which side the justices will come down, observers said, because cable industry attorneys themselves did not argue that the rules were arbitrary and the judges appeared to debate among themselves whether they had authority to make such a ruling on their own..