Minority Preferences Federal Communications Commission Lisencing

Minority Preferences In Federal Communications Commission Licensing Practices and Procedures February 23, 2000 By: Brian M. Rowland http://www.brianrowland.com

This article concerns preferential policies based on racial classification carried out by the Federal Communications Commission (Commission or FCC) that pertain to the allocation of broadcast and other communication licenses granted by the Commission. An historical examination of the disparities in minority-controlled communications companies is followed by a review of the evolution of FCC policy and its related case law, and analysis and opinion concerning the successes and failures of the Commission’s efforts. I.

Historical Perspective

African-American representation in the ranks of ownership of radio and television stations and other telecommunications systems has been sparse. Prior to 1949, when Jesse B. Blayton, a university professor, certified public accountant and banker, bought Atlanta’s WERD-AM, no broadcast facility in the United States had been owned by a minority.1 It wasn’t until 1973, when the Commission awarded the license of Detroit’s WGPR-TV to WGPR, Inc., that an African-American business owned a television station.2 Since those early days of near non-existent minority representation, the Commission has taken certain remedial action. II.

Evolution of the Law

Coincident to Blayton’s purchase of WERD-AM, in 1949, the United States District Court of Appeals for the District of Columbia Circuit pronounced in 1

Tom Opdyke, LIFE AS IT USED TO BE: WERD Is A Word In Black History, ATLANTA JOURNAL-

CONSTITUTION, October 31, 1994, Section C at 02. 2

WGPR Inc., a minority-owned company, was authorized by the Federal Communications Commission to

construct a new television station on channel 62 in Detroit. See In Re App’n of WGPR Inc., Memorandum Opinion and Order, 42 F.C.C.2d 836 (1973). Also see In Re Request by WGPR, INC., DETROIT, MICH. For Waiver of Grant Fee, 54 F.C.C.2d 297, (1975).

Johnston Broadcasting Co. v. FCC, that the use of comparative hearings was the proper procedure for the Commission to use to distinguish between competing applicants to properly award licenses to serve the public interest.3 In Johnston, the Court upheld the Commission’s choice of Thomas N. Beach (the applicant competing against Johnston) for a Birmingham, Alabama, radio station license, stating that “[w]hen minimum qualifications of both applicants have been established, the public interest will be protected no matter which applicant is chosen. From there on, the public interest is served by the selection of the better qualified applicant.”4 The Johnston Court validated the Commission’s choice of Beach based on the Commission’s finding that inter alia Beach’s broadcast programming proposals would provide “greater opportunity for local expression than would Johnston.”5 This emphasis on local expression serves as a foreshadowing of policies to come, which would mandate diversity of ownership as a springboard for advancing minority ownership and access to the public airwaves. In 1965, the Commission declared a need for “a maximum diffusion of control of the media of mass communications.”6 Despite that pronouncement, the policy set forth in the 1965 Policy Statement did not concern itself with minority representation in ownership, but rather, diversification of ownership as a measure to prevent monopolization. In addition to diversification, the policy statement declared the criteria for comparative hearings to include full-time participation in station operation by owners, proposed programming service, past broadcast record, efficient use of the frequency, personal character of the applicant, and “other factors.”7 The Commission maintained these basic criteria for comparative hearings until FCC Chairman Richard Wiley prompted his staff to research and discover ways in which the percentage of minority owned broadcast facilities could be bolstered. In the wake of Wiley’s request, the Commission issued the 1978 Policy Statement. The statement enunciated the use of comparative hearing preferences 3

See Johnston Broadcasting Co., v. FCC, 175 F.2d 351, 357 (D.C. Cir. 1949).

4

See id.

5

See id. at 358.

6

Policy Statement on Comparative Hearings FCC, Public Notice, 1 F.C.C.2d 393, 394 (1965).

7

See id at 394-400.

favoring minority applicants, the distress sale policy, and the award of tax certificates to the owners of broadcast or cable systems that sold their properties to minority-controlled businesses.8 This policy change began a period of nearly 15 years in which minority ownership expanded from less than 1% of 8,500 existing stations in 1978, to 3% of over 16,000 stations by 1995.9 The policies set forth by the 1978 Policy Statement, to increase the level of broadcast facility ownership by minorities, defined minorities as “Black, Hispanic Surnamed, American Eskimo, Aleut, American Indian, and Asian American extraction,”10 and set forth three methods to increase minority ownership. First, the comparative hearing minority preference policy worked by adding minority ownership to the criteria set forth in the 1965 Policy Statement. This “‘plus’ [was] awarded only to the extent the minority owner actively participate[d] in the day-today management of the station.”11 Second, the distress sale was a plan which eliminated the existing policy that “a licensee whose qualifications to hold a broadcast license [that had] come into question [could] not assign or transfer that license until the FCC ha[d] resolved its doubts in a non-comparative hearing.” Instead, “[t]he distress sale policy [was] an exception to that practice, [which allowed] a broadcaster whose license ha[d] been designated for a revocation hearing, or whose renewal application ha[d] been designated for hearing, to assign the license to an FCC-approved minority enterprise.”12 Finally, tax certificates were offered to broadcasters that sold their properties to organizations with a minority ownership share of over 50%. The certificates “permit[ted] sellers of broadcast properties to defer capital gains taxation on a sale whenever it [was] deemed necessary or appropriate to effectuate a change in a policy of, or the adoption of a new policy by,

8

Statement of Policy on Minority Ownership of Broadcast Facilities, Public Notice, 68 FCC2d 979 (1978)

9

Subcomm. On Oversight of the House Comm. On Ways and Means, 103rd Cong., 1st Sess (1995) (statement of

William E. Kennard, FCC General Counsel). 10

See Metro Broadcasting Inc., v. FCC, 497 U.S. 547, n1 (1990) (upholding the FCC’s minority preference -

comparative hearings and distress sale policies). 11

See id. at 557.

12

See id. at 557.

the Commission with respect to the ownership and control of radio broadcasting stations.”13 The comparative hearing process for services such as cellular telephony, low power television (LPTV), and wireless cable (MMDS,) was eliminated in favor of random selection lotteries in 1981. The change was authorized by Congress with the intent that lotteries would speed the selection process for these emerging technologies.14 “The Commission's new lottery authority contain[ed] four significant provisions. First, the Commission [was] expressly empowered to use a lottery to grant initial construction permits or licenses among competing applicants if the public interest would thereby be served. Next, the Commission's administrative burden in conducting the lottery [was] reduced because it [was] only required to determine that the applications [were] acceptable for filing prior to the lottery. A full qualifications check of only the successful applicant need be made after the lottery is conducted. Third, when lotteries [were] used for allocating ‘mass media’ licenses, i.e., those broadcast-type services where the licensee retains editorial control over the medium, the lottery must be weighted with ‘significant preferences’ allocated to minority group applicants and those who own[ed] few or no other media of mass communications. In non-mass media services, however, the lottery [was to] be conducted strictly on a random basis. Finally, the Commission [was] authorized to use lotteries ‘in any instance,’ in its discretion, where it [was] determined appropriate after promulgating rules in a formal rule making proceeding.”15 The lottery system did not prove an adequate solution in all situations and did little to alleviate the backlog in the ever-slowing process of license allocation. In 1981, the Commission chose not to extend the lottery process to common carrier services like cellular telephones as such services do not allow editorial control over content and therefore did not promote diversity of viewpoints. In support, the 13

See id. at n19.

14

Public Law No. 97-35, the Omnibus Budget Reconciliation Act of 1981, 95 Stat. 736-37, codified as 47

U.S.C. § 309(i). 15

See In the Matter of Amendment of the Commission's Rules to Allow the Selection from Among Certain

Competing Applications Using Random Selection or Lotteries Instead of Comparative Hearings, Second Report and Order, 93 F.C.C.2d 952, 956 (1983).

Commission stated “[a] mass media licensee has control over the content of its transmissions, while a common carrier offers a communications pipeline to its subscribers for the carriage of information of their own choice.”16 Although the lotteries for LPTV were weighted to enhance minority ownership, minority ownership of all television outlets hovered at or below 3.2% in the 1990s.17 Other problems arose with license lotteries, the most pernicious of which was the entry into the contest of speculators that would sell-off their licenses for millions of dollars, slowing the pace at which construction permits went on the air, and enriching those who entered the lotteries solely to sell the license before construction.18 By 1985, the FCC expressed desire to eliminate the lottery system in favor of allocating licenses by auction. The theory was that the license would be auctioned to the party that valued the license most, and because of that, the public would be best served by the efficiency of the process.19 The Commission issued a notice of inquiry in 1987 concerning the legality of the minority preference policies, including requests for comment about its comparative licensing, distress sale, and tax certificate policies.20 In response, Congress restricted the Commission’s funding such that the FCC was restricted from using funds to change or reexamine changes of current policies. In doing so, “[t]he conferees agree[d] that the prohibition against [the] FCC to change or reexamine changes of current policies governing minorities [was] intended to prevent the 16

See In re Application of Cellular Mobile Systems of Tampa, et al., Memorandum Opinion and Order, 98

F.C.C.2d 231, 234 (1984). 17

Minority Commercial Broadcast Ownership in the United States, Nat’l Telecommunications and Information

Administration, Dept. of Commerce, (visited Feb. 18, 2000) . 18

See generally In the Matter of Implementation of Section 309(j) of the Communications Act Competitive

Bidding, Notice of Rulemaking, 8 FCC Rcd. 7635, 7641 (1993) [hereinafter Auction Notice] (citing that the lotteries did not award licenses to those who valued them most – typical of this were the lottery winners of the rural licenses for Columbia County, Wisconsin, which sold for $62.5 million only 165 days after being awarded in 1990). 19

See generally Auction Notice, n.20 (1993).

20

Reexamination of the Commission's Comparative Licensing, Distress Sales and Tax Certificate Policies

Premised on Racial, Ethnic or Gender Classifications; Notice of Inquiry, 52 FR 596, (1987) (questioning the constitutionality of the policies mandated by Congress in The Communications Act of 1982 § 309(i)).

Commission from backtracking on its policies that provide[d] incentives for minority participation in broadcasting.”21 At this point, the utilization of minority preferences in comparative hearings was endorsed by Congress and appeared well founded. The 1990s were ushered in by the Supreme Court’s confirmation of the legitimacy of the FCC’s comparative hearing and distress sale policies in Metro Broadcasting, Inc., v. FCC.22 An important aspect of Metro Broadcasting was the Court’s adoption of the intermediate standard of review for determining the validity of the racial classification policies mandated by Congress. In declaring the standard, Justice Brennan stated that “[w]e hold that benign race conscious [sic] measures mandated by Congress -- even if those measures are not ‘remedial’ in the sense of being designed to compensate victims of past governmental or societal discrimination -- are constitutionally permissible to the extent that they serve important governmental objectives within the power of Congress and are substantially related to achievement of those objectives.”23 In dissent, Justice O’Connor dismissed the newfound intermediate standard, declaring that “[u]nder the appropriate standard, strict scrutiny, only a compelling interest may support the Government's use of racial classifications. Modern equal protection doctrine has recognized only one such interest: remedying the effects of racial discrimination. The interest in increasing the diversity of broadcast viewpoints is clearly not a compelling interest. It is simply too amorphous, too insubstantial, and too unrelated to any legitimate basis for employing racial classifications. The Court does not claim otherwise. Rather, it employs its novel standard and claims that this asserted interest need only be, and is, ‘important.’”24 Justice O’Connor continued by saying, “[w]e have recognized that racial classifications are so harmful that ‘[u]nless they are

21

H.R. Conf. Rep. No. 708, 103d Cong., 2d Sess. (1994) (listing as Amendment 54 restoring FCC funding

restrictions contained in the prior year’s Appropriations Act). 22

See Metro Broadcasting, Inc., v. FCC, 497 U.S. 547 (1990) (upholding by a 5-4 vote the minority preference

rules of the Commission). 23

See id. at 564, 565.

24

See id. at 612.

strictly reserved for remedial settings, they may in fact promote notions of racial inferiority and lead to a politics of racial hostility.’”25 The Metro Broadcasting decision kept the comparative hearings’ race-based minority preferences in place, carrying the FCC policy through the next several years. Interestingly though, the dissenting opinion forecasted the future direction of the Court. III.

The Modern Era

The Supreme Court held in Adarand Constructors,Inc., v. Pena, that strict scrutiny must be applied to race-based affirmative action plans and that “Metro Broadcasting undermined important principles of this Court's equal protection jurisprudence, established in a line of cases stretching back over 50 years.”26 In Adarand, which concerned minority set-aside programs in the construction industry, the plaintiff claimed “that the Federal Government's practice of giving general contractors on Government projects a financial incentive to hire subcontractors controlled by ‘socially and economically disadvantaged individuals,’ and in particular, the Government's use of race-based presumptions in identifying such individuals, violates the equal protection component of the Fifth Amendment's Due Process Clause.”27 Justice O’Connor led the majority opinion overruling Metro Broadcasting. The opinion written by Justice O’Connor was built upon on concepts of skepticism, consistency, and congruence. “Skepticism” meant that “[a]ny preference based on racial or ethnic criteria must necessarily receive a most searching examination.”28 “Consistency” stood for the concept that the standard of 25

See id. at 613. citing to City of Richmond v. J. A. Croson Co., 488 U.S. 469,493 (1989) (holding that any

governmental action that is explicitly race-based must be necessary to achieve a compelling governmental interest, such that race based affirmative action plans must be subjected to strict scrutiny as are governmental actions that intentionally discriminate against racial minorities). 26

See Adarand Constructors, Inc., v. Pena, 515 U.S. 200, 231 (1995) (overruling Metro Broadcasting in favor of

the rule from Croson – calling upon strict scrutiny for federal as well as state and local governmental acts which seek to employ race-conscious criteria to achieve remedial action favoring minorities). 27

See id. at 204.

28

See id. at 223 citing to Wygant v. Jackson Bd. Of Educ., 476 U.S. 267 (1986) (declaring that any official

action that treats a person differently on account of race is inherently suspect).

review under the Equal Protection Clause is not dependent on the race of those burdened by a particular classification.29 “Congruence” demanded that “[e]qual protection analysis in the Fifth Amendment area is the same as that under the Fourteenth Amendment.”30 In Adarand, the Court seized the opportunity to rule in such a way as to cause sweeping changes in the Commission’s policies toward enhancement of minority ownership of broadcast stations. As an example, the course of the then-pending case, Graceba Total Communications v. FCC, was probably altered. Graceba had won two licenses to provide interactive video data services (IVDS), which allow for two-way data transmission over the radio spectrum. The licenses were acquired in an open government auction conducted under rules promulgated to grant businesses owned by racial minorities (or owned by women) a 25% “bidding credit.” Although Graceba won, it did not qualify for the bidding credit. Graceba petitioned, arguing that the auction practices had artificially inflated the price of the licenses.31 After being remanded to the FCC, Graceba appealed the FCC’s decision back to the Federal Circuit Court. In near sarcasm, Circuit Judge Silberman criticized the FCC’s self proclaimed “good faith reliance on Supreme Court precedent,” stating that the Commission’s solicitude extends only to those precedents which the FCC finds conducive to its objectives.32 The Judge elaborated saying “[i]t will not be surprising to anyone familiar with this litigation that the FCC's report and order neatly avoids resolving Graceba's properly presented constitutional claims. Instead, the FCC's remedial action--the blanket retroactive conversion of the auction's racial and gender preferences into ‘small business credits’--quite obviously is tailored to eliminate the claims of the petitioners before us without curing (or even addressing) the auction process's alleged constitutional defects. The FCC makes a truly astonishing admission that its choice of remedy was animated by a desire to ensure 29

See id. at 224 citing to Croson, 488 U.S. at 494 (declaring that all racial classifications under the 14th

Amendment must be strictly scrutinized). 30

See id. at 224 citing to Buckley v. Valeo, 424 U.S. 1, 93 (1976).

31

See generally Graceba Total Communications, Inc., v. FCC and United States of America, 115 F.3d 1038

(D.C. Cir. 1997)(remanding Graceba’s claim to the Commission for further consideration). 32

See In re: Graceba Total Communications, Inc, Lexis 29601, (D.C. Cir. 1999).

that, as a practical matter, the preferential racial and gender bidding credits implemented in the 1994 auction remained in place.”33 IV.

Opinion and Conclusion

Since 1949, when the FCC decided Johnston, and selected the applicant whose programming would allow the “greater opportunity for local expression,” the Commission has struggled mightily to infuse fairness, diversity and remediation through its regulatory policies. Although the Commission’s efforts to increase minority ownership in broadcast properties met with some success, many abuses occurred. Today, with the allocation of thousands of new low power FM (LPFM) radio station licenses on the immediate horizon, the Commission’s policies favoring racial minorities can be described as vaporous. Examination of the history, and evolution of law designed to enhance minority ownership of broadcast outlets, demonstrates that the Commission did not come by the policies of the late-1970s, through mid-1990s (the era), with ease. However, a considerable amount of the problems incurred were caused by dealmaking, rather than rulemaking. From an insider’s viewpoint, it can be said that deal-making became the rule. Throughout the era, minority preference policies were exploited by communication attorneys and savvy broadcasters who would pay-off minority “partners” to front license applications that the minority partner did not know was a sham. Often, the minority on the application discovered the sham after the license was awarded, when they were removed from the partnership because they could not ante-up their share of funds to construct the facility. There also existed those who “worked” the system by applying for licenses to intentionally “fish” for settlement offers. Communications attorney Thomas L. Root perpetrated perhaps the most glaring adulteration of the system. Root organized Sonrise Management Inc., which raised approximately $16 million to “invest” in sham radio station license applications. In Root’s scheme, typically, a minority from within the prospective city of license was recruited to front the application and later urged, or financially coerced, to settle in a buy-out offer from other competing applicants. Root had over 33

See id.

150 sham radio station applications going with the intended result that the local minority applicant would be bought-out in a pre-hearing settlement.34 On September 11, 1990, following a 33 count indictment, Root entered a plea agreement in consolidated federal proceedings and was found guilty of two counts of altering, forging and counterfeiting public records, three counts of wire fraud and one count of transport of stolen monies obtained by fraud. Root's misconduct, which occurred in the context of application licensing proceedings before the Commission, included the forging of a counterfeit order of an Administrative Law Judge of the Commission. State court indictments were also returned against Root in North Carolina and Florida in connection with events surrounding the formation of construction permit applicants by Sonrise. On August 28, 1992, the State of North Carolina entered a Judgment and Commitment for all counts to which Thomas L. Root pled no contest; Root was sentenced to 15 years in prison to be served concurrently with his federal sentence.35 Buy-out settlements ran the range of one’s imagination. Some applicant’s settled to recover only their expenses, while others, knowing the strength of the payor’s desire to acquire the license, demanded well over $1 million. Even in small market license contests, applicants could command hundreds of thousands of dollars to withdraw.36 It is apparent that such deal-making, rationalized by the Commission’s desire for efficiency and elimination of license allocation backlog,37 facilitated the unjust 34

See generally Preying on the Faithful Investor Alert, Office of the Kansas Securities Commissioner, (visited

Feb. 19, 2000) . 35

See In re Applications of The Petroleum V. Nasby Corp., For Renewal of License of Station WSWR (FM)

Shelby, Ohio; The Petroleum V. Nasby Corp., For Transfer of Control of Station WSWR (FM) Shelby, Ohio, FCC, 9 FCC Rcd 6072,6073 (1994) (describing the activities of Thomas L. Root and Kathy Root and determining that his actions do not disqualify the Corporation from being an FCC licensee). 36

See E.g. In re Applications of Rebecca Radio of Marco, FCC Memorandum Opinion and Order, 3 FCC Rcd

2256 (1988). 37

See In the Matter of Amendment of Section 73.3525 of the Commission's Rules Regarding Settlement

Agreements Among Applicants for Construction Permits, Report and Order, 6 FCC Rcd 85, 87 (1990) (stating that expeditious resolution of proceedings to facilitate the offering of new service to the public is a primary concern in comparative new cases).

enrichment of sham applicants, prevented bona-fide minority applicants from receiving licenses, and resulted in a general bastardization of the process. Ultimately, the Commission ceased approving buy-outs that were for amounts greater than that which an applicant could demonstrate as expenses incurred in seeking the license.38 The most recent broadcast service to be allocated to the public is LPFM. It is characterized by extremely low signal strength that generally would cover an area less than 5 miles in diameter. Soon available, LPFM is to be strictly non-commercial. LPFM will not be protected in a separate portion of the band (as current noncommercial licenses are), the frequencies will be interspersed throughout the FM frequency range.39 In essence, LPFM will allow individuals and organizations to operate non-profit stations that serve a highly limited geographic area. The stations will generate no revenue for the owners and the licenses will be non-transferable. Common sense dictates that LPFM will be a relatively valueless dilution of the already saturated FM band. What about minority preferences and LPFM? The Commission “note[s] that a number of commenters [sic] advocate preferences for entities controlled by minorities. [But] [w]e shall defer consideration of this matter. The Commission is conducting fact-finding studies as to whether such preferences may be justified consistent with the Supreme Court's decision in Adarand Constructors v. Pena. Depending on the outcome of these studies, we will consider in the future whether to adopt minority control as a point system factor.”40 This comment buried deep in the Commission’s Report and Order appears as a dying vestige of policy the Commission promulgated less than a decade prior. To conclude, the Commission’s attempt to enhance minority ownership via comparative hearing minority preferences, bidding credits, distress sale policies and tax certificates has been both a success and a failure. Successful because more minorities have in fact been allowed into the industry in ownership positions, and 38

See id. at 85.

39

See generally In the Matter of Creation of Low Power Radio Service, Report and Order, 2000 Lexis FCC

395 (2000) (announcing the rules, application process and technical parameters of LPFM). 40

Id. at para 146.

too, because such measures to remedy past inequalities are genuinely observed as beneficial and just. The policy failures began in part when comparative hearings were permitted to be resolved with cash buy-out settlements. Prospective minority owners were tempted to forego their dreams of having their own stations for the lure of quick money. As well, the “Thomas Roots” of the world preyed upon minorities using them as fronts for sham applications. In the early 1990s, the Commission deregulated the ownership rules allowing large corporations to own multiple stations in single markets. This resulted in the sale of a vast majority of broadcast stations owned by individuals and small organizations, to large conglomerates, squeezing out even more minority owners. For example, in Jacksonville, Florida, Cox Broadcasting owns over six radio stations, Clear Channel owns eight radio and two television stations (and a local billboard company), and soon, five television stations will be controlled or owned by just three companies; Gannett, Post-Newsweek, and Clear Channel. All of Jacksonville’s facilities were at one time in the past owned by individual persons or corporations. Deregulation of ownership rules has obliterated whatever hope the Commission once had in creating ownership diversity or “the greater opportunity for local expression.” The Commission’s most recent diversity effort - the allocation of thousands of non-profit, non-transferable, neighborhood-range LPFM licenses, will arguably create unreliable and amateurish programming sources, with no assurance that minorities will receive remedial benefit in the process. The Commission’s effort to enhance minority ownership through preference policies has been a typical case of good intentions – bad results. In its haste to serve the public interest, the Commission erred by allowing comparative hearing settlement buy-outs to subvert the allocation process, resulting in harm to many of the parties it intended to assist.