2nd UPDATE: Court Upholds FCC Ban On Exclusive Cable Contracts

A divided federal appeals court on Friday upheld the Federal Communications Commission's decision to extend a rule that bars cable operators from withholding channels from competitors.

The decision essentially upholds the status quo for cable operators. It means cable companies like Comcast Corp. (CMCSA) can't try to use their partial ownership of popular channels like E! or the Golf Channel as a competitive advantage by preventing rivals from carrying them.

Cablevision Systems Corp. (CVC) and Comcast had challenged the FCC's decision to keep the rule in place, arguing that the prohibition was no longer necessary to preserve competition in the pay-TV market.

The U.S. Court Appeals for the District of Columbia Circuit said it's reasonable to conclude that the FCC's prohibition may not be necessary "if the market continues to evolve at such a rapid pace."

However, the court upheld the agency's authority to make that decision. It rejected the cable operators' challenge in a 2-1 ruling.

The court's majority said it was reasonable for the FCC to conclude that the ban on exclusive contracts between cable operators and affiliated cable programmers continued to be necessary.

In a 29-page dissenting opinion, Judge Brett M. Kavanaugh argued that the case was really about the First Amendment rights of cable operators.

The FCC's desire that every pay-TV provider have access to the same channels isn't much different than the government telling "Barnes & Noble what publisher's books it had to sell, or telling a bookstore-affiliated publishing company that it had to make certain books available to all bookstores," he wrote.

The ban on exclusive contracts for TV channels was set by Congress in 1992. At the time, lawmakers were concerned that cable companies could withhold popular channels, particularly local sports networks, that they owned from competitors, effectively creating a monopoly.

Congress requires the FCC to examine the rule every 10 years to determine if it's still necessary. In 2002, the agency decided to extend the ban for another five years.

It did the same thing in 2007, although it noted cable operators did face more competition from satellite-TV providers and phone companies like Verizon Communications Inc. (VZ). The agency decided to extend the ban, however, after noting that six of the top 20 national cable networks and almost half of regional sports channels were owned by the four largest cable providers.

In a statement, Cablevision said the FCC's rules are "based on an outdated and obsolete view of the competitive landscape," and favor broadcasters and other pay-TV providers.

Comcast agreed, issuing a statement saying it was disappointing that the court "preserved the current unfairness that allows DirecTV to have exclusives for NFL Sunday Ticket and NASCAR Hot Pass while restricting the exclusives that cable operators may have."

FCC Chairman Julius Genachowski said the agency was pleased with the court's decision.

"The Commission's program access rules have played a vital role in making diverse and attractive video programming available to cable and satellite TV viewers," he said in a statement.

The case is Cablevision Systems Corp. v. FCC, 07-1425.

-By Amy Schatz, The Wall Street Journal; 202-862-6631; amy.schatz@wsj.com

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; brent.kendall@dowjones.com

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