A decisive appellate court ruling striking down the FCC’s indecency policy raises the prospect of a showdown in the Supreme Court where federal regulators could see their authority over objectionable content greatly curtailed or even tossed out altogether.

Biz insiders Tuesday were abuzz over the implications of the 2nd Circuit Court of Appeals decision in Fox Television Stations vs. FCC, which found that the FCC’s policies were “unconstitutionally vague” as it tried to crackdown on the utterance of even single expletives.

The 2nd Circuit decision stems from the Federal Communications Commission’s prohibition, starting in 2003, on “fleeting expletives,” such as Cher and Nicole Richie delivering f-bombs during Fox’s live telecast of the Billboard Music Awards. The appeals court found that the FCC’s policy “creates a chilling effect that goes far beyond the fleeting expletives at issue here.”

“By prohibiting all ‘patently offensive’ references to sex, sexual organs, and excretion without giving adequate guidance as to what ‘patently offensive’ means, the FCC effectively chills free speech, because broadcasters have no way of knowing what the FCC will find offensive.”

The appeals court judges were clear that they “do not suggest that the FCC could not create a constitutional policy,” but only that the “current policy fails constitutional scrutiny.”

The appeals court went so far as to identify actual instances where broadcasters withheld programming with the fear that they would be punished, a prospect that carries even greater financial risk after Congress increased fines tenfold in 2004.

The decision cited an instance where Phoenix TV stations dropped live coverage of the funeral of Pat Tillman, the former football star killed in Afghanistan, because of language used by Tillman’s family members to express their grief. It also cited Fox’s decision not to rebroadcast an episode of “That ’70s Show” because it dealt with masturbation, even though it did not describe or depict the act. The episode went on to win an award from the Kaiser Family Foundation for its depiction of a sexual health issue.

With the ruling, the FCC faces the prospect of revising its policy, asking for a rehearing at the 2nd Circuit or appealing to the Supreme Court. The latter option is the most likely course, biz insiders said, if only because of the political ramifications if the FCC were to stand down on indecency on the basis of only the 2nd Circuit decision.

Watchdog org Parents Television Council, which has been at the forefront of filing indecency complaints with the FCC, urged the administration to appeal.

The org’s president, Tim Winter, said, “Let’s be clear about what has happened here today: A three-judge panel in New York once again has authorized the broadcast networks unbridled use of the ‘f-word’ at any time of the day, even in front of children. The Court substituted its own opinion for that of the Supreme Court, the Congress of the United States, and the overwhelming majority of the American people.”

FCC chairman Julius Genachowski said they are “reviewing the court’s decision in light of our decision to protect children, empower parents and uphold the First Amendment.”

No sure win

Nevertheless, an appeal to the Supreme Court comes with the risk to the FCC that the justices will issue a broader ruling limiting its authority in regulation of indecent content. The FCC’s policies face a raft of other pending litigation. Even when the Fox the Supreme Court ruled 5-4 last year to uphold the government’s on administrative grounds, Justice Clarence Thomas, in a concurring opinion, expressed concerns that the FCC’s policies were a “deep intrusion” into broadcasters’ First Amendment rights.

“The FCC has been told repeatedly since it started its crackdown that there is risk when you overreach,” said Scott R. Flick, a partner at the Washington law firm of Pillsbury, which has a specialty in communications law. Although he said it was “certainly plausible that the entire policy will be blown out” if it gets to the high court, conventional wisdom is that the justices will retain “some little sphere where government can regulate to some degree.”

The appeals court opinion, written by Judge Rosemary Pooler, described an FCC during the Bush administration as determined to curb the coarsening of the airwaves, even if that meant drifting away from the clarity that had existed following the Supreme Court’s 1978 decision in FCC vs. Pacifica. The appeals court noted that the 1978 decision, involving a federal government crackdown on a radio broadcast of a George Carlin monologue, limited the government’s enforcement powers to the famous “seven specific words.”

Broadcasters have for some time argued that the media landscape has changed since that decision, and they are held to a higher level of scrutiny even with the ubiquity of cable, satellite and Internet platforms that aren’t subject to FCC content sanctions.

The appellate court stopped short of applying such dramatic changes to its ruling, noting that it was “bound by Supreme Court precedent, regardless of whether it reflects today’s realities.” But as if to tee up the issue for the high court, the appellate court still made mention of the incongruity in the way that the rules are applied.

Judges cited the Supreme Court’s 2000 decision in U.S. vs. Playboy, in which the high court struck down a provision of the Telecommunications Act of 1996 that prohibited cable TV operators from showing sexual content during certain hours. The high court cited the availability of scrambling technology as a less-restrictive means of protecting minors from indecent content.

But broadcast content also can be screened out, via the V-chip and other blocking devices. In that light, the appellate court said it could “think of no reason why this rationale for applying strict scrutiny in the case of cable television would not apply with equal force to broadcast television in light of the V-chip technology that is now available.”

The FCC under then-chairman Michael Powell set its current indecency policy in motion after a January 2003 broadcast of the Golden Globe awards on NBC, in which Bono used the phrase “fucking brilliant.” The FCC had said the f-word in any context “inherently has a sexual connotation” and can lead to enforcement fines.

In 2006, Fox Television Stations, eventually joined by the other networks, challenged the slapdown that it received for the Billboard award broadcasts, charging that the FCC’s policy was “arbitrary and capricious.” The 2nd Circuit agreed in 2007, but the Supreme Court upheld the FCC’s authority in a decision last year.

Ruling pleases Fox

Nevertheless, the high court kept its decision to questions of administration law, and sent the constitutional implications back to the lower court for review.

Fox in a statement said it was “extremely pleased” with the decision. “We’ve always felt that the government’s position on fleeting expletives was unconstitutional.”

Beyond the fleeting expletives, broadcasters are fighting FCC indecency sanctions on several fronts. CBS is awaiting a ruling from the 3rd Circuit Court of Appeals on the 2004 Super Bowl halftime show that included a flash of Janet Jackson’s breast during the now infamous “wardrobe malfunction,” which triggered the wave of congressional inquiry and action. CBS also has a challenge pending at the FCC level a fine against the drama series “Without a Trace” for content that dealt with promiscuous teenagers.

ABC is awaiting a decision from the 2nd Circuit (from a different panel of judges than those who ruled on fleeting expletives) on a flash of nudity in an episode of “NYPD Blue.” And Fox has a case that is on track to go to a jury trial in D.C. District Court stemming from an indecency fine levied by the FCC on the reality program “Married by America.” That case went on the trial track because Fox refused to pay the fine, which forced the Justice Department to sue it in an effort to collect

Although Genachowski’s regime has so far shown far less interest in pursuing indecency enforcement than his Republican predecessor, Kevin Martin, net execs noted that the FCC last month issued a $25,000 fine against Fox for failing to respond to the commissions inquiry into an indecency complaint filed in January against the Fox animated series “American Dad.”

Fox disputed the commission’s assertion that it ignored the FCC’s request for info on the seg ( Daily Variety , June 4).

(Cynthia Littleton contributed to this report.)