(Corrects 7th paragraph quote to reflect revised statement by FCC chairman, using word "restrict" instead of "prohibit") (Note strong language in paragraphs 4, 6. Adds FCC chairman statement, background)
NEW YORK, June 4 (Reuters) - A U.S. appeals court on Monday overruled federal regulators who decided that expletives uttered on broadcast television violated decency standards, a major victory for TV networks.
The U.S. Court of Appeals for the Second Circuit in New York, in a divided decision, said that the U.S. Federal Communications Commission was "arbitrary and capricious" in setting a new standard for defining indecency.
The court sent the matter back to the commission for further proceedings to clarify its indecency policy. The FCC, which said it was still studying the opinion, could decide to ask the U.S. Supreme Court to reverse the appeals court.
The FCC ruled in March 2006 ruling that News Corp.'s NWSa.N Fox television network had violated decency rules when singer Cher blurted "fuck" during the 2002 Billboard Music Awards broadcast and actress Nicole Richie used a variation of that word and "shit" during the 2003 awards.
No fines were imposed but Fox had challenged the decision to the appeals court, arguing that the government's decency standard was unclear, violated free speech protections and that the rulings had contradicted findings in past cases.
Republican FCC Chairman Kevin Martin angrily retorted that he found it "hard to believe that the New York court would tell American families that 'shit' and 'fuck' are fine to say on broadcast television during the hours when children are most likely to be in the audience."
"If we can't restrict the use (of the two obscenities) during prime time, Hollywood will be able to say anything they want, whenever they want," Martin said in a statement.
He was silent on a Supreme Court appeal, though Senate Commerce Committee Chairman Daniel Inouye, a Hawaii Democrat, and the Parents Television Council urged the FCC to appeal.
The stakes are high for broadcasters who could face fines of up to $325,000 per violation. FLEETING EXPLETIVES INDECENT?
The three-member appeals panel focused on whether expletives were used repeatedly or were only uttered fleetingly. The FCC had argued that, under certain conditions, one utterance can violate the decency standard.
"We find that the FCC's new policy regarding 'fleeting expletives' represents a significant departure from positions previously taken by the agency and relied on by the broadcast industry," Judge Rosemary Pooler wrote for herself and Judge Peter Hall in the majority decision.
"We further find that the FCC has failed to articulate a reasoned basis for this change in policy," the ruling said. "Accordingly, we hold that the FCC's new policy regarding 'fleeting expletives' is arbitrary and capricious."
The court did not rule on constitutional challenges to the FCC's policy. But the majority of the judges suggested it could be tough for the commission to prevail on constitutional grounds.
"We are skeptical that the commission can provide a reasoned explanation for its 'fleeting expletive' regime that would pass constitutional muster," the majority wrote.
Judge Pierre Leval dissented, writing that he believed the FCC "gave a reasoned explanation for its change of standard."
Fox said it was "very pleased with the court's decision" and that it believes "that government regulation of content serves no purpose other than to chill artistic expression in violation of the First Amendment."
"Viewers should be allowed to determine for themselves and their families, through the many parental control technologies available, what is appropriate viewing for their home," Fox said. BUSH ADMINISTRATION CRACKDOWN
The FCC under the Bush administration embarked on a crackdown of indecent content on broadcast TV and radio in 2004 after pop star Janet Jackson briefly exposed her bare breast during the broadcast of that year's Super Bowl halftime show.
A few weeks after that incident, the FCC reversed an earlier staff decision and ruled that the fleeting use of an expletive by U2 rock star Bono during a 2003 NBC broadcast was indecent.
FCC Chairman Martin has pressed subscription television services to give customers the option of blocking channels they find offensive and on Monday opened the door for the idea of blocking broadcast channels as well.
"Permitting parents to have more choice in the channels they receive may prove to be the best solution to content concerns," he said. (Additional reporting by Peter Kaplan in Washington and Paul Thomasch in New York)