I think Sony Support solved this one for me. Apparently you can't use Progressive Scan output if you want the closed caption to work.

I will have to try this tonight and see if it solves the issue.
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SOLUTION:
To view Closed Captioning (CC) information from a DVD using the CC function of the television, turn off the Progressive Scan function of the DVD player. The Closed Caption information from a DVD cannot be viewed using the CC function of a television when the DVD player outputs a progressive signal.