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Recent FCC Actions

 

November 1, 2007

Re:      Recent FCC Actions: (1) Adoption of Ban on Exclusive Service Agreements Between Franchised Cable Operators and MDUs; (2) Adoption of Franchising Reform for Incumbent Cable Operators; (3) Due Dates Set for Comments on “Tying” By Programmers

On Wednesday, October 31, the FCC took several actions of significance for the cable industry.  First, the FCC unanimously adopted an order barring franchised cable operators from entering into new agreements that would provide them with the exclusive right to provide multiple dwelling units (“MDUs”) with video service (and also abrogated exclusivity provisions in existing agreements).  Second, the FCC issued its long awaited order extending to incumbent cable operators certain franchise reform measures that the FCC adopted for new entrants last year.  Third, the FCC announced the comment/reply comment deadlines in its previously-announced rulemaking proceeding concerning wholesale “tying” or “bundling” of programming services by broadcasters and cable networks.   A brief summary of each of these actions is provided below.  We will follow-up with a more detailed description of the MDU exclusivity and incumbent franchise reform orders when the texts of those items are released (probably within the next few weeks).

Prohibition on MDU Exclusive Service Agreements.

Under new rules announced by the Commission, exclusivity clauses in new agreements between franchised cable operators and MDU owners are banned and any such provisions in existing agreements are nullified.  The FCC cited the program access provision of the Cable Act (Section 628) as the source of its authority to adopt this prohibition.  That section bars cable operators from engaging in “unfair methods of competition or unfair or deceptive acts or practices” that have the purpose or effect of preventing or significantly hindering competing MVPDs from providing programming to subscribers.  Although this provision generally has been viewed as directed towards the contractual relationship between MVPDs and programmers, the FCC adopted a much more expansive reading of it in order to justify its ban on exclusive service agreements between cable operators and MDUs.

While the specifics of the FCC’s order won’t be fully known until the text is released, it is apparent that the prohibition, as adopted, applies only to franchised cable operators.  It does not apply to DBS providers and “private” cable operators (and may not apply to AT&T’s U-Verse service, which AT&T contends does not fall within the statutory definition of a cable system).  However, the FCC did state that it would be undertaking a further rulemaking proceeding in the next several months to consider whether it has the authority to extend the MDU exclusivity ban to these non-cable MVPDs.  This order does not bar bulk billing and bulk discount arrangements or exclusive “marketing” agreements between MDUs and cable operators, but those subjects will be covered in the new rulemaking announced by the FCC.  The FCC also noted that it has a pending proceeding regarding the permissibility of exclusive contracts for telecommunications services in MDUs and that it intends to resolve that proceeding before the end of the year.

It is virtually certain that the FCC’s action will be challenged in court on the grounds that the FCC exceeded its authority and that its abrogation of contracts constitutes a regulatory taking.  Although he voted for the item, Commissioner McDowell in particular made clear that he has significant doubts as to whether the Commission’s action will be legally sustainable.

Extension of Franchising Reform to Incumbent Cable Operators.

The second action taken by the FCC yesterday was the adoption of an order extending to incumbent cable operators certain franchising reforms that the FCC adopted for new entrants in December 2006.  These reforms include the clarification that certain costs and fees imposed by franchising authorities count towards the five percent franchise fee cap and the extension of limitations relating to I-Net requirements, PEG obligations, and mixed-use networks to incumbents.  In addition, the FCC concluded that it cannot preempt state or local customer service requirements (for either new entrants or incumbents) nor can it prevent cable operators and local franchising authorities from agreeing to more stringent customer service standards than those adopted as guidelines by the Commission. 

The order also apparently addresses most favored nations clauses, finding that such clauses may provide cable operators the option and ability to change provisions in existing agreements.  However, at the same time, the FCC emphasized that its extension of franchising reforms to incumbent operators does not give those operators the right to breach existing contractual obligations embodied in franchise agreements.   

This order also likely will face judicial challenge.  Local franchising authorities, who already have attacked the adoption of franchising reforms for new entrants, argued strongly that the FCC has no authority to inject itself into this area.  Commissioners Copps and Adelstein both agreed and, as a result, dissented from the Commission’s order.

Comment Deadline Established for “Tying” Rulemaking.

In September, the FCC announced that it was commencing a rulemaking to consider whether it could and should bar or otherwise regulate the practice engaged in by some broadcasters and cable programmers of “tying” or “bundling” multiple programming channels at the wholesale distribution level.  This proceeding also will be considering whether rules should be adopted with respect to certain other programmer practices, such as the imposition of conditions on the distribution of their services via “shared headends” and the use of “non-disclosure” clauses in affiliation agreements.  The FCC has now announced that comments in this proceeding will be due on November 30, 2007 and reply comments will be due on December 17, 2007.

If you have any questions regarding the foregoing, feel free to contact us.

 

 

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