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In light of Saturday’s announcement that the new joint venture between Comcast Corporation and NBC Universal, Inc. (“Comcast-NBCU”) is open for business, it is an opportune time to consider how this new media force will affect the competitive marketplace for retransmission consent – i.e., broadcasters’ statutory right to obtain compensation for their content by granting or withholding consent to carriage of their programming by cable companies, satellite operators and other multichannel video programming distributors (“MVPDs”). The Comcast-NBCU deal has some strings attached – by virtue of the merger review process by the Federal Communications Commission and the U.S. Department of Justice – that will affect not just Comcast-NBCU but also broadcasters who compete in the video programming marketplace.

First, a few words about these strings.  The FCC’s approval of Comcast-NBCU venture represents only the latest instance of the FCC using its merger review process to advance broader public interest objectives not readily achievable through the FCC’s general rulemaking procedures. This is nothing new. Over the years, the Commission has used its merger-review process to elicit “voluntary” commitments and to impose merger conditions to achieve its goals.  This has been the case regardless of whether Republicans or Democrats comprised the majority of the Commissioners and regardless of any conditions imposed by DOJ. Ask AT&T and BellSouth, for example.

Conditions attached to the FCC’s approval of Comcast-NBCU will affect the marketplace in many ways, particularly given that they will be in place for up to seven years.  That said, focus for now on retransmission consent. The Comcast-NBCU joint venture presents a special case because it combines a distribution network with substantial programming assets, including TV stations, cable channels and a major broadcast network. Many fear that this degree of vertical integration could distort the competitive marketplace through the extensive aggregation of content with distribution. For example, the FCC expressed concern that Comcast-NBCU would attempt to disadvantage rival MVPDs by withholding Comcast-NBCU programming or by raising programming costs.  As a result, the FCC, by conditionally approving the Comcast-NBCU deal, has made clear its willingness to take steps to intervene in the marketplace when it fears that a proposed transaction would increase an entity’s ability and incentive to reduce competition from rival video programming vendors by withholding carriage or imposing unreasonable terms and conditions on carriage deals.

Some of these conditions may have consequences for TV broadcasters other than NBCU. Specifically: 

• Arbitration and Standstill Remedies for MVPDs. Competing MVPDs may negotiate with Comcast-NBCU for access to Comcast-NBCU video programming, but if a dispute arises about prices, terms or conditions, the FCC has deemed that MVPDs may invoke a commercial arbitration process to resolve the dispute. The FCC’s order sets forth a baseball-style arbitration process, and Comcast will be required to continue to supply the programming that is the subject of the dispute until the dispute is resolved. This standstill requirement is designed to preserve the status quo pending resolution of the dispute.
• Network affiliation and retransmission consent remedies. By combining network and distribution assets, Comcast-NBCU raises the potential for interference with the retransmission consent process. As a result, NBCU and Comcast have entered into two agreements relating to network affiliation and retransmission consent.  In the first agreement, Comcast-NBCU have agreed among other things 1) that the NBC Network will be solely responsible for negotiating network affiliate agreements with local NBC affiliates, while Comcast and/or its affiliates will be solely responsible for negotiating retransmission consent agreements with individual local NBC affiliates; 2) nondiscrimination provisions will apply with respect to network affiliation and retransmission consent agreements, 3) Comcast will honor NBC’s agreements to preserve network nonduplication to prevent importation of another affiliate’s broadcast station signal into an NBC affiliate’s market, 4) decisions regarding exclusivity will be left to the NBC Network, 5) in connection with any carriage negotiations between NBC affiliates and Comcast, Comcast is prohibited from applying a direct feed to its systems in the station’s market; and 6) Comcast will not seek repeal of the current retransmission consent regime.  In the second agreement, Comcast has agreed generally to separate its retransmission negotiations from the knowledge and influence of NBCU and to not discriminate against ABC, CBS and Fox affiliates in favor of any NBCU-owned or affiliated station.

So how would the presence of baseball-style arbitration and standstill requirements in disputes among MVPDs affect the market for retransmission consent for broadcasters?  The answer is in the tea leaves.  In applying these conditions to Comcast-NBCU, the FCC is signaling an increased willingness to require arbitration of carriage disputes – arbitration that is not required in the case of retransmission consent disagreements between a broadcaster and an MVPD – and to, via standstill, prevent parties from withholding programming pending the outcome of a carriage dispute.  The arbitration/standstill remedies apply only with respect to MVPD complaints against Comcast-NBCU; however, an ongoing rulemaking proceeding considers whether similar tools should be available in retransmission consent disputes.

This is problematic – mandating arbitration or requiring interim carriage should not be applied to thwart broadcasters’ retransmission consent rights.  Questions have been raised about the FCC’s authority to impose such an arbitration requirement absent Congressional action. The standstill provision however, makes it less likely that agreements will be reached. The incentive to game the FCC process to achieve private contractual advantages will be too great to resist. Contrary to the FCC’s assertions, a standstill is likely to increase the number of disputes that go to arbitration rather than pushing parties towards agreement.

What about the significance of the second set of conditions, relating to network affiliation and the retransmission consent process? One key point is that Comcast will not be allowed to bypass the local NBC affiliates to deliver its programming directly to advantage itself in a retransmission consent negotiation with its affiliates. If allowed, this bypass would effectively reduce Comcast’s incentive to reach an agreement. Time Warner Cable opposed imposition of that condition, and the FCC did not extend it to any other MVPDs. As a result, NBC affiliates now have added bargaining power over Comcast in their retransmission consent negotiations. In addition, the “structural separations” are enforceable conditions that also should benefit other broadcasters in a market – provided that they are Fox, ABC or CBS affiliates – by shielding Comcast’s retransmission consent negotiations with those affiliates from the influence of NBCU.  

Clearly, the FCC is sending a message that it is not willing to wait for failures in the video programming marketplace before taking steps to involve itself in private contractual arrangements.

The wait is over, net neutrality watchers – the first legal challenge to the Federal Communications Commission’s new rules has been filed, so those who have waited with baited breath can feel free to exhale. 

Yesterday, Verizon and Verizon Wireless filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit seeking to strike the rules adopted in the FCC’s December 23, 2010 Report and Order (the R&O).  The fact that Verizon lobbed the first volley in this near-inevitable litigation is unsurprising, and Verizon’s efforts will have a ripple effect on how and where the appeal is heard. As we've blogged about before, these rules – transparency, no blocking and no unreasonable discrimination, as set forth in 194 pages – have stirred debate in DC among service providers, lawmakers, lawyers, lobbyists, policy influencers and the just plain interested.  The rules have not even taken effect – that will happen 60 days after the date of a Federal Register notice announcing that the Office of Management and Budget has approved the information collection requirements contained in certain of the new rules.  The text of the R&O itself has not yet been published in the Federal Register – and that’s where things get interesting.

Verizon’s filings make clear that Verizon believes that the D.C. Circuit would provide a receptive audience to Verizon’s concerns – one with exclusive jurisdiction to review the matter at this stage. Here’s where the Federal Register comes into play.  There are two permissible tracks for appellate review of final FCC decisions, and Verizon is attempting to rely upon the track that requires review by the D.C. Circuit and does not require that the FCC decision be published in the Federal Register. 

• For Track #1, the D.C. Circuit Court of Appeals has exclusive authority to review certain statutorily defined FCC decisions – generally dealing with FCC licensing matters.  Verizon claims that the R&O modifies Verizon’s licenses, thus triggering the exclusive jurisdiction of the D.C. Circuit.  Verizon’s argument relies on the FCC’s assertions in the R&O that it has authority to impose net neutrality rules because the FCC has statutory authority to change license terms and to propose new requirements on existing licenses, provided that it complies with statutory procedures.
• Track #2 is available for review of all FCC decisions except those that are governed by Track #1.  In track #2, review of certain decisions can be obtained by any U.S. Court of Appeals in any judicial circuit once that decision is published in the Federal Register. As noted above, this triggering event has not yet happened with respect to the R&O. At least one court has found that a Track #2 appeal filed prior to Federal Register publication must be dismissed as incurably premature (the Council Tree case).  Under the Track #2 approach, if appeals are filed by multiple parties in multiple circuits, there is a process for consolidating appeals in one court.

When a single FCC document contains elements of both a rulemaking (i.e., establishing rules of general applicability) and an adjudication (i.e., resolving a specific dispute among parties before the FCC), things are more complicated.  Under FCC rules, the deadlines for the adjudicatory portions are calculated based on the release date of the FCC’s decision, while the deadlines for the rulemaking portions are calculated from the date of Federal Register publication.  Verizon has acknowledged that the R&O has elements of both a rulemaking and an adjudicatory decision and has stated an intention to file a separate appeal with the D.C. Circuit upon Federal Register publication.  Clearly, Verizon is trying to cover both bases with a “belt and suspenders” approach.

The receptive-audience hypothesis finds more support in Verizon’s unusual request to have the same three-judge panel that heard the Comcast case hear Verizon’s appeal.  In Comcast v. FCC, decided last April, the D.C. Circuit struck the FCC’s efforts to enforce certain of its net neutrality policies (prior to their codification last December) in a complaint against Comcast regarding alleged interference with peer-to-peer networking applications.  The Court found that the FCC failed to link its assertion of authority to any statutorily mandated responsibility and thus lacked authority to regulate an Internet Service Provider’s network management practices.  Verizon essentially is asking the D.C. Circuit to consider the R&O to be a response to the Comcast case and to have the same three-judge panel handle this appeal.

Will Verizon succeed in having the case heard in the D.C. Circuit?  We certainly can expect challenges to Verizon’s filings in addition to challenges to the R&O filed by other parties.  Public Knowledge quickly expressed its displeasure with Verizon’s efforts, and supporters of the FCC’s R&O undoubtedly will follow.  Expect arguments over whether the court lacks jurisdiction because it is incurably premature a la the Council Tree decision  Some may challenge whether the R&O actually amounts to a license modification because the R&O states that it does not take effect until some future date or because the R&O cites numerous statutory grounds for authority other than the bases cited by Verizon.  Expect appeals in other judicial districts, although these will have to develop some creative arguments to avoid dismissal on Council Tree grounds if Federal Register publication is not complete at the time.

Action at the FCC also will play a role.  The FCC handles the process of submitting the R&O for Federal Register publication.  If Federal Register publication happens in the near future, expect Verizon to make additional appellate filings with D.C. Circuit on that basis as well and to ask either for consolidation of its appeals or for the court to select the appropriate docket.  In addition, some parties may exercise their rights to seek reconsideration of the R&O by the FCC and/or may seek a stay at the D.C. Circuit pending such reconsideration.

The upshot here is that the FCC’s new net neutrality rules will be shaped by the appellate process, and Verizon’s filings represent simply the first attempt to leverage appellate procedures to influence the outcome of that process.    

Less than one month remains until the close of the filing window to participate in the Federal Communications Commission’s upcoming auction of 144 FM broadcast construction permits to the public.  The auction is scheduled to begin on April 27, 2011.  Applicants interested in participating in the auction must file an application with the FCC between January 31, 2011 and February 10, 2011.

The construction permits are associated with so-called “vacant” FM allotments. The FCC has assigned certain FM channels to certain communities via allotment, and the FCC will auction the rights to build FM radio facilities using these channels.  Of the 144 vacant FM allotments in this auction, 37 are holdovers from the last FM auction.  This means that no party placed the minimum bid for these vacant allotments before the last auction closed. The minimum bid for the majority of the allotments is $25,000 or less.  Only 14 of the allotments have minimum bids of at least $60,000. Seven allotments have minimum bids of $100,000. Three allotments have minimum bids of $60,000 and four allotments have minimum bids of $75,000.

The application must include ownership information about the applicant; identify the vacant allotments for which the applicant intends to bid, and whether the applicant has any agreements with other parties regarding the auction.  Under the FCC’s anti-collusion rules, applicants are prohibited from discussing their applications, including bidding strategies, with other applicants in the auction, unless each applicant identifies the other in their application.  This prohibition applies to each applicant until the auction is closed.

Time is of the essence.  Although the auction is more than three months away, interested parties must file their applications for the auction by February 10.  These applications are not placeholders for the auction; the application locks in the applicant’s qualifications to bid in the auction, identifies the allotments on which the applicant may bid, and any bidding arrangements applicants might have with third parties.  Applicants will not be able to amend their applications after February 10 to improve their situation in the auction.  Advance preparation now is necessary.

Now that the Sturm und Drang over the FCC’s new Net Neutrality Rules is in full throat, some lurking concerns warrant more attention – namely, concerns about the FCC’s enforcement of its new rules and the administration of its complaint process.  The FCC states that it seeks “prompt and effective” enforcement of its new rules, but eyebrows are arching regarding whether the current structure will effectively promote this goal. 

"The FCC states that it seeks 'prompt and effective' enforcement of its new rules, but eyebrows are arching regarding whether the current structure will effectively promote this goal."

First, some context.  Assume for the moment that you provide fixed or mobile broadband service and that the new rules survive unscathed after the administrative, judicial and legislative battles that are almost certainly on the way.  Someone believes that you have violated these rules – for example, your subscriber believes that you have failed to adequately disclose your network management practices, or an edge provider believes that you have blocked its lawful content (if you are a fixed provider) or an end user complains that you have unreasonably discriminated in transmitting their lawful network traffic over your network.  How can this aggrieved party seek legal relief, and what relief is available? 

The FCC has retained independent enforcement authority for the net neutrality rules, but as noted in Matthew Lasar’s overview at Ars Technica, the FCC's enforcement process is overwhelmingly complaint-driven.  The new rules give the aggrieved party two “backstop mechanisms” at the FCC in the event that the interested parties cannot resolve their dispute privately: a formal complaint process and an informal complaint process. 

• The formal complaint process imposes procedural obligations on the complainant and launches an adjudicatory proceeding.  Formal complaints will be addressed through “accelerated docket” procedures.  Before filing a formal complaint, the complainant must notify the respondent in writing that the complainant intends to file the complaint.  The complaint must comply with FCC processes, and the complainant must pay a filing fee (which may be the FCC Enforcement Bureau’s version of “paid prioritization”).  The complainant must “plead fully and with specificity the basis of its claims and to provide facts, supported when possible by documentation or affidavit, sufficient to establish a prima facie case of an open Internet violation.”  The rules set forth a timetable for answers and replies, and the FCC will issue an order “determining the lawfulness of the challenged practice.” 
• The informal complaint process, by contrast, is more akin to tossing “paper grenades.”  Anyone with a computer may submit informal complaints (for example, via the FCC’s website or to the agency’s Consumer and Government Affairs division) in an effort to draw the FCC’s attention to challenged practices and perhaps spark an investigation.  There are no “accelerated docket” procedures.  The FCC has stated that individual informal complaints will not typically result in written Commission orders, and the potential remedies and sanctions are unclear.

As Larry Downes describes in his essay regarding the costs of enforcement of net neutrality rules, allowing “any person” to launch net neutrality complaints triggers inefficiencies and transaction costs because the filer can shift enforcement costs to the FCC or to ISPs.  Its not hard to imagine a disgruntled group campaigning and recruiting others to file loosely worded complaints that tie up the resources of broadband providers as they respond to paper grenades launched via the FCC’s electronic transom.  What is hard is running a small business or getting financing while buried in paper when an FCC decision on a complaint – even in a frivolous case – may be months away. 

"Given the FCC's lack of resources (and authority?) to police the entire Internet and its long-standing enforcement track record, we should expect the process to remain complaint-driven..."

Given the FCC’s lack of resources (and authority?) to police the entire Internet and its long-standing enforcement track record, we should expect the process to remain complaint-driven; however, reliance on a formal complaint process alone would reduce the incentive for “any person” to file complaints in bad faith.  The FCC’s decision to make available the “informal” process in addition to the “formal” process may turn out to be costly for broadband providers.  Here’s why:  

• While the FCC has stated that “any person” may file a complaint, the formal complaint process has more mechanisms in place to deter the filing of non bona fide complaints – for example, there’s a $200 filing fee, procedural requirements and an “abuse of process” sanction against parties who file “unlawful” frivolous pleadings.  These mechanisms should make it much harder for competitors, disgruntled employees or others who suffer no actual harm to game the process. 
• The availability of informal processes may encourage the filing of “cookie cutter” complaints, where persons or groups may seek to launch a barrage of nearly identical complaints in an effort to get the FCC staff’s attention for political purposes. 
• The FCC does not set forth any particular remedy for an informal complaint other than saying that the FCC would “take appropriate enforcement action, including the issuance of forfeitures” for any net neutrality violation. 
• The FCC did not adopt any specific forfeiture amounts for violations, so the penalty would likely be set on a case-by-case basis. 

Also, if what is past is prologue, broadband providers should have concerns that the mere filing of an informal complaint, even a frivolous one, would have other consequences.  Consider the case of those broadcasters who have found that meritless indecency complaints have hindered their ability to conduct legitimate business.  The reason is the “enforcement hold” that the Enforcement Bureau imposes against broadcasters’ FCC applications (e.g., license renewals, approvals for transactions) when one or more complaints are filed against their broadcast station(s).  Under FCC policy, the presence of this “red flag” can force the broadcaster to become involved in potentially protracted negotiations to get FCC clearance for their proposed transaction or license renewal.  This pressure has resulted in some broadcasters giving up legal rights by entering into consent decrees (whereby the station pays a penalty to resolve the complaint but does not admit liability for the conduct) or tolling agreements (where the broadcaster agrees to forego its rights to challenge an FCC action that takes place outside of the statute of limitations; i.e., their “shot clock” for reaching a decision) with the FCC.  Essentially, licensees often face intense pressure to agree to “voluntary” concessions and to raise the white flag in an effort to get the FCC to drop their red one.

One way for broadband providers to minimize liability is to be sure that they are complying with the FCC’s transparency requirements.  Providers that make adequate disclosure of their network management practices, performance characteristics and commercial terms of service will enjoy greater latitude in negotiating with the FCC.  And, so long as those practices are followed, a complaining party will find its burden a bit more difficult to meet. 

Nevertheless, with the broadcast indecency lesson in mind, broadband providers should be concerned.  It is reasonable to expect significant litigation over the rules, just as the FCC’s indecency policies have been heavily litigated. The FCC may hold up informal complaints for a protracted period as the legal challenges continue – recall that there is no “accelerated docket” for informal complaints and even if there was, the FCC may claim authority to waive any its internal timetables for “good cause.”  Such a litigation tangle may result in stalled FCC enforcement and delays in application processing – delays that could apply differently to different categories of service providers because some are more dependent on FCC licensing than others. 

In short, enforcing the FCC’s net neutrality rules represents a regulatory thicket for broadband providers and others – one that is worth the effort to navigate around given the uncertainty and the legal challenges to come. 

Despite the apparent lack of a “smoking gun,” a federal appeals court is allowing a class action lawsuit to proceed against several major wireless carriers in a decision that calls to mind the maxim: “if it quacks like a duck…”

On December 29, 2010, the U.S. Court of Appeals for the 7^th Circuit rejected efforts by these carriers to seek dismissal of a class action lawsuit alleging that the carriers’ text messaging services violated antitrust laws.  In Text Messaging Antitrust Litigation, Case No. 10-8037, the three-judge panel upheld the trial court’s decision that the plaintiffs had sufficiently alleged a violation of the antitrust laws (in particular, the Sherman Act).  Defendants, Verizon Wireless, et al., had argued that plaintiffs’ allegations, even if true, did not constitute price-fixing or any other violation.  Circuit Judge Posner, however, wrote that the plaintiffs had adequately alleged a violation of law, and therefore the case should go forward to discovery.

The case revolved around the plaintiffs’ efforts to file an amended complaint stating that the major wireless carriers have conspired to fix prices and not compete against each other in the provision of text messaging services.  The defendants argued that the complaint “only” alleged that the wireless carriers do not compete with each other vis-à-vis text messaging, and the law does not prohibit companies from individually deciding not to compete.  The defendants argued that the law requires a plaintiff to allege specific actions of collusion among the defendants, in addition to the absence of competition among them.

The court agreed that the Sherman Act does not prohibit wireless carriers from each making the same decision, by coincidence, not to compete with respect to text messaging service.  However, the court disagreed that the law requires a plaintiff to allege a specific “smoking gun” at the complaint stage.  The court summarized the allegations that were in the complaint, including “a mixture of parallel behaviors, details of industry structure and industry practices, that facilitate collusion.”  As the court went on to explain:

Parallel behavior of a sort anomalous in a competitive market is thus a symptom of price fixing; though standing alone it is not proof of it; and an industry structure that facilitates collusion constitutes supporting evidence of collusion.  *  *  *  [T]he complaint in this case alleges that the four defendants sell 90 percent of U.S. text messaging services, and it would not be difficult for such a small group to agree on prices and to be able to detect “cheating” (underselling the agreed price by a member of the group) without having to create elaborate mechanisms . . .

The court went on to note that, according to the complaint, the defendants exchanged text pricing information via their trade association; defendants were all on a “leadership council” within the trade association, a leadership council whose stated mission was to “substitute ‘co-opetition’ for competition;” in the face of steeply falling costs, each defendant chose to raise prices; and finally, “all at once the defendants changed their pricing structures, which [had been] heterogeneous and complex, to a uniform pricing structure, and then simultaneously jacked up prices by a third.”

In other words, the complaint alleged that the defendants walked like a duck, swam like a duck, and quacked like a duck, and therefore must be a duck, even if there is, as yet, no photograph of the defendants to prove they are a duck.

The court held that, when taken together, the allegations in the complaint pass the laugh test for whether there might be a price-fixing violation going on.  (The court said “plausibility standard,” the legalese version of “laugh test”).  The court said the complaint does not have to allege that on a particular day, the vice president of one defendant met with/telephoned the vice president of another defendant to go over the details the price fixing, or any similar “smoking gun.”  The complaint has alleged enough detail and enough anomalous behavior on defendants’ part to make the defendants respond to discovery.

If you are a smaller wireless carrier having roaming agreements with the defendants, the rates those major carriers charge their subscribers for texting will directly affect how much those carriers will pay you to perform text services for their incoming roamers.  If you are a wireless subscriber, you are probably a co-plaintiff in this case, since it is a class action covering 90% of all domestic text messaging.  Either way, it will be interesting to see where this case goes from here.