Lessons from Aereo: Laws, Litigation and Loopholes

In a case with far-reaching implications for the television business, for cloud computing and for new technologies, the U.S. Supreme Court found that Aereo’s online video service infringed copyrights held by television producers, broadcasters, marketers and distributors in broadcast television programming.  In a 6-3 decision, the Court decided in American Broadcasting Cos., Inc. et al. v. Aereo, Inc., FKA Bamboom Labs, Inc. that Aereo “publicly performs” a copyrighted work within the meaning of the Transmit Clause of the U.S. Copyright Act and thereby infringed exclusive rights of the copyright holders because Aereo did not license the content.  

Aereo’s service allows subscribers, for a monthly fee, “to watch television programs over the Internet at about the same time as the programs are broadcast over the air.” According to Aereo, the system consists of thousands of small antennas in centralized location that receive over-the-air broadcast programming. The company uses special equipment to allow subscribers to stream the programming. The petitioners in this case were copyright holders who sought a preliminary injunction against Aereo, alleging copyright infringement. The Court did not rule on other claims of copyright infringement raised in the lower courts.

Justice Stephen Breyer, writing for the majority, wrote that Congress amended the Copyright Act in 1976 in part to overrule two U.S. Supreme Court decisions (Fortnightly Corp. v. United Artists Television, Inc. and Teleprompter Corp. v. Columbia Broadcasting System, Inc.) that held that cable systems’ retransmissions of over-the-air broadcasts were not public performances under the Copyright Act. He concluded that

having considered the details of Aereo’s practices, we find them highly similar to those of the CATV systems in Fortnightly and Teleprompter. And those are activities that the 1976 amendments sought to bring within the scope of the Copyright Act. Insofar as there are differ­ences, those differences concern not the nature of the service that Aereo provides so much as the technological manner in which it provides the service. We conclude that those differences are not adequate to place Aereo’s activi­ties outside the scope of the Act.

The majority found, in essence, that Aereo’s system was the modern equivalent of these early CATV, or community antenna television, systems, which used centralized antennas on hilltops or other sites to receive off-air broadcast signals and retransmit those signals via coaxial cable to subscriber homes.  Justice Antonin Scalia, writing the dissent, rejected the majority’s conclusion about Aereo’s resemblance to cable TV services, finding that sufficient technological distinctions existed for purposes of the public performance right and that the majority’s ruling was an “ad hoc rule for cable system lookalikes.” He also argued that Aereo could not be held directly liable for copyright infringement on public performance grounds because “it does not make the choice of content” and therefore does not “perform.” That said, the dissent makes clear that other legal grounds for potential copyright liability were not before the Court, stating that the Networks’ “request for a preliminary injunction – the only issue before this Court – is based exclusively on the direct-liability portion of the public-performance claim (and further limited to Aereo’s ‘watch’ function, as opposed to its ‘record’ function).”

The majority described its decision as a “limited holding” and that Congress “did not intend to discourage or to control the emergence or use of different kinds of technologies.” Justice Breyer wrote:

We cannot now answer more precisely how the Transmit Clause or other provisions of the Copyright Act will apply to technologies not before us. We agree with the Solicitor General that '[q]uestions involving cloud computing,[remote storage] DVRs, and other novel issues not before the Court, as to which ‘Congress has not plainly marked [the] course,’ should await a case in which they are squarely presented.” … And we note that, to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress…

The majority did not address the legal effect of Cartoon Network LP, LLLP v. CCS Holdings, Inc., a 2008 decision by a panel of the U.S. Court of Appeals for Second Circuit. In ruling for Aereo in 2013, a three-judge panel of the same Court cited the Cartoon Network case for the proposition that Aereo’s transmissions were not “to the public” for purposes of the Transmit Clause.  Cartoon Network involved whether transmissions using remote storage DVR services were public performances for purposes of the Copyright Act. While the precise legal issue in Aereo involved near-real-time streaming rather than content storage, the omission is noteworthy because Aereo reportedly relied on the Cartoon Network precedent in designing its system. 

Some Implications of the Court's Decision

There is much ambiguity in the Court’s decision, and its application to new technologies will be a source of much analysis and debate. Even if Aereo had prevailed on the public performance claim at the preliminary injunction stage, other theories of copyright liability would have been considered in further proceedings on remand. In addition, the Court’s decision on public performance grounds meant that the Court did not need to determine whether Aereo would have qualified as a “cable system” that was eligible to obtain statutory copyright licenses for the broadcast programming. Similarly, the Court did not look beyond copyright law to communications law and the rules for broadcast retransmission consent. Moreover, the “record” function was not at issue in the case, so the decision’s application to cloud storage services is undetermined at the U.S. Supreme Court. In short, Aereo represents only a portion of the larger legal picture.

I’ve said before that disruption does not occur in a vacuum. The multi-billion-dollar marketplace for video programming services is shaped heavily by regulatory forces. Franchising, copyright, retransmission consent and other legal issues play a role in defining the industry’s buyers and sellers, as well as the terms and conditions of the availability of programming. New providers must manage a variety of legal and regulatory risks to enter and to succeed in this marketplace.

Aereo’s legal approach challenged the existing business model in an effort to bypass licensing negotiations to determine compensation for copyright holders. Chief Justice John Roberts told Aereo’s counsel at oral argument that “your technological model is based solely on circumventing legal prohibitions that you don’t want to comply with, which is fine.” The majority’s reasoning ties Aereo’s practices to precedent from decades ago, despite the technological differences between today's cloud/DVR/Internet services and the community antennas of that era.  Justice Scalia in dissent stated that “I share the Court’s evident feeling that what Aereo is doing (or enabling to be done) to the Networks’ copyrighted programming ought not to be allowed. But perhaps we need not distort the Copyright Act to forbid it.” A major point of contention between the majority and the dissent is whether the case showed that Copyright Act had a “loophole” that should be addressed by the Court or by Congress.

It is noteworthy that the result in Aereo turned less on nuanced technological distinctions and more on broader legal policy:

In other cases involving different kinds of service or technology providers, a user’s involvement in the opera­tion of the provider’s equipment and selection of the con­tent transmitted may well bear on whether the provider performs within the meaning of the [Copyright] Act. But the many similarities between Aereo and cable companies, consid­ered in light of Congress’ basic purposes in amending the Copyright Act, convince us that this difference is not critical here.

This language also illustrates the challenges in applying to new technologies the longstanding legal principle of stare decisis, which means judicial adherence to settled precedent from prior decisions.  The majority endeavored to use legislative history and “Congress’ basic purposes in amending the Copyright Act” to fit Aereo’s business practices into legal precedent. Whether made by lawmakers, judges or regulators, legal rules have a difficult time keeping up with technological change. Rules that are too specifically tailored run the risk of being rendered obsolete, while broader rules can be more vague and difficult to apply as a matter of stare decisis.

The majority stressed that its holding was “narrow” in terms of the intended impact on new technologies. For now, expect the ruling to result in more payments to producers, broadcasters and copyright holders when program distributors seek to license retransmissions of broadcast programming. In any case, as new providers seek to become video programming distributors and existing providers evaluate their options, Aereo will be an important legal touchstone for assessing new business models and technologies for the delivery of broadcast programming.

The TV Industry Isn't "Starting to Collapse." Here's Why.

Disruption does not occur in a vacuum. Recently Henry Blodget and Dan Frommer considered whether technological disruption may lead to the "collapse" of the television industry given the recent track record of the newspaper industry. The debate centers on TV viewers’ changing habits, and the Internet, new video providers (e.g., Hulu, Netflix and iTunes) and non-TV displays (e.g., smartphones and tablets) factor heavily into this debate. Technology has enhanced time-shifting, and viewers watch much less programming live (or nearly live) or via a traditional TV.  Some viewers replace linear program streams with on-demand viewing. Reasonable minds can differ on the ramifications of these changes. What this debate lacks, however, is a thorough assessment of the role that the legal systems play in this heavily regulated space – systems that, for better and for worse, can limit and delay industry-wide disruptions. 

Video programming markets exist within an expansive, multilayered regulatory structure that shapes the options available to viewers. The structure affects access to programming, access to distribution facilities, the terms and conditions of programming rights and other aspects of production and distribution. While Blodget sees vulnerability in the network model amid alternative means for production, acquisition and distribution, Frommer argues that changes in the TV industry will “happen a lot slower than you think” due to factors such as network bundling contracts and carryovers of cable bundling to the Internet. Program suppliers (whether network or syndicated), broadcasters, cable operators, Internet-based video service providers and others compete in this marketplace, but Federal policy also plays a significant role.

Blodget and Frommer focus on the rise and viability of new à la carte competitors to traditional broadcast, cable and satellite providers. These outlets provide a variety of programming, but such providers have differing levels of bargaining power and must compete to negotiate for programming rights. These providers lack certain regulatory benefits available to cable and satellite companies. Federal law assigns certain rights (and certain burdens) to "multichannel video programming distributors," or MVPDs. To date, the Federal Communications Commission has declined to extend this definition to a category of providers that it calls “Online Video Distributors” (OVDs) which include providers such as Netflix, Hulu and others. In a pending proceeding, the FCC has sought public comment on the definition of “MVPD” due to the wide-ranging policy implications.

An MVPD classification gives a provider certain regulatory benefits with respect to access to programming. For example: 

  • Under federal program access rules, among other things, cable-affiliated programmers must make their programming available to MVPDs on nondiscriminatory rates, terms and conditions. Classification issues, however, will impact the universe of parties in the marketplace. An “over-the-top” video provider, Sky Angel, filed a program access complaint against Discovery Communications and Animal Planet in a dispute over a terminated affiliation agreement. Although the complaint remains pending, in its initial ruling, the FCC's Media Bureau found that Sky Angel was not an MVPD because it did not provide subscribers with a transmission path. Extension of MVPD status to such providers would represent a dramatic change in the regulatory regime.
  • Federal law provides, with limited exceptions, that no MVPD may retransmit the signal of a broadcast station without the station’s express authority.  Every three years, commercial broadcasters must contact their local MVPDs and must elect whether to have their broadcast signals carried by those operators in accordance with a retransmission consent agreement or to invoke statutory rights of mandatory carriage. In addition, FCC rules require MVPDs to honor broadcasters’ exclusivity rights with respect to certain network, syndicated and/or sports programming. At present, only MVPDs are eligible to seek relief from the FCC to resolve disputes with broadcasters over these rights. Again, definitions matter.

Even non-MVPDs have benefitted from FCC actions to stimulate access to programming by OVDs.  The FCC's approval of Comcast/NBCU joint venture involved several conditions designed to facilitate access by OVDs to programming owned by the joint venture. While the FCC may lack explicit statutory authority to mandate such access, if FCC approval is required for a specific transaction, the agency sometimes requires the transacting parties to adhere to behavioral, structural or other conditions to get such approval. The Commission’s actions in the context of Comcast/NBCU and the Sky Angel case are introductory steps, potentially toward addressing more significant changes down the road.

Of course, access to programming also requires consideration of the benefits and burdens of copyright laws. The Copyright Act grants copyright holders limited bundles of rights to their works, such as rights to perform their copyrighted works in public (which includes broadcast programming and retransmission of such programming on MVPD networks), rights to preclude others from making public performances of these works and rights to reproduction of those works. Qualifying MVPDs can obtain compulsory or statutory licenses to retransmit certain video programming without having to negotiate with many individual copyright holders whose programs are included in the video stream. Copyright law issues are front and center in a legal challenge brought by broadcasters against the launch of Aereo’s subscription-only Internet service. Aereo plans to offer subscribers specific bundles of broadcast network programming for a fee. The networks assert that Aereo’s service constitutes copyright infringement and argue that while other providers pay fees to license the content, Aereo does not. Once again, legal definitions and regulatory uncertainty over emerging technologies affect access to programming.

Notice that I’ve focused only on certain regulations involving access to programming. A much longer blog post would deal with other important regulatory structures: for example, media ownership, access to network facilities, local video franchising, equipment regulation and the regulator’s role in dispute resolution.  More regulation translates into regulatory uncertainty (for example, over definitional issues), higher transaction costs, more litigation and more intensive lobbying. The lesson here is that the government regulates the video programming industry much more heavily than the newspaper industry, so it’s difficult to translate the problems facing the latter into predictions about the viability of the former.

So between Henry Blodget and Dan Frommer, who’s right about whether the TV business is “starting to collapse”? I see that as a false choice given the unpredictability of this rapidly changing marketplace. The pace of change on the Internet can be dramatic, but where regulation and litigation are involved, the pace can turn glacial. Thanks in part to the legal system, I don’t expect the “TV business” to “collapse” but rather to continue to evolve incrementally, with competition, new and disruptive technologies and government action serving as major drivers.

Comcast-NBCU: FCC's Merger Conditions Will Impact the Retransmission Consent Marketplace

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.

Incentive Auctions of TV Spectrum for Broadband May End Up Not So Voluntary

The FCC has begun its long anticipated rule making proceeding to reallocate 120 MHz of TV spectrum from wireless broadcast to wireless broadband services. Just a few days ago, the Commission voted 5-0 to consider three different approaches for reclaiming this spectrum, relying mostly on voluntary participation by TV broadcasters who wonder openly how truly voluntary this process will be if not enough TV stations agree to trade spectrum for cash and possibly, a smaller slice of shared spectrum to continue broadcasting.

The first approach is to encourage broadcasters to return 120 MHz of spectrum to be auctioned for wireless broadband service, with broadcasters receiving some portion of the auction proceeds. These incentive auctions would require Congressional approval. The second approach is adoption of rules to encourage two or more television stations to share the same 6 MHz TV channel. The third approach is adoption of new engineering rules to improve the VHF band with the hope that some television broadcasters would relinquish their stations in the UHF band in exchange for stations in the VHF band. The FCC likely will order TV spectrum auction winners to pay the costs to repack the TV Band to clear contiguous blocks of spectrum to auction.

Broadcasters are less than enthusiastic about the third approach because of concerns about impulse noise from electrical power lines, signal quality issues in the VHF band and the costs associated with moving a station from the UHF to the VHF band. The Commission believes the continued growth and importance of wireless broadband services requires allocation of spectrum from other services. The Commission has identified television broadcast spectrum as the most suitable candidate, arguing that television broadcasters do not use their spectrum efficiently, that less than 10% of the nation receives broadcast television through over-the-air reception and that broadcasters will still have 300 MHz of spectrum remaining after the FCC takes away and auctions the reclaimed spectrum.

TV stations question whether the Commission’s proposals will degrade the quality of HD signals because shared spectrum is insufficient to broadcast in HD. It is unclear what costs TV stations would have to bear (and in this economy, the costs of the auction transaction itself could be daunting). There is also fear that this approach could undermine the legal basis for the must carry/retransmission regime. Fundamentally, many question the necessity of reclaiming that much spectrum, pointing out that the demand for spectrum is greatest in the largest metropolitan markets where TV stations are not likely to voluntarily participate in auctions. The quickest path to freeing up more spectrum for broadband applications would be to give broadcasters more flexibility to use their spectrum for broadband services by reforming the technical rules and allowing secondary leasing rules to govern rather than the outmoded command and control model now favored by FCC regulators only with respect to broadcasting.

In an ironic twist, broadband providers are now touting the benefits of a “broadcast type” service over broadcast spectrum. This is allegedly the most efficient use of spectrum to deliver video programming consumers are demanding in greater numbers. At the end of the day, broadcasters are expected to go along with the proposals so long as they are truly “voluntary.” As anyone who has negotiated voluntary conditions as part of an FCC merger review knows, some things in DC are more voluntary than others.


STELA! FCC Implements Satellite Television Extension and Localism Act

Following the passage by Congress earlier this year of the Satellite Television Extension and Localism Act (STELA, for short), the FCC adopted new rules to provide satellite subscribers with greater flexibility to receive certain television stations from other markets.

The FCC revised its rules to make it easier for satellite subscribers to receive a significantly viewed (SV) out-of-market station. Previously, satellite subscribers could receive an out-of-market SV station with the same network affiliation as the local in-market station only if the satellite subscribers received the local in-market network station. Now satellite subscribers need only receive the satellite carrier’s local-into-local service package.

These changes may tilt retransmission consent negotiations in favor of the satellite carriers, who could favor an out-of-market SV station to the in-market station based on the amount of retransmission consent fees that are negotiated. Many broadcasters have entered into agreements that provide for little or no compensation for out-of-market subscribers.

The FCC reasons that subscribers would prefer receiving the in-market station to the out-of-market SV station, that satellite carriers will negotiate in good faith with in-market stations, and that SV stations usually are available only in a portion of the market. Time will tell, but there is good reason to be skeptical. Satellite carriers will inevitably use SV stations as a substitute, instead of a supplement, to an in-market station if any disputes arise about compensation for retransmission consent. If this happens, broadcast localism goals of the FCC will be undermined and Congress may be called back to the table to clean up the mess.

The FCC must deliver to Congress a report on in-state broadcast programming by August 27, 2011. The FCC seeks comment and data from the public in preparing this report.


Governmental intervention to referee TV carriage disputes could lead to unintended consequences

There is nothing wrong with TV stations charging cable and satellite companies who repackage popular broadcast channels and sell subscriptions to the public. It’s sort of like saying because you can get tap water for free, bottled water should be free too. Yet there are advocates in Washington from the cable and satellite industries who are seeking governmental intervention to referee private negotiations between TV stations and cable and satellite companies when the vast majority of deals get done without any disruptions in service to the public.

So what is really going on here? Cable and satellite companies are engaged in a not-so-transparent effort to arbitrage the FCC process to involve the government in order to gain leverage in retransmission consent negotiations. At the same time, a real marketplace for broadcast programming is emerging as Congress intended. Senator Rockefeller (D-WV) appears willing to take the bait and to authorize Congress to give the FCC authority to become such a referee. He said at a Congressional Hearing yesterday that “If you fail to fix this situation, we will fix it for you.” While Congress has many priorities, it’s unclear whether imposing more governmental regulation on the marketplace for retransmission consent – a system that works -- is likely to be high on the list given the shift in the House to a Republican majority and the general mood of the country. Moreover, there are more compelling communications law issues, such as finding more spectrum for broadband or clarifying the FCC’s authority to regulate the Internet, that are in need of governmental action.

This strategy is puzzling. The unintended consequences of inviting government regulation of the marketplace, in the absence of a market failure, could lead to a-la carte pricing regulation as consumers demand to know why they are paying for cable and satellite programming services they never watch. The truth is that broadcast programming is provided to cable operators at bargain basement prices relative to cable programming services and yet remains some of the most-watched and popular programming. It is likely to remain so even in this new media era as TV stations continue to lead in providing local news, emergency information and other programming to their communities.

Congress wisely carved a narrow role for itself in 1992 when it gave TV stations the option of negotiating carriage fees or demanding mandatory carriage. Calls for the government to require mediation or interim carriage during a dispute would mean that more, not fewer, deals, would get bogged down as the players attempt to game the FCC process to their advantage. These proposals are not justified by marketplace failures, changed circumstances or any other grounds. Stripped down, it’s clear this is nothing more than one private party seeking additional unwarranted negotiating leverage against another through governmental regulation in the guise of protecting the public.