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.

Will the FCC and the FAA Allow Expanded Use of Wireless Devices on Airplanes?

Here’s an important announcement for gadget-laden air travelers: Federal Communications Commission Chairman Julius Genachowski reportedly has asked the Federal Aviation Administration to “enable greater use of tablets, e-readers, and other portable devices during flights.”  As travelers know well, the FCC and the FAA place significant legal restrictions on passenger use of portable electronic devices during air travel, particularly during takeoff and landing. The Chairman’s letter may open the aircraft door to a policy that releases public pressure and enables increased wireless gadget use during flights.

The FCC and the FAA have limited in-flight use of portable electronic devices due to concerns about potential wireless interference to aircraft systems used for navigation and communication. FAA rules largely prohibit the use of such devices in flights, with limited exceptions. In August, the FAA announced plans to review these regulations, and the agency has requested public comment. Reportedly, the FAA does not intend to expand the rules to include voice calls. Chairman Genachowski issued a statement in support of the FAA’s review last August, saying that “[d]ramatic changes in technology and society make it both appropriate and timely for the FAA to review whether updates to their rules are needed.”

Current FCC rules prohibit passengers from using cellular phones and other wireless devices on airborne aircraft. Several years ago, the FCC launched a proceeding to consider lifting this restriction, but the agency terminated the proceeding in March 2007, citing “insufficient technical information” on potential interference.  The FCC also coordinates closely with the FAA on air-safety matters, such as for towers near airports that require registration with the FCC and for certain wireless devices operating near Terminal Doppler Weather Radar systems. Safety issues are among the FCC’s highest enforcement priorities, which makes the news of the Chairman’s letter, and his apparent willingness to revisit these issues, particularly noteworthy.

As our travels and our productivity depend on increasing gadget use, it is a sign of the times that the FCC and the FAA are taking a fresh look at their regulations. Loosening the rules would require tackling some challenging safety and technical issues. As a result, air passengers awaiting rule changes should anticipate potentially long delays because the timing and scope of any new rules remain, at present, largely up in the air.

Video Interview: Explaining Why the Television Industry Isn't Collapsing, with LXBN TV

Following up on my most recent blog post, I spoke recently with Colin O'Keefe of LXBN regarding the state of the television industry. In the short interview, I discuss some of the regulatory factors at play in the evolving marketplace for online video services. 

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.

FCC Provides Guidance on Net Neutrality Compliance Ahead of Federal Register Publication

Late last week, the Federal Communications Commission’s Enforcement Bureau and General Counsel’s office jointly released a Public Notice offering “initial guidance” on how Internet Service Providers can comply with the transparency and disclosure rules that the FCC adopted in its Open Internet Order last December.  These are among the same “net neutrality” rules that Verizon and MetroPCS filed lawsuits to stop last December – lawsuits that U.S. Court of Appeals for the D.C. Circuit dismissed as “premature” because the rules had not been published in the Federal Register. We expect that the clarifications and explanations in the new “initial guidance” will be contained in the Federal Register publication of the Open Internet Order, which will trigger a new round of judicial review.  In this sense, the timing of the guidance can be viewed as a pre-emptive effort to possibly eliminate or narrow the lawsuits that will eventually be filed following Federal Register publication.

In another sense, the Public Notice actually provides some clarity to ISPs on how to comply with the disclosure rules.  The FCC once again stated that the guidance is illustrative and that broadband providers can implement other approaches that will comply.  Here are the five areas where the FCC provided clarification: 

  • Point-of-Sale Disclosures – The Open Internet Order requires ISPs to disclose network management practices, performance characteristics and commercial terms “at the point of sale.”  The Order further stated that, to meet this requirement, a provider must prominently display links to disclosures on a public website.  The FCC clarified that providers do not need to create or distribute hard copies of disclosure materials or to train sales employees to make such disclosures. Providers instead may direct prospective customers to the web page (not just the ISP’s home page) orally and/or prominently in writing.  In retail offices, broadband providers should have available devices that consumers can use to access the disclosures.
  • Service Description – The Open Internet Order requires broadband providers to disclose accurate network performance information.  For fixed broadband, the 13 large ISPs that are participating in the FCC’s SamKnows speed test can use the results as a sufficient representation of what their customers can expect.  Those ISPs that are not participating in the project can use the methodology to measure actual performance.  The FCC plans to release the methodology and the results before the rules become effective.  Alternatively, ISPs may disclose actual performance based on internal testing, consumer speed tests or other reliable third-party sources.  For mobile broadband, the FCC is collecting data on broadband performance and, when that information has been analyzed, the FCC plans to provide further guidance.  Until that time, mobile broadband providers may disclose the results of their own or third-party testing.  For all broadband providers, the Public Notice encourages disclosure of the source and methodology used to evaluate performance, and expects disclosure to be modified if actual performance materially differs from the disclosure. Expect the standards of disclosure to evolve based on comments filed in the FCC's separate "Need for Speed" proceeding, where the FCC has sought comment on the types of broadband speed and performance information that would be of most use to consumers.
  • Extent of Required Disclosures – The Commission stated in the Open Internet Order that its list of potential disclosure topics “is not necessarily exhaustive.”  Obviously, this statement aroused anxiety in ISPs who were concerned that potential findings of non-compliance for disclosures the FCC didn’t even mention.  Given this vagueness – and the potential legal pitfalls that could ensue – the Public Notice “clarified” that certain information contained in the Order will suffice for compliance “at this time,” though the FCC can determine in the future that that different disclosures are appropriate “at that time.”  The compliance disclosure topics are in paragraphs 56 (for all broadband providers) and 98 (for mobile broadband providers) of the Order and are summarized in this presentation.
  • Content, Applications, Service and Device Providers – The Open Internet Order requires disclosure to content, application, service and device providers.  Given the uncertainty over what broadband providers must disclose to these edge providers, the Public Notice clarified that the disclosures sufficient to enable consumers to make informed choices will generally satisfy the disclosure obligations to edge providers.  Thus, the FCC anticipates that broadband providers should only need to have one set of disclosures, and “technologically sophisticated” edge providers should be able to rely on a disclosure statement that the broadband ISP provides to consumers.
  • Security Measures – In response to claims that disclosure of numerous and constantly evolving security techniques would be unduly burdensome on broadband providers, the Public Notice reiterated the “touchstone” of its transparency rules – disclosure of information sufficient for consumers to make informed choices.  As examples, the FCC expects broadband providers to disclose if security measures intended to spread of viruses, malware, spam and other threats also prevent end users from running mail or web servers.  The FCC does not expect ISPs to disclose internal security measures that do not affect consumer choice, such as routing security practices.

Left unaddressed was the uncertainty surrounding enforcement of the Open Internet rules.  As we wrote in our earlier blog post, the FCC’s failure to articulate timing of decisions on complaints and remedies for non-compliance made it difficult for broadband providers to assess the risk associated with the complaint process.  At least with the guidance offered in the Public Notice, broadband providers have a little more clarity that will, hopefully, spur disclosures that are not put to the enforcement test.

FCC Working Group Releases Blueprint for Future of Media

The FCC recently released a long-anticipated report on the future of journalism and localism, prepared by the FCC Working Group on the Information Needs of Communities. 

The report, entitled “Information Needs of Communities: The Changing Media Landscape in a Broadband Age,” could be a potential road map for the FCC moving forward on overhauling and updating the agency’s regulatory approach to print, broadcast, cable and the Internet. The report’s conclusions and recommendations are important because they signal the most current thinking of FCC staff about their roles as regulators.  Nevertheless, a lengthy process remains to transform these recommendations into regulations and policy.  It is unclear how many recommendations ultimately will be adopted. 

The working group comprises journalists, scholars, entrepreneurs and government officials, all of whom the FCC selected.  In 2009, a bipartisan commission by the Knight Foundation considered how technology is changing how the media functions and communities receive and process information.  The Knight Commission called on the FCC to examine these issues more closely, which led to formation of the working group.    

The report presents an optimistic view of the state of journalism.  News and information gathering is more vibrant than ever, and local news continues to play a vital role for media.  Commercial and nonprofit media are working on collaborative projects.  Nonprofit media have become more varied and more important.  The Internet has led to the free exchange of ideas and information.  The report, however, observes that the abundance of media outlets does not necessarily translate into an abundance of reporting. 

How does the working group propose to bridge this gap between the growth of media outlets and the reduction in reporting?  Through a combination of reducing regulatory burdens on media, encouraging entrepreneurship and philanthropy, and focusing on the historically underserved.  Here are some key components of the report: 

Online Disclosure and Transparency.  The report advocates that broadcasters should be required to provide more information about their operations online.  For example, the report recommends: 

  • eliminating the FCC’s requirement that local television stations retain a paper copy of their quarterly-issues programs lists and replacing it with a streamlined, web-based form. The form could include the amount of community-related programming, news-sharing and partnership arrangements, how multicast channels are being used, sponsorship identification, disclosures and the level of website accessibility for people with disabilities. 
  • requiring broadcasters to disclose any pay-for-play arrangements online in addition to the current required on-air disclosures. 
  • requiring satellite operators to post their disclosure forms online. 
  • migrating online or eliminating any material that FCC licensees are required by law to keep in public files and repealing the burdensome enhanced disclosure rules adopted in 2007.  These rules, which have not taken effect, were designed to replace the broadcaster’s quarterly issues/programs lists with a standard form that would report detailed programming information to the Commission and would post the completed form on the Internet. 
  • terminating the FCC’s localism proceeding, which proposed among other items that broadcast stations create community advisory boards, require staff to be on site whenever a station was on the air and provide reports on the quantity of local music played. 
  • formally repealing any remnants of the Fairness Doctrine, which was stricken in 1987. 

Universal Broadband. The report finds that local media innovation, as well as the information health of communities, requires a universal and open Internet. Efforts to expand broadband would include the use of voluntary incentive auctions for commercial and noncommercial broadcasters. 

Underserved Audience.  The report recommends that the FCC ensure that modern media work for people in historically underserved areas.  The report suggests: 

  • reserving TV channels 5 and 6 for TV and radio opportunities for new small businesses, including those owned by minorities and women. 
  • implementing the Local Community Radio Act in a manner that supports the growth of LPFM stations. 
  • that Congress restore the tax certificate program to promote diversity in media ownership. 

State-based C-SPANs. To promote the availability of local public affairs programming, the working group recommends establishment of a state-based C-SPAN in every state and that Congress give regulatory relief to multichannel video programming distributors who help facilitate such networks. 

Media Ownership and Access.  The report remains neutral with respect to increased media ownership, favoring an approach that considers the impact of the Commission’s rules as currently crafted or proposed on local news and public affairs reporting in the community as a whole.  The report implies that the focus of media ownership is whether the arrangement contributes to the overall media health of the community.  This approach may give some hope to broadcasters in smaller markets that the FCC may someday be more open to consolidation. The report also recommends re-assessment of the effectiveness of the satellite TV set-aside for educational programming and of cable TV leased access systems. 

Public Interest.  The report’s public interest analysis is its most interesting and surprising aspect.  The report concludes that many rules intended to advance public interest goals are ineffective and out of sync with the information needs of communities and the nature of modern local media markets.  In some cases, policies do not achieve their intended goals.  In other cases, policies that might have once made sense have not kept up with changes in media markets.  Several policies are not sufficiently oriented towards addressing the local information gap.  Most of all, any rules or policies must live within and respect the essential constraints of the First Amendment. 

Notably, the report states that government is not the solution to providing robust local news and information but can remove obstacles confronting those working to solve these problems.  Instead, most of the solutions to today’s media problems will be found by entrepreneurs, reporters and creative citizens, not by legislators or administrative agencies. 

In 475 pages filled with recommendations, the report defies a quick and simple analysis.  At first blush, one is stricken by the report’s ambitious, comprehensive nature; in the end, however, such scope guarantees that each and every recommendation will not ultimately become law.  Some will face Constitutional challenges (such as any laws that specifically favor minorities or females as opposed to small businesses) and others will face challenges from competing interests and other stakeholders.  All of this assumes of course that there is no change in administration next year, in which case the report could find itself relegated to the dustbin of history, as have so many previous reports. 

One last point: it does not necessarily follow that adoption of these recommendations will result in massive government deregulation.  For example, while substitution of a new disclosure form for the quarterly issues/programs list and elimination of the enhanced disclosure form is certainly welcome news, the report does recommend adopting a new disclosure form.  A parallel example may be the changes in the FCC’s Equal Employment Opportunity (“EEO”) policies; a change from the agency’s traditional analysis to the modern EEO Program Reports.  Although the changes modernized the EEO process, by no means did it unburden broadcasters’ EEO obligations. 

Even with these provisos, the report represents an impressive accomplishment in bringing the discussion of journalism, localism and the media into modern times.

Shhh! FCC Proposes Rules to Turn Down Loud Commercials

There’s a kind of hush on the way as lawmakers and regulators in Washington, DC have quickly escalated their war on loud commercials in video programming.  On May 27, 2011, the Federal Communications Commission proposed new rules to implement the Commercial Advertisement Loudness Mitigation Act (the “CALM Act”), enacted by Congress on December 15, 2010.  These rule changes would incorporate new technical standards aimed at requiring broadcast stations, cable operators and other multichannel video programming distributors (“MVPDs”)  to turn down the volume of commercials in video programming. The FCC is required to prescribe regulations by December 15, 2011, and the new regulations would have to take effect within one year after the date they are adopted.  The comment cycle has been announced in the Federal Register. Comments are due on or before July 5, 2011 and reply comments are due on or before July 18, 2011. 

What has prompted legislation and new regulations designed to give viewers serenity from loud commercials?  According to the FCC, complaints about loud commercials are not new, but the rise of digital television has expanded the dynamic range of audio, both in program material and in commercials. The FCC stated that it has received more than 800 complaints about “loud commercials” since January 2008.  The CALM Act is not only specific in how Congress expects the FCC to tackle the issue, it also sharply limits the FCC’s authority on the matter.

As the CALM Act requires, the new rules would incorporate a technical standard published by the Advanced Television Systems Committee (“ATSC”) called ATSC A/85. A consumer’s home receiver would be capable of automatically adjusting volume based on metadata (called a “dialnorm”) encoded in the programming.  These volume adjustments would occur as programming transitions between program material and commercials or when the viewer changes channels.  Under the proposed rules, the ATSC A/85 standard and “successor” standards would be incorporated by reference into the rules and that public notice and an opportunity for comment would not be necessary.

For broadcasters and MVPDs, the new regulations likely will produce disquiet about increased regulatory risk and legal liability. Some considerations: 

  • The rules would apply to all commercials transmitted by a broadcaster or an MVPD. There be no exceptions for commercials that are inserted by third-party content providers; thus raising questions about who bears the ultimate responsibility for compliance.  The rules would not be enforced directly against third-party content providers, and there will be situations where responsibility remains to be allocated – for example, if an MVPD carries a broadcast station’s programming that contains loud commercials.
  • The FCC has raised some interpretive questions regarding what counts as a “commercial advertisement” for purposes of the rules. For example, the FCC wants to know whether the rules would include political ads by a legally qualified candidate or promotions of specific video programs. In addition, the FCC has asked about the impact on noncommercial broadcast stations, which are legally prohibited from broadcasting advertisements.
  • Broadcasters and MVPDs would have new burdens to demonstrate compliance with the rules in response to a consumer complaint alleging loud commercials.  Compliance could occur with respect to a “safe harbor” under the statute or in other ways.  To qualify for the safe harbor, the entity would have to install, utilize and maintain in a “commercially reasonable manner” the equipment and necessary software to comply with the ATSC A/85 standard.  The FCC has sought comment on what practices are “commercially reasonable” for this purpose.  The FCC also wants to know other ways compliance can be demonstrated. For example, stations and MVPDs may choose to enter into agreements with content providers whereby the provider would agree to deliver content that complies with ATSC A/85 RP. The station or MVPD would remain responsible but could choose to negotiate for indemnification clauses in these contracts.
  • Broadcast stations and MVPDs would be able to apply for a limited, one-year waiver from the CALM Act requirements based on financial hardship.  The FCC cites a Senate Committee report that estimates the cost of equipment as ranging from a few thousand to about $20,000 per device.  Under the FCC’s proposal, financial hardship would be demonstrated based on evidence of the station’s financial condition, cost estimates for new equipment, a detailed explanation of the justification for the postponement and an estimate of the time to comply.  Waiver proponents would not be required to demonstrate financial hardship.  The FCC has sought further comment regarding whether blanket waivers may be necessary in smaller markets.
  • The FCC has identified “practical challenges” in compliance for some MVPDs who use a different type of audio system than the AC-3 system for which the technical standard was designed but who nevertheless would be subject to the rule.  The FCC has sought comment about these challenges.
  • Some providers receive program material from third-party programmers.  The FCC wants input on the technical ability to pre-screen that content for loud commercials.
  • The FCC has proposed a consumer-driven complaint process whereby consumers would be permitted to prepare and submit an online form that relates specifically to complaints about loud commercials.  There would be no filing fee, but the complainant would be required to submit contact information and specific information about the programming that is the subject of the complaint.  The broadcaster or MVPD receiving the complaint would be expected to retain records and documentation to demonstrate compliance. 

Despite the prevalence of digital video recorders (or more importantly, their fast-forward functionality) and the volume button on remote controls, through the CALM Act, Congress has charged the FCC to act quickly to combat loud commercials.  As the NPRM makes clear, however, questions remain, and we have yet to hear the answers.    

Comcast-NBCU: FCC Conditions Deal to Promote Online Video Services; Questions Remain

Perhaps video never “killed the radio star,” but what should we expect for online video now that the joint venture between Comcast Corporation and NBC Universal, Inc. (“Comcast-NBCU”) has become a reality? This new entity may be the product of two “old media” powerhouses, but new-media concerns about online video distribution represent a major theme in regulatory approvals of the Federal Communications Commission and the U.S. Department of Justice. These new regulatory ground rules will help shape the online video marketplace – a marketplace that so far is vaguely defined and in a state of transformation.

As we’ve previously described, the FCC often uses its merger-review authority to help advance objectives that may ordinarily exceed the agency’s reach. In light of the continuing legal battles over the scope of the FCC’s legal authority to regulate the Internet, it is noteworthy that Comcast and NBCU, in an effort to obtain FCC approval, agreed to some enforceable commitments and conditions to govern the new entity’s participation in the online video marketplace. While these conditions are specific to the transaction, they will affect how Comcast-NBCU will negotiate with third parties who want access to Comcast-NBCU content.

A key question: what “marketplace”? In conditioning its approval, the FCC expressed concern that Comcast-NBCU would have the “incentive and ability” to discriminate against two FCC-defined categories of online video distributors: 

  • Multichannel video programming distributors (or “MVPDs”) such as cable operators, satellite providers or other providers of such multichannel programming; and
  • Non-MVPD distributors of online video programming, such as standalone “over-the-top providers” like Hulu (in which NBCU has an ownership stake), Netflix, GoogleTV and iTunes.  

In general, these categories contrast MVPDs (as providers combinations of linear program streams such as cable or broadcast channels of programming) with more “over-the-top” video services (such as on-demand and pay-per-view services). To complicate matters further, in a footnote, the FCC left open the possibility that certain types of OVDs also could be deemed MVPDs. The FCC determined that “regardless of whether online video is a complement or substitute to MVPD service today, it is potentially a substitute product” and sought to implement conditions to address these “nascent” online video services. The FCC’s decision has consequences for online video and in other contexts. For example, just yesterday DirecTV asked the FCC to clarify which entities constitute MVPDs for purposes of regulations involving set-top boxes. 

With respect to the marketplace for online video, Cardozo Law School professor Susan Crawford's blog post on Comcast-NBCU provides an interesting analysis of the FCC’s decision to apply conditions to protect OVDs. She asserts that the FCC has “created a market” by designating OVDs as a category entitled to protection. In my view, the “OVD” designation is more like a class of service providers than a market, because the FCC declined to identify current potential substitutes for the provision of these services and implicitly raised the question of whether some OVDs compete in a separate market for the provision of multichannel programming service. For these reasons, and in light of the definitional ambiguities surrounding the “MVPD” designation, the “marketplace” for OVD services, however defined, is an evolving concept. 

Acronym soup notwithstanding, the FCC sought to address Comcast-NBCU’s purported incentives to discriminate against rival OVDs (whether MVPD or not). For example, the FCC expressed concerns that Comcast-NBCU would raises prices for rivals to access its affiliated programming or would refuse to provide this programming in a timely manner or in the same quality. The FCC found that its program-access rules – i.e., rules designed to prevent vertically integrated program suppliers from improperly favoring affiliated cable operators – would not provide sufficient protection because strategies of uniform price increases would not discriminate among service providers. Instead, the FCC required Comcast-NBCU to provide affiliated programming to rival MVPDs at fair market value and on nondiscriminatory prices, terms and conditions.   

For OVDs seeking access to Comcast-NBCU programming, the FCC provides the following rights. 

  • An OVD may decide to become an MVPD and, like other MVPDs, would be entitled to access Comcast-NBCU-affiliated content for online display at fair market value and on nondiscriminatory prices, terms and conditions.  
  • An OVD may request that Comcast-NBCU offer its video programming to the OVD on the same terms and conditions that would be available to an MVPD, provided that the OVD is willing to pay the economic equivalent of the price, terms and conditions on which Comcast-NBCU provides video programming to MVPDs. If the OVD qualifies, Comcast-NBCU must provide “materially” the same programming that it offers to other “similarly situated” MVPDs; however, if the other MVPD is obligated to make the programming available through a linear stream, the OVD’s obligation must be “materially similar.” 
  • An OVD will be entitled to access to “comparable programming” available on economically equivalent prices, terms and conditions if the OVD enters into an arrangement to distribute programming from one or more of Comcast-NBCU’s non-affiliated “peers.” Who are these peers? They include certain broadcast networks, cable programmers, production studios and film studios whose names you’ve heard before (e.g., they are affiliated with Disney, Time Warner, News Corporation, Viacom, Warner Bros., 20th Century Fox or Sony Pictures) or otherwise must be one of a handful of the largest players in their industry. Unlike the second option, this programming need not be provided in linear streams.

So what’s the upshot? Comcast describes these procedures as a “focused mechanism for online video providers to obtain access to certain NBC Universal content [that is] carefully crafted to be fair to all players.” That said, these conditions clearly serve as a filtering function to help ensure that Comcast-NBCU only has to share programming with companies that demonstrate certain “bona fides.” OVDs may opt to enforce these conditions via arbitration, but the legal text is replete withdense interpretive issues. Moreover: 

  • If the OVD opts to become an MVPD, that is an expensive proposition. The OVD must consider the costs of deploying networks, negotiating carriage and programming rights, and obtaining local franchises, as well as the prospects of being deemed another cable company.
  • If the OVD decides to compete on an equal footing with an MVPD, that too is an expensive proposition. The MVPD must consider the costs of economically equivalent programming and the likely requirement that the programming would have to be provided as a linear stream offered on an “all or nothing” basis – i.e., akin to real-time distribution of a program channel as opposed to on-demand programming.
  • If the MVPD enters into an agreement with a Comcast-NBCU “peer” for comparable programming, that is – you guessed it – an expensive proposition. This trigger requires an agreement with one of the largest industry players, who no doubt would have to be presented with a compelling business case to sign an agreement with an unaffiliated distribution partner because many of these participants already have extensive distribution channels.  

In addition, Comcast provides some online programming on an “authenticated” basis to only those individuals who subscribe to Comcast MVPD service. Comcast will continue to be allowed to do so, subject to these sets of conditions. Comcast-NBCU also will not be allowed to put certain online programming behind a paywall for as long as at least one of the other major broadcast networks provides a similar service. 

The FCC has tried in other ways to implement enforceable “fair play” conditions on Comcast-NBCU. Comcast-NBCU may not enter into agreements to hamper online distribution of its or another’s video programming. Comcast-NBCU also must continue to offer standalone broadband Internet access services, at reasonable prices and of sufficient bandwidth that customers can access online video services without being required to purchase a Comcast-NBCU subscription for cable television services. The company may not disadvantage rival online video distribution services through its broadband services and/or set-top boxes. Finally, Comcast-NBCU has agreed to abide by the FCC’s “Open Internet” rules (a.k.a "Net Neutrality"), and it appears that this commitment would remain even if those rules are successfully stricken or modified by judicial appeal

As for Hulu, as a result of the FCC’s approval, neither Comcast nor NBCU will be permitted to exercise any rights to influence Hulu’s conduct or operation, but the companies may retain a purely economic interest. Recent media reports indicate that Hulu is considering an MVPD-style approach to online video distribution. Just yesterday Hulu CEO Jason Kilar posted his thoughts about the future of TV and argued that consumers, advertisers and content owners will play a more important role than distributors in the future of online video – an interesting take in light of the FCC’s actions to limit Comcast-NBCU’s oversight. 

In the end, the FCC’s “transaction-specific” conditions will have major implications for the “over the top” providers who had no part in the transaction. Time will tell how the FCC’s actions, and the reactions of Comcast-NBCU and the competition, will influence the evolution of online video services. In light of this unprecedented vertical combination, all eyes will be on the industry to spot the next players in line with plans to create a similar combination of content and distribution.

Hidden in Plain View: The Threat Within the FCC's Enforcement of its Net Neutrality Rules

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.