Late in the day on Friday, October 5, 2012, the FCC announced that it was allowing the portion of the “program access” rules that preemptively prohibit exclusive contracts for the distribution of satellite-delivered, cable-affiliated programming to sunset, effective immediately. The FCC also clarified that exclusive arrangements would still be subject to review on a case-by-case basis under other provisions of the program access rules and that there would be a rebuttable presumption that an exclusive contract involving cable-affiliated regional sports programming harms competition. Finally, the FCC adopted a Further Notice of Proposed Rulemaking ("FNPRM") to consider the adoption of additional rebuttable presumptions that would apply to exclusive contracts for national and/or regional sports networks and to revise its rules governing the application of the program access rules to “buying groups.” Comments will be due 30 days after the FNPRM is published in the Federal Register and reply comments will be due 15 days after initial comments.
Background. Section 628 of the 1992 Cable Act directed the FCC to adopt “program access” rules to ensure that new market entrants would not be unreasonably denied programming needed to compete effectively with incumbent cable operators. The rules mandated by the statute fell into two categories: (i) a general prohibition on unfair practices the purpose or effect of which is to hinder significantly or prevent any multichannel video programming distributor (“MVPD”) from providing satellite-delivered cable programming and (ii) specific prohibitions against discriminatory prices, terms and conditions, the exercise of improper influence over an affiliated programmer’s decisions regarding the sale and terms of programming, and exclusive agreements. These specific prohibitions included a preemptive ban on exclusive distribution agreements in those geographic areas that were served by a cable operator in October 1992. The Act provided that this ban on exclusive agreements would automatically sunset after ten years unless the FCC found that the prohibition “continues to be necessary to preserve and protect competition and diversity in the distribution of video programming.”
In 2002 and again in 2007 the Commission conducted rulemaking proceedings to determine whether the prohibition on exclusive agreements should be allowed to sunset. In each instance, the FCC found that the prohibition remained “necessary” and renewed it for a five year period. Cablevision and Comcast challenged the 2007 extension in the United States Court of Appeals for the D.C. Circuit; while the rules were affirmed on the grounds that they were a reasonable exercise of the FCC’s predictive judgment, the court noted its expectation that “cable’s dominance in the MVPD market will have diminished still more by the time the Commission next reviews the prohibition” and that the FCC would carefully weigh such a development along with Congress’ intention that the prohibition eventually sunset.
In March 2012, the FCC commenced a new proceeding to consider whether the time had come to allow the exclusivity prohibition to sunset and to seek comment on other changes it might make to the program access rules. Not surprisingly, the larger cable operators and programmers supported allowing the prohibition to sunset, while smaller cable operators and competing MVPDs, such as DirecTV, Dish, Verizon, etc., supported the prohibition’s retention in whole or in part. Several commenters also urged the FCC to make additional changes in the rules in order to increase the effectiveness of buying groups such as NCTC and to address the program industry’s bundling and volume discounting practices. The FCC’s order expressly states that it is only addressing the exclusivity ban sunset and buying group issues and related procedural rule changes and is not addressing the other issues raised in the March rulemaking notice.
Sunset of Exclusivity Prohibition. After reviewing the record evidence regarding current market conditions, the FCC unanimously concluded that the time had come to allow the exclusivity prohibition to expire. In particular, the FCC noted that cable’s share of MVPD subscribers nationwide had decreased from 67 percent in 2007 to 57.4 percent today (although regional concentration remained high and a source of concern). The FCC also found that the spin off of Time Warner Cable from Time Warner Inc. and the sale of Comcast’s share of the A&E suite of networks had reduced the total number of cable affiliated networks subject to the ban; moreover, a substantial portion of the remaining cable affiliated national networks and regional sports networks are owned by Comcast, which is required to make those networks available to all MVPDs (even if the exclusivity ban sunsets) under the terms of the FCC’s order approving the Comcast/NBCU transaction. The FCC also found that most current carriage agreements would be unaffected by the sunset.
Another key element of the FCC’s rationale for allowing the exclusivity ban to sunset was its conclusion that competing MVPDs denied access to cable affiliated programming could still seek relief under other provisions of the program access rules on a case-by-case basis. In particular, the FCC pointed to Section 628(b) of the Act, which broadly prohibits “unfair practices” that “hinder significantly or prevent any [MVPD] from providing satellite cable programming”; Section 628(c)(2)(B), which prohibits discrimination (including unreasonable refusals to deal) among MVPDs; and Section 628(c)(2)(A), which prohibits a cable operator from “unduly or improperly influencing” the decision of an affiliated programmer to enter into a carriage agreement with an MVPD. Moreover, the FCC noted that it retains residual authority under Section 628(b) to monitor marketplace developments and the impact of the exclusivity ban sunset and to adopt new rules to protect consumers and competition if necessary.
Other Modifications to the Current Rules.
- Establishment of rebuttable presumption in cases involving RSNs. The FCC rejected suggestions that it sunset the exclusivity ban only for national programming networks and leave it in place for satellite delivered regional sports networks ("RSNs"). Noting that it already had adopted a case-by-case approach for dealing with program access complaints involving terrestrial RSNs, the FCC concluded that it should apply the same treatment to satellite delivered RSNs. In particular, the FCC established a rebuttable presumption that an exclusive contract involving a cable affiliated RSN, whether delivered by terrestrial or satellite means, has the purpose or effect of hindering significantly an MVPD’s provision of satellite cable programming and thus satisfies that element of an complaint brought Section 628(b). The FCC specifically found that singling out RSNs for a rebuttable presumption did not violate the First Amendment.
- New procedural rules. The FCC modified the procedural rules governing program access complaints by extending the period for filing an answer to a Section 628(b) complaint from 20 days to 45 days (matching the period currently allowed to respond to complaints involving a terrestrial RSN) and by establishing a six month deadline for the Media Bureau to decide complaints alleging a denial of programming. While the FCC declined a request by Fox that it reconsider rules adopted in 2007 that allow party-to-party discovery in program access cases, the FCC made certain changes to the terms of the standard “protective order” used in program access cases.
- Subdistribution agreements/Open Video Systems/Liberty Media. The FCC made several additional changes to its rules governing subdistribution agreements and the regulation of Open Video Systems to reflect the sunset of the ban on exclusive agreements. The FCC also modified the merger conditions adopted in its 2008 order approving the Liberty Media/DirecTV transaction. Specifically, the FCC modified those conditions (which are scheduled to sunset in February 2014) to permit exclusive agreements, but to provide that exclusive contracts covered by the conditions would be subject to case-by-case review under Section 628(b) and, in certain instances, under the prohibition against discrimination in Section 628(c).
Further Notice of Proposed Rulemaking.
- Additional Rebuttable Presumptions. The FCC’s FNPRM seeks comment on whether it can and should establish additional rebuttable presumptions in program access cases arising from the denial of access to certain programming. In particular, the FCC asks whether it can and should establish a rebuttable presumption that an exclusive agreement involving an RSN constitutes an “unfair act” for purposes of complaints brought under Section 628. The FCC also asks whether this same rebuttable presumption (as well as the rebuttable presumption of harm) can and should be applied to complaints involving national sports networks.
- Buying Groups. Although the FCC did not directly address any of the comments it received concerning volume discounts, uniform price increases, and bundling, it did take note of comments it received relating to the application of its program access rules to buying groups such as NCTC. Based on those comments, the FCC has proposed, and seeks comment on, revisions to the definition of the term “buying group” for purposes of the program access rules. Specifically, the FCC noted that, in order to qualify as a buying group under the current rules, liability for the group’s programming fees must be addressed in one of three separate ways, none of which conform to actual current industry practice. To rectify this situation, the FCC proposed to modify its rules so that a buying group would be eligible to take advantage of the program access rules if it agrees to assume liability to forward all payments due and received from its members to the appropriate programmer.
The FNPRM also seeks comment on whether the program access rules should be amended to prohibit cable affiliated programmers from unreasonably preventing particular members of a buying group from opting into a “master agreement” for the carriage of programming. ACA has proposed that the FCC establish a “safe harbor” under which a buying group member with under 3 million subscribers would be presumptively entitled to participate in master agreements negotiated by the buying group. In addition, under ACA’s proposal, (i) a buying group that exceeds the subscriber level “safe harbor” would nonetheless be entitled to participate in master agreements if it incurs a specified share of its programming expenditures through the buying group and (ii) when a master agreement is up for renewal, buying group members participating in the expiring agreement would have the right to participate in the renewal. The FNPRM seeks comments and supporting data with respect to all aspects of ACA’s proposal (including information regarding specific instances in which a buying group member has been excluded from a master agreement) and also solicits alternative proposals for addressing this issue.
Another issue that the FNPRM raises with respect to buying groups involves the “standard of comparability” of rates used to determine whether a buying group is being discriminated against. The FNPRM seeks comment on ACA’s request that the FCC revise its rules to specify that a buying group will be considered “similarly situated” to an individual MVPD that offers the programmer access to the same number of subscribers. The FNPRM also asks for comment on ACA’s request that the FCC make clear that a cable affiliated programmer cannot refuse to offer a master agreement to a buying group that specifies a schedule of non-discriminatory license fees over a range of subscribership levels. This proposal is intended to address the fact that buying groups such as NCTC currently negotiate agreements without certainty as to how many of its members will opt in to the deal. According to ACA, this creates a “chicken and egg” problem that occurs when certain members of a buying group are unwilling to opt into a master agreement because the negotiated fees are too high, even though the license fees would go down if the members did opt in. The FCC specifically asks how volume discounts are calculated for buying groups where neither the buying group nor the programmer knows precisely which buying groups will participate in an agreement.
Finally, the FCC has asked for comment on whether it should amend its buying group rules to provide that a buying group may not “unreasonably” deny membership to any MVPD requesting membership. Citing past membership freezes by NCTC as well as a recent case brought by a municipally-owned MVPD that was initially denied membership in NCTC, the FCC suggests that buying groups play such a significant role in the marketplace that it is necessary to regulate their membership decisions. The FNPRM states that the FCC is not proposing to require that a buying group accept as members every MVPD that applies; rather, the FCC proposes only to prohibit “unreasonable” denials of membership. Examples of a “reasonable” basis for denying an MVPD membership in a buying group include the MVPD’s history of defaulting on its payments or “legitimate antitrust” concerns. The FCC proposes to enforce this rule by denying the protection of the program access rules to a buying group that is found to have unreasonably refused to admit an MVPD to membership.