On Monday, March 31, 2014, the Federal Communications Commission (FCC) voted unanimously to amend its “good faith negotiation” rules to prohibit the joint negotiation of retransmission consent by two or more stations that are among the four most highly rated stations in a market and are not commonly owned. The FCC also commenced a new rulemaking proceeding to consider whether it should repeal its network non-duplication and syndicated exclusivity blackout rules.
NOTE: The FCC separately took several actions with respect to its broadcast ownership rules, including the adoption of a rule whereby television stations that enter into “joint sales agreements” will be deemed to be commonly-owned. The FCC’s ownership rule-related actions will be described in a separate Client Advisory.
Background: Local commercial broadcast television stations that elect to exercise their retransmission consent rights under Section 325(b) of the Communications Act may be carried by a multichannel video programming distributor (MVPD) only if the station agrees to give the MVPD its express, written consent to such carriage. In 1999, Congress amended the retransmission consent provisions to require that negotiations for such consent be conducted in good faith. The FCC adopted rules implementing the good faith negotiation requirement, including a list of behaviors that the FCC deemed to be per se violations of the obligation to negotiate in good faith. The list of per se violations, as originally adopted, did not address the broadcasters’ practice of engaging in joint or coordinated negotiations in a market.
In recent years, negotiations between stations and MVPDs over the terms of retransmission consent agreements have become increasingly contentious, with the prices demanded for retransmission consent escalating at a rate far above inflation. Citing these developments, a number of MVPDs, public interest groups and other interested parties petitioned the FCC in 2010 to conduct a rulemaking proceeding to adopt changes in its rules governing retransmission consent negotiations. The FCC commenced the requested rulemaking in 2011, seeking comment on both the scope of its authority to make changes in its rules and on specific proposals for such changes.
One of the proposed changes in the rules on which the FCC sought comment was to expand the list of per se violations of the good faith negotiation requirement to cover the joint negotiation of retransmission consent by multiple broadcasters in a market. The cable and satellite industry supported such a change, arguing that joint negotiations permitted stations to collude for the purpose of increasing their leverage and the rates they could extract from MVPDs for retransmission consent. These arguments recently gained traction due to comments made to the FCC by the Department of Justice’s Antitrust Division which raised concerns about coordinated broadcaster retransmission consent practices.
Description of the Rule Prohibiting Joint Negotiations. In the Report and Order, the FCC agreed that joint negotiating practices can, in certain circumstances, allow broadcasters to charge supra-competitive rates for retransmission consent and thus are not in the public interest. The FCC stated that “With regard to Top Four broadcasters, we can confidently conclude that the harms from joint negotiation outstrip any efficiency benefits identified and that such negotiation on balance hurts consumers.” The FCC thus modified its list of per seviolations of the good faith negotiation requirement to prohibit joint negotiations involving two or more stations that are among the four highest rated stations in the market and are not commonly owned. Stations subject to the new rule are barred from engaging in joint negotiation as of the effective date of the rule, and regardless of whether the stations are subject to existing agreements, formal or informal, written or oral, that obligate them to negotiate retransmission consent jointly. The new rule will not apply, however, to joint negotiations that have already been completed prior to the effective date, and thus the rule does not invalidate retransmission consent agreements concluded through such negotiations.
Joint negotiations. The first element of the new rules is that the stations must have engaged in joint negotiations. The FCC’s definition of joint negotiations is expansive, covering the following tacit and implicit tactics:
- Delegation of authority to negotiate or approve a retransmission consent agreement by one Top Four broadcast television station (or its representative) to another such station (or its representative) that is not commonly owned, operated, or controlled, and that serves the same designated market area (DMA);
- Delegation of authority to negotiate or approve a retransmission consent agreement by two or more Top Four broadcast television stations that are not commonly owned, operated, or controlled, and that serve the same DMA (or their representatives), to a common third party;
- Any informal, formal, tacit or other agreement and/or conduct that signals or is designed to facilitate collusion regarding retransmission terms or agreements between or among Top Four broadcast television stations that are not commonly owned, operated, or controlled, and that serve the same DMA. This provision shall not be interpreted to apply to disclosures otherwise required by law or authorized under a Commission or judicial protective order.
- Same market. Stations are considered to be in the same “market” for purposes of applying the joint negotiations prohibition if they are assigned to the same Designated Market Area by Nielsen.
- Top Four stations. The prohibition on joint negotiations only applies to the four most highly rated stations in a market. Consistent with the FCC’s local broadcast ownership rules, a station is deemed to be a Top Four station if it is ranked among the top stations in a DMA based on the most recent all-day (9 a.m. – midnight) audience share, as measured by Nielsen or any comparable professional, accepted audience ratings service.
- Commonly owned. Joint negotiations between and among stations are not prohibited if the stations are commonly owned. The FCC will determine whether stations are commonly owned by reference to the agency’s broadcast ownership attribution rules. Thus, for example, two stations that the FCC has allowed to be commonly owned, operated or controlled pursuant to a waiver of the local ownership rule will be permitted to engage in joint negotiations.
Further Notice of Proposed Rulemaking on Network Non-duplication and Syndicated Exclusivity Rules. The FCC has initiated a new rulemaking proceeding to consider whether it should repeal its network non-duplication and syndicated exclusivity blackout rules. These long-standing exclusivity rules (that predate the retransmission consent regime) are used by broadcasters to protect their exclusive rights to programming within their geographic markets from encroachment by the importation of distant broadcast stations by cable operators pursuant to the compulsory copyright license.
More specifically, under the network non-duplication and syndicated exclusivity rules, a local station can require cable operators to delete duplicating network feeds and syndicated programming offered by out of market broadcast stations that they carry. Because these exclusivity rules provide broadcasters a regulatory, extra-contractual mechanism to exclude competing sources of network and syndicated programming on local cable system lineups, the rules have bolstered broadcaster demands for higher retransmission consent fees.
In requesting comments on whether such rules should be retained or discarded, the FCC seeks tangible, quantifiable evidence as to whether and how elimination might impact broadcasters, program suppliers, MVPDs and the efficiency of the retransmission consent negotiation process. The FCC alternatively asks whether amendments to the rules would be more appropriate, and if so, what aspects of the rules should be modified.
Analysis of the FCC’s Actions. The FCC’s action on joint negotiation and its hard look at the broadcast exclusivity rules are positive developments insofar as they represent the FCC’s first concrete action in response to rising retransmission consent fees, and the impact such increased programming costs have on consumers. This is distinct departure from previous Commissions (and Chairmen) under which MVPD arguments on this topic failed to gain much traction.
However, it remains to be seen what impact, if any, that the FCC’s actions will have on retransmission consent fees. In particular, the Report and Order does not indicate how the ban on joint negotiations will be enforced. The imposition of forfeitures on broadcasters that engage in collusive sharing of information may be of cold comfort to an MVPD, since once the sharing has occurred, it is difficult to undo.
In addition, the scope of the prohibition on joint negotiations prohibition is fairly narrow in that it is limited to coordinated behavior between non-commonly owned Top Four stations in a single market. (The FCC apparently dropped plans to adopt a further change in its rules that would have created a rebuttable presumption that joint negotiations involving stations other than the four highest rated stations in a market violate the good faith negotiation requirement). While the FCC’s ownership rules generally do not permit common ownership of two Top Four stations in a market, the FCC’s newly adopted rule deeming stations that are parties to Joint Sales Agreements to be commonly owned gives such stations two years to come into compliance with the local ownership cap. It is unclear whether the ban on joint negotiations will apply to stations during this two year transition period.
Finally, the effect of the proposed repeal of the network non-duplication and syndicated exclusivity rules would be mitigated in large part by network affiliation agreement terms that restrict a station from consenting to out-of-market carriage. And even if a station is not contractually barred from consenting to out-of-market carriage, the cost of importing a distant signal may be prohibitive in some instances. For example, an MVPD will have to obtain retransmission consent from the out-of-market station and pay both transport costs and distant signal compulsory license royalties in order to carry the station. In this regard, it should be noted that, under the Copyright Act, the repeal of the syndicated exclusivity rules will trigger a proceeding to adjust upward the amount of royalties that cable operators pay.