UNDER WATCHFUL EYES: Payola in the Twenty-First Century

by David D. Oxenford

Last summer, New York State Attorney General Eliot Spitzer reawakened interest in a subject that many had thought well settled over 50 years ago—the subject of payola. That investigation led to settlement decrees with Sony BMG Music and Warner Music, as well as a lawsuit against radio broadcast company Entercom Communications Corporation. The FCC has itself taken up the investigation, based on the record initially developed by Mr. Spitzer. After failing to reach multimillion dollar settlements with four major radio companies, the FCC this week began its own investigation into payola allegations, asking for extensive document production from four radio industry giants.

The renewed emphasis on payola highlights issues of importance to all broadcasters—not just those in commercial radio—and not just dealing with the broadcast of music. The payola restrictions grow out of prohibitions in the Communications Act and the FCC Rules requiring that, whenever a broadcaster receives something of value in exchange for the broadcast of specific material, the broadcaster acknowledge on the air that the broadcast material was paid for or sponsored by the party that paid the consideration. The failure to make such acknowledgement has recently led to criminal charges against certain employees of a Midwestern public radio company who had allegedly taken items of value (including a pool table and carpeting) for the mention of local businesses on the noncommercial radio station. Press reports in a Washington newspaper have also challenged the practice of some television stations not including sponsorship announcements in newscasts, where news segments have featured employees of commercial advertisers and where, allegedly, the news mentions were “value added” components of the advertising agreements.

But the sponsorship issues that are most in the public eye are those actions that are underway in New York State and the FCC investigation into possible payola. Thus, the payola issue is the focus of this memo, though the suggestions set out below can easily be adapted to other areas of broadcast operations not dealing with music programming.

While the popular press has picked up on the recent payola allegations as evidence that the music on the radio is selected not based on the quality of the music but instead based on how much record companies are willing to pay, a closer look at exactly what Mr. Spitzer discovered is in order. Certainly, the investigation revealed a handful of broadcast employees who apparently violated the letter of the law by taking money or valuable items in exchange for playing specific songs on the air. But the Attorney General also faulted record companies for conducting organized call-in request campaigns for particular songs. The AG report also wrote extensively about record companies buying advertising or sponsored plays of songs, announced as such on the air, characterizing the programs as intentional attempts to distort the popularity of songs because electronic monitoring services would register that the songs were played more often than otherwise merited. This claim also was part of the basis of the lawsuit against Entercom. These activities have never been found by the FCC to be illegal. In fact, the settlement agreement with the record companies seem to acknowledge that such activities are not in and of themselves impermissible, as the AG’s office did not require that these spin programs be stopped, instead requiring only that the record companies notify the electronic measurement services when the spin programs are in effect so that the services can take such programs into account. The complaint against Entercom also seems to acknowledge that the spin programs were not in and of themselves illegal, but instead faults Entercom for not sufficiently disclosing these programs to the measurement services—an obligation that is not evident in any statute or FCC rule.

The New York investigation also faulted record companies and independent promoters for providing support to radio stations in the form of cash payments, electronic equipment, trips, concert appearances by bands, and other material intended for station contest prizes. However, most of the evidence did not show that stations took such “consideration” for playing specific songs, but instead that some of the promoters claimed to their superiors that the give-aways resulted in increased airplay—even absent any specific agreement.

So what is a radio station to do in light of the increased activity in the area of payola? The policies that most stations already should have in effect are unchanged by the recent actions, though care should be given to insure that station policies are in fact being observed. Some ideas:

• Insure that employees observe payola restrictions. The AG’s investigation found several instances where programmers were taking valuable items in exchange for playing songs – where management was apparently unaware of the conduct. Make sure that all employees understand the FCC rules, remind them of the criminal and civil liabilities that can result from a violation of the rules, and have them sign payola affidavits on a regular basis certifying that they know the rules. And investigate all circumstances where you have any reason to think that any programming has been aired in exchange for consideration that has not been announced. The FCC has said that just having employees sign affidavits does not absolve a licensee of its duty to take reasonable steps to discover any unreported instances of pay for play.

• Watch internal and external communications. Caution employees about the use of emails and written communications. Jokes about receiving something of value for playing songs may not look so funny in the hands of the FCC or the AG’s office. Any references even implicitly tying any sort of value to playing specific songs can be taken out of context to support a claim that your station has violated the law.

• Divorce your promotions department from music decisions. The AG’s report faulted radio stations for agreeing to play songs in exchange for promotional consideration—ranging from free CDs or concert tickets for give-aways, to personal appearances at station events by recording artists. Don’t tie airplay to the receipt of freebies, merchandise, or artist appearances. One of the few FCC fines in the payola area in the last 10 years was to a station that had promised a specific number of “plays” of a record in exchange for an appearance by the band, and did not announce those plays as having been sponsored by the record company.

• Acknowledge the source of free stuff. When you are given free concert tickets or CDs or other merchandise, acknowledge on the air the source of that stuff. A simple, “we’d like to thank Sony records for providing us with the tickets to Tuesday night’s concert which we will be giving away to the 4th caller” will avoid issues that you are hiding sponsorship identification. For concerts where the station is provided with an artist at no or significantly reduced cost, acknowledge that the label or promoter is “sponsoring” the event. If you are given “free” stuff in exchange for promoting a concert or other event, the announcements for the concerts are treated as if they were sponsored (the free stuff being the consideration for the spots), so you must acknowledge that the promotional announcements have been “paid for” or “sponsored by” the party giving you the free stuff.

• Be sure that the acknowledgement of sponsorship on spin programs is clear and unambiguous. The AG’s settlement with Sony BMG did not find spin programs to be illegal, it only found that Sony BMG had not adequately disclosed them to the electronic music monitoring services. But stations need to make sure that, when records are played pursuant to such a program, it is clear to all audience members that the playing of the song is “paid for” or “sponsored by” the record label.

• Exert great care in allowing staff to accept trips, concert tickets or similar gifts from those promoting music. The settlement with Sony BMG did not forbid the record company from giving away trips or concert tickets to broadcast station employees in order to expose those employees to artists. However, stations should be careful when their employees accept these perks. Management should be made aware of all such benefits received by station employees, and steps should be taken to review the programming decisions made by employees who received the benefits to make sure that they are not making programming decisions based on the receipt of the benefits. A system of checks and balances on programming decisions, where someone who did not receive any benefit from record promoters double checks decisions of those who did, may be in order.

• Treat independent record promoters as if they are record company employees. Independent record promoters are subject to all the same rules that apply to record companies. If an independent promoter gives you something in exchange for playing a song, the promoter has sponsored the play. The AG report imposed requirements on Sony BMG that requires them to supervise independent promoters in the same way as their own employees and subject them to the same rules and restrictions. Stations should do the same.

In this time of scrutiny by the New York Attorney General and by the FCC, it is important that stations exert the utmost care in all their dealings with record companies and others trying to promote the inclusion of any sort of programming on the air. While it has been music programming that has received the most attention in recent months, the promotion of any commercial endeavor or political cause can raise similar issues. Broadcasters should tread with care in making their programming decisions to make sure that any consideration received for such decisions is announced to the public. A little extra diligence can go a long way to prevent fines and other far more serious consequences of the failure to follow the law.

For more information, please contact:

Author: David D. Oxenford Washington, D.C. (202) 973-4256 davidoxenford@dwt.com

This advisory is a publication of the Broadcast Group of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent developments in the broadcasting industry. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2006, Davis Wright Tremaine LLP.

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