Broadcast Advisory Bulletin
A $12.5 Million Teaching Tool – The Recent
Payola Consent Decrees
By
David
D. Oxenford and Brendan
Holland
[June 2007]
On April 13, 2007, the FCC released orders adopting consent decrees
with four large radio broadcasters settling alleged violations of
the FCC’s payola rules. As a result of these consent decrees,
CBS Radio, Citadel Broadcasting, Clear Channel, and Entercom Communications
agreed to make voluntary contributions to the U.S. Treasury totaling
$12.5 million dollars, and agreed to abide by a number of recordkeeping,
monitoring, and reporting requirements. We understand the FCC has
recently initiated some additional payola inquiries with other broadcast
groups, and thought that a review of these consent decrees would
be helpful to broadcasters in general.
The requirements of the consent decrees are quite extensive, and
provide the radio industry with useful insight into what the FCC
would view as an ideal program for broadcasters to adopt to fully
comply with the sponsorship identification rules. While there is
no indication that every broadcaster will have to go to the lengths
promised by these broadcasters to achieve compliance with the rules,
the terms of the Consent Decrees provide a set of best practices
toward which all broadcasters should strive in order to avoid allegations
of payola. This memo summarizes the recent actions, and attempts
to provide guidance for other broadcast stations to avoid similar
payola allegations in the future.
Background
Before discussing the specifics of the consent decrees, it is important
to review the requirements of the FCC’s payola rules. Some
basics are set forth below.
What is Payola? Generally, the term “payola”
is used to describe the “unreported payment to, or acceptance
by, employees of broadcast stations, program producers or program
suppliers of any money, service or valuable consideration to achieve
airplay for any programming.” Although this statement of the
payola policy and the language of underlying statute seem to limit
payola violations to situations where payment is made to station
employees, the Commission also includes payments made to the station
itself in its definition of payola. Thus, the crux of the issue
is the failure of a station to inform the public that the station
or its employees have been paid to air specific broadcast content.
When is a Sponsorship Identification Required?
The Commission’s Rules require radio and television stations
to inform their audience when a third party has paid the broadcaster
to air particular material. In the case of commercial announcements,
the sponsor is usually evident by the product that is being promoted.
Where it is clear what product is being promoted and who is promoting
that product, no further announcement is required. The payola issues
arise when the fact that payment is being received is not evident
from the broadcast, e.g. when a record company or independent promoter
pays a station or its employees to air songs by a particular artist
without any on-air disclosure.
To What Programming Do These Rules Apply? A broadcaster
is required to provide a sponsorship identification at the time
it airs any material for which consideration was received. That
identification is to inform the public that a third party paid for
the material that was aired. Section 317(a) of the Communications
Act of 1934, as amended, and Section 73.1212 of the Commission’s
Rules require that a sponsorship identification be given “[w]hen
a broadcast station transmits any matter for which money, service,
or other valuable consideration is either directly or indirectly
paid or promised to, or charged or accepted by such station.”
As the rules cover direct or indirect receipt of valuable consideration,
the FCC cases even applied the rules so as to prohibit stations
from broadcasting syndicated or network programming for which undisclosed
consideration has been received by the producer of the program.
How is a Station Owner Supposed to Know That His Employees
or Program Providers Have Taken Payola? Licensees of broadcast
stations are required to exercise “reasonable diligence”
to ascertain whether any payments or consideration have been received
by the station, its employees, or agents, which would necessitate
that a sponsorship identification announcement be made. Usually
this reasonable diligence is achieved by requiring employees to
sign affidavits periodically attesting to their receipt of gifts,
money, or other consideration from third parties in exchange for
the airing of particular material. Stations should also include
provisions in agreements for the acquisition of programming from
third parties that specifically require that consideration from
outside parties not be received for the inclusion of material in
those programs (or, if it is received, that the receipt is disclosed
in the program).
The Consent Decrees: Setting a New Standard
Based on the details of the recent consent decrees, the Commission
appears to have set out standards for a “safe harbor”
for relationships between broadcasters and record companies, artists
and promoters. If a company observes the guidelines set forth in
these decrees, there should be no question that the company has
complied with the sponsorship identification rules. While these
decrees may go well beyond the minimum necessary to comply with
the law, there can be no ambiguity that a broadcaster is in compliance
if it meets the standards established by these decrees.
The decrees contain two sets of compliance standards for the four
companies who signed the agreements. First, the companies agreed
to initiate a “Company Compliance Plan” aimed at monitoring
the company’s stations, providing training to employees, and
establishing a system for addressing possible instances of payola.
Second, the broadcasters agreed to institute “Company Business
Reforms” intended to ensure that there would be no future
violations of the payola rules by distinguishing between prohibited
and permissible activities with regard to record labels and music
promoters, including the parameters for acceptable gifts from and
transactions with companies that distribute and promote records.
The specific points of the Compliance Plans and the Business Reforms
are discussed below.
Company Compliance Plan
The specific requirements of the Compliance Plans are set forth
below. Our commentary on various aspects of those plans then follows
in italics:
- Commit to enforcing “high standards” with respect
to the sponsorship identification rules to avoid violations and
the appearance of impropriety in the selection of music, particularly
as it relates to “pay for play” programs. The
decrees do not define what “high standards” mean.
However, in connection with some of the consent decrees entered
into between broadcast companies and the New York State Attorney
General’s office, broadcasters agreed to specifically notify
all broadcast monitoring services when the stations were going
to broadcast any sort of sponsored “spin program,”
i.e. a program where record companies paid money to have their
songs played on the air. The Commission’s consent decrees
do not specifically require such notification, perhaps because
the companies that are involved have already agreed to abide by
those restrictions in New York state consent decrees.
- Appoint a compliance officer responsible for ensuring compliance
with the payola rules and with the new procedures.
- Submit an annual report to the FCC and to the company’s
board of directors for each of the next three years detailing
the company’s compliance. This is similar to settlement
agreements that the FCC has entered into in other areas, such
as in connection with EEO matters, where the FCC retains the ability
to monitor compliance in the future.
- Designate a market-level compliance contact in each radio station
market responsible for working with the company-wide compliance
officer for implementation of reforms and procedures. For
all broadcasters, making sure that each cluster has someone who
is very familiar with the payola rules, and can either answer
questions or find answers, would seem to be a good idea. Having
a “point person” on any complicated FCC compliance
issue is always a great idea.
- Conduct mandatory training for all programming personnel on
compliance with the payola rules. Such training must also be given
to all new company programming personnel promptly after they commence
their duties, and refresher courses must be given to employees
at least once every year. Clearly, this standard should be
adopted by all broadcasters. All on-air personnel should be trained
as to the requirements of the rules, and reminded regularly of
their obligations to comply with those rules. On-air employees
should also periodically sign an affidavit certifying that they
understand their legal obligations, and that they have not received
any compensation for any airplay decisions that have not been
disclosed to management.
- Create a database for documentation of all items of value received
from record labels, required by the consent decree agreement (for
details of the recordkeeping requirements, see below). These records
must be kept for at least three years, and the database must be
available to the FCC for inspection upon request. The FCC
has never before required such recordkeeping, but broadcasters
should always be ready to respond to any FCC inquiry about what
programming was sponsored, and whether any payments were received
by record companies or others in exchange for playing music on
the air.
- Establish an internal company “hotline” so that
employees can call the company compliance officer if they have
any questions regarding the business reforms required by the agreements.
This, too, should be adopted by all companies in some form or
another. While not all companies may have the resources to
set up a “hotline,” all companies should designate
specific management personnel to whom programming employees can
come with questions about the rules or to report any possible
violations of the rules.
- Ensure that all contractual agreements with programming personnel
include clauses relating to compliance with the sponsorship identification
rules. Similar provisions should be included in agreements
with independent contractors, syndicators, and other companies
that provide program material to the station.
- If a company station receives a Notice of Apparent Liability
or similar FCC document proposing a fine or the revocation of
the station’s license as a result of a violation of the
sponsorship identification rule, then the station will: (1) suspend
any employee alleged to have violated the payola rules and immediately
commence an investigation, (2) require the employee to undergo
remedial training prior to their return to duties, and (3) discipline
the employee, up to and including termination, if the FCC actually
imposes a fine or revokes the license based on the violation.
These also seem to be reasonable steps to take – perhaps
even conservative ones, as an employee who has violated the payola
rules can simply take a remedial course and return to work. Obviously,
the nature of the violation and the intent of the parties should
be taken into account in assessing any penalties for violations
of the rules, but a knowing violation of the payola rules should
always be grounds for the most severe sanctions against an employee.
Company Business Reforms
Under the Business Reforms, the companies agreed to abide by certain
guidelines that establish the boundaries between acceptable and
prohibited behavior in connection with the sponsorship identification
rules. The rules cover the broadcaster’s relationship with
anyone who might be promoting a musical recording, including the
record labels, its employees and agents, any artist of their representatives,
and any independent promoter. Again, our comments on the Prohibited
and Permitted activities are provided in italics following the particular
item.
Prohibited Activities
The following activities are prohibited under the terms of the
consent decree:
- The company agrees to not solicit, receive, or accept cash
or any other item of value from a record label or record label
employee in agreement to provide or increase airplay of music
unless it complies with the Commission’s sponsorship ID
rules and meets the standards set forth below. The broadcasters
agree to abide by the rules – a pretty obvious requirement.
- The company agrees to not accept any item of value from an independent
music promoter, unless that promoter certifies in writing to the
company that no compensation to the promoter from a record label
is based upon airplay. This is a significant change for independent
promoters, because, as a result of this policy, no independent
promoter can be compensated based on their success in getting
airplay for the records that they are promoting.
Permitted Activities
The following activities are permitted, so long as the Sponsorship
Identification rules are met and the disclosure and documentation
requirements set forth in the consent decree (and set forth in the
next section of this memo) are followed:
- Contests or Giveaways: The company may solicit,
receive, and accept items of value, including but not limited
to promotional items, gift cards, CDs, gift certificates, concert
tickets, airfare, hotel rooms, vouchers, and cash, from record
labels to give away on the air, at a station event or promotion,
or for the benefit of charity, to persons or entities other than
company employees (or members of their immediate families or households).
Contest rules and on-air announcements relating to such contests
shall clearly indicate the value of the prize(s) as required by
FCC rules and identify the record label as the provider of the
prize(s) to be awarded. This requires that the on-air giveaway
of concert tickets or CDs makes clear that the item was provided
by a record label or other party who provided them to the station.
- Advertising: The company may solicit, receive,
and accept payment (in cash or through the receipt of other items
of value) from record labels for on-air advertising, provided
that the announcement clearly identifies the record label as the
sponsor of the advertisement. This seems to require that the
record label be clearly identified in any ad if the ad is paid
for by the label, even if it clearly identifies the particular
band the ad may be promoting.
- Other Commercial Transactions: The company
may enter into commercial transactions with record labels pursuant
to which a company and a record label may license, sell, or otherwise
agree to distribute or promote the record labels’ artists,
songs, or records. This section presumably permits the broadcasters
to enter into agreements, with iTunes, Amazon or their own services
to sell music or music downloads.
- Artist Appearances and Performances: The company
may arrange for artists to appear or perform at events or interviews,
including under circumstances where a record label has subsidized
reasonable costs related to the appearance, performance or interview.
Company stations’ on-air announcements of an artist’s
performance that is subsidized in any part by the record label
shall indicate clearly that the artist’s appearance is sponsored
by the record label. The broadcast on a company station of all
or a portion of the artist’s live performance at the event
is permitted, provided that any such broadcast complies with the
Sponsorship Identification Laws. Here, again, the rules require
that promotional announcements for a station event featuring a
band whose expenses are paid for by the artist or label contain
announcements listing the artist or label as a sponsoring party.
- Nominal Consideration: The company may solicit,
receive, and accept the following items of value from record labels
for use by a company station: (These sections seem to permit
many of the relationships that have always existed between record
companies and radio programmers – allowing station programming
personnel to receive CDs and other ordinary promotional materials
of nominal value, tickets to concerts, trips to industry events,
and similar items. Many of these perks of the business are probably
a major reason that many broadcast programmers first got into
the broadcast business. Of course, there was never any itemization
of the number of concert tickets or CDs a station employee could
receive before these agreements.)
(i) CDs and other promotional items of nominal value. A
station may solicit, receive and accept from record labels:
(A) electronic copies of songs and up to 20 copies of the
same CD to familiarize company employees with recordings;
(B) electronic copies of recordings for posting on company
station websites to familiarize visitors to such websites
with the artists’ recordings, and (C) promotional items
intended for the personal use by company employees, if the
value of each such individual item does not exceed $25, such
as T-shirts, key chains, coffee mugs, baseball hats, posters,
pens and bumper stickers.
(ii) Concert tickets. A station may solicit, receive and
accept up to 20 tickets (which may include associated backstage
or “VIP”-type passes) for a single-day concert,
for each day of a multi-day concert, and/or to an industry
event to be used by company employees to familiarize them
with the performing artists. Tickets provided by record labels
for company employees who are working at the concert and/or
industry event (e.g., technicians, on-air talent, promotions
staff, etc.) shall be subject to the disclosure and documentation
provisions set out below, but shall not be counted towards
the 20 ticket limit.
(iii) Modest personal gifts for life events, professional
achievements and holidays, or gifts commemorating achievement
by company or a record label. Company employees may receive
and accept reasonable gifts from a record label commemorating
life events, professional achievements and holidays. A “reasonable”
gift is one whose value the employee has no reason to believe
is greater than $150. An example of a life event would include
a birthday, wedding or the birth of a child. An example of
a professional event would be a job promotion or the winning
of a music industry award. A company station may receive and
accept from a record label gifts that commemorate achievements
of the company, the company station, the record label, or
the record label’s artists. An example of such a gift
would be a plaque commemorating an artist’s achieving
“gold record” level sales.
(iv) Meals and entertainment. Company employees may receive
and accept meals and entertainment in an amount not to exceed
$150 per person, per event, provided that the event is attended
by a record label employee and has a legitimate business purpose,
and any payment is consistent with the value of the meal or
entertainment. Company employees may receive and accept meals
and entertainment from a record label in an amount that exceeds
$150 per person, provided that the event is attended by a
record label employee, has a legitimate business purpose,
and is approved in writing by the compliance officer, as provided
in the accompanying compliance plan. A company employee may
also receive and accept meals and entertainment from a record
label for the benefit of his/her spouse or “significant
other” accompanying the employee at such occasion, consistent
with and subject to the limitations of this provision.
(v) Travel and lodging expenses. A company station may receive
and accept from a record label reasonable travel and lodging
expenses for company employees to attend live performances
or appearances by artists for the purpose of familiarizing
such employees with a record label’s artists. A company
station may also receive and accept from a record label reasonable
travel and lodging expenses to industry events if the company
station provides, to the satisfaction and approval of the
compliance officer, a legitimate business purpose underlying
the record label’s payment of such expenses. Each company
station shall be limited to 20 such trips annually, to be
allocated among company employees at the discretion of the
company station. For purposes of these business reforms, “reasonable
travel and lodging expenses” means commercial airfare
(coach class), train or car service and a sufficient number
of nights lodging to accomplish the intended business purpose.
All travel and lodging expenditures must be approved in advance
and in writing by the compliance officer. A company employee
may also receive and accept meals and entertainment during
such trips, consistent with and subject to ¶(iv), above.
Travel to industry events seems to be one of those perks
with the most potential for abuse – and here the Commission
seems to have adopted very liberal rules – permitting
up to 20 trips per year per station, with no expenditure caps.
The most important lesson for every station is the fact that
these trips must be disclosed to the station management and
approved. Employees should not be individually deciding when
to accept trips – and even meals and entertainment –
from those promoting programming that could be aired on a
station.
Documentation Requirements
One of the areas covered by the consent decrees with the greatest
obligations imposed on broadcasters who signed these agreements
has been in the area of recordkeeping. The consent decrees require
these broadcasters to keep detailed records of many of the practices
that have gone on in broadcasting from time immemorial – such
as recording how many CDs have been provided to a station for giveaways
and how many tickets were provided to a local concert. While there
is nothing in the FCC’s rules that require this data to be
kept by every broadcaster, broadcasters do need to defend themselves
if a claim of payola is ever raised. So these recordkeeping requirements
can be instructive for all broadcasters. The companies who signed
the consent decrees are required to document the following:
- The company must create a database to record items of value
received from record labels. The database must contain a record
identifying all items of value received by each company, its station,
or employees from record labels (exclusive of artist performances
and commercial transactions with record labels), and the disposition
of such items shall be recorded as follows. In the case of each
item of value that exceeds $25 (on an individual per item basis)
intended to be awarded in a contest or given away by a station,
the database shall record the date and manner of disposition and
recipient of each such item. Items received for use by a station
or its employees (such as CDs for review by station employees
and concert tickets) shall be so recorded. Items in excess of
$25 received by company or its employees personally or in connection
with business-related meals, entertainment and travel shall be
recorded in the database separately.
- Contests or Giveaways. In addition to the documentation maintained
in the database in each instance where the company solicits, receives
or accepts an item of value from a record label to give away on
the air, the company shall (i) verify in writing to the record
label that the contest prize(s) will not be given away to an employee
of a station (or to members of their immediate families or households);
and (ii) for each item of value given away that exceeds the monetary
reporting threshold established by the Internal Revenue Service,
maintain a record verifying that a contest winner has been selected,
including the full name and address of the recipient of the prize,
and provide this information, in writing, to the record label
upon request.
- Advertising by Record Labels. All advertising by record labels
shall be subject to a written agreement and recorded in one or
more separate databases.
What This Means to Broadcasters for the Future
This appears to be but the first action that the FCC will take
in the payola area. The Commission has been promising further actions
to clarify broadcasters’ obligations, and has generally been
looking at the entire sponsorship identification area in many different
contexts. So look for more clarification to come. In the meantime,
these consent decrees do, for now, provide guidance and best practices
for broadcasters. Last year, we provided a checklist of compliance
tips to avoid payola problems in our
advisory, and these suggestions remain valid. We will likely
re-issue that advisory with additional information in the near future.
It is also important to note that, while these guidelines seem
to apply almost exclusively to transactions with record companies,
the sponsorship identification rules apply to any sort of program
mentions in exchange for consideration. So if, for instance, a local
business is wining and dining your employees to cause them to mention
the business on the air, that consideration should be disclosed,
and the employees should know to disclose it to station management.
All stations, television as well as radio, need to be alert to these
possible traps which may arise outside of the record company context
where payola is usually thought of as occurring.
Ultimately, the size of the recent contributions to the U.S. Treasury
and the extent of the remedies imposed on these four companies demonstrate
just how seriously the FCC is taking these matters. So all broadcasters
would do well to take all steps possible to ensure compliance in
this area and avoid potential future problems.
For more information, please contact:
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. Attorney Advertising. Prior results do not
guarantee a similar outcome. Thank you.
Copyright © 2007, Davis Wright Tremaine LLP.
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