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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.
Copyright © 2007, Davis Wright
Tremaine LLP.
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