Program Access Update: Sunset of Exclusive Program Contract Prohibition

Last month, the Federal Communications Commission (FCC) issued a Report and Order (Order) in which it declined to further extend the program access law’s exclusive contract prohibition. The prohibition generally banned cable operators from entering into exclusive contracts for satellite-delivered, cable-affiliated programming in areas served by cable operators. In light of significant industry developments, including a 2010 U.S. Court of Appeals decision narrowly upholding the Commission’s last extension of the ban, the Commission–acknowledging a video marketplace today that is less dominated by cable than it was 20 years ago when the ban was enacted–opted not to extend the “blunt tool” of outright prohibition and to rely instead upon its authority to void exclusive contracts on a case-by-case basis.
 
Nonetheless, the exclusive contract ban effectively endures with respect to cable-affiliated satellite-delivered regional sports networks (RSNs), which will be subject to a rebuttable presumption that an exclusive contract with such networks violates the program access rules, as is currently the case for terrestrially delivered RSNs.  This presumption applies separately to high-definition (HD) and standard-definition (SD) version of a RSN.  At the same it issued the Order, the Commission adopted a further notice of proposed rulemaking (Further Notice) to address exclusive contracts involving RSNs and national sports networks, as well as changes to the program access rules as they pertain to program buying groups.  Initial comments in response to the Further Notice are due by Dec. 14, 2012 and reply comments are due by Jan. 14, 2013. 

Background

The program access rules, adopted by the FCC in 1992, were based on Congress’ belief that cable’s horizontal concentration and vertical control over program networks were inhibiting competition by existing and potential competitors. The rules were intended to encourage entry into the multichannel video programming distribution (MVPD) market by making available to competitors programming thought necessary for them to become competitively viable. The exclusive contract prohibition applied only to cable-affiliated programming delivered via satellite; it did not apply to such programming delivered via terrestrial facilities. 

Section 628(c)(2)(D) of the Communications Act and Section 76.1002(c) of the FCC’s rules, which generally prohibited exclusive contracts for satellite cable programming between vertically integrated programming vendors and cable operators in areas where a cable operator is providing service, included a sunset date of  Oct. 5, 2002. The sunset provision authorized the FCC to extend the exclusivity prohibition if “necessary to preserve and protect competition and diversity in the distribution of video programming.” In 2002, the FCC extended the prohibition for five years until October 2007 and, as detailed in our Advisory, in September 2007 the FCC unanimously voted to extend the ban another five years, to Oct. 5, 2012. 

The Commission’s 2007 extension was challenged by two major cable operators and narrowly survived judicial review. As summarized in our Advisory, the U.S. Court of Appeals for the District of Columbia Circuit upheld the Commission’s order in a 2-1 decision, ruling that the Commission’s interpretation of the operative federal statute was reasonable, and that its actions were not arbitrary and capricious. The court, however, expressed its expectation that at the next review, the Commission would “weigh heavily Congress’s intention that the exclusive contract prohibition will eventually sunset.” 

The FCC’s Order Declining to Extend Exclusivity Ban

In its recent Order, the Commission noted the significant developments in the multichannel video programming distribution market since 2007–most notably, the cable industry’s decline in MVPD market share, which reduces incentives for programming vendors to enter into exclusive contracts. The Commission found that the preemptive ban now “sweeps too broadly” and can instead be replaced by case-by-case analysis to assess the impact of individual exclusive contracts in a more targeted, less burdensome manner.

Additional factors considered by the Commission included: (i) the procompetitive benefits that exclusive contracts may have on increasing investment in video programming; (ii) the procompetitive benefits of allowing MVPDs to differentiate service offerings through exclusive video programming services; (iii) avoiding conflict with programmers’ First Amendment rights; (iv) consistency in the treatment of satellite-delivered and terrestrially-delivered programming under the program access rules; and (v) the limitations of existing affiliation agreements, which the Commission expects will not allow cable-affiliated programmers to immediately terminate existing contracts. 

Ban Effectively Extended for Regional Sports Networks and HD

The ban will effectively endure for one important class of networks. The Order establishes a rebuttable presumption that an exclusive contract involving a satellite-delivered cable-affiliated RSN–which the FCC views as “both non-replicable and highly valued by consumers”–has the purpose or effect of significantly hindering or preventing other MVPDs from providing satellite cable programming.  (Below we note that the FNPRM issued with the Order proposes extending this presumption to terrestrially-delivered cable-affiliated RSNs as well as to all “National” Sports Networks). Thus, in order for an exclusive satellite-delivered cable-affiliated RSN contract to be upheld, the defendants would be required to come forward with evidence that rebuts or meets the presumption. The Order further indicates that the FCC will consider complaints involving HD RSN networks separately from the SD version of the network because “consumers are increasingly demanding HD programming and do not view the SD version of a particular network to be an acceptable substitute for the HD version due to the different technical characteristics and sometimes different content of these versions . . . In cases involving an RSN, there will be a rebuttable presumption that an exclusive contract involving the HD version of the RSN results in ‘significant hindrance’ even if the complainant offers the SD version of the RSN to subscribers.”

Case-by-Case Complaint Analysis

The Commission affirmatively declined the requests of some commenters to extend the rebuttable presumption of a Section 628(b) violation to other genres of programming beyond RSNs. Going forward, for other networks, the Commission will consider the permissibility of exclusive contracts on a case-by-case basis for possible violations of Section 628(b) of the Communications Act, which prohibits “unfair” contracts or practices that have the purpose or effect of “significantly hindering or preventing” the complainant from providing satellite cable programming to consumers.  The complainant generally will have the burden of proof and the Commission suggests that illustrative examples of evidence in complaint proceedings might include “appropriately crafted regression analysis” or “statistically reliable survey data” showing competitive harm. 

The Order reiterates prior FCC rulings that a selective refusal to license–i.e., when a programmer singles out a particular MVPD for differential treatment by refusing to license its content to that MVPD while licensing to other MVPDs in the market–will be viewed as unlawful discrimination under Section 628(c) of the Communications Act unless the programmer can establish a “legitimate business reason” for the refusal. 

The Order amends the FCC rules to provide a 45-day answer period for all program access complaints and adopts a six-month deadline (calculated from the date of filing of the complaint) for the FCC’s Media Bureau to act on a complaint alleging a denial of access. 

Further Notice

In the Further Notice, the Commission requests comment on several related issues, including: 

• Whether it should establish a rebuttable presumption that an exclusive contract for a terrestrially-delivered cable-affiliated RSN has the purpose or effect of significantly hindering or preventing other MVPDs from providing satellite cable programming–i.e., should the rebuttable exclusion that applies to satellite-delivered RSNs be extended to all RSNs;
• Whether a complaint challenging an exclusive contract involving a cable-affiliated RSN (regardless of whether it is terrestrially- or satellite-delivered) is entitled to a standstill of an existing programming contract during the pendency of a complaint;
• Whether the FCC should establish a rebuttable presumption of a Section 628(b) violation for an as yet undefined cable-affiliated “national sports network”;
• Whether the FCC should modify its program access rules relating to programming buying groups, which are commonly used by small and medium-sized MVPDs, including whether it should: 
  • Redefine and broaden the definition of the term “buying group”;
  • Prohibit buying groups from unreasonably denying membership to any MVPD requesting membership;
  • Prohibit cable-affiliated programmers from unreasonably preventing particular members of a buying group from opting into a master agreement; and
  • Establish a standard for comparing discounts afforded buying groups vis á vis individual MVPDs. 

Small to medium MVPDs rely on membership in buying groups to obtain lower prices for programming than they would otherwise be able to negotiate through direct deals.

Initial comments in response to the Further Notice are due by Dec. 14, 2012 and reply comments are due by Jan. 14, 2013. 

Davis Wright Tremaine lawyers have been involved in all aspects of the FCC’s program access rules since their adoption in 1992. Please let us know if you would like further information regarding the Order or issues pending in the Further Notice, or assistance with preparing comments for submission to the FCC.