Client Alert

Yesterday the Federal Communications Commission ("FCC" or "Commission") released the full text of the order adopted at its October 31, 2007 meeting, which takes the unprecedented step of voiding existing exclusive contracts between multichannel video programming distributors ("MVPDs") subject to Section 628 of the Communications Act of 1934, as amended, and owners of Multiple Dwelling Units ("MDUs"). The order applies retrospectively to existing contracts as well as any future agreements. The highlights of the order are as follows:

• The order bans exclusive contract provisions in agreements between MVPDs and any conceivable type of MDU, including apartments, cooperatives, condominium buildings, and any other centrally managed real estate development (e.g., gated communities, mobile home parks, and garden apartments, among others specified by the Commission). The Commission flatly rejected any case-by-case exemption or time limit on any exclusive contract.
• The order applies retrospectively, and prohibits the use and enforcement of existing exclusive contracts, declaring such contracts null and void 30 days after publication of the Report and Order in the Federal Register.
• In addition to the Report and Order, the Commission issued a Further Notice of Proposed Rulemaking (“FNPRM”) to address whether the exclusivity clauses involving cable operators should be expanded to include Direct Broadcast Satellite (“DBS”) providers, Private Cable Operators (“PCOs”), and other MVPDs not subject to Section 628.

This order is the FCC’s latest gift to AT&T and Verizon, who are in the midst of rolling out their own video services. The order is one of the most extensive and abrupt policy changes ever taken by the Commission. The FCC’s actions will no doubt be challenged in court by both the cable and MDU industries on the basis that it constitutes an unconstitutional regulatory taking (an argument the FCC attempts to defend against in five short paragraphs of the order (¶¶ 56-60). Once again the FCC relied on its “ancillary jurisdiction” to take sweeping regulatory action.

Report and Order

In its Report and Order, the Commission reversed a number of previous findings to support its abrogation of private contracts and the ability of network providers to recoup network investments. Just four years ago the Commission supported exclusivity clauses in its Inside Wiring Order. The Report and Order released yesterday marks a dramatic shift in Commission policy as the Commission concluded that the harms of exclusive contracts between MDU owners and MVPDs outweighed any potential benefits to consumers and that the new rules will increase choice and competition for consumers residing in MDUs and other residential real estate developments. Specifically the Order finds that:

• Incumbents have increased the use of exclusivity clauses in their agreements with MDU owners;
• Exclusivity clauses that bar competitive entry harm competition, consumer choice, and broadband deployment and can insulate the MVPD from any need to improve service offerings;
• Exclusivity clauses in contracts for the provision of video services by MVPDs to MDUs constitute an unfair method of competition or an unfair act or practice under Section 628(b) of the Communications Act.

The Report and Order rejected the potential benefits of exclusivity clauses—the attraction of investment to marginally attractive MDUs and the fact that exclusive deals act to drive down prices—as insignificant.

The Commission did, however, leave MDU owners with the power to deny access to new entrants to any MDU. MDU owners retain the right, under relevant state law, to deny any provider the right to provide service to its property.

Further Notice of Proposed Rulemaking

In the companion FNPRM, the Commission seeks comment on a number of items that would extend the exclusivity rules to DBS, PCO, and other MVPD providers not covered by Section 628, and whether legal authority to regulate these entities in such a manner is extended. The FNPRM also seeks comment on whether the Commission should prohibit exclusive marketing and bulk billing arrangements.

Comments are due 30 days from publication of the FNPRM in the Federal Register, and reply comments are due 30 days thereafter. As a result, comments will likely be due in late January or early February and reply comments will likely be due in late February or early March.

If you have any questions or need additional information, please contact Ross Buntrock (email), Mike Hazzard (email), Mark Palchick (email), Pam Rothenberg (email) or Danielle Benoit (email).