FCC Program Carriage Rules Survive First Amendment Challenge; Standstill Rule Vacated

By Nickolas Milonas, Marty Stern, and Marc Martin

In a decision that may affect future Federal Communications Commission rulemakings, the US Court of Appeals for the Second Circuit recently ruled in a case that challenged the constitutionality of the FCC’s program carriage rules. Specifically, the court held that the FCC’s program carriage rules, which address discrimination and related claims by programmers against cable operators, do not violate cable companies’ First Amendment rights. And although the court agreed that the FCC had the authority to regulate program carriage, the court vacated a specific component, the FCC’s “standstill rule,” on procedural grounds. 

Congress was concerned with the potential for anticompetitive effects resulting from increased vertical integration between distributors and content providers when it passed the 1992 Cable Act, which authorized the FCC to establish regulations addressing specified anticompetitive practices involving program carriage agreements. The FCC’s program carriage rules were designed to curb alleged anticompetitive conduct by prohibiting cable and other multichannel video programming distributors from discriminating against unaffiliated networks in favor of their own programming on the basis of affiliation and engaging in other specified conduct—such as requiring an interest in a programmer in exchange for carriage or requiring exclusive carriage rights vis-à-vis another distributor.  

Cable companies challenged the FCC’s most recent amendments to the program carriage rules, arguing that to the extent the program carriage rules required them to carry unaffiliated networks on the same terms as affiliated networks, the rules imposed a content-based restriction on their editorial determinations of what programming networks they chose to provide to their customers. The cable companies argued such content-based restrictions should be subject to—and would not survive—strict scrutiny.

In rejecting the cable companies’ argument, the Second Circuit held that the program carriage rules are content neutral and only prohibited distributors from discriminating based on affiliation—and not based on content. Consequently, the rules were subject to intermediate scrutiny. Under an intermediate scrutiny standard of review, the FCC’s rule must (1) advance an important governmental interest unrelated to the suppression of speech, and (2) not burden substantially more speech that necessary to further those interests. In applying this standard, the court found that the program carriage rules advanced governmental interests of fair competition and promotion of a diverse information sources in the video programming market. The court also noted that the program carriage rules were narrowly tailored to avoid placing any greater burden on distributors’ editorial discretion than necessary by only prohibiting affiliation-based discrimination that has anticompetitive effects. Indeed, the court was keen to note that distributors could still refuse to carry an unaffiliated network if based on reasonable business practices. In fact, the DC Circuit recently overturned an FCC program decision because it held that Comcast refused to carry an unaffiliated network based on reasonable business decisions—and not based on network affiliation.

While the court rejected the cable companies’ First Amendment challenge, it agreed with the companies in vacating the FCC’s standstill rule. The standstill rule requires a distributor to continue carrying an unaffiliated network under the terms of its preexisting contract until the network’s program carriage complaint against the distributor is resolved. The cable companies argued that the FCC failed to provide adequate notice of and opportunity to comment on the standstill rule under the Administrative Procedure Act (APA) because it was not mentioned in the FCC’s 2007 Notice of Proposed Rulemaking (NPRM), which eventually lead to a 2011 Order adopting the rule. 

The FCC argued that the standstill rule was procedural and not subject to notice and comment rulemaking under the APA. The court disagreed, finding that the standstill rule was substantive in nature because it allowed the FCC to “temporarily extend” the terms of an agreement between a distributor and an unaffiliated network while a dispute was pending. The court further noted that no statute specifically conferred such authority in the program carriage context and that the FCC did not indicate that it was considering adopting such a rule in its 2007 NPRM—which, as a result, provided no opportunity for public comment on the matter. And because the court vacated the rule on procedural grounds, it also recognized that the FCC would be free to adopt the exact same rule in the future by providing notice and comment. In terms of its significance, this decision may make the FCC, as well as other federal agencies, more cautious in adopting rules pursuant to the APA’s procedural exception to notice and comment. 

Cybersecurity Webcast Focuses on Risks and What Companies Need to Know

By Marty Stern

The recent rise in frequency and sophistication of cyber attacks underscores the reality that nearly every company faces some sort of risk. Data security breaches and distributed denial-of-service (DDoS) attacks, among others, can target every industry from financial markets to social media. News headlines have highlighted attacks and breaches involving Sony, Citi, the New York Times, and LivingSocial, among others. These attacks create increasing prevention, regulatory, insurance, and recovery costs, suggesting that companies need to be aware of these risks and implement policies and procedures to protect their infrastructure, data, intellectual property, and other assets in efforts to mitigate and avoid exposure.

A K&L Gates presentation entitled “What Your Company Needs to Know about Cybersecurity,” recently focused on these issues and a series of cybersecurity best practices, featuring K&L Gates partners Roberta Anderson, David Bateman, and Bruce Heiman. The program provided an introduction to managing Advanced Persistent Threats on data and infrastructure, understanding the legal and regulatory developments surrounding cybersecurity, dealing with agency and class-action litigation risks, as well mitigating loss through insurance coverage relating to cyber risks. Noting that no single approach provides a silver bullet, the panel discussed a comprehensive strategy, focusing on prevention and deterrence, pursuit of perpetrators, response to attacks, avoidance of legal/regulatory liability, and loss mitigation.

An audio archive of the webcast is available here (free registration required; password “klgates”). To download the presentation slides, click here. For the additional presentation materials, click here

Comcast wins Program Carriage Decision before DC Circuit

By Nickolas Milonas, Marty Stern, and Marc Martin

The Federal Communication Commission’s first effort to force a cable operator to carry a cable network because of an apparent violation of its program carriage rules was recently overturned by the DC Circuit Court of Appeals. The DC Circuit ruled that the FCC failed to demonstrate Comcast violated the program carriage rules by “unlawfully discriminating” against the Tennis Channel. The Communications Act and the FCC’s program carriage rules generally prohibit cable operators and other video programming distributors from discriminating against unaffiliated programming networks in the terms and conditions of carriage. Essentially, this prohibits cable operators from discriminating against unaffiliated programmers in favor of their own affiliated content when doing so would “unreasonably restrain the ability of an unaffiliated video programming vendor to compete fairly.” An FCC order in 2012 required Comcast to carry the Tennis Channel on its networks with equal distribution as two of its own affiliated sports channels (the Golf Channel and NBC Sports Network, previously known as Versus).

Comcast offers programming to subscribers via distribution tiers—packages of programming at different prices. Comcast carries the Golf Channel and NBC Sports Network on its most broadly distributed tiers. In 2003, the Tennis Channel initially sought distribution on Comcast’s “sports tier”—a narrowly distributed package. In 2009, the Tennis Channel proposed that Comcast reposition Tennis Channel content on tiers with broader distribution. Comcast rejected the proposal, and the Tennis Channel filed a complaint with the FCC in 2010. The FCC affirmed an Administrative Law Judge decision requiring Comcast to carry the Tennis Channel on the same distribution tier in order to reach the same number of subscribers as the Golf Channel and NBC Sports Network. Comcast appealed.

The DC Circuit unanimously rejected the FCC’s 2012 order. The court noted that there was no dispute among the parties that the program carriage rules only prohibit discrimination based on affiliation. Therefore, according to the court, if a cable operator treated vendors differently as the result of reasonable business practices, then there would be no violation. The court first noted that the record lacked evidence to show that Comcast discriminated against the Tennis Channel on the basis of affiliation. The court then stated that there was a reasonable basis for Comcast to reject the Tennis Channel’s proposal because there appeared to be no benefit to Comcast from incurring additional fees by placing the Tennis Channel on a more advantageous tier.

Two separate concurring opinions would have vacated the FCC’s order based on First Amendment grounds, as well as the applicable statute of limitations. However, as the court noted, it did not need to reach those issues.

Facebook App Offers Free Phone Calls Over Wi-Fi

By J. Bradford Currier and Marc Martin

In a move likely to further disrupt the voice services market, Facebook recently announced that it will offer free calls via Wi-Fi for users of its Messenger app on Apple devices in the United States. The Messenger calling feature, tested in Canadian markets earlier this month, allows users to “call” their Facebook friends who have installed the Messenger app and linked their mobile number with Facebook by clicking their contact information. While data charges will still apply for Messenger calls made over a wireless carrier’s 4G or 3G network, there will be no separate charge for calls made over a device connected to the Internet via a Wi-Fi connection. Facebook’s announcement marks another example of the growing trend of using mobile apps to end-run traditional public switched telephone network (“PSTN”)-based voice services.

While Messenger will allow users of Apple’s mobile operating system to call Facebook friends, calls to landlines or devices using non-Apple operating systems are not currently available. The Messenger app can be used to make calls not only on the iPhone, but any device running Apple’s mobile operating system, such as the iPad tablet. Consumers with Messenger already installed on their Apple device will not need to update the app to access the new calling feature, which was automatically downloaded to existing users. Facebook has not indicated when the Messenger calling feature will be available in other countries or for non-Apple operating systems. 

Industry observers praised the new Messenger features as critical for consumers with poor wireless network coverage or who want to conserve cell phone minutes and costs. However, Facebook may face opposition from the wireless industry, which may view the Messenger app as an unfair competitive threat. If the wireless industry attempts to block the Messenger app, it could result in an interesting test of the “no blocking” provisions of the FCC’s Open Internet Order (i.e., net neutrality), which generally prohibit mobile wireless providers from blocking lawful applications that compete with the provider’s voice or video telephony services. In addition, if the Messenger app begins to offer the capability to make calls to and receive calls from the PSTN, it would be subject to the same regulatory requirements applicable to PSTN-interconnected VoIP service. 

Depending on the traction Facebook Messenger gets, the service has the potential to further disrupt markets for traditional landline voice services, which are already facing pressure from the wireless industry and interconnected VoIP providers.

FTC Proposes Major Expansion to COPPA's Scope and Compliance Requirements

Update (11/22/11): The FTC extended the deadline for comments on the proposed COPPA reforms until December 23, 2011, citing the complexity of the questions and issues raised by the proposed amendments. The original comment deadline was November 28, 2011.

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The Federal Trade Commission recently announced a set of proposed revisions to the Children’s Online Privacy Protection Act (“COPPA”) which would expand the Act’s application to a greater number of websites and online services. COPPA requires that website operators notify parents and obtain parental consent before they collect, use, or disclose personal information from individuals under 13 years of age. Specifically, the proposed rules would expand the definition of personal information to include so-called “persistent identifiers,” which represent unique user identification information obtained for purposes other than for the support of the internal operations of a website or online service. The new rules would also extend COPPA protections to photographs, videos, or audio files that include a child’s image or voice. The FTC will consider a wider range of factors, including whether a website includes child celebrities and music content, when determining whether the site or online service is directed to children. The proposed rules rejected a number of alternative means of obtaining parental consent proposed by stakeholders and declined to establish a safe harbor for websites and online services which follow best practices guidelines issued by the Direct Marketing Association.

A K&L Gates Client Alert providing a detailed summary of the FTC’s proposed COPPA revisions and an analysis of the potential impacts of the reforms on websites and online services may be found here.

Cloud Computing Case Clarifies Applicability of US Privacy Law to Non-U.S. Nationals

By Susan Altman

The Ninth Circuit Court of Appeals, in its October 3, 2011 decision in Suzlon Energy Ltd v. Microsoft Corporation, has taken another step in defining the rights of people to protect their emails from being disclosed in civil court proceedings. The question before the Suzlon court was whether a party can require a U.S. electronic communication service provider to produce emails stored on a U.S. server for the account of a non-U.S. national without regard to the safeguards and restrictions imposed by the Electronic Communications Privacy Act of 1986 (ECPA). The court answered with a clear “no,” stating that the protections of the ECPA against unrestricted disclosure of emails by an electronic communication service provider apply to non-U.S. nationals as well as to U.S. citizens.

The Suzlon case originated out of an Australian civil claim by Indian wind energy company Suzlon against Indian citizen Rajagopalan Sridhar, a former employee accused of committing fraud against the Suzlon empire through a multijurisdictional shipping scam. In the course of the Australian action, Suzlon’s lawyers sought to obtain Sridhar’s emails, which resided in a Microsoft Hotmail email account on a server located in the U.S. Sridhar did not consent to the production of his emails (nor did he consent in a related case where Google was the electronic communication service provider). Microsoft objected to the production of the emails and both the U.S. District Court for the Western District of Washington and the Ninth Circuit agreed that Sridhar was protected by the ECPA. (In an interesting procedural sidenote, the court summarized the arguments presented to the lower court relating to assistance to foreign tribunals and outlined how a U.S. federal court ends up in the position of ruling on what is essentially a discovery issue relating to an Australian case.)

The Suzlon case provides useful guidance to electronic communication service providers offering cloud services in the U.S. Certainly those within the jurisdictional reach of the Ninth Circuit, and most likely service providers throughout the U.S., can operate with the expectation that the ECPA will apply to all customers using a U.S. account. The service providers will not have to distinguish between U.S. citizens and non-U.S. nationals in determining rights to stored emails. Litigants will have to follow the same procedures in filing motions to compel production regardless of citizenship. The decision will not affect issues of national security as it does not address law enforcement action in any way. The Suzlon case doesn’t change the world, but it does add a small measure of clarity.