FCC Order Upheld on Appeal: Exclusive MDU Access Agreements Banned

On May 26, 2009, the U.S. Court of Appeals for the District of Columbia Circuit upheld the Federal Communications Commission’s (FCC) order of November 2007 in which it declared that exclusive access provisions in agreements between cable operators and managers of apartments, gated communities and other multiple-dwelling units (MDUs) are unenforceable. The decision was not surprising given the oral argument and the court’s refusal to stay the rules pending a decision on the merits.
 
As the order is already effective, the decision does not change the status quo. All cable operators must continue to cease from enforcing or entering into contracts that violate the FCC’s November 2007 order. This advisory offers background on the progression of FCC regulation in this area and an analysis of the May 26 Court of Appeals decision and how it is likely to affect cable operators and, possibly, direct broadcast satellite (DBS) providers.

Background

In November 2007, the FCC issued a Report and Order reversing its 2003 decision that permitted exclusive access arrangements for MDUs.

The Commission argued it had authority to ban exclusivity clauses under Section 628(b) of the Communications Act. Section 628(b) declares it “unlawful for a cable operator … to engage in unfair methods of competition or unfair or deceptive acts or practices, the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming … to subscribers or consumers.”
 
On appeal, cable operators and real estate interests argued that the text, structure and legislative history of Section 628 did not permit the FCC to regulate MDU exclusivity. They maintained that Section 628 applied only to the regulation of contracts between program vendors (networks), cable operators and other multichannel video service providers. The statute had long been interpreted by regulators, programmers and service providers to require only that the FCC assure a free market for video programming.

The decision

The Court of Appeals agreed with the FCC that the text of Section 628(b) could be construed to authorize the Commission’s rule prohibiting exclusivity clauses in MDU video service agreements. While the FCC conceded “that Congress’s primary purpose in enacting Section 628 was indeed to expand competition for programming, not service,” the court found “nothing in Section 628 that unambiguously forecloses the Commission’s interpretation” of the statute.

It did not appear to bother the court that the remaining provisions of the statute are “uniquely suited to the problem of unfair dealing over television shows between programming vendors controlled by cable and competing video providers” because Congress did not expressly limit the Commission to dealing with program contract disputes. Likewise, although the court agreed that the legislative history provided “considerable evidence” that Congress intended to address the wholesale program market, it found no reason to conclude that Section 628 was designed only to deal with that problem. The court suggested that the FCC would be restrained in its application of Section 628(b)’s authority by the rule that prohibits unreasonable, arbitrary or capricious agency regulation.
 
The court also rejected claims that the FCC failed adequately to explain its change of position from its 2003 decision in violation of the Administrative Procedure Act. The National Cable & Telecommunications Association (NCTA) argued that the Commission’s 2003 decision not to ban exclusivity clauses was based on a finding of improving competition. Because the FCC’s own records show that competition to cable continued to grow after 2003, NCTA argued that the Commission’s own logic prohibited the new rule.

The court found, however, that the Commission had expressly stated that its 2003 decision rested in part on the absence of a sufficient record, and its 2007 order described a detailed record of the need for a rule banning exclusivity clauses in MDU agreements. The court did not comment on the fact that the FCC’s 2003 order never mentioned Section 628 as a possible source of authority to ban exclusivity clauses.

Finally, the court had no trouble dismissing the arguments of real estate interests, who claimed that the FCC had no power to regulate the real estate industry. Instead, the court agreed with the FCC that its rule prohibited enforcement and execution of exclusivity clauses only by cable operators.

Conclusion

While the court’s decision precludes the ability of cable operators to enter into or enforce agreements for exclusive access, the decision does not address other forms of agreements between property owners and video service providers, some of which are the subject of a further notice of proposed rulemaking. Specifically, the FCC is still considering whether to extend the ban to DBS providers, and whether to outlaw bulk billing and exclusive marketing arrangements.

The exclusivity ban is only the most recent of several efforts by Congress and the FCC to ensure that multiple video providers serve apartments and gated communities. The FCC’s home wiring rules require cable operators to offer to sell their wiring to residents and building owners upon termination of service. This wiring, which the FCC defined to extend to the point it exits the sheet rock (usually the junction box), enables a competitor to provide service to the unit without wiring the unit itself.

Similarly, the FCC’s home run wiring rules require multichannel video service providers to share common area wiring (e.g., hallways and risers) with competitors under defined circumstances. The FCC’s Over-the-Air Reception Devices (OTARD) rule concerning restrictions on viewers’ ability to receive video programming signals from DBS, broadband radio service providers, and television broadcast stations also makes it easier for these video providers to offer services to MDU residents.

The FCC’s ban on exclusive service agreements with MDUs, in conjunction with these other regulations, further complicates the process of contracting broadband services to MDUs. Davis Wright Tremaine LLP has significant experience in the application of the laws governing video, voice and Internet service to MDUs. Please contact us if you would like further information.