United States: Communications Law Bulletin -- April 2006

Perhaps the most important, if not surprising, development of the month for the communications industry was the President’s announcement, on April 26, that he will nominate Federal Communication Commission ("FCC" or "Commission") Chairman Kevin Martin to a second term. That nomination now must be confirmed by the Senate.

If a Republican candidate is elected President in 2008, Chairman Martin’s new term with the Commission can be expected to continue until 2011.

Also, there is some indication that the legislative delay in the confirmation of Robert McDowell to the Commission may be lifted. Specifically, Sen. Landrieu (D‑LA) agreed to end her opposition to the nomination after the Administration announced its support for additional Hurricane Katrina clean-up funds. Unless other senators block the McDowell nomination, his name may come up for a vote soon.

This issue of our Bulletin covers a number of other developments, and includes our usual list of deadlines for your calendar.

In response to a letter from Representative Sensenbrenner (R-Wis.) of the House Judiciary Committee, Federal Trade Commission ("FTC") Chairman Deborah Majoras clarified that the recent deregulation of broadband Internet access services by the FCC now subjects those services to the FTC’s jurisdiction, as these information services no longer fall within the common carrier exemption in the FTC Act. Accordingly, providers of these services are now subject to FTC rules on competition and deceptive business practices. The letter noted, however, that broadband Internet access services provided on an elective common carrier basis would likely fall within the exception and remain subject instead to FCC jurisdiction.

With respect to pending Congressional legislation, urged Congress to ensure that any new statutory authority for the FCC with respect to these services should not "oust" the FTC from its established jurisdiction. With respect to the FCC’s Title I ancillary jurisdiction over broadband Internet access services, Chairman Majoras stated that the FTC will coordinate with the FCC regarding any concurrent jurisdiction.

In addition, Chairman Majoras noted that the FTC will hold hearings later this year on consumer protection issues in Global Marketing and Technology, in which various broadband Internet access issues are likely to be discussed.

In early April, the House Telecom and Internet Subcommittee voted down (by a vote of 23-8) a "beefed-up" net neutrality amendment (to the video franchise bill — see separate article) that would have barred broadband providers from charging a fee for priority traffic. As ultimately passed, the bill only provides FCC enforcement authority for its existing general net neutrality principles, with fines of up to $500,000 for violations, and explicitly bars the FCC from creating new net neutrality rules. Proponents of the stronger amendment nonetheless vowed to continue to press the issue in full committee and on the floor of the House.

The bill then went to a full committee markup at the end of April, at which the House Energy and Commerce Committee again rejected the Democratic-backed net neutrality amendment (this time by a vote of 34-22).

In the Senate, however, net neutrality still shows some signs of life. Senators Snowe (R-Maine) and Dorgan (D-ND) are reported to be circulating draft net neutrality legislation (the Internet Neutrality Act) that would establish a basic nondiscrimination policy for the Internet. Although the bill has not yet been introduced, it reportedly would allow network operators to manage their networks to prevent congestion and spam, but would also require nondiscrimination for content, applications and services (to ensure quality and service consistent with that provided to affiliates) and would bar additional charges to non-affiliates for such content, applications or services. The bill therefore appears similar to the bill released by Senator Wyden (D-Oregon) and reported in our March edition. The Snowe-Dorgan bill reportedly would require the FCC to establish Net neutrality rules, to issue temporary cease and desist orders (pending a final ruling) after the filing of any complaint that makes a prima facie showing, and to act on complaints under these new rules within 90 days of their filing.

Although this is a Democratic bill, both Senate Commerce Chairman Stevens (R-Alaska) and ranking member Inouye (D-Hawaii) have stated that some form of net neutrality legislation will be contained in any telecom reform bill passed out of the Commerce Committee.

Meanwhile, pursuant to a 2005 telecom deregulation law, the Texas Public Utilities Commission ("PUC") has opened a proceeding to determine whether state laws appropriate ensure network neutrality. The Texas PUC has set a comment deadline of June 13th and has scheduled a workshop on the issue for the same day. The deregulation law requires the PUC to report on the issue by the end of the year.

Finally, at the FCC, Chairman Martin has stated that he believes that the FCC already has sufficient authority to address net neutrality and has shown a "willingness to step in" when faced with blocking complaints.

The House video franchise bill discussed in last month’s Bulletin was approved by a 27 to 4 vote of the House Telecommunications Subcommittee after a nearly six-hour markup session on April 5 and by the full House Commerce Committee by a 42-12 vote on April 26. The bill would enable telephone companies to apply for a nationwide license to offer video service, rather than having to negotiate a local franchise with every municipality. Commerce Committee Republicans turned back Democrats’ attempts to add strict buildout requirements, by a 22-33 vote, and net neutrality provisions, by a 22-34 vote. Those amendments had met a similar fate in the Subcommittee markup. Commerce Committee Chairman Barton (R. Tex.) won the support of Ranking Member Dingell (D. Mich.) on a manager’s amendment that defines franchise area and that defines revenues for the purpose of franchise fees.

Chairman Barton opposed both the buildout and net neutrality amendments, saying that the competition unleashed by the bill would make buildout requirements unnecessary and that he did not think that "the draconian things they say will happen are going to happen if we don’t adopt" the net neutrality amendment. AT&T and Verizon have pledged to let consumers access anything they want on the Internet, but they also want to offer private Internet-based services with faster download speeds for services such as movies. The Net neutrality amendment proposed by Subcommittee Ranking Member Markey (D. Mass.) would have addressed competitors’ concerns about "fast-lane" access by allowing all content to be eligible for fast-lane access without charge. Although the amendment was defeated, net neutrality advocates were encouraged by the vote. Although ultimate House passage seems likely, Senate action on a bill and reconciliation with the House appear to be major obstacles.

In response to the FCC’s request for comment on its annual multichannel video competition report, parties submitted a variety of views on April 3 addressing the "70/70 test" for measuring the extent of video competition (discussed in last month’s Bulletin). The National Cable & Telecommunications Association ("NCTA") stated that increasing competition from DBS, over-the-air broadcasters and the Internet are pushing national cable subscriber rates far below the 70% threshold and that additional steps to spur video competition thus are not needed. NCTA asserted that "the concern that motivated Congress to adopt the 70/70 test — a fear the cable operators would increasingly become the sole source of video programming in a community — has been overtaken by marketplace developments."

That view was disputed in an ex parte filing by a consortium of open media and consumer advocates arguing that video competition has declined and that DBS has not curbed cable price increases. Another public interest group urged more active regulation to ensure diversity in programming. They argued that non-affiliated programmers appear to have been deterred from using leased access to gain entry, which has "further entrenched cable operators’ hold on video programming." Verizon stated in its comments that the FCC should adopt rules that ease competitive entry into the video market, regardless of whether the 70/70 threshold has been met. In their reply comments, filed on April 25, AT&T, Verizon and various public interest groups argued that the FCC has the authority to adopt any rules it deems necessary to promote diversity of information sources.

The public debate over á la carte cable programming also continues to rage. At a meeting with Commissioner Tate, Viacom officials presented an economic analysis by Stanford University Professor Bruce Owen concluding that government-imposed á la carte programming would likely result in higher prices for many consumers and reduced viewing of many networks. It was reported on April 11 that Commissioner Adelstein said at a luncheon meeting during NCTA’s National Show that the FCC should give cable á la carte a fresh look because dueling FCC reports have created confusion, which was not resolved by a recent Congressional Research Service study endorsing neither report. The more recent FCC report, backed by Chairman Martin, which supported more unbundled programming, has been criticized by NCTA, Disney and Viacom. Commissioner Adelstein did not specifically call for another study and said that he was not asking for a notice of proposed rulemaking on the issue. He also mentioned, in response to a question, that local franchise authorities want video competition. "They’re falling over themselves to award these franchises."

The Commissioners’ legal advisors also expressed divergent views during a panel discussion at the NCTA National Show as to the need for prompt action on the pending Media Bureau proceeding regarding the possible preemption of video franchising barriers. Heather Dixon, Legal Advisor for media issues to Chairman Martin, stressed that "delay in getting authorization is critical for a business, . . . [so] I think we’re going to try to work quickly." Rudy Brioche, Legal Advisor for media issues to Commissioner Adelstein, responded that the time-consuming nature of multiple local video franchise applications would not qualify as the kind of problem that should trigger FCC preemption, given the "fact-specific" character of each case. Analysts believe that FCC action is only likely if federal video franchise legislation fails to pass.

It was reported on April 3 that state video franchise bills advanced in Florida and Iowa after they were amended to provide incumbent cable operators ways to opt out of existing municipal franchises when a state-franchised competitive video provider enters the market. A Florida House committee approved a bill that would preempt municipal franchise authority and shift franchising to the Florida Department of State. A similar Iowa Senate bill is poised for a final vote. Telephone companies with local telephone franchises would obtain state video franchises automatically. The Iowa bill would also cap franchise fees at five percent and ban buildout requirements and income-based redlining.

On April 7, Kansas Governor Kathleen Sibelius signed into law the similar bill discussed in last month’s Bulletin transferring video franchising authority from municipalities to the state. The law caps franchise fees at five percent and allows incumbent cable companies to request, when a state-franchised competitor enters the market, that the municipal franchise authority amend any franchise terms that differ from those for the state-franchised entrant. Franchised telecommunications carriers are franchised automatically by the state for video services. The law bars buildout requirements and income-based redlining. AT&T is assessing whether to roll out its video service in Kansas under the new franchising regime. A similar bill failed to pass the Missouri Senate, and sponsors have conceded defeat.

California Assembly Speaker Fabian Nunez (D.) and Assemblyman Lloyd Levine (D.) are cosponsoring a bill to shift video and cable franchising from municipalities to the state. The bill includes buildout requirements that discourage "cherry picking" and bars income-based redlining. The California Cable & Telecom Association said it would oppose the bill unless it is amended to address incumbents’ competitive concerns, but AT&T welcomed the bill as "the first step to bring video choice to California consumers." The NAACP, the California Hispanic Association for Corporate Responsibility and the Communications Workers of America announced their support for the bill during a news conference held in conjunction with its introduction. It was reported on April 27 that the California Assembly Utilities and Commerce Committee referred the bill to the Assembly Appropriations Committee without making any of the changes proposed in hearings that would have given municipalities a role in consumer protection and franchise enforcement, strengthened redlining protections and preserved public access programming.

The Texas PUC is currently conducting several rulemaking proceedings to implement the first statewide video franchising law in the nation, passed last year. Commissioner Barry Smitherman sent a memorandum to other regulators stating that the PUC should examine what its role should be in resolving customer complaints regarding video service, particularly in areas served by a single, state-franchised video provider. He noted that the legislature did not intend for the PUC to take on the investigation and resolution of video customer complaints, which the law leaves up to competitive market forces.

AT&T has also turned to the courts in its efforts to enter the video service market. It was reported on April 10 that AT&T sued two Chicago suburbs in U.S. District Court challenging their authority to impose video franchise obligations on its attempts to deploy its Project Lightspeed fiber optic network, which it intends to use to provide IP-enabled video service. AT&T maintains that, because its video service is IP-based, it is an upgrade of the DSL service it already provides, rather than a cable video service requiring a municipal franchise. AT&T argues that it is being denied its right as a telecommunications carrier to build in public rights of way. The towns argue that application to new video service entrants of the same franchising requirements that have been met by incumbent cable video providers is necessary to maintain "a level playing field."

On April 13, a federal court dismissed an AT&T claim that a Walnut Creek, Cal. mandate that it obtain a franchise before upgrading its network to provide video service is preempted by federal law. The court also refused to act on AT&T’s claim that California law authorizes it to send video programming over its telephone lines without obtaining a separate franchise from the city, stating that AT&T could refile that claim in state court.

Alcatel SA ("Alcatel") and Lucent Technologies Inc. ("Lucent") agreed in April to merge in a deal valued at $13.4 billion. The merged company, which has yet to be named, would be one of the largest manufacturers of telecommunications equipment in the world, with revenues of around $25 billion, 88,000 employees and a global customer base.

Several reasons have been given for the merger. The two companies are considered to be a good fit because of their complimentary product lines and geographic focus. Alcatel, based in Paris, France, has strong sales in high-speed digital subscriber line equipment and derives more than two-thirds of its business from Europe, Latin America, the Middle East and Africa. Lucent, based in Murray Hill, New Jersey, specializes in wireless technology and servicing telecom networks and obtains more than two-thirds of its business in the United States. In addition, the recent consolidation trend among telecom operators has reduced the number of available customers and shifted pricing leverage to the operators, putting pressure on equipment manufacturers to merger.

The deal is styled as a "merger of equals" even though the combined company will be based in Paris, its shares will be listed in Paris and Alcatel shareholders will own about 60% of the combined company to 40% for Lucent shareholders. The combined company’s board will consist of six members from each of Alcatel’s and Lucent’s boards, and two new board members who will be citizens of European countries. Serge Tchuruk of Alcatel will serve as chairman of the combined company, and Patricia Russo of Lucent will serve as CEO. The companies have announced that they plan to cut approximately 10% of the combined workforce, or 9,000 jobs, in their effort to achieve $1.7 billion in savings within three years.

The deal must be approved by both companies’ shareholders and U.S. and European regulators. There may be heightened regulatory scrutiny in the US due to the classified work that Lucent’s Bell Labs unit does for the military and intelligence agencies. In an attempt to satisfy those concerns, the companies have announced that Bell Labs will be placed in an independent subsidiary governed by a board of three US citizens. There may be regulatory concerns on the other side of the Atlantic, as well, due to Alcatel’s joint ownership with the French government of satellite manufacturer Thales SA. The deal is expected to close in 6 to 12 months.

On April 13 and 14, major broadcasters filed petitions for review in two federal courts of appeals challenging recent indecency decisions issued by the FCC. Fox and CBS petitioned the U.S. Court of Appeals for the Second Circuit for review of the Commission’s March 15 Memorandum Opinion and Order finding that programs broadcast by the networks’ affiliates were indecent. ABC and Hearst-Argyle Television filed a similar petition for review in the U.S. Court of Appeals for the District of Columbia Circuit with respect to an ABC network program. NBC and its affiliates have filed a motion to intervene in the Second Circuit case. Numerous interested parties are expected to intervene, and the cases are likely to be consolidated.

The petitioners seek review of the Commission findings that language aired on the following shows was indecent: The Early Show, a CBS program aired in 2004 in which a cast member of Survivor described a fellow contestant as a "bullshitter;" Fox’s broadcast of Cher’s use of the word "fuck" on the 2002 Billboard Music Awards; Fox’s broadcast of the 2003 Billboard Music Awards in which Nicole Richie said the words "fuck" and "shit;" and multiple episodes of ABC’s NYPD Blue broadcast in the first half of 2003 in which the words "bullshit" and "bullshitter" were uttered. The FCC did not issue fines in these cases because the incidents occurred before the Commission clarified its indecency standard in 2004 to state that almost any broadcast of certain expletives would be considered profane and indecent. In a joint statement, the petitioners said that they "are seeking to overturn the FCC decisions that the broadcast of fleeting, isolated — and in some cases unintentional — words rendered these programs indecent."

While none of these cases involved NBC, the network and its owned and operated stations filed a petition to intervene on behalf of the other networks and stations. In the motion to intervene, NBC and its owned and operated stations state that "[t]he Order represents a significant expansion of the Commission’s content regulation of broadcasters’ speech, characterizing as ‘indecent’ or ‘profane’ even the most brief and spontaneous utterances of expletives on network TV." They further argue that "[t]he Order impermissibly regulates free speech under the First Amendment, oversteps the Commission’s regulatory authority, and reflects an arbitrary and capricious exercise of agency action." NBC also said that the Commission’s definition of indecency, expanded to include the word "shit," will "chill the speech of broadcasters."

Broadcasters also are opposing forfeiture decisions at the Commission. Fox station KTVI filed an opposition to the Commission’s proposed forfeiture for its broadcast of The Pursuit of D.B. Cooper. CBS also has opposed a proposed forfeiture for its broadcast of Without a Trace. Public television station KCSM plans to oppose the Commission’s proposed forfeiture for its broadcast of The Blues: Godfathers and Sons.

In opposition to the proposed indecency forfeiture for broadcast of The Pursuit of D.B. Cooper, Fox argues that the Commission’s indecency rules are unconstitutional because "[t]he massive expansion of cable and satellite video programming, together with the advent of the Internet, renders obsolete the second-class treatment of broadcasters under the First Amendment." Fox also argues that the Commission’s decision to label Fox’s broadcast indecent deviates from recent FCC precedent. Addressing the Commission’s Saving Private Ryan decision in 2005 — in which the FCC determined that the broadcast of "fuck" and "shit" was not indecent — Fox argues that "[t]here is no logical reason why material that was deemed essential to tell a war story in Saving Private Ryan should be any less essential when portraying a fugitive on the run."

CBS argues before the Commission that the unprecedented forfeiture proposed for its airing of Without a Trace "is unsupported by the record before the Commission, is inconsistent with the Commission’s indecency standards, and cannot be reconciled with the Communications Act and the FCC’s Forfeiture Policies." In particular, CBS argues that the FCC has not attempted to measure "community standards for the broadcast medium." CBS also argues that the proposed fine violates the First Amendment because it "vastly exceeds the limited authority under FCC v. Pacifica Foundation and calls into question the continuing validity of the FCC’s indecency policy." CBS argues, among other things, that technological changes have created less restrictive means to regulate indecent speech.

Meanwhile, the FCC rescinded $260,000 in indecency fines levied against certain Indiana television stations after some of the stations informed the FCC that it had erred when it concluded that they were in the Central time zone, rather than the Eastern time zone, and that the broadcasts of indecent material were outside the 10:00 p.m. to 6:00 a.m. safe harbor.

The FCC is proceeding to issue letters of inquiry to Clear Channel Communications Inc., CBS Radio Inc., Entercom Communications Corp. and Citadel Broadcasting regarding compliance with the Commission’s payola regulations. Commissioner Adelstein, in a prepared written statement about the letters of inquiry, said, "I am pleased that we have launched this formal phase of the payola investigation. This should put to rest any question about the FCC’s commitment to enforce the law. Our investigation will be a thorough and complete review of the industry’s alleged payola practices."

Meanwhile, the FCC reportedly is holding settlement negotiations with the four broadcasters identified in its payola investigation. Press reports state that Clear Channel is prepared to settle in the $1.5 million to $3 million range while Citadel and Entercom are reportedly offering around $1 million each. Reports suggest that CBS Radio has not made an offer yet.

These developments come after New York State Attorney General Eliot Spitzer last month sued Entercom, the nation’s fifth largest radio chain, alleging that the company "traded airplay for revenue." According to the Associated Press, Mr. Spitzer has said that settlement talks could undermine his work. The suit, filed in Manhattan state court, alleged that gifts, trips and cash were traded for airplay for certain songs at Entercom’s radio stations. "We have moved from the label side, those who put out the records and are forced to pay for air time," said Spitzer, "and switched to the radio conglomerates . . . that are extracting money." The complaint also alleges that the company "falsely promot[ed] records up the music charts" in reports it provided to trade publications about the airplay of songs. Two major recording companies agreed last year to settle with Spitzer to end payola investigations. Warner Music Group Corp. said it would pay $5 million, and Sony BMG Music Entertainment agreed to pay $10 million. Spitzer contends that the FCC has been "asleep at the switch" with regard to payola and should consider revoking licenses. The FCC sharply disputed this characterization.

At a Newspaper Association of America convention in Chicago on April 4, 2006, FCC Chairman Kevin Martin said that the Commission’s failure to end the broadcast-newspaper cross‑ownership ban "may adversely impact the quality of news and localism." Chairman Martin also said that newspapers’ financial struggles have led to a 4.1 percent drop in newspaper newsroom staff employment from 2001-2005. Despite a decade of Commission promises to review and revise the newspaper-broadcast cross-ownership ban, it has not changed since 1975, he said. The ban has persisted, he noted, in the face of dramatic changes in the marketplace. "The rule that is in place today was based on a market structure that bears little resemblance to the current environment. That rule was adopted in an era with little cable penetration, no local cable news channels, fewer broadcast stations, and no Internet." He also observed that at least 300 daily papers have stopped publishing since the cross-ownership rule was adopted. Chairman Martin said that the Commission should issue a "neutral" notice of proposed rulemaking to address the issues remanded to the Commission by the Third Circuit. After a record is developed, "we will look at whether it makes sense to address all of the rules together or if it makes more sense to address issues separately."

FCC Chairman Martin is calling for a Commission vote on a broad media ownership inquiry soon after the U.S. Senate approves Robert McDowell’s delayed appointment, according to reports. Easing media ownership limits is a priority on Martin’s agenda. Adoption of the media ownership notice of proposed rulemaking will be delayed until the third Republican commissioner is confirmed, which is expected soon. For his part, Commissioner Copps has said that the Commission must create a better record than in the past. "We ought to have ownership hearings around the country. Not just one . . . It’s very hard to generalize" about the issues. "If we go in and do our homework and compile a granular record," Copps added, "you could craft a series of rules that would virtually sail through the court system."

Following a study by the Center for Media & Democracy that 77 television stations used 36 video news releases ("VNRs") almost 100 times without revealing their sources, Commissioners Copps and Adelstein have called for tougher enforcement. "The public," Commissioner Adelstein said in a written statement, "has a legal right to know that people who present themselves to be independent, unbiased experts and reporters are not shills hired to promote a corporate — or governmental — agenda." Commissioner Adelstein has suggested that the television stations alleged to have aired unattributed VNRs should apologize to viewers. Commissioner Copps echoed Commissioner Adelstein, calling for a crackdown use of VNR material without attribution. Free Press and The Center for Media & Democracy have asked the FCC to initiate an investigation. Their complaint states that violations have occurred in the 10 largest U.S. markets and that "[a] list of the worst possible offenders includes stations owned by Sinclair Broadcast Group, News Corp./Fox Television Stations, Clear Channel Communications, Tribune Company and Viacom/CBS Corp." While an FCC spokesman said that the Commission "will review the complaint carefully," Commissioner Adelstein went farther, saying that the stations "clearly misled their audience[s]" because "[i]t’s often impossible for viewers to tell the difference between news and propaganda." Commissioner Adelstein added that the alleged violations could result in hefty civil fines and even criminal punishment. Any evidence of criminal conduct should be referred to the FBI and Justice Department for investigation and possible prosecution, he said. Commissioner Copps was blunt: "We need to come down hard on this." "When legitimate news is scrapped in favor of outright propaganda," Copps added in a written statement, "viewers are in trouble." Adelstein hinted at tougher regulation: "It certainly appears as if the industry is incapable of effectively regulating itself. It is now incumbent on the FCC to take the necessary steps to protect the viewing public." Chairman Martin and Commissioner Tate have not commented on the matter.

The FCC released its long awaited Second Report and Order and Second Further Notice of Proposed Rulemaking ("Report and Order" and "Further Notice") revising its general competitive bidding rules governing the benefits reserved for designated entity licensees ("DEs"). DEs benefits include receiving bidding credits and license set-asides during spectrum auctions for small and very small businesses. The FCC deliberately released the item in time for the new rules to apply to the Advanced Wireless Service ("AWS") auction scheduled for June 29, 2006 (see separate article regarding the auction). The new rules will become effective thirty days after their publication in the Federal Register.

Material Relationships. The Report and Order makes significant changes to the FCC’s DE rules by including certain "material relationships" as factors in determining DE eligibility, modifying its unjust enrichment rules, and imposing new reporting requirements on DEs. Specifically, except in certain circumstances, an applicant or licensee now has an "impermissible material relationship" when it has agreements with one or more other entities for the lease or resale of more than 50 percent of its spectrum capacity of any individual license. An "impermissible material relationship" renders the applicant or licensee: (1) ineligible for DE benefits; and (2) subject to the repayment of unjust enrichment on a license-by-license basis.

Furthermore, an applicant or licensee now has an "attributable material relationship" when it has one or more agreements with any individual entity (including entities and individuals attributable to that entity) for the lease or resale of more than 25 percent of the spectrum capacity of any individual license that is held by the applicant or licensee. The "attributable material relationship" with that entity will be attributed to the applicant or licensee for the purposes of determining the applicant’s or licensee’s: (1) eligibility for DE benefits; and (2) liability for unjust enrichment on a license-by-license basis.

The Report and Order provides that the new eligibility restrictions based on "material relationships" will be applied on a prospective basis. Thus, the FCC will not reconsider any DE benefits previously awarded to licensees prior to the release date of the Report and Order or to determine DE benefits for assignment, transfer of control and lease applications filed before the release date of the Second Report and Order that are still pending approval. In addition, an applicant will not be ineligible for DE benefits based solely on a "material relationship" provided that the agreement that forms the basis of the relationship: (1) is otherwise in compliance with the FCC’s DE eligibility rules; (2) was entered into prior to the release date of the Report and Order; and (3) is subject to a contractual prohibition that prevents the affiliate from contributing to the DE’s total financing.

Unjust Enrichment. The Report and Order also modifies significantly the FCC’s unjust enrichment rules by extending the unjust enrichment period to ten years (rather than five years). Thus, for the first five years of the license term, if a DE loses its eligibility for a bidding credit, 100 percent of the bidding credit, plus interest, must be repaid. For years six and seven of the license term, 75 percent of the bidding credit, plus interest, must be repaid. For years eight and nine, 50 percent of the bidding credit, plus interest, must be repaid. For year ten, 25 percent of the bidding credit, plus interest, must be repaid.

Moreover, the entire bidding credit amount owed, plus interest, must be repaid if a DE loses its eligibility for a bidding credit prior to notifying the FCC that the construction requirements applicable at the end of the license term have been met. For example, the Report and Order explains, if a DE assigns a bidding credit license to an entity that is ineligible for bidding credits eight years after the grant of the license and prior to the filing the construction notification, 100 percent of the bidding credit, plus interest, must be repaid (rather than the 50 percent unjust enrichment payment that would be due had if the construction notification was filed).

Existing DEs with impermissible and attributable material relationships that were in existence prior to the release date of the Report and Order are grandfathered under the new unjust enrichment rules. The FCC will enforce the unjust enrichment rules by: (1) reviewing all agreements to which DE applicants and licensees are parties; (2) requiring that applicants and licensees seek advance approval for all events that may affect their ongoing DE eligibility; (3) imposing periodic reporting requirements on DEs; and (4) conducting random audits of DEs. The FCC also commits to audit the eligibility of every DE that wins a license in the AWS auction as least once during the initial license term.

Further Notice. The FCC seeks comment in Further Notice regarding whether it should implement additional rules to ensure that DE benefits are awarded to appropriate entities and for the purposes intended by Congress. The FCC seeks comment on four particular areas:

(1) Defining the Class. Whether a certain class of entity, if any, should trigger any additional restrictions regarding DEs and whether a class should be based on a specific financial threshold.

(2) In-Region Limitations for Class of Entities. Whether the FCC should adopt an in-region component to defining relationships with any particular class or type of entity that trigger additional eligibility restrictions.

(3) Material Relationships. Whether the FCC’s DE rules should be further modified to include other types of agreements in the definitions of "impermissible material relationships" or "attributable material relationships."

(4) Personal Net Worth. Whether personal net worth should be included in determining DE eligibility and, if so, whether Council Tree’s proposal to prohibit individuals with a net worth of $3 million or more from having a controlling interest in a DE should be adopted.

Comments and replies to the Further Notice are due 60 and 90 days, respectively, after it is published in the Federal Register.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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