Communications Law Bulletin-January 2004

The Month in Brief

The New Year already has brought a number of developments that cut across all industry segments. Perhaps the most consequential of these is the apparent decision of the Federal Communications Commission ("FCC" or "Commission") to clarify the regulatory status of Voice over Internet Protocol ("VOIP") service. VOIP, which for years has sheltered comfortably under the Commission's reluctance to "regulate the Internet," may become subject to new burdens and obligations that will help to shape the future direction of the Internet and traditional telecommunications service.

In this issue of our Bulletin, we discuss VOIP and other issues. We also provide our usual list of deadlines for you calendar.

For many years, the Commission has avoided deciding whether voice services that use the Internet protocol will pay access charges, contribute to the universal service fund and shoulder other burdens that are imposed on traditional voice telephone companies. The Commission's official position is still the one it took in 1998, when it stated in a Report to Congress that phone-to-phone VOIP probably is a telecommunications service subject to common carrier regulation, but computer-to-computer, computer-to-phone, and phone-to-computer variants likely are unregulated enhanced/information services.. Except for these tentative observations, the 1998 Report reached no conclusions and imposed no obligations on VOIP providers. Since then, the variety and prominence of VOIP services have grown along with the pressure on the FCC to revisit the VOIP issue. The issue has been given new life by recent requests from AT&T and Pulver.com for rulings on the regulatory status of their VOIP offerings, and by persistent suggestions that this year will bring a VOIP rulemaking proceeding.

FCC and industry officials now say that the Commission will reject AT&T's petition, which requests that it not be liable to the regional Bell operating companies ("RBOCs") for millions of dollars in access charges where AT&T uses the Internet (rather than the public switched telephone network) to carry long-distance calls between conventional telephones. FCC Chairman Michael Powell announced his intention to have the Commission act on the AT&T petition before the Commission's February 12, 2004 meeting.

The AT&T petition, and a flurry of lobbying on both sides of the voice-over-IP issue, prompted the FCC to invite AT&T to the Commission to meet with the agency's staff and participate in a courtroom-like debate. AT&T argued that its VOIP service should continue to pay only the same business line rates paid to local telephone companies by Internet servcie providers. SBC Communications, speaking for the RBOC position, argued that AT&T and other VOIP providers should be required to pay the access charges imposed on long-distance carriers, and claimed that AT&T is engaging in "regulatory arbitrage" by using the Internet to evade the usual regulatory obligations of long-distance telephone companies.

The FCC's rejection of AT&T's position is expected to be based on the fact that AT&T's VOIP calls originate and terminate at a conventional telephone on the public switched telephone network ("PSTN"). AT&T's voice-over-IP service often commences with a traditional call from a phone, which is converted by AT&T into digital packets carried over AT&T's Internet backbone. Before the call is delivered to the called party, the digital packets are converted back to a conventional PSTN format for delivery to a conventional telephone. The Commission is expected to find that such phone-to-phone telephony does not fall within the category of "enhanced or information services" that the Commission has exempted from payment of access charges.

Although the Commission is expected to reject AT&T's request, it is believed that the Commission will uphold the request of Pulver.com. The Pulver.com service does not use phone numbers or the traditional phone network at all. Rather, its service uses specialized equipment that communicates over broadband Internet connections. Because the Pulver.com calls are not phone-to-phone services that originate and terminate on the PSTN, the Commission is expected to grant Pulver.com's request for relief from regulation.

The Commission's expected actions on the AT&T and Pulver.com requests will leave many questions unanswered. Other participants in the voice-over-IP space will face continued uncertainty unless their applications mirror either the AT&T and Pulver.com Internet phone applications. It is anticipated, however, that the FCC will initiate a rulemaking proceeding this year that will comprehensively address the regulatory status of the principal variants of VOIP. That rulemaking likely will go beyond the access charge issue to address the possible obligations of different types of VOIP providers to contribute to universal service funds, support E-911 emergency services and comply with the Communications Assistance to Law Enforcement Act ("CALEA").

At the state level, many states are uncertain as to how much authority they have to regulate voice-over-IP services and VOIP providers. Both the California PUC and the Colorado PUC have decided that they will not address VOIP regulation until the FCC rules on the extent to which the states have jurisdiction to do so. In light of the expectation that the FCC soon will rule on the regulatory status of VOIP, neither the Colorado nor the California PUCs believe that it makes sense for the new Internet technology to be subject to fifty-one (51) utility commission "imposing idiosyncratic, inconsistent and costly obligations."

However, the Washington Utilities and Transportation Commission (WUTC) has scheduled open hearings on May 5, 2004 to determine whether voice-over-IP providers owe intrastate access charges. The particular case involves the WUTC's complaint against LocalDial, a VOIP service provider, and the WUTC is solely focused on the issue of whether such a VOIP provider is liable for access charges for using the equipment and facilities of telephone companies for the origination or completion of intrastate interexchange calls.

Finally, in Minnesota, the U.S. District Court denied various motions that followed its October 16, 2003 ruling in the Vonage v. Minn. PUC case, which declared Vonage's voice-over-IP communications service to be an unregulated information service and entirely outside of the Minnesota PUC's jurisdiction. Specifically, the Minnesota PUC filed a motion for amended filings or a new trial, and Qwest Communications, the RBOC serving Minnesota, filed a motion to intervene and amend judgment. The U.S. District Court ruled that its prior conclusions were not altered by the PUC's assertion that 97% of the Vonage calls come into contact with the PSTN. The U.S. District Court's decision was primarily based upon its determination that Vonage's services are "information services" and that Congress had pre-empted state regulation of any and all aspects of information services.

FCC Chairman Powell has asked his fellow commissioners to reverse an October 2003 Enforcement Bureau decision regarding the use of profanity on network television. The Bureau's order had determined that NBC and its affiliate stations had not violated the FCC's indecency rules by airing U2 rock star Bono's use of an expletive during the Golden Globe awards in January 2003. The ruling stated that Bono's comment was not indecent or obscene because he used the word as an adjective and not to describe a sexual act. While Powell's proposal would ban the use of the "f-word" in almost all instances, exceptions would include profanity used in political speech.

Given the level of criticism of the Bureau order from members of Congress, the Parents TV Council and thousands of parents, Powell's proposal is likely to gain support from the other commissioners. In a November 25, 2003 letter to the Parents TV Council, Commissioner Martin reiterated his call for stricter enforcement, urging that the FCC should assess fines for each indecent word instead of for a single program. Also in response to the Enforcement Bureau's ruling, Rep. Doug Ose (R.-CA) introduced HR-3687, listing eight specific words that would be defined as "profane." The bill, co-sponsored by Rep. Lamar Smith (R.-TX), covers all grammatical variations of these eight words. House Telecommunications Subcommittee Chairman. Fred Upton (R.-Michigan.) proposed legislation that would increase the financial penalties for broadcasters airing obscene, indecent, and profane material on TV and radio. While the FCC currently may impose a fine of $27,500 for indecency and up to $300,000 for continuing offenses, the bill would raise the fine to $275,000 per violation and up to $3 million for continuing violations.

On January 5, 2004, the FCC released a forfeiture order fining Fax.com $5,379,000 for 489 violations of the rules issued under the Telephone Consumer Protection Act ("TCPA") prohibiting the faxing of unsolicited commercial advertisements. This is the largest "junk fax" penalty imposed by the FCC and one of the largest penalties ever imposed by the FCC in any enforcement case.

Fax.com operated as a fax broadcaster, sending fax advertisements on behalf of other firms. The FCC imposed the maximum penalty of $11,000 per TCPA violation because "Fax.com's business itself is predicated upon a knowing and willful violation of" the TCPA and the FCC's junk fax rules.

The forfeiture order grew out of a Notice of Apparent Liability ("NAL") issued in 2002, in which the FCC set forth the allegations against Fax.com. The NAL was stayed by order of the U.S. District Court for the Eastern District of Missouri on First Amendment grounds, but that order was reversed by the Eighth Circuit Court of Appeals, and Fax.com was required to respond to the NAL. The FCC rejected Fax.com's argument that the junk fax ban violates the First Amendment, citing the Eighth Circuit's decision that the government had demonstrated a legitimate interest in restricting unwanted fax advertising to prevent the shifting of costs to unwilling consumers and interference with their reception of other faxes. On January 12, 2004, the Supreme Court denied Fax.com's petition for certiorari challenging the Eighth Circuit's decision.

The FCC also rejected Fax.com's arguments that the TCPA is "void for vagueness" and that the NAL failed to describe Fax.com's alleged misconduct with the required specificity. Finally, the FCC rejected Fax.com's argument that the amount of forfeiture is excessive under the due process guarantee of the Fifth Amendment and the excessive penalties clause of the Eighth Amendment. The FCC explained that it had previously determined that $4,500 was an appropriate base penalty for each junk fax transmission and that the FCC had adjusted the amount upward in instances where the fax recipient had previously asked the sender to refrain from faxing the ads. In the case of Fax.com, $11,000 per occurrence was an appropriate penalty in view of the FCC's finding that Fax.com conducts its fax broadcasting without any regard to whether the recipient has an established business relationship with either Fax.com or the advertiser or has otherwise granted permission for the fax to be sent.

The FCC gave Fax.com 30 days in which to file a report as to whether it had come into compliance with the TCPA and the rules prohibiting junk faxes. The FCC will use that report and any consumer complaints to determine whether additional enforcement action is needed against Fax.com or the companies for whom it sent unsolicited fax ads.

On January 13, 2004, the Supreme Court, in Verizon Communications Inc. v. Trinko, overturned a lower court ruling that had upheld an antitrust claim based on Verizon's alleged violation of the network-sharing obligations imposed by the Telecommunications Act of 1996 ("1996 Act"). Trinko, a local telephone service customer of AT&T, had alleged that Verizon harmed Trinko and other customers by discriminating against AT&T and other local service competitors in providing access to Verizon's operations support systems ("OSS"). Trinko cited New York Public Service Commission ("PSC") and FCC findings that Verizon had failed to meet its obligations under the 1996 Act to provide OSS to competitive local exchange carriers ("CLECs"). Trinko alleged that this discrimination was part of an anticompetitive scheme in violation of Section 2 of the Sherman Act, which declares that a firm shall not "monopolize" or "attempt to monopolize."

In a unanimous opinion written by Justice Scalia, the Supreme Court held that the breach of an incumbent local exchange carrier's ("ILEC's") duty under the 1996 Act to share its network with CLECs does not state a claim under Section 2 of the Sherman Act. The alleged access discrimination does not violate preexisting antitrust standards, which were not changed by the 1996 Act. Under those standards, courts generally will not compel a firm to share a unique infrastructure with its competitors.

The Court distinguished the leading case imposing Section 2 liability for a refusal to deal with competitors, Aspen Skiing Co. v. Aspen Highlands Skiing Corp. Unlike the defendant in Aspen, Verizon did not cease a prior practice of dealing with competitors voluntarily. No anticompetitive intent can therefore be read into its failure to provide access to its network. Moreover, unlike the Aspen defendant, Verizon was not refusing to provide its competitors with a product it already sold at retail. Rather, the unbundled network elements ("UNEs") offered under the 1996 Act are not available to the public, but are provided to competitors under compulsion. The Court added that violation of the network-sharing requirements of the 1996 Act was not a denial of access to an "essential facility" controlled by Verizon.

The Court also found no reason to depart from the general proposition that there is no duty to aid competitors. The regulatory agencies' aggressive responses to CLEC allegations of Verizon's violations demonstrated that the regulatory "regime was an effective steward of the antitrust function." Any additional benefit to competition provided by antitrust enforcement thus would tend to be small. Applying Section 2's requirements to this regime could result in mistaken inferences that would chill the competitive conduct the antitrust laws are designed to protect.

Although initial CLEC reaction to the decision was negative, it is not clear whether, as CLECs claim, access to ILEC UNEs will be more difficult to obtain as a result of the decision. The Trinko complaint, which sought class action damages and relied on the PSC and FCC proceedings against Verizon, was filed the day after Verizon settled the FCC's enforcement case. Although the complaint also sought injunctive relief, it is questionable whether the opposite holding in Trinko would have resulted in any greater degree of access to UNEs than the remedies that the PSC and FCC had already obtained. CLEC advocates have indicated that they will seek a legislative remedy to "clarify when antitrust laws apply" to Bell company actions, but Congressional reaction to this idea has been mixed.

The Commission has fined Datel Design and Development, Inc. ("Datel") $10,000 for the importing and marketing of 15,000 headsets that do not comply with the radiated emission limits of Part 15 of the Commission's rules. Although the devices were manufactured outside of the United States by a third party, the Communications Act requires manufacturers and those who import, sell, and offer for sale or ship devices or home electronic equipment to comply with the Commission's rules. As the party that imported and sold the devices within the United States, Datel was responsible for ensuring that the devices complied with Commission rules. In addition to the fine, the Commission also required that Datel submit a report to the Commission identifying all entities to which it distributed the non-compliant device and describing the steps it intends to take to remove the non-compliant devices from the market and to ensure that such violations do not occur in the future.

The Commission fined the former licensee of an FM radio station $25,000 for violations of the radiofrequency radiation ("RFR") exposure limits applicable to transmitters on towers, failing to have Emergency Alert System ("EAS") equipment installed and operating, failing to maintain a main studio and failing to have adequate transmission system control. An inspection revealed that the transmitting antenna for the station, which was mounted on a U.S. Forest Service tower, was placed substantially lower on the tower than authorized by the license. Because of this, operation at only 40% of authorized power created RFR fields that exceeded the exposure limits for the general public on the observation tower and in areas outside the fence surrounding the tower that were accessible to the public.

The Commission has been sanctioning noncommercial educational ("NCE") stations for broadcasting advertisements in violation of the Communications Act and its rules. NCE stations are prohibited from broadcasting advertisements, although they may broadcast on-air acknowledgments of contributors of funds. These acknowledgments may be made for identification purposes only, and may not promote the contributors' products, services or business. Nor may the announcements contain comparative or qualitative descriptions, price information, calls to action or inducements to buy, sell, rent or lease. The Commission has acknowledged that it may be difficult to distinguish between promotion and identification, and requires only that licensees exercise reasonable, good-faith judgment in this area.

In one recent case, the Commission issued a $10,000 forfeiture to a television NCE station based on the 1,911 times that the prohibited announcements were aired. In this case, the Commission found that the announcements "heavily dwelled" on a product's particular features or "encouraged patronage." Although the licensee claimed it was within its good-faith judgment to air the announcements, the Commission found that no reasonable licensee could conclude that these announcements were anything but promotional. In a second case, the Commission took a much more lenient view and admonished an FM NCE station licensee for airing prohibited announcements. The lesser sanction was imposed because the licensee had an otherwise unblemished record and the station itself did not produce the violative programming or announcements contained therein.

The FCC recently issued its first enforcement citations under its rules concerning the National Do-Not-Call Registry. The first citation was issued to CPM Funding, Inc., d/b/a California Pacific Mortgage, on December 18, 2003. Additional citations were issued to four other companies on December 22. The citations were issued for making telemarketing calls to individuals that had placed their telephone numbers on the National Do-Not-Call Registry.

David Solomon, Chief of the Enforcement Bureau, stated that "[t]his citation demonstrates our resolve to ensure that consumers are not bothered by unwanted, intrusive calls to their homes. Do -Not-Call enforcement is the FCC's top consumer protection priority and we, along with our partners at the FTC, will continue to be vigilant in this area on behalf of the American public."

Under the Communications Act, the Commission cannot impose liability on an entity that does not hold an FCC license or other authorization without first issuing a citation on that entity. After providing the telemarketers with an opportunity to respond to the citations, the Commission may impose a fine of up to $11,000 for each post-notice violation of its rules, or each day of a continuing violation.

Over the past year, the Commission and the Universal Service Administrative Company ("USAC"), which administers the Schools and Libraries (or E-rate) Program, have come under fire because of abuse and fraud by program participants. The Commission recently adopted new measures to clarify its rules and policies concerning the program to try to prevent such abuse and fraud, and to ensure that program funds are equitably disbursed. The new rules will impact, either directly or indirectly, carriers that provide services to schools and libraries under the E-rate Program. The measures adopted by the Commission:

• Prohibit schools and libraries from transferring equipment purchased under the E-rate Program to other locations for three years after the equipment was purchased, with certain exceptions;

• Allow schools and libraries to receive universal service support for the upgrade or replacement of internal connections twice in a five-year period, although support for basic maintenance of internal connections still may be obtained on a yearly basis;

• Create a more formal process for annually updating the list of services eligible for support under the E-rate Program;

• Prohibit the provision of free services to schools and libraries receiving discounts under the E-rate Program and clarify USAC's procedures for service substitutions; and

• Allow unused funds from the E-rate Program to be carried forward and allocated in the next funding year.

The Commission also adopted a second further notice of proposed rulemaking which seeks comment on ways to improve the E-rate Program. Among other questions, the Commission asks whether it should modify: (1) the discount matrix used to determine the level of discounts for which applicants are eligible; (2) the current competitive bidding process; (3) current rules relating to wide area networks; and (4) current procedures for recovery of funds. It also seeks comment on whether it should adopt a ceiling on the amount of funding a school or library can request on an annual basis.

Two months after wireless local number portability ("LNP") began, it remains a controversial issue in the telecommunications industry. Technological and policy problems continue to be debated and addressed by the Commission and members of the industry.

Telemarketing Developments. The Direct Marketing Association, the Newspaper Association of America and NeuStar, which administers the Local Number Portability Administration Center, are working to create a data file that telemarketers can use to determine whether a wireline number has changed to a wireless number. Under the Telephone Consumer Protection Act, telemarketers are prohibited from making autodialed calls to wireless telephones. Before wireless LNP, telemarketers could easily distinguish between wireless and wireline consumers based upon telephone numbers. Now that consumers can port wireless and wireline numbers, however, telemarketers have a much more difficult time in identifying numbers associated with wireless and wireline telephones. Eventually, telemarketers should be able to access information regarding newly ported wireless numbers through a secure site on the Internet for a fee.

Limited Waiver of Wireless LNP. The Commission granted a limited waiver of its wireline-to-wireless porting requirement for certain local exchange carriers ("LECs") that have less than two percent of the nation's subscriber lines until May 24, 2004. The waiver applies to all two percent carriers operating within the top 100 Metropolitan Statistical Areas that had not received a request for local number porting from a wireline carrier before May 24, 2003 or a wireless carrier that has a point of interconnection or numbering resources in the rate center where the customer's wireline number is provisioned.

According to the Commission, the LECs covered by this waiver face technological and operational problems in modifying their networks to provide wireline-to-wireless porting. Specifically, many of these so-called two percent carriers had not received requests to port numbers from other wireline carriers by May 24, 2003. Accordingly, they did not have the necessary hardware and software to provide porting and have not had time to ensure that any network upgrades work reliably and accurately. Some two percent carriers also do not have the experience to implement accurate porting. The Commission determined that it was therefore in the public interest to grant these carriers a limited waiver.

The National Cable and Telecommunications Association ("NCTA") was among organizations filing petitions for reconsideration or clarification of the FCC's new broadcast flag rules. The rules were intended to provide copy protection for broadcast content and prevent its redistribution on the Internet. NCTA's petition addresses four areas in which the rules or misinterpretations of the rules could cause "inadvertent departures" from the agency's goals. The petitions were due January 2, 2004.

NCTA said the Commission put an "inadvertent freeze on network innovation" with the rule that requires a multichannel video program distributor ("MVPD") to "use 8-VSB, 16-VSB, 64- QAM or 256-QAM signal modulation" on its network. If an operator wanted to use a more effective signal modulation approach, it would have to seek a rulemaking or waiver. NCTA said the rule placed "a straitjacket on network innovation" by limiting an MVPD's ability to change signal modulation techniques without a rule change or waiver if they carry any unencrypted over-the-air broadcast signals."

The cable association also complained that the new rules give a competitive advantage to DBS networks because satellite boxes are treated differently. NCTA said the FCC's requirements include QAM demodulators used by cable set-top boxes but exclude QPSK and 8-PSK demodulators used by DBS boxes. As a result of this distinction, the rules do not impose the same output, recording, robustness and similar requirements on manufacturers of DBS boxes, their retailers or the customers who purchase them. NCTA said the broadcast flag rules therefore "impose more burdens on cable operators than they do on their chief competitors."

While the FCC was clear about its intentions for consumer equipment, it was "vague" about business equipment, never providing an explicit professional equipment exemption that would "give comfort to businesses that employ demodulation equipment in their ordinary course of business," NCTA said. The association also suggested that if the FCC was offering such an exception through its rule requiring a "written commitment" exemption, cable operators should not have to assume that burden. In NCTA's view, any MVPD that had filed a registration statement with the FCC should not be required to file an additional "written commitment" declaring itself a cable system in order for the FCC to consider it an MVPD under the broadcast flag rules. "This would be consistent with the Commission's ongoing commitment to reduce unnecessary paperwork," NCTA argued..

Finally, NCTA asked the Commission to clarify that cable operators may distribute programming over "robust" home networks. The association believes the rule means programming could be transferred from one in-home device to another without an inspection for the flag in every transport. The cable industry had suggested a "gateway device" to do the initial inspection but then allow content to be transferred between boxes within a secure home network. NCTA said that while it appeared the FCC had agreed to that approach, some industry players might think otherwise, so the agency should clarify the situation.

The FCC is expected to release a rulemaking proposing that cable and wireless providers become subject to mandatory service outage reporting requirements. Last summer's major blackout and mounting homeland security concerns are the driving forces behind this rulemaking, which will seek to obtain more comprehensive information on future significant service outages. Currently, only wireline providers are subject to mandatory service outage reporting requirements. In contrast, wireless providers face voluntary reporting, which is triggered by a service outage that lasts for at least thirty minutes and affects 30,000 or more customers.

Although many industry sources view the collection of service outage information as an important goal, there are several complicated issues developing in the rulemaking that will require resolution. One issue is whether the wireless and cable service outage reporting would be mandatory or voluntary. Some industry officials claim that a voluntary reporting system would be more effective than mandatory reporting. In response, other industry officials cite a recent trial of voluntary reporting that had less than fifty percent participation.

If the FCC adopts mandatory reporting requirements, it will face the complex task of adopting metrics for different services. Several industry sources have questioned whether the reporting requirements would cover switch or cell cite outages. A final difficulty the FCC would face regarding metrics would be how to draft measurements for different services.

In addition to addressing the metrics issue, the FCC would have to adopt a scheme for protecting proprietary information, if reporting becomes mandatory. A focus group in the FCC's Network Reliability and Interoperability Council recently suggested a system of anonymous reporting. However, a state critic of that suggestion claimed that under a system of anonymous reporting, providers might file reports only for months in which they did not have a service outage.

The Consumers Union recently announced that it will ask the FCC to prevent cell phone providers from "locking" handsets with codes that prevent consumers from using one handset on another provider's network. According to the Consumers Union, there is no legitimate reason for cell phone providers to "lock" handsets, and handset portability would force wireless providers to be more responsive to consumer dissatisfaction. Consumers Union President James Guest pointed to a recent Consumer Reports survey in which fewer than half of the respondents indicated they were "highly satisfied" with their service.

In response to this criticism, industry advocates explained that cell phone providers "lock" phones with software to prevent resellers from buying cheap cell phones in the United States and selling them internationally at a huge profit.

The DC Circuit Court of Appeals upheld an FCC decision allowing Verizon Wireless to grant customer-specific concessions. Jacqueline Orloff, a former Verizon customer, had filed a complaint with the FCC, arguing that Verizon's practice of offering unadvertised deals to prospective customers violated the non-discrimination provision of the Communications Act and Verizon's duty as a common carrier. The FCC rejected those claims and Orloff sought judicial review of the FCC's determination.

The DC Circuit explained that commercial mobile radio service providers, such as Verizon, are subject to Title II of the Communications Act. However, the DC Circuit acknowledged that Congress empowered the FCC to exempt Commercial Mobile Radio Service ("CMRS") providers from the tariff filing requirements of Title II. The court further explained that the FCC decided to grant this exemption in 1994, when the FCC concluded that market forces would ensure that rates were lawful and fair.

After it established that there is no statutory provision requiring Verizon to publish its rates, the court addressed Orloff's claim that Verizon's actions constituted "unjust or unreasonable discrimination." According to the court, Verizon was not a dominant carrier in the market in which Orloff lived. As a non-dominant provider, Verizon's actions were merely part of a "competitive marketing strategy." The court concluded that "haggling" is inherent in any competitive market and that Orloff's arguments could be detrimental to competition.

Industry observers believe the decision marks another major step in the transition from the previous regime of controlled, heavily regulated markets to the new regime of deregulated, competition-based markets. The decision has broad impact, however, making it much harder to prove discrimination in any detariffed, competitive market, including both wireless and long distance.

Despite issues of character and fitness being raised by several parties, the FCC has now approved the assignment or transfer of WorldCom's licenses to the newly formed MCI upon its emergence from bankruptcy. Although the FCC noted its obligation to assess an applicant's qualifications to be a Commission licensee, it declined to "second-guess" the extensive corporate governance reforms undertaken and reviewed by the SEC and the bankruptcy court. The FCC noted that ongoing legal proceedings will determine any liability for acts by the "old" WorldCom, and concluded that the license transfer would be in the public interest, in large part because the individuals charged with misconduct are no longer with the company. In so holding, the FCC specifically noted that the public interest standard for common carrier licenses -- where "content is divorced from conduit" -- differed from that applied in the broadcast context.

The Senate passed a $373 billion spending package on January 22 that includes provisions to change the national media ownership limit to 39 percent.

The new cap, approved by a 65-28 vote, overturns an FCC decision in June 2003 that would have increased the amount of the national audience that television networks may reach from 35 percent to 45 percent. The provision was part of a contentious, catchall spending bill that the House of Representatives passed in December. Many House and Senate members had sought to restore the 35-percent limit, arguing that allowing networks to acquire more stations would staunch market diversity and local reporting. Met with such resistance, the White House threatened to veto any spending bill that would reverse the FCC decision. Congress ultimately settled on a 39-percent compromise that would be permanent. That percentage represents the national audience that News Corp.'s Fox network and Viacom's CBS network currently reach and means that it would be difficult for either media conglomerate to acquire more local stations without divesting others. General Electric Co.'s NBC network owns local stations that reach about 34 percent of the audience, while Walt Disney Co.'s ABC network reaches about 24 percent.

The passage of the spending measure came two days after Democrats voted to keep debating its provisions. Democrats objected to the ownership provisions among others in the spending bill. "We will say more about that in the future," noted Senate Majority Leader Tom Daschle, D-S.D., a longtime critic of a media ownership increase. Senate Commerce Committee Chairman John McCain, R-Ariz., also raised concerns about the FCC's relaxation of its cross-ownership rules, which he called equally as "onerous" as the 39-percent ownership limit.

The legislation heads to President Bush, who is expected to sign it. It is possible that the FCC could initiate a rulemaking at any time to change the media ownership limit, although sources say that scenario is unlikely. Meanwhile, a federal appellate court in Philadelphia is weighing challenges filed to the FCC's June decision relaxing the media ownership cap and other broadcast rules.

The cable industry, the motion picture association, performing rights organizations that distribute copyright royalties and DirectTV were among those petitioning the FCC in late December to reconsider its so-called "plug and play" Order, which sets out technical, labeling and encoding rules that promote compatibility between cable and consumer electronic devices.

The Commission in late 2003 adopted rules for digital cable "plug and play" compatibility. Petitions for reconsideration of the Order adopting the rules were due December 26, the day the rules took effect. Under the plug and play rules, consumers will be able to purchase "digital cable ready" DTV receivers that will meet uniform standards. These sets will be able to connect directly to digital cable systems without the need for a set-top box. The sets would require a security card from the local cable provider to be inserted in the receiver. A set-top box still would be needed for two-way services such as video on demand that are not covered by the new rules.

Perhaps of most interest to broadcasters is the new requirement that "digital cable ready" sets must include an over-the-air DTV tuner.

Of concern to NCTA, among other issues, was clarification of the rules for carrying program and system information protocol ("PSIP") data. NCTA said that a Memorandum of Understanding between the cable and consumer electronics industries that was filed with the FCC in 2003 was "delicately structured" to protect conditional access, preserve the economic structure of the cable business and ensure that cable had technological tools to "provide even more attractive services to customers." NCTA stressed that testing is important because "hackers are waiting" with digital boxes, filters and Web sites to infiltrate the cable business.

Also filing a petition for reconsideration was the Motion Picture Association of America. Among its recommendations are that the Commission require that the capability for selectable output control be built into devices and that it clarify a section of the order to say it did not abrogate any contract obligations of multichannel video program distributors.

In a joint petition, Broadcast Music Inc. ("BMI") and the American Society of Composers, Authors & Publishers ("ASCAP") stated that they want specific authority to decrypt, monitor and copy audiovisual works using their computer systems. The groups monitor the performance of audiovisual works by local TV stations and broadcast, cable and satellite networks to distribute royalties to the creators and copyright owners. They use automated tracking techniques on computers, including personal computers. While acknowledging that the FCC had issued a Second Further Notice of Proposed Rulemaking on the use of personal computers as authorized devices in plug and play, the groups fear overly restrictive licensing terms would make royalty distribution too expensive.

BMI and ASCAP proposed that the FCC add a provision that performing rights societies "shall not be prevented by the rules from decrypting any digital rights management method" if the decryption is done solely to monitor performance and distribute royalties in the normal course of business. Under their proposal, those running any approved digital rights management method would have to make available to the performing rights societies the ability to access any encrypted information for business purposes.

The FCC released a Notice of Proposed Rulemaking and Order ("NPRM and Order") on December 30, 2003, seeking comment on the application of cognitive radio technology to facilitate spectrum access, efficiency and reliability. The FCC subsequently released details of the NPRM and Order, although it has not yet been published in the Federal Register and comment deadlines have not been triggered.

Cognitive radios can search the radio spectrum, sense the radio frequency environment and operate in spectrum not used by others. By operating in the unused spaces in the spectrum, cognitive radios can enable better and more efficient use of the spectrum. The following discusses some areas of potential interest in which the FCC seeks comment.

Secondary Markets. The FCC is interested in how cognitive or "smart" radios can be used in secondary markets, where licensees and third parties enter into voluntary spectrum use agreements. The FCC suggests that a cognitive radio could be developed to "negotiate" with a licensee's system and use spectrum only if agreement is reached between a device and the system. In this manner, a cognitive radio could incorporate a mechanism that would enable sharing of spectrum under the terms of an agreement between a licensee and a third party.

The FCC notes that leasing arrangements may be made easier through the use of emerging technologies such as cognitive radios. A lease, for example, could specify the frequencies available, power levels and locations where the spectrum could be used and time limits on use. A cognitive radio could ensure that the lease terms are met. Eventually, cognitive radio technology may allow licensees and potential lessees to negotiate for leased spectrum use on a real-time basis, without needing prior leasing agreements with all potential lessees.

Spectrum Access and Reversion. Another scenario in which the FCC envisions using cognitive radio technologies would enable licensees entering into leasing arrangements to retain the right to "interrupt" or preempt a lessee's use temporarily in order to gain immediate access. The FCC envisions that spectrum reversion would most likely apply to the leasing of spectrum from public safety entities, if such leasing is ultimately permitted by the FCC. Although these issues may be of particular import to possible public safety leasing, the FCC seeks comment on interruptible leasing by licensees other than public safety entities.

Interoperability Between Communications Systems. Cognitive radios may contribute to the provision of E911 by connecting different systems using different air interfaces. The FCC seeks comment on how cognitive radio technologies can provide support to wireless E911 services.

Mesh Networks. The FCC notes that "mesh networks" can allow radio use to expand to areas beyond the reach of network base stations. This capability, the FCC suggests, could make it possible to deploy operations in areas where line of sight transmission is obstructed. The FCC seeks comment on how mesh networks might serve the agency's efforts to facilitate broadband communication services to consumers, and any necessary rule changes.

In November, California Governor Arnold Schwarzenegger (R) issued an executive order directing state agencies to undertake a comprehensive six-month review of the proposed and current regulations regarding the rights and obligations of landline and wireless telecom consumers and providers.

The governor's order was issued at the same time the Cal. Public Utilities Commission was considering whether to place the controversial proposal entitled "The Telecommunications Consumer Bill of Rights" on the agency's January 22nd agenda for a final vote. In July of last year, CPUC Commissioner Carl Wood released his final draft of the proposed Telecommunications Consumer Bill of Rights, a consumer protection measure setting forth basic consumer rights that all communications service providers in California, including both wireline and wireless providers, would be required to follow, and consumer protection rules that the service providers would be required to abide by in order to protect consumers' rights. Voting on the proposed bill of rights has been postponed several times since the legislation was introduced.

While the governor acknowledges that he does not have the authority to compel the PUC, as an independent constitutional agency, to follow his executive order, he has asked that the PUC voluntarily comply with the terms of his directive. California PUC Commissioner Susan Kennedy supports the governor's request to suspend the vote on adopting new rules until June, pending a full review of the proposed and current regulations. Commissioner Kennedy has been vocal in opposing the inclusion of wireless carriers in the proposed Consumer Bill of Rights legislation, and is expected to introduce her own proposal for legislation that would only apply to wireline carriers. Kennedy's aides indicate that her concern is that wireless carriers should not have wireline consumer disclosure and service requirements, given the recent burdens associated with the FCC's November 24 deadline for implementation of full wireless number portability.

California PUC Commissioner Loretta Lynch questioned the timing of the governor's request, and speculated that the request may have been merely an attempt to disrupt the Commission's plans to vote on the proposal by Commissioner Carl Wood. Wireless carriers in California are strongly opposed to the proposed Consumer Bill of Rights, and argue that the bill of rights will harm the state's economy and cause wireless carriers to scale back investment in new infrastructure and customer care. A recent study by the Law & Economics Consulting Group estimates that the overall impact of the proposed CPUC rules could exceed $2.1 billion annually, and that as a result, wireless consumers could face an increase of nearly $4 per month in rules-related implementation costs. Wireless carriers claim that the strong market competitiveness among wireless carriers in California combined with the state's existing rules provide adequate protection for consumers.

On December 29, 2003, the New York-based United States Bankruptcy Judge overseeing the MCI chapter 11 bankruptcy case approved a settlement whereby Verizon will pay MCI $169 million to resolve a reciprocal compensation dispute that arose six years ago.

Specifically, the parties disagreed as to whether Verizon should pay MCI reciprocal compensation on the phone calls by Verizon's customers to Internet service providers ("ISPs") that are MCI customers. Verizon argued that it is not liable for reciprocal compensation because many ISPs use the MCI facilities for local connections, and because the calls made by Verizon's customers to such ISPs are usually one-way in nature, resulting in Verizon's paying much more in reciprocal compensation to MCI than MCI pays to Verizon. MCI has argued that Verizon is required to pay reciprocal compensation on those calls.

The settlement resolves many cases in state and federal courts, as well as various proceedings before the Federal Communications Commission and elsewhere. In addition, the terms of the settlement between Verizon and MCI set forth the parties' agreement for payment of fees associated with telecommunications traffic routed between the two companies for the next three years.

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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