United States: Communications Law Bulletin – June 2006 – Part 1

June was far from a sleepy summer month for the communications industry. Legislative developments came quickly in areas ranging from Net neutrality and video competition to broadcast indecency, and the courts weighed in with a long-awaited affirmation of the Federal Communications Commission’s ("FCC") rules on competitive access to incumbent telephone companies’ facilities. These and many other developments are reported here, along with our usual list of deadlines for your calendar.

On June 16, the U.S. Court of Appeals for the D.C. Circuit upheld the FCC’s February 2005 Triennial Review Remand Order ("TRRO") against cross-appeals by incumbent local exchange carriers ("ILECs"), competitive local exchange carriers ("CLECs") and other parties.

The TRRO was the FCC’s fourth attempt, after three previous reversals, to fashion unbundling rules governing competitors’ access to ILEC network elements under Section 251 of the Communications Act ("the Act"). Although the TRRO cut back on the availability of ILEC unbundled network elements ("UNEs") provided in the FCC’s prior orders, ILECs challenged certain aspects of the unbundling in the TRRO as still too strict. CLECs and other parties appealed other aspects of the order as having eliminated or relaxed ILEC unbundling obligations unduly.

Judge Sentelle, writing for a panel that also included Chief Judge Ginsburg and Judge Griffith, rejected all six of the challenges to the TRRO, commenting that "the Commission’s fourth try is a charm." Applying the Chevron deference standard, the court held that the FCC had satisfactorily explained its policy choices based on the record before it. The court first rejected ILEC arguments that the FCC had failed to give sufficient consideration to the availability of tariffed special access services in its unbundling analysis. It held that the FCC had considered special access services but found that local service competition based on such services was "limited" and that an inquiry into the impact of those services on the extent to which CLECs are "impaired" in competing with ILECs in individual markets would be "‘excessively complicated’" and "‘utterly impracticable.’" Thus, the FCC "provided a reasoned explanation for its decision not to eliminate unbundling solely on the basis of limited [special access]-based competition." The court then rejected an ILEC challenge to the criteria set forth in the TRRO governing access to ILEC high-capacity DS1 and DS3 local subscriber "loops" and transport UNEs. Contrary to the ILECs’ arguments, the court found that the FCC justified its criteria on the basis of both actual and potential competition and made "‘reasonable trade-offs’" in assessing "the costs and benefits of unbundling."

The court also rejected the CLECs’ arguments that the FCC should have found that they are impaired in competing with ILECs nationwide without access to local switching facilities used in the consumer mass market, high-capacity loops and DS1 transport. With regard to DS1 high-capacity loops, the court noted that, in rejecting a nationwide impairment finding, the FCC properly followed the court’s directions in previous appeals to fashion a more granular impairment standard. The FCC also reasonably rejected, as an "administrative nightmare," the CLECs’ fallback position that impairment should have been assessed with regard to DS1 loops on a building-by-building basis. With regard to local switching UNEs, the court rejected the CLECs’ argument that the FCC’s nationwide finding of non-impairment is insufficiently granular, noting that the FCC was not required to find variation among markets where the record does not support it. The CLECs’ widespread deployment of switching facilities supports the FCC’s conclusion that CLECs can compete nationwide without access to ILEC local switching UNEs in the consumer mass market.

Finally, the court rejected various miscellaneous arguments, including non-carriers’ procedural objections to the FCC’s non-impairment finding as to mass market local switching and the CLECs’ and other parties’ challenges to the transitional rules for implementing the TRRO. Contrary to the procedural arguments, CLECs, rather than ILECs, bear the burden of proof with regard to impairment, and the "reasonably efficient competitor" standard used in finding non-impairment with regard to mass market local switching was a "logical outgrowth" of the Notice of Proposed Rulemaking. Both Covad Communications Company, the lead petitioner in the consolidated appeals, and AT&T Inc. commended the decision for bringing closure to the three years of legal wrangling since the release of the Triennial Review Order in 2003 and in bringing stability to the industry.

In the wake of the TRRO’s affirmance, a group of CLECs withdrew their petition for forbearance relief from various unbundling criteria in the TRRO on June 23. The CLECs had requested forbearance from the wire center-based test for determining access to DS1 loops in predominantly residential and small business buildings and certain criteria governing eligibility for enhanced extended loops (combinations of unbundled loops and transport, or "EELs"). It had become clear that the FCC preferred not to act on the petition because of its current procedural posture. Chairman Kevin Martin and Commissioner Tate oppose the petition, Commissioners Copps and Adelstein support it and Commissioner McDowell has recused himself on account of his CLEC background. Under the Act, a forbearance petition takes effect automatically if the FCC does not deny it by the statutory deadline. Because the Democratic Commissioners had criticized the majority for allowing a Verizon forbearance petition to take effect automatically on a 2-2 vote in March, however, they did not want to be in the awkward position of enabling the CLEC petition to take effect automatically on a 2-2 vote. Analysts observed that, although the withdrawal means that CLECs will continue paying higher special access rates for access to high-capacity circuits, they are "well positioned to stay the course and maintain market share in the small business … segment" because the TRRO maintains access to DS1 loops and transport, according to Medley Global Advisors. Russell Merbeth, counsel for Echelon Telecom, Inc., expressed the hope that Congress would step in and provide the requested relief as part of the current reform effort.

On June 15, President George Bush signed legislation that significantly raises the fines imposed on broadcasters found to have broadcast indecent programming. The new law increases the maximum fine for a single indecency violation by tenfold to $325,000. Approval of the bill follows closely the FCC’s denial of a petition for reconsideration filed by the CBS-owned stations that were assessed large fines over the Janet Jackson Super Bowl incident. The legislation does not apply to cable or satellite broadcasts, and it does not define the meaning of the term "indecent." After the signing ceremony, President Bush stated that the "problem we have is that the maximum penalty that the FCC [could] impose under current law [was] just $32,500 per violation. And for some broadcasters, this amount is meaningless." While the bi-partisan legislation gives the FCC a more powerful weapon with which to punish broadcasters who air indecent content, some lawmakers believe the FCC needs to hone its definition of indecency. Rep. Walden, for example, declared recent FCC rulings "confusing."

In response to FCC rulings and the tenfold increase in fines authorized by Congress, PBS has issued indecency guidelines for its member stations and producers. Producers have been told to fully remove offending words (rather than just the offending portion of compound words) and to pixelate or otherwise obscure lips shown uttering them. These guidelines largely were issued because any indecency violations committed by public broadcasters conceivably could render many smaller member-supported public television stations insolvent. This result has led to harsh criticism that the new federal fines will chill expression because of the FCC’s standards are not clear. Many broadcasters fear that these issues already are causing self-censorship because programming decisions will be based in part on fear of fines, rather than on assessments of what is necessary to produce quality programming content.

On June 1, Robert M. McDowell officially joined the FCC as Commissioner, filling the fifth and final open position and establishing a Republican majority for the first time during Chairman Martin’s leadership. Industry analysts expect that Chairman Martin now will try to move quickly on key items on which he has been unable or unwilling to negotiate with Democrats. One issue that apparently will not be addressed by the FCC in the near term, however, is the multicast must-carry order. According to news reports, this topic was removed from the June 21 FCC open-meeting agenda because Commissioner McDowell reportedly had constitutional and other concerns with the proposed order.

On June 21, 2006, the Commission adopted a Further Notice of Proposed Rulemaking seeking comment on the Commission’s media ownership rules, which the Third Circuit in Prometheus v. FCC remanded to the Commission after staying its 2002 Biennial Review Order. Although the Further Notice has not yet been released, the FCC has announced that it will invite comment on the following FCC Rules:

• Local television ownership limit;

• Local radio ownership limit;

• Newspaper-broadcast cross-ownership ban;

• Radio-television cross-ownership limit;

• Dual network ban; and

• UHF discount on the national television ownership limit.

Specifically addressing the rules remanded in Prometheus, the Commission invites comment on the following issues:

• Whether the Commission should revise the limits adopted in the 2002 Biennial Review Order on the number of stations that can be commonly owned in one market, or whether there is additional evidence or analysis available now upon which the Commission can rely to further justify the ownership limits that the Commission adopted in 2002;

• Whether the Commission should revise the numerical limits it adopted in 2002 or whether there is additional evidence available to further justify them; and

• How the Commission should address radio/television and newspaper/broadcast cross-ownership issues.

The Further Notice also seeks comment on the court’s remand of certain proposals relating to minority ownership and minority participation in the current media environment. In addition, the Further Notice seeks comment on whether, as a result of competition, the rules remanded to the Commission by the Third Circuit, as well as the dual network rule (which was not at issue in Prometheus), are in the public interest. The Commission has allocated $200,000 to conduct studies on a variety of ownership-related topics and plans to hold six public hearings on the Further Notice in various locations around the country. The Commission has said that comment cycle will be extended beyond the normal period to 120 days.

Chairman Martin and Commissioners Tate and McDowell expressed their desire to balance competition and market forces with the goals of localism and diversity and acknowledged the need to reach out for public comment. Commissioners Adelstein and Copps, however, dissented in part from the Further Notice. Commissioner Adelstein likened the Further Notice to submission of a high-school term paper for a Ph.D thesis, stating that "This Commission failed in 2003, and if we don’t change course, we will fail again." He cited the following as deficiencies of the Further Notice: the failure to allow the public to comment on specific proposals before issuance of final rules; the failure to commit to completing the localism proceeding and rulemaking before changing the ownership rules; and the failure to commit to any final decision in a comprehensive manner. "Given the history of this proceeding," he added, "these failings are astonishing." Commissioner Copps agreed that the Commission must commence the media ownership proceeding, but, like Commissioner Adelstein, took issue with the manner of its implementation. Commissioner Copps called for greater public participation in the process ("A handful of generalized FCC hearings are not themselves enough"), meaningful research and data ("a few studies done on the cheap just are not going to tell us what we need to know"), and greater transparency ("I am deeply disappointed that this Notice does not contain a specific, up-front commitment to share proposed media concentration rules with the American people in advance of the final vote."). Commissioner Copps also expressed his dismay "that localism is not front-and-center in this proceeding" and that "this item fails to commit to specific efforts to advance ownership by minorities." Meanwhile, Chairman Martin has promised to "incorporate into this proceeding the efforts undertaken on this issue since the last examination of our media ownership rules" and described the proceeding as a "comprehensive review." He acknowledged that "[p]ublic input is integral to this process," emphasizing that the Commission is providing an extended 120-day comment period and will conduct half-a-dozen public hearings on media-ownership issues across the country.

The FCC’s special 27-member panel ("Panel") investigating Hurricane Katrina’s impact on communications infrastructure and services has released its report and recommendations for the improvement of disaster preparedness, network reliability and first responder communications. Concurrently with the release of the report, the FCC issued a notice of proposed rulemaking seeking comment on the Panel’s recommendations.

The Panel’s recommendations are organized generally into four areas:

• Pre-positioning the communications industry and the government to achieve grater network reliability and resiliency. The Panel recommends proactive (rather than reactive) measures be taken, including a "Readiness Checklist" for the communications industry that would help speed response and recovery efforts. The checklist would include the development of formal business continuity plans, training exercises and other procedures and maintaining pre-positioned supplies and equipment. The Panel also recommends that the FCC: (1) undertake community education campaigns to educate the public safety community about non-traditional emergency communications tools; and (2) adopt a prioritized system of automatically waiving regulatory requirements and granting special temporary authority in certain situations and coordinating federal outage and infrastructure reporting requirements in times of crisis.

• Improving coordination of recovery efforts. The Panel recommends that the FCC work with other federal agencies to develop national credentialing requirements and guidelines that would enable communications personnel quicker access to affected areas after a disaster. The Panel also makes several recommendations to improve communications and coordination efforts among federal, state and local authorities and the private sector.

• Improving the operability and interoperability of public safety and 911 communications. The Panel recommends encouraging state and local public safety entities to maintain extra equipment components that would be needed to restore public safety communications immediately after a disaster. In addition, the Panel suggests that the FCC facilitate interoperability between first responders, such as the development and approval of regional plans for the use of 700 MHz systems. The Panel further recommends that service providers and network operators maintain extra 911 equipment and infrastructure to ensure the availability of emergency capabilities.

• Improving the communication of emergency information to the public. The Panel proposes that the FCC develop a public education and awareness program regarding the Emergency Alert System ("EAS") and ensure that all Americans, including those with disabilities and/or who do not speak English, can receive emergency communications.

The FCC’s notice of proposed rulemaking asks several overarching questions, which could significantly affect the communications industry. For example, the FCC questions whether the recommendations should be implemented by voluntary industry consensus or regulatory fiat. In addition, the FCC asks whether it should take additional measures beyond the Panel’s recommendations to promote more effective, efficient response and recovery efforts. The FCC also asks generally about its authority and jurisdiction to implement the Panel’s recommendations. Comments and replies are due 30 and 45 days, respectively, after the notice of proposed rulemaking is published in the Federal Register.

Following opposition by multiple parties to the new rules applicable to designated entities ("DEs"), the FCC adopted on its own motion an order on reconsideration generally affirming, but also clarifying, those rules. In addition, the U.S. Court of Appeals for the Third Circuit rejected a motion to stay the auction pending judicial review of the new rules.

The FCC’s initial DE order, a summary of which is available in the May 2006 edition of the Communications Law Bulletin, made significant changes to the DE rules by including certain "material relationships" as factors in determining DE eligibility, modifying certain unjust enrichment rules, and imposing new reporting requirements on DEs. On reconsideration, the FCC rejected arguments that the new DE rules were adopted without sufficient notice or violate the Communications Act, and confirmed that the new rules apply to the upcoming Advanced Wireless Service ("AWS") auction, currently scheduled for August 9, 2006.

The FCC offered the following clarifications of the new DE rules:

• Meaning of Spectrum Capacity. The FCC’s "material relationship" restrictions require a DE to assess the percentage of its spectrum that will be leased or resold to other parties. The FCC adopted a safe harbor measurement to assist DEs as they evaluate transactions – if the spectrum capacity thresholds are met on a MHz*pops basis, the FCC will find the DEs in compliance with the rules. Entities not meeting the thresholds on a MHz*pops basis, however, still may be found in compliance with the thresholds based on other, unstated factors.

• Grandfathered Agreements. The FCC clarified that agreements entered into by a DE no later than April 24, 2006 are grandfathered for the purposes of existing eligibility benefits and the imposition of unjust enrichment to the extent the DE has no discretion as to the future lease or resale of its spectrum.

• Applicable Services. The FCC clarified that the new "material relationship" rules apply to those services in which leasing is permitted under the FCC’s secondary market rules.

• Unjust Enrichment. The FCC stated that the new ten year unjust enrichment schedule will apply only to licenses that are granted after the release of the new DE rules (i.e., April 24, 2006). Similarly, the requirement that the FCC be reimbursed for the entire bidding credit if a DE loses its eligibility prior to filing the construction notification at the end of the license term will apply only to licenses that are granted after April 24.

The clarifications became effective on June 14, 2006, after they were published in the Federal Register.

Disappointed with the FCC’s ruling on reconsideration, several parties had asked the U.S. Court of Appeals for the Third Circuit to stay the upcoming AWS auction pending judicial review of the new DE rules. Council Tree Communications, Inc., Bethel Native Corp., and the Minority Media and Telecommunications Council, which filed for a stay, argued that "this case presents issues of vital importance that demand immediate judicial intervention" before the AWS auction is held. Other carriers, however, although also disappointed by the FCC’s ruling, decided not to file suit because they did not want to further delay the AWS auction. The FCC has stated that 252 short form applications have been filed to participate in the AWS auction, 166 of which claim DE status.

Oral arguments regarding the request to stay the AWS auction were held before the Third Circuit on June 28, 2006. Only one day after oral arguments, the three-judge panel rejected the motion. Although the judges expressed some sympathy for the petitioners’ position, the court concluded that they had failed to satisfy two of the four part test necessary for a stay. Specifically, the court stated that the petitioners did not demonstrate that the stay was necessary to prevent irreparable harm or that the stay was in the public interest. The court did not reach the merits of other two prongs of the test -- whether the petitioners were likely to prevail on the merits of their case and whether a stay would cause substantial harm to other parties. The court also did not reach the merits of whether the FCC provided sufficient notice prior to adopting the new rules, leaving the issue to be resolved by the court panel that considers the pending petition for review of the new rules.

In related events, the Wireless Telecommunications Bureau issued an order clarifying certain implementation and reporting procedures under the new DE rules. The Bureau stated that it is developing interim procedures for DEs to file information and/or applications regarding: (1) events that would trigger a "material relationship," and (2) data to be including in DEs’ annual reports. The interim procedures will be in place while the Bureau designs permanent forms and procedures and modifies its Universal Licensing System. DEs will not be required to file for FCC approval of reportable eligibility events or annual reports until the effective date of the interim procedures is announced by the FCC.

Nokia Corp. ("Nokia") and Siemens AG ("Siemens") agreed to combine their telecommunications equipment businesses in a joint venture to be called Nokia Siemens Networks. The venture will be owned equally by both companies, but will be based in Nokia’s home of Finland, and Nokia will have a majority of the venture’s board seats. Nokia Siemens Networks will have assets valued at more than $30 billion and is projected to have annual sales of $20 billion. The venture will be the industry’s third largest competitor measured by revenues.

Among the reasons for the deal are the consolidation of the equipment makers’ main customers, the phone companies that operate communications networks, and increasing competition from low-cost Chinese rivals. These forces have spurred equipment makers to seek larger scale. In April, equipment manufacturers Alcatel SA and Lucent Technologies Inc. agreed to merge, and analysts predict more consolidation in the industry.

Nokia and Siemens expect to cut duplicative research and development costs, and to reduce staff by up to 15%, in an attempt to save as much as $1.9 billion annually by 2010. The product focus of the combination will be on broadband and fixed-mobile convergence, in anticipation of their customers’ strategic planning.

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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