Articles Posted in Must-Carry/Retransmission Consent

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The press has been abuzz in recent months regarding the launch of various Internet-based video services and the FCC’s decision to revisit its current definition of Multichannel Video Programming Distributors (MVPDs). In December, the FCC released a Notice of Proposed Rulemaking (NPRM), seeking to “modernize” its rules to redefine what constitutes an MVPD. The FCC’s proposals would significantly expand the universe of what is considered an “MVPD” to include a wide-variety of Internet-based offerings. Today, the FCC released a Public Notice providing the dates by which parties can provide their own suggestions regarding how to modify the definition of “MVPD”. Comments are now due February 17, 2015, with reply comments due March 2, 2015.

The Communications Act currently defines an “MVPD” as an entity who “makes available for purchase, by subscribers or customers, multiple channels of video programming.” Specific examples given of current MVPDs under the Act are “a cable operator, a multichannel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor who makes available for purchase, by subscribers or customers, multiple channels of video programming.” The Act states, however, that the definition of MVPD is “not limited” to these examples.

Historically, MVPDs have generally been defined as entities that own the distribution system, such as cable and DBS satellite operators, but now the FCC is asking for comments on two new possible interpretations of the term “MVPD.” The first would “includ[e] within its scope services that make available for purchase, by subscribers or customers, multiple linear streams of video programming, regardless of the technology used to distribute the programming.” The second would hew closer to the traditional definition, and would “require an entity to control a transmission path to qualify as an MVPD”. The FCC’s is looking for input regarding the impact of adopting either of these proposed definitions.

What all this means is that the FCC is interested in making the definition of “MVPD” more flexible, potentially expanding it to include not just what we think of as traditional cable and satellite services, but also newer distribution technologies, including some types of Internet delivery.

Underscoring its interest in this subject, the FCC asks a wide array of questions in its NPRM regarding the impact of revising the MVPD definition. The result of this proceeding will have far-reaching impact on the video distribution ecosystem, and on almost every party involved in the delivery of at least linear video programming. Consequently, this is an NPRM that will continue to draw much attention and merits special consideration by those wondering where the world of video distribution is headed next.

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Few dates on the broadcasters’ calendar are easier to miss than the deadline for TV stations (and a few fortunate LPTV stations) to send their must-carry/retransmission election letters to cable and satellite providers in their markets. Because it doesn’t occur every year, or even every other year, but every third year, the triennial deadline can slip up on you if you don’t closely monitor our Broadcast Calendar. For those that haven’t been paying attention, October 1, 2014 is the deadline for TV stations to send their carriage election letters to MVPDs. The elections made by this October 1st will govern a station’s carriage rights for the three-year period from January 1, 2015 to December 31, 2017, and this will be the first set of election letters that stations must immediately upload to their online public inspection file at the FCC.

I noted in a post here three years ago that the impact of these elections is becoming more significant with each three-year cycle. In particular, that post focused on the fact that network-affiliated stations can no longer consider retrans revenue to be “found” money, but instead as revenue essential to both short-term and long-term survival. Short-term, in that stations must compete for programming and advertising against cable and satellite programmers that have long had two revenue streams–advertising and subscriber fees. Long-term, in that there was little doubt that networks were looking to charge affiliates more for network programming by taking an ever larger share of retrans revenue, and that it was only a matter of time before networks began selecting their affiliates based not upon past performance, but upon which station could bring the best financial package to the network going forward.

As we’ve learned over the past year in particular, that means not just negotiating the best retransmission deals possible, but sending an increasing portion of those revenues to the network. Wells Fargo analyst Marci Ryvicker, who will be one of our speakers at the 2014 Pillsbury Trends in Communications Finance event in New York next month, noted that pattern just a few weeks ago. Using CBS’s recent projections on the overall revenue it expects to receive from affiliates, she was able to calculate the monthly affiliate cost for CBS programming at $1.30 per subscriber by 2020. Add to that the station’s costs for negotiating retrans deals, as well as the increasing cost of producing local programming and securing attractive syndicated content, and it is clear that no network affiliate can afford to be cutting substandard retrans deals and hope to survive in the long term. MVPDs may grumble about those “greedy stations” during retrans negotiations, but generating the revenue necessary to retain the programming that attracts cable, satellite, and over-the-air viewers (not to mention advertisers) is not an optional activity for local TV stations.

The impact of this is not, however, limited to purely matters of retransmission. Yes, broadcasters can no longer afford to enter into amateur retrans deals that threaten to alienate their networks by providing below-market rates, or which sloppily authorize retransmission or streaming rights far outside the local broadcaster’s market (this mistake becoming even more consequential if the FCC moves forward in eliminating the network non-duplication rule). The bigger trend is that these economic forces are driving consolidation in the TV industry.

Building large broadcast groups allows co-owned TV stations the critical mass necessary to negotiate difficult retrans deals against the much-larger cable and satellite operators, and, where necessary, to withstand the economic impact of a retrans impasse when it happens. Similarly, larger TV groups are better positioned to negotiate the best possible programming deals with their networks (keeping in mind that “best possible” isn’t necessarily the same as “good”).

Single stations and small station groups routinely have to punch well above their weight by employing smart executives and counsel with deep experience in retrans negotiations to survive in this increasingly harsh environment. That is what makes the FCC’s prohibition earlier this year on certain joint retrans negotiations, as well as current efforts on Capitol Hill to broaden that prohibition, so perverse. By eliminating one of a small broadcaster’s best options for cost-effectively negotiating viable retransmission agreements, the government is pushing those broadcasters to sell their stations to a larger broadcaster (or some would say, to the government itself). In the current environment, a station that fails to sell to a larger broadcaster possessing the skill and mass necessary to effectively negotiate retransmission agreements risks losing its network affiliation to just such a station group, precisely because that group can frequently deliver better retrans results.

So as you send out your elections this year, keep in mind that while the election process itself hasn’t changed, what you will need to do afterwards has changed dramatically. More to the point, think hard about what you need to be doing with your retrans negotiations if you still want to be around in three years to send out that next batch of election letters.

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July 2014

Pillsbury’s communications lawyers have published FCC Enforcement Monitor monthly since 1999 to inform our clients of notable FCC enforcement actions against FCC license holders and others. This month’s issue includes:

  • Multi-Year Cramming Scheme Results in $1.6 Million Fine
  • Violation of Retransmission Consent Rules Leads to $2.25 Million Fine
  • $25,000 Fine for Failure to Respond to FCC

Continued Cramming Practices Lead to Double the Base Fine

The FCC recently issued a Notice of Apparent Liability for Forfeiture (“NAL”) against a Florida telephone company for “cramming” customers by billing them for unauthorized charges and fees related to long distance telephone service.

The FCC had received more than 100 customer complaints against the company. The complaints alleged that the company had continued to bill the customers and charge them late fees after they had paid their final bills and canceled their service with the company. The FCC opened an investigation in response to the complaints and issued a Letter of Inquiry (“LOI”) to the company in July 2011, but the company did not submit a timely response. The FCC issued an NAL in 2011 proposing a $25,000 fine against the company for its failure to reply to the LOI, and ultimately issued a Forfeiture Order fining the company $25,000.

Section 201(b) of the Communications Act of 1934 (the “Act”) requires that that “[a]ll charges . . . in connection with . . . communication service shall be just and reasonable.” Prior decisions of the FCC have determined that placing unauthorized charges and fees on consumers’ phone bills is an “unjust and unreasonable” practice and is therefore unlawful.

The NAL provides information from 11 customer complaints detailing instances where customers attempted to cancel their service and continued to be charged late fees and other fees by the company. The FCC determined that the phone company did not have authorization to continue billing these customers after they canceled their service.

Although the FCC’s Forfeiture Guidelines do not provide a base fine for cramming, the FCC has settled on $40,000 as the base fine for a cramming violation. The NAL addressed 20 cramming violations, which would create a base fine of $800,000. However, the FCC determined that an upward adjustment of the fine was appropriate in this case because the unlawful cramming practices had been occurring since 2011, the company did not respond to the 2011 LOI, and there was a high volume of customers who received cramming charges. Therefore, the FCC increased the proposed fine by $800,000, resulting in a total proposed fine of twice the base amount, or $1.6 million.

Cable Operator’s Retransmission of Six Texas TV Stations Results in Multi-Million Dollar Fine

Earlier this month, the FCC issued an order against a cable operator for rebroadcasting the signals of six full-power televisions stations in Texas in violation of the FCC’s retransmission consent rules.

The cable operator serves more than 10,000 subscribers in the Houston Designated Market Area (“DMA”) in 245 multiple-dwelling-unit buildings and previously had retransmission consent agreements with the stations. However, those agreements expired in December 2011 and March 2012. The cable operator continued retransmitting the signals of those stations without extending or renewing the retransmission consent agreements, and the licensees notified the cable operator that its continued retransmissions were illegal. Subsequently, each licensee filed a complaint with the FCC.

In its May 2012 response to the complaints, the cable operator did not deny that it had retransmitted the stations without the licensee’s express written consent, but said that it had relied on the master antenna television (“MATV”) exception to the retransmission consent requirement. The cable operator noted that it had begun converting its buildings to MATV systems in November 2011 and had hoped to complete the installations before the retransmission agreements expired in December 2011, but did not complete the MATV installation until July 26, 2012.
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In a 6-3 decision released this morning, the Supreme Court didn’t just rain on Aereo’s parade, but drenched it. For a case involving fairly convoluted points of law, the Supreme Court’s decision is surprisingly straightforward: if it walks like a duck and quacks like a duck, no amount of technology will change the fact that it is a duck.

At this early stage of the case–keep in mind this was just about whether an injunction against Aereo should have been issued by the lower courts for one specific type of copyright infringement–the question before the Court was whether Aereo’s system “performs” broadcasters’ copyrighted works, and whether that is a “public” performance. If so, Aereo’s operations infringe on broadcasters’ copyrights in that programming. Aereo’s argument in response was that since its system does nothing until activated by a subscriber, and even then only transmits a single private copy to that subscriber, Aereo was not involved in generating public performances.

The Court strongly disagreed, finding that an essential purpose of Congress’s passage of the Copyright Act of 1976 was to make clear that transmissions of broadcast programming by third-parties to the public (e.g., cable systems) create public performances that implicate copyright law. Specifically, the Court noted “the [Copyright] Act is unmistakable: An entity that engages in activities like Aereo’s performs,” and “the fact that Aereo’s subscribers may receive the same programs at different times and locations is of no consequence. Aereo transmits a performance of petitioners’ works ‘to the public.'”

Aereo’s argument that it is just a renter of receiving equipment fared no better, with the Court stating: “We conclude that Aereo is not just an equipment supplier and that Aereo ‘performs.'” Of note for those concerned about whether an Aereo decision for broadcasters might affect the public’s ability to store other data in the cloud, the Court agreed with the brief filed by the Department of Justice that there is an important distinction between members of the public storing their own content in the cloud and those using the Internet to access the content of others, finding that a transmission to “the public” for purposes of implicating the Copyright Act “does not extend to those who act as owners or possessors of the relevant product.”

However, the most interesting aspect of the decision is that the Court is far more hostile to Aereo than even the 6-3 vote would indicate. Some of the strongest arguments against Aereo are actually found in Justice Scalia’s dissent, which was joined by Justices Thomas and Alito. While criticizing the majority for its “looks like a cable system” premise, in making his best case for finding in favor of Aereo, Justice Scalia makes two telling statements. The first, after he argues that Aereo is just a passive conduit for subscribers’ content reception and therefore does not “perform” broadcasters’ copyrighted content, is his statement noting

“[t]hat conclusion does not mean that Aereo’s service complies with the Copyright Act. Quite the contrary. The Networks’ complaint that Aereo is directly and secondarily liable for infringing their public-performance rights (Section 106(4)) and also their reproduction rights (Section 106(1)). Their request for a preliminary injunction–the only issue before this Court–is based exclusively on the direct-liability portion of the public performance claim…. Affirming the judgment below would merely return this case to the lower courts for consideration of the Networks’ remaining claims.”

Justice Scalia then goes much further, stating:

“I share the Court’s evident feeling that what Aereo is doing (or enabling to be done) to the Networks’ copyrighted programming ought not to be allowed. But perhaps we need not distort the Copyright Act to forbid it.”

He then proceeds to note again that there are other copyright infringement claims before the lower court that should be considered on remand, and that Congress is always free to modify the law to eliminate any perceived “loophole” if necessary.

As a result, while today’s ruling is a 6-3 decision in favor of granting an injunction against Aereo, it ultimately reads like a 9-0 rebuke of Aereo’s business plan. One of the most interesting legal analogies is also found in Justice Scalia’s dissent, where he likens Aereo to a copy shop where the shop owner plays no part in the content copied:

“A copy shop rents out photocopiers on a per-use basis. One customer might copy his 10-year-old’s drawings–a perfectly lawful thing to do–while another might duplicate a famous artist’s copyrighted photographs–a use clearly prohibited by Section 106(1).”

The reason this analogy is (perhaps unintentionally) revealing is that in the Aereo scenario, the subscriber can’t use the system to display his ten-year-old’s drawings; he can only display the content that Aereo puts on the shelf in its copy shop for the subscriber to access–all of which is copyrighted. Even if a particular program has entered the public domain, the broadcast signal–including its combination of program selections, current advertising, and station interstitials–is not in the public domain. In any event, Aereo has never attempted to limit its relay of content to subscribers to public domain materials (which admittedly would be the worst business plan ever).

While there had been some concern among broadcasters (and hope for Aereo supporters) after oral argument in this proceeding that Aereo was gaining traction with its claim that a ruling against Aereo was a ruling against innovation, the Court’s decision states that it sees today’s ruling as narrowly focused on the issue of transmission of broadcast signals, and that parties seeking to expand its principles to issues like cloud computing will have to wait until that issue is actually before the Court. In the meantime, the Court made clear that the only innovation it saw in Aereo was copyright infringement, and that has already been around for a long time.

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Yesterday, the U.S. Supreme Court heard oral arguments in the Aereo case, providing the first indication of how the Justices view the case pitting Aereo against content providers, particularly broadcast networks. For background on Aereo’s technology and the previous lower court cases, Scott Flick of our office has written extensively on the subject, and a variety of his writings on Aereo can be found here. While trying to read the Court’s mind solely through the questions asked by the Justices can be risky, it is fair to say that Aereo encountered some skepticism on its claim to be an innovator and not a copyright infringer.

Given the significant amount of lower court litigation preceding Tuesday’s oral arguments, there wasn’t much in the way of surprises in the arguments made, many of which focused on the question of whether Aereo engages in a “public performance” when it transmits content to paying subscribers requesting that programming. A transcript of the proceeding can be found here. A number of the Justices focused on the question of whether Aereo’s fabled sea of mini-antennas served any purpose beyond seeking to circumvent the Copyright Act of 1976. Chief Justice Roberts noted that Aereo’s system seemed designed specifically “to get around the copyright laws,” and Justice Ginsburg asked Aereo’s counsel if there is any “technical reason” Aereo needed to have 10,000 dime-size antennas to operate, or if it was merely designed that way to “avoid the breach of the Copyright Act.”

What was a bit of a surprise was the extent to which the Justices’ questions focused on Aereo’s strategic effort to cloak itself as just another provider of cloud services. A number of the Justices indicated concern that there might not be an elegant way of ruling against Aereo without risking a ripple effect to cloud-based services, and it was obvious that none were interested in seeing that happen. Justice Kagan sought clarification regarding how Aereo could be distinguished from other cloud service companies, asking:

What if –­­ how about there are lots of companies where many, many thousands or millions of people put things up there, and then they share them, and the company in some ways aggregates and sorts all that content. Does that count?

Counsel for the broadcasters and the Justice Department attempted to respond to this concern, largely reiterating the position taken in the DOJ’s amicus brief:

The proper resolution of this dispute is straightforward. Unlike a purveyor of home antennas, or the lessor of hilltop space on which individual consumers may erect their own antennas . . . [Aereo] does not simply provide access to equipment or other property that facilitates customers’ reception of broadcast signals. Rather, [Aereo] operates an integrated system–i.e., a “device or process”–whose functioning depends on its customers’ shared use of common facilities. The fact that as part of that system [Aereo] uses unique copies and many individual transmissions does not alter the conclusion that it is retransmitting broadcast content “to the public.” Like its competitors, [Aereo] therefore must obtain licenses to perform the copyrighted content on which its business relies. That conclusion, however, should not call into question the legitimacy of businesses that use the Internet to provide new ways for consumers to store, hear, and view their own lawfully acquired copies of copyrighted works.

The catchphrase for this idea in the oral arguments became a “locker” in the cloud, where consumers could safely store their lawfully obtained content, but which would cross the copyright line if stocked for the consumer for a fee with infringing content by a commercial service like Aereo. While a useful analogy, it did not appear to put an end to the Justices’ concern that the line between a fair use and infringement might not always be clear in the cloud. That is certainly true, but it is also true outside the cloud, where copyright questions are notoriously complex and difficult.

Of course, the most interesting aspect of the Court’s diversion into an examination of cloud services is that it is technically irrelevant to the case at hand. It is safe to say that when Congress enacted the Copyright Act of 1976, cloud computing wasn’t even a distant dream. Imputing an intent on the part of Congress to draft the law in 1976 so as to neatly exclude such services from what might have then been considered copyright infringement is an unrealistic expectation. As a result, courts have always been faced with the task of applying existing copyright law to evolving applications of technologies, with the understanding that Congress will need to step in and change the law if the results cease to be satisfactory.

Having said that, it is the policy of the Supreme Court to narrowly rule on questions before it wherever possible, and drafting a decision addressing only Aereo without reaching the broader question of copyright law in the cloud is certainly the judicious approach, and what most expect the Court to do when a decision is released this summer.

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Oral arguments before the Supreme Court are less than a week away in the Aereo case, and broadcasters are feeling pretty good about their chances. With the Department of Justice, Professor Nimmer (who, along with his father, quite literally wrote the book on copyright), and a host of other luminaries filing in support of the broadcasters’ position, the storyline looks a lot like broadcasters have portrayed it from the beginning: that this is a simple case of copyright infringement hidden behind a veil of modern technological obfuscation.

Sensing that such a storyline is fatal to its prospects, Aereo has responded by casting this case as an attack on consumers’ use of the cloud, and has attracted some allies based on that storyline. However, it is a pretty thin storyline, as few think that the country’s highest court is so careless as to draft a broadcast retransmission rights decision that accidentally destroys the world of cloud computing. The two are not tough to distinguish, and even if the Court secretly disliked cloud computing, it hardly needs to opine on the copyright implications of cloud computing to decide the Aereo question.

Still, lower courts have disagreed on these issues, and only a fool enters the Supreme Court certain that the court will rule in his favor. There are many moving parts, and if a case were easy to decide, it would not have made it to the Supreme Court. That is why both sides will be anxiously watching the oral arguments for hints as to where the various justices stand on the matter.

As of today, however, broadcasters have one less reason to sweat about the outcome. The Court announced yesterday that Justice Alito, who had previously recused himself from the case, is now able to participate. This is a significant development for broadcasters. Because the 2nd Circuit decision being appealed was in Aereo’s favor, Alito’s earlier recusal meant that the case would be heard by the remaining eight justices. That created the risk of a 4-4 tie, which would leave the adverse 2nd Circuit decision in place.

In that scenario, broadcasters would need to win 5 of the 8 possible votes in order to overturn the lower court decision. That can be a tall order, and impossible if it turns out that four justices are firmly on the Aereo side of the fence. With Alito no longer recused, broadcasters now have an additional avenue for scoring that fifth vote. In other words, it’s easier to attract 5 votes out of 9 than it is to get 5 votes out of 8. That means broadcasters are unlikely to find themselves losing on a tie vote, and if the rest of the court should split 4-4, Alito’s entry into the fray effectively gives broadcasters a free throw opportunity at the buzzer to score his vote and break that tie. Now broadcasters just need to convert on that opportunity.

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I wrote a few weeks ago about Aereo’s Rocky Path Ahead, discussing the legal obstacles Aereo will need to overcome even if the Supreme Court should rule in its favor in the currently pending proceeding. Yesterday, that path became even rockier, when a federal judge in Utah dropped a boulder in Aereo’s path. The resulting sound was that of a thousand tiny antennas splintering against Utah red sandstone, with the judge granting a preliminary injunction prohibiting Aereo from operating in Utah, Colorado, Kansas, New Mexico, Oklahoma, and Wyoming.

The decision is Aereo’s first major defeat in court, although Aereo look-alike FilmOn X already has two preliminary injunctions against it. The most notable aspect of Judge Kimball’s decision, however, is that he had little difficulty concluding that Aereo’s service was exactly the type of copyright infringement Congress intended to prohibit in enacting the 1976 Copyright Act. Quotable quotes from the decision include “[t]he court … has carefully reviewed each of the prior decisions and has concluded that the California and D.C. district court cases [granting injunctions] as well as Judge Chin’s dissent in the Second Circuit case are the better reasoned and more persuasive decisions ….” and “[t]his court agrees with Judge Chin that ‘[b]y any reasonable construction of the statute, Aereo is engaging in public performances’ when it intercepts and retransmits copyrighted programs to paying strangers.”

As the language above indicates, broadcasters have much to like in Judge Kimball’s decision and really nothing to dislike. In fact, they surely hope that the Supreme Court decision will look a lot like the Utah decision. In that regard, I should mention that TV Technology this week published a pro/con article on how the Supreme Court should rule, and asked me to write the pro-broadcaster analysis. John Bergmayer of Public Knowledge ably handled the pro-Aereo portion of the article which, by coincidence, was published on the same day the Utah decision was released. In reading Judge Kimball’s decision, I was struck by how many of the pro-broadcaster arguments found their way into his decision. For those interested, reprinted below is my contribution to the TV Technology article. If you would like to see the entire article, including John Bergmayer’s pro-Aereo argument, it can be found here.

The Broadcaster Argument Against Aereo

The major argument you hear in support of Aereo is “if a viewer can do it, then the viewer should be allowed to hire Aereo to do it for them.” That logic is flawed for a number of legal reasons too complex to address in this short space, but it is also factually flawed–a truism that isn’t true (i.e., a person can have sex with their spouse, but if they hire someone else to do it, that’s prostitution, and it’s illegal in most places).

More specifically though, Aereo isn’t doing what viewers otherwise do on their own, it is doing what no viewer in their right mind would do–renting a building near the Empire State Building to place their antenna and the equipment necessary to transcode the signal for relay over the Internet, signing up for broadband Internet access at that leased sight so the signal can be transmitted over the Internet, paying for electricity at that site to power the equipment, making regular maintenance visits to keep the equipment operational, and paying higher fees for both the antenna site and home broadband connections because of the broadband speeds and capacity needed to relay nonstop HD broadcast programming.

The reason no consumer has ever done this is obvious–installing a window antenna, buying basic cable service, or just watching Internet video sources like Hulu is both simpler and cheaper. The difference between a home viewer and Aereo is akin to the difference between a recreational fisherman and a commercial fisherman–for good reason, the commercial fisherman is subject to many more regulations, and if the recreational fisherman starts using commercial trawlers and drift nets for fishing, he is no longer a recreational fisherman.

The Supreme Court is not, however, considering Aereo’s general legality at this early stage, but only the narrow question of “whether a company ‘publicly performs’ a copyrighted television program when it retransmits a broadcast of that program to thousands of paid subscribers over the Internet.” The stakes are markedly higher for Aereo than for broadcasters at the Supreme Court, as a ruling against Aereo would pave the way for an injunction against its service while simultaneously making it very difficult for Aereo to demonstrate in various courts around the country that its service does not infringe copyright. In contrast, a ruling in favor of Aereo, while a significant boost, would still leave Aereo with major legal and factual obstacles to overcome at trial (e.g., does each Aereo subscriber actually have their own antenna and DVR as promised?; do the copies of programs made at the request of subscribers qualify as fair use under copyright policy?). In other words, the Supreme Court’s ruling on this one issue could be devastating to Aereo, but a ruling to the opposite effect won’t resolve Aereo’s other legal issues.

Copyright law can be arcane in the extreme, but to oversimplify the transmission issue a bit, it boils down to this: if Aereo transmits the same content to a thousand subscribers, there is no dispute that each subscriber counts as a public performance of the content and infringes the rights of the copyright holder. Aereo argues however that it is not transmitting the same content to a thousand subscribers, but is transmitting unique content to each of those subscribers, leading to a thousand private performances that do not trigger copyright infringement. Stated in this way, the key question becomes “what is the ‘content’, and how can it be unique for each subscriber?” Aereo’s argument is that since each subscriber is assigned (at least temporarily) its own antenna and hard drive, a transmission of program content from that particular hard drive is unique. This conclusion is counterintuitive at best, since every hard drive copy and transmission of this week’s episode of The Big Bang Theory will be bit-for-bit identical with every other one, undercutting the notion that these transmissions are in any way unique private performances. As Judge Chin pointed out in his Second Circuit dissents in this proceeding, the relevant “content” has to be the program itself, not the bits on a particular hard drive, and since the same program is being distributed to those thousand subscribers, Aereo is transmitting a public performance that infringes copyright. Asserting that “this string of bits is different than that string of bits because they come from different hard drives, even though they are bit-for-bit identical” is just one more reason people make fun of lawyers.

While Aereo asserts that this illogical result is a loophole left by Congress in copyright law, it is not. Instead, it is a loophole created out of whole cloth by overenthusiastic extension of the sometimes tortured logic found in the Second Circuit’s earlier decision in the Cablevision case. Cablevision, however, is a good example of that maxim we learned in law school that “good facts make bad law.” In that case, the subscriber had paid for the content, and the cable operator had paid for the right to retransmit that content. Setting aside its legal reasoning to get there, it was not difficult for the Second Circuit to conclude, in effect, that if everyone in the process has been compensated anyway, and the proposed use isn’t undercutting the market for that content, then what’s the harm of letting a subscriber have their DVR located at the cable headend rather than at their house? However, whenever the law is contorted to achieve a factually attractive outcome, the inevitable result is other parties seeking to apply that same tortured logic to situations with far less attractive facts. Aereo is that case, and the Supreme Court hopefully will be the solution.

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Where the law aims to draw a bright line between what is permissible and what is not, advances in technology often blur that line, creating factual scenarios that couldn’t have existed when the law was drafted. In the case of Aereo’s technology, the mistake many are making is to assume that technology doesn’t just blur the line, but erases it entirely. Courts, however, are remarkably astute at locating that faded line and darkening it rather than just throwing up their hands and saying “Congress didn’t specifically address this technology, so you’re free to do whatever you want with it.” As Napster discovered years ago, just because a technology wasn’t envisioned by Congress when the copyright laws were drafted doesn’t exempt it from their application.

In the proceeding now pending before the Supreme Court, the Court is looking only at the narrow issue of whether the Second Circuit erred in declining to issue an injunction against Aereo’s service on the grounds that Aereo’s transmissions are not “public performances” of broadcast programs. While the details of this debate are quite nuanced, a ruling that Aereo is engaged in transmitting public performances would be the judicial equivalent of a torpedo amidships; Aereo might not sink immediately, but it would start taking on water fast. Aereo’s argument against such a finding is that its system of thousands of antennas paired with thousands of hard drives allows it to engage in thousands of private transmissions, but no transmissions to “the public” triggering copyright liability.

From a policy standpoint, there is little doubt that Congress never intended to bless such an arbitrary distinction, or the use of technological workarounds that serve no purpose but to try to circumvent copyright laws. To some extent, Aereo doesn’t seem to deny this, but argues that Congress left a tiny opening in the law that the Second Circuit then stretched into a man-size opening in the Cablevision case, and Aereo is just stepping through that doorway.

Tellingly, however, the relevant aspects of copyright law have not changed much in recent years, and it was only the Second Circuit’s actions that created a “loophole” where none existed before. As Judge Chin made clear in his Second Circuit dissents, creating the Aereo loophole requires such a tortured reading of the law that “pinhole” is a more accurate description than “loophole”. Because the Supreme Court is not bound by Second Circuit decisions, however, it could well resolve the issue in favor of broadcasters without breaking a sweat.

Lost in the furor over what the Supreme Court will do though, is the fact that Aereo has a lot more at stake at this stage than broadcasters. While a sufficiently adverse ruling by the Supreme Court could be fatal to Aereo, a ruling favorable to Aereo would still leave a rocky path ahead, with many other obstacles to be traversed. As just one example, what if trial discovery reveals that the Aereo architecture doesn’t quite live up to the “one subscriber, one antenna” approach upon which Aereo has staked its legal survival?

Similarly, while the current debate at the Supreme Court is focused on the legality of Aereo’s transmissions to subscribers, missing from the public debate has been much discussion of the legality of Aereo’s copying of broadcast programs to transmit. Aereo’s fundamental legal argument in that regard has been that if a consumer can legally make a home copy, then they should be able to hire Aereo to do it for them. But consider the following example: as a listener, you can record radio broadcasts, including the music in them, and keep those copies for your personal, noncommercial use. Knowing this, I create a company with the ability to receive all local radio stations using sophisticated signal analysis software and databases that can instantly recognize any song and, upon request, copy that song onto a hard drive. I then solicit subscribers, who send me their requested playlists, and for a fee, my sophisticated equipment and full-time employees can automatically record each requested song onto the hard drive I have assigned to a particular subscriber. The subscriber can then access that music for use on home computers and stereos, or pay me an additional fee to convert all of “their” files into MP3, FLAC, or other useful file formats so that the music can be downloaded to any of the subscriber’s consumer devices, including tablets, smartphones, or home music servers.

In an Aereo world, all I’ve done is accomplish what a radio listener (with very expensive and sophisticated monitoring equipment and software) could have done on their own, so my music service is completely legitimate and copyright compliant. Of course, why stop there? Why not sell subscribers a blank CD and then charge them a fee for recording “their” music on it? We’ve just automated the process for subscribers to create their own “home” mix tapes! It’s Pandora without all those pesky ASCAP, BMI, SESAC, and record company royalties. In the real world, however, does anyone think this “Audio Aereo” service would survive even the most cursory of legal challenges? Video Aereo may fare no better.

While advocates of Aereo will cite the Second Circuit’s Cablevision decision as the guiding legal precedent for Aereo’s operations, the true wellspring of Aereo is the Supreme Court’s 1984 Sony Betamax decision. In a narrow 5 to 4 decision, the Supreme Court found that home recording of television programming constituted a “fair use” under copyright law, launching the age of home video recording. The Second Circuit’s contribution in Cablevision was to state that the location of a viewer’s recording device is unimportant, clearing the way for cable subscribers to “rent” a DVR located at the cable headend from their cable provider while retaining the fair use status of “home” recording.

In developing a Rube Goldberg service whose complexity serves no purpose other than seeking to sidestep copyright law, Aereo has pushed the Second Circuit’s logic past the breaking point. In Cablevision, the subscriber had paid for the content, and the cable operator had paid for the right to retransmit that content. It was therefore not difficult for the Second Circuit to conclude, in effect, “if everyone in the process has been compensated, and it doesn’t undercut the market for the content, then what’s the harm of letting a subscriber locate their DVR at the cable headend rather than in the subscriber’s house? Have we really altered the activity to such an extent that recording program content is no longer the fair use blessed by the Supreme Court in Sony Betamax?”
And this is where a fundamental flaw in Aereo’s legal position emerges. The test is not whether a member of the public can copy a program for their own home viewing and call it fair use; the test is whether Aereo copying a program for that subscriber still qualifies as a fair use under copyright doctrine. Fair use analysis considers four factors: (1) the commercial or nonprofit nature of the activity; (2) the nature of the copyrighted work; (3) the substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for, or value of, the copyrighted work. The Supreme Court’s decision in Sony Betamax focused on the first and fourth factors, finding that individuals recording programs for time-shifting is a noncommercial activity, and that time-shifting is unlikely to undercut the market for the copyrighted work. The Supreme Court therefore found that home taping qualifies as fair use.

In contrast, Aereo’s copying of broadcast programming (even at a subscriber’s behest) is decidedly not a “noncommercial activity”, and even the Second Circuit decision affirming the denial of an injunction against Aereo did not disagree with the district court’s finding that Aereo would cause irreparable harm to broadcasters. That irreparable harm arises from undercutting the market for the copied programming. In other words, the two factors that principally led the Supreme Court to bless home taping as a fair use in Sony Betamax produce the opposite result when applied to Aereo. Justice Stevens’ majority decision in Sony Betamax is instructive in this regard. He wrote that “If the Betamax were used to make copies for a commercial or profitmaking purpose, such use would presumptively be unfair,” and “every commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright….” The Aereo service is clearly a “commercial use of copyrighted material” that undercuts the market for that material. By the very decision that allows home recording to exist as a fair use under copyright law, “home” recordings made by Aereo appear to fall outside that protection, and Aereo would not be able to avail itself of the fair use defense in making copies of broadcast programming.

Which means that if the Supreme Court rules against Aereo on the transmission issue, the Aereo story could come to a relatively abrupt end, but if it doesn’t, Aereo still faces serious legal hurdles ahead. In either case, the Supreme Court’s decision on the transmission issue is not likely to be the “one and done” referendum that Aereo might have hoped for. Stated differently, if the Supreme Court decision does turn out to be “one and done,” it will be Aereo that is done.

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The irony. The sheer irony. Just a few weeks ago, Congress was holding hearings in which the challenges of concluding retransmission negotiations without the occasional service disruption featured prominently. Representative Eshoo’s draft legislation targeting such disruptions had just been released, and there was little doubt that some members of Congress felt that CBS and Time Warner Cable had not worked hard enough at preventing a disruption of CBS programming on TWC cable systems, or worse, had been indifferent to the impact on cable viewers.

Fast forward a few weeks and we now face another impasse where the parties have been unable to negotiate an accord, with the resulting disruption greatly affecting the public. Also familiar are the statements to the press and the public by the negotiators that the inability to reach a negotiated resolution is entirely the other party’s fault.

The difference this week is that we are not talking about a retrans dispute, but the shutdown of the federal government. While the ramifications of this disruption are far greater than any retrans dispute, the similarity of circumstances is striking. First, all of the parties to the negotiation knew well in advance exactly when the current authorization was expiring and of the need to negotiate an extension. Second, all of the parties knew that the stakes are high and that disruption of service to the public should be avoided if at all possible. Third, it is primarily a dispute about money.

And yet, despite the early warning, the high stakes, and the impending loss of service to the public, Congress failed to reach agreement and the government shut down. As I wrote a few weeks ago, as nice as it would be to avoid it, one of the inherent characteristics of arm’s length negotiations is that a disruption is sometimes necessary to jolt the parties into moving off of their original positions and on to a negotiated result. Admittedly, national budgetary policy is more complex than most (but perhaps not all) retransmission negotiations, but then the adverse impact of the accompanying disruption is vastly greater as well.

Unlike a retrans dispute, however, where the public can fully restore service with a set of rabbit ears, nothing I can buy at my local radio Radio Shack will open the national parks or allow FCC staffers to return to their desks to process my applications. In short, even where the harm from service disruption is infinitely greater than in any retrans negotiation, Congress failed to find common ground and avoid that disruption.

Given the high stakes, it is interesting that there are actually far more protections against failed negotiations in the retrans context than in the congressional context. For example, unlike Congress, parties to retransmission negotiations are subject to the FCC’s rule requiring good faith negotiations. While those who assert that the current retrans process is broken frequently argue that merely policing the negotiation process to ensure the parties are negotiating in good faith is not enough, it seems like those rules might actually be fairly useful in the current congressional conundrum.

For example, a party violates the FCC’s good faith rule if it refuses to show up for negotiations, unreasonably delays negotiations, refuses to put forth more than a single unilateral proposal (the “take it or leave it” approach), or fails to respond to a proposal by the other party. Some might argue that such restrictions limit a party’s freedom to negotiate, but all retrans negotiations are conducted within that regulatory framework, making retrans negotiations more regulated than most, and giving proponents of adding yet further layers of restrictions a high hurdle to jump.

That will of course not prevent continued efforts by regulatory proponents to make that leap, but given the events of this week, it will be hard for members of Congress to feign shock and disbelief that two parties, even after making arduous efforts, aren’t always able to negotiate away their differences before those differences disrupt service to the public. Where such intractable disputes arise, we should all be thrilled if all that is needed to solve the problem is a pair of rabbit ears.

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Today’s exploration in vocabulary:

INTRANSIGENT: characterized by refusal to compromise or to abandon an extreme position or attitude : uncompromising < intransigent in their opposition> < an intransigent attitude> (from Merriam-Webster.com).

RETRANSIGENT: characterized by an insistent belief that negotiations which inevitably result in a signed retransmission agreement with less than a 0.01% chance of viewer disruption are ‘broken’ and demand immediate intervention by Congress < he was retransigent in his refusal to negotiate terms> (from CommLawCenter.com).

In the aftermath of the CBS/Time Warner Cable retransmission deal, I noted that one legacy of that negotiation would be lessened concern by future negotiators of finding themselves in a three way negotiation, with the FCC being the third wheel in the room. Since that time, several interesting developments have emerged. First, the Media Daily News reported that a Time Warner Cable representative revealed that the FCC actively discouraged Time Warner from filing a retrans complaint against CBS, indicating that the agency did not just passively decline to intervene, but sought to avoid being drawn into the middle of the negotiation (“don’t call us, we’ll call you!). If true, that puts an exclamation point on the conclusion that the FCC is none too interested in being drawn into retrans negotiations.

MVPDs apparently heard that message as well. They redoubled their efforts on Capitol Hill to have Congress change retrans law, running an ad in Politico aimed at members of Congress and making sure that a discussion of retransmission negotiations occupied an inordinately large portion of two hearings in the House of Representatives last week regarding reauthorization of the Satellite Television Extension and Localism Act (STELA). STELA is the law that permits carriage of distant broadcast signals by Satellite TV providers until the end of 2014. A bill to extend that authority is deemed by most to be must-pass legislation, meaning that retrans reform advocates are hoping to use it as a vehicle to modify retrans laws. That is a long shot effort, but not nearly as daunting as attempting to pass a standalone retrans bill.

Still, that did not prevent Representative Eshoo, who has been sympathetic to the pleas of MVPDs in the past, from introducing draft legislation last week titled The Video CHOICE (Consumers Have Options in Choosing Entertainment) Act. As described by its sponsor, the bill, among other things:

  • “Gives the FCC explicit statutory authority to grant interim carriage of a television broadcast station during a retransmission consent negotiation impasse.”
  • “Ensures that a consumer can purchase cable television service without subscribing to the broadcast stations electing retransmission consent.”
  • “Prohibits a television broadcast station engaged in a retransmission consent negotiation from making their owned or affiliated cable programming a condition for receiving broadcast programming.”
  • “Instructs the FCC to examine whether the blocking of a television broadcast station’s owned or affiliated online content during a retransmission consent negotiation constitutes a failure to negotiate in ‘good faith.’ “

At one of last week’s hearings, Representative Eshoo appeared to concede that the bill had little chance of passage, indicating it was “a series of ideas intended to spur constructive and actionable debate on ways to improve the video marketplace for video content creators, pay-TV providers and, most importantly, consumers.”

However, the bill demonstrates why government involvement is more complicated than proponents of retrans reform might assert. For example, regarding the requirement that viewers be able to subscribe to cable without subscribing to retrans stations, if the reason for changing the law is to ensure consumers are able to get broadcast programming over their cable system during retrans negotiations, giving consumers the right to not get the broadcast programming at any time over their cable system is not very helpful. In fact, this provision seems to concede that consumers can just use an antenna for broadcast programming rather than rely on their cable system, and since that is the case, these same consumers can just use an antenna to avoid any retrans-based disruptions, obviating the need for the law in the first place.

Because that result is so obviously illogical, I have to assume that this provision is instead aimed at preventing the unfairness of consumers being charged for a broadcast channel they aren’t receiving from their cable provider during a retrans disruption. That, however, has nothing to do with the retrans negotiation itself, and the stated provision wouldn’t fix that problem. If the retrans agreement has expired and the cable system therefore isn’t carrying the broadcast channel, the cable system also isn’t paying the broadcaster for retransmission. As a result, any money paid by subscribers for broadcast content they aren’t receiving is merely an economic windfall for the cable system. If that is the bill’s concern, the solution is to require MVPDs to issue subscriber refunds instead of pocketing the cash. Interfering with negotiations intended to put an end to that inequitable subscriber scenario would actually be counterproductive, as it merely causes the inequity to be extended longer still.

The provision prohibiting bundled negotiations has an even simpler flaw–if broadcasters are prohibited from accepting carriage of their cable networks as a form of compensation for granting retrans consent, they will be forced to shift to requesting all-cash compensation. Doing that, however, would increase a cable operator’s out of pocket program costs while eliminating a currently available avenue for bringing negotiations to a successful conclusion. The result would be more drawn-out and contentious all-cash negotiations that would serve to increase subscription fees, precisely the opposite of the bill’s intent.

Of course, the provision of the bill that has drawn the most attention is the first one, which would allow the FCC to mandate continued carriage of a broadcast station during retrans negotiations. You don’t have to be a rocket scientist to see the flaws in that idea; the big one being that retrans negotiations would never end since the MVPD has no incentive to agree to any deal as long as it can continue to retransmit the programming at the prior subscriber rate (or for that matter at any arbitrary fee that is less than what it would pay in an arm’s length negotiation). To try to solve that problem, the law would need to create some methodology for determining when FCC-imposed retransmission should end if no deal is reached. The logical point in time would be when negotiations cease. However, all such a law would accomplish is to move the time of the retrans disruption to a different date, while incentivizing broadcasters to formally declare negotiations broken off (most likely because the law incentivized MVPDs to negotiate as slowly as possible in the first place by granting forced retransmission). Such incentives merely encourage arbitrary disruptions in the negotiations, making it more difficult to promptly complete negotiations, and causing uncertainty, expense, and aggravation for everyone.

An alternative to that approach would be to limit the FCC’s authority to impose forced retransmission under such a law to a fixed period (e.g., one month), but all that would do is shift any program disruption by a month. In other words, the industry would just move from three-year retransmission agreements to two-year-and-eleven-months agreements that are followed by a one-month FCC-imposed retrans period. In either case, if a retrans disruption was going to occur because the parties couldn’t agree on price, then the disruption is going to occur no matter how the legislation is written.

The unavoidable truth is that the rare retrans disruption doesn’t occur because the parties didn’t begin negotiating early enough to get a deal done; it occurs because the parties can’t agree on price and won’t change their views on pricing until the pressures of a retrans disruption are upon them. In the end, private contractual negotiations are about agreeing on the value of an item to be conveyed, and if the parties can’t agree on that, a transaction doesn’t happen. All the king’s horses and all the king’s men can’t change that. To think otherwise is merely to be retransigent.