Articles Posted in Sponsorship ID & Payola/Plugola

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Consumer protection is always in style at the Federal Trade Commission (FTC”). When 50 fashion “influencers” flooded Instagram, all wearing the same dress in photos tagged “@lordandtaylor”, and an article featuring the same dress appeared in the online fashion magazine Nylon, some at the FTC suspected an advertising campaign masquerading as a social media dialogue.  While this matter arose in a “new media” context, and therefore impacts all businesses’ online activities, broadcasters are doubly affected—online and on-air—by the FTC’s action.

As we describe in more detail in our Client Advisory Lord and Taylor Case Shows the Importance of Transparency in Advertising, the FTC’s investigation into a supposedly viral phenomenon unveiled an integrated advertising campaign. Among other things, Lord & Taylor formally contracted with fashion influencers, giving them the dress for free and compensating them to “product bomb” Instagram with photos of themselves wearing the dress on one particular weekend.  Lord & Taylor approved the influencers’ posts and required them to include the @lordandtaylor tag and #DesignLab hashtag.  Lord & Taylor also contracted with Nylon to run an article about its new Design Lab collection, featuring the dress in the article and on Nylon’s Instagram page as well.  Again, Lord & Taylor reviewed the content before it was published.  However, Lord & Taylor did not require the influencers or Nylon to disclose their connection to Lord & Taylor or that they had been compensated for posting the photos and comments.

In December 2015, the FTC released its Enforcement Policy Statement on Deceptively Formatted Advertisements.  The Policy Statement provides an overview of how the FTC intends to apply its consumer protection principles to “native advertising”—online advertising material that resembles editorial content, product reviews, or other content which could mislead consumers into believing that the advertising isn’t really advertising.  It also notes some factors that have contributed to a rise in native advertising online, such as the increased ability of publishers to quickly and cheaply reformat and reuse content, evolving business models around monetization of content, and the ability of consumers to skip or block ads placing pressure on advertisers to capture consumers’ attention.  However, the Policy Statement concludes that “[a]lthough digital media has expanded and changed the way marketers reach consumers, all advertisers, including digital advertisers, must comply with the same legal principles regarding deceptive conduct the Commission has long enforced.”

In setting out what those legal principles are, the FTC referred back to many cases involving a wide variety of media, including television infomercials that blurred the line between advertising and editorial content.  The FTC brought numerous cases in the 1980s and 1990s against infomercials that looked like investigative news reports or consumer product review content and required the addition of conspicuous “PAID ADVERTISEMENT” disclosures at the beginning and throughout the program where product ordering information was presented.

The FTC’s approach to digital marketing is similar. In its Native Advertising: A Guide For Businesses released along with the December Policy Statement, the FTC noted “[t]he more a native ad is similar in format and topic to content on the publisher’s site, the more likely that a disclosure will be necessary to prevent deception.”  In the Lord & Taylor case, the Nylon article used language similar to traditional editorial content recommending certain fashion choices.  Specifically, it stated:  “[W]e’re taking out the guess work and introducing you to spring’s must-have line: Lord & Taylor’s Design Lab.”  The FTC faulted Lord & Taylor for not requiring a disclosure that the article was paid-for advertising.

In addition, the FTC’s updated Endorsement Guides published in 2009 require that when advertisers recruit endorsers and provide them with free merchandise or other compensation, they must require their endorsers to clearly and conspicuously disclose their connection to the advertiser and, further, to monitor those endorsements for accuracy and inclusion of the required disclosure language.  Here, while Lord & Taylor did review and even edit the endorsements, it did not require any disclosure of the endorser’s relationship with Lord & Taylor.  We have written extensively about the Endorsement Guides and how they apply to broadcasters, including common situations that arise in on-air “banter”, here and here.

As a result of its investigation into Lord & Taylor’s advertising of the Design Lab line, the FTC and Lord & Taylor agreed to a settlement which imposes a number of conditions beyond mere compliance on Lord & Taylor going forward.  These include filing various reports with the FTC, preserving documents for later FTC review should it be necessary, and providing copies of the settlement agreement to all those who have anything to do with creating similar advertising campaigns. The case is an important reminder to all advertisers that, as the FTC has said, “[r]egardless of the medium in which an advertising or promotional message is disseminated, deception occurs when consumers acting reasonably under the circumstances are misled about its nature or source, and such misleading impression is likely to affect their decisions or conduct regarding the advertised product or the advertising.”

Do your online and on-air promotions meet this test?

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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:

  • Sponsorship Identification Violation Yields $115,000 Civil Penalty
  • $13,000 Increase in Fine Upheld for Deliberate and Continued Operation at Unauthorized Location
  • FCC Reduces $14,000 Fine for EAS and Power Violations Due to Inability to Pay

FCC Adopts Consent Decree Requiring Licensee to Pay $115,000 Civil Penalty

Earlier this month, the FCC’s Enforcement Bureau entered into a Consent Decree with a Nevada TV station terminating an investigation into violations of the FCC’s sponsorship identification rule.

The FCC’s sponsorship identification rule requires broadcast stations to identify the sponsor of content aired whenever any “money, service, or other valuable consideration” is paid or promised to the station for the broadcast. The FCC has explained that the rule is rooted in the idea that the broadcast audience is “entitled to know who seeks to persuade them.”

In 2009, the FCC received a complaint alleging that an advertising agency in Las Vegas offered to buy air time for commercials if broadcast stations aired news-like programming about automobile liquidation sales events at dealerships. The FCC investigated the complaint and found that the licensee’s TV station accepted payment to air “Special Reports” about the liquidation sales. The “Special Reports” resembled news reports, and featured a station employee playing the role of a television reporter questioning representatives of the dealership about their ongoing sales event.

The licensee acknowledged the applicability of the sponsorship identification rule to the “Special Reports,” but asserted that the context made clear their nature as paid advertisements despite the absence of an explicit announcement. The FCC disagreed, contending that the licensee failed to air required sponsorship announcements for twenty-seven “Special Reports” broadcast by the station from May through August of 2009.

As part of the Consent Decree, the licensee admitted to violating the FCC’s sponsorship identification rule and agreed to (i) pay a civil penalty of $115,000; (ii) develop and implement a Compliance Plan to prevent future violations; and (iii) file Compliance Reports with the FCC annually for the next three years.

FCC Finds That Corrective Actions and Staffing Problems Do Not Merit Reduction of Fine

The FCC imposed a $25,000 fine against a Colorado radio licensee for operating three studio-transmitter links (“STL”) from a location not authorized by their respective FCC licenses.

Section 301 of the Communications Act prohibits the use or operation of any apparatus for the transmission of communications signals by radio, except in accordance with the Act and with a license from the FCC. In addition, Section 1.903(a) of the FCC’s Rules requires that stations in the Wireless Radio Services be operated in accordance with the rules applicable to their particular service, and only with a valid FCC authorization.

In August 2012, an agent from the Enforcement Bureau’s Denver Office inspected the STL facilities and found they were operating from a location approximately 0.6 miles from their authorized location. The agent concluded–and the licensee did not dispute– that the STL facilities had been operating at the unauthorized location for five years. A July 2013 follow-up inspection found that the STL facilities continued to operate from the unauthorized location.
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May 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:

  • FCC Proposes $11,000 Fine for Marketing of Unauthorized Device
  • $2,944,000 Fine for Robocalls Made Without Recipients’ Consent
  • Sponsorship Identification Complaint Leads to $185,000 Consent Decree
  • Premature Consummation of Transaction Results in $22,000 Consent Decree

Modifying Design of Parking Meter Requires New FCC Certification and Warning to Users

Earlier this month, the Spectrum Enforcement Division of the FCC’s Enforcement Bureau issued a Notice of Apparent Liability for Forfeiture (“NAL”) against a company that designs, develops, and manufactures parking control products (the “Company”). The NAL indicated the Company had marketed one of its products without first obtaining an FCC certification and for failing to comply with consumer disclosure rules. The FCC’s Enforcement Bureau proposed an $11,000 fine against the Company.

In August of 2013, the FCC received a complaint that a particular product made by the Company did not have the required FCC certification and that the product did not comply with consumer disclosure requirements. After receiving the complaint, the FCC’s Spectrum Enforcement Division issued a Letter of Inquiry (“LOI”) to the Company. The Company responded in the middle of March, at which time it described the product in question as a “parking meter that accepts electronic payments made with credit cards, smart cards, or Near Field Communications-enabled mobile device applications.” The response to the LOI indicated that the Company had received an FCC authorization in 2011 but had since refined the design of the product. Although one refinement involved relocating the antenna on the device, which increased the field strength rating from the level authorized in 2011, the Company assumed that the changes to the device qualified as “permissive changes” under Section 2.1043 of the FCC’s Rules. In addition, the Company admitted to marketing the refined product before obtaining a new FCC certification for the increased field strength rating, and that its user manual did not contain required consumer disclosure language. However, the Company had not actually sold any of the new parking meters in the U.S.

Section 302(b) of the Communications Act prohibits the manufacture, import, sale, or shipment of home electronic equipment and devices that fail to comply with the FCC’s regulations. Section 2.803(a)(1) of the FCC’s Rules provides that a device must be “properly authorized, identified, and labeled in accordance with the Rules” before it can be marketed to consumers if it is subject to FCC certification. The parking meter falls under this requirement because it is an intentional radiator that “can be configured to use a variety of components that intentionally emit radio frequency energy.” The Company’s product also meets the definition of a Class B digital device, in that it is “marketed for use in a residential environment notwithstanding use in commercial, business and industrial environments.” Under Section 15.105(b) of the FCC’s Rules, Class B digital devices “must include a warning to consumers of the device’s potential for causing interference to other radio communications and also provide a list of steps that could possibly eliminate the interference.”

The base fine for marketing unauthorized equipment is $7,000, and the base fine for marketing devices without adequate consumer disclosures is $4,000. The Company argued that even though it had marketed the device before it was certified, it had not sold any, and it promptly took corrective action after learning of the issue. The Enforcement Bureau declined to reduce the proposed fines because the definition of “marketing” does not require that there be a sale, and “corrective measures implemented after the Commission has initiated an investigation or taken enforcement action do not nullify or mitigate past violations.” The NAL therefore assessed the base fine for both violations, resulting in a total proposed fine against the Company of $11,000.

Unsolicited Phone Calls Lead to Multi-Million Dollar Fine

Earlier this month, the FCC issued an NAL against a limited liability company (the “LLC”) for making unlawful robocalls to cell phones. The NAL followed a warning issued more than a year earlier, and proposed a fine of $2,944,000. The LLC provides a robocalling service for third party clients. In other words, the LLC’s clients pay it to make robocalls on their behalf to a list of phone numbers provided by the client.

The Telephone Consumer Protection Act (“TCPA”) prohibits robocalls to mobile phones unless there is an emergency or the called party has provided consent. These restrictions on robocalls are stricter than those on live calls because Congress found that artificial or prerecorded messages “are more of a nuisance and a greater invasion of privacy than calls placed by “live” persons.” The FCC has implemented the TCPA in Section 64.1200 of its Rules, which mirrors the statute.

The LLC received an LOI in 2012 from the Enforcement Bureau’s Telecommunications Consumers Division (the “Division”) relating to an investigation of the LLC’s services. The Division required the LLC to provide records of the calls it had made, as well as to submit sound files of the calls. This preliminary investigation revealed that the LLC had placed 4.7 million non-emergency robocalls to cell phones without consent in a three-month period. After making these findings, the Division issued a citation to the LLC in March of 2013, warning that making future calls could subject the LLC to monetary penalties and providing an opportunity to meet with FCC staff and file a written reply. The LLC replied to the citation in April of 2013, and met with FCC staff.

However, in June of 2013, the Division initiated a second investigation to ensure the LLC had stopped making illegal robocalls. The LLC objected, but produced the documents and audio files requested. The Division determined, by analyzing the materials and contacting customers who had received the prerecorded calls made by the LLC, that the Company made 184 unauthorized robocalls to cellphones after receiving the citation. Continue reading →

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April 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:

  • FCC Proposes $12,000 in Fines for Contest Violations
  • $20,000 Fine for Unlicensed Operation and Interference
  • Violations of Sponsorship Identification and Indecency Rules Lead to $15,000 Consent Decree

Changing Rules and Delay in Conducting Contest Lead to $12,000 in Fines

Late last month, the FCC’s Enforcement Bureau issued two essentially identical Notices of Apparent Liability for Forfeiture (“NALs”) against two radio station licensees for failure to conduct a contest as advertised. Although the stations have different licensees, one licensee provided programming to the second licensee’s station through a time brokerage agreement. The brokering station’s response to a letter of inquiry (“LOI”) addressed both licensees’ actions with regard to the contest. In the subsequent NALs, the FCC’s Enforcement Bureau proposed a $4,000 fine against the brokered licensee and an $8,000 fine against the brokering licensee.

In July of 2009, the FCC received a complaint that several radio stations held a weekly contest called “Par 3 Shoot Out” but did not conduct the contest substantially as announced or advertised. Specifically, the complaint maintained that at least one participant did not receive a promised prize of a golf hat and was not entered into a drawing to win a car or other prizes (as was promised in the contest’s rules). About four months later, the FCC issued an LOI to the licensee conducting the contest about the claims made in the complaint. In its response to the LOI, the licensee conducting the contest indicated that the contest consisted of two phases. The first was an 18-week, online golf competition where the highest-scoring contestant each week would win a hat from a golf club. Each weekly winner and one write-in contestant would be able to participate in the second phase of the contest, a real golf competition consisting of taking one shot at a three par hole. As was publicized online, the prize for the winner of the second phase was a $350 golf store gift certificate, and if anyone hit a hole-in-one, they would win a Lexus car.

According to the brokering licensee, the first phase of the contest took place between June and November 2008. The contest took place entirely online, and although the second phase was scheduled to begin in November 2008, it was postponed due to inclement weather and ultimately did not occur at all because the employee who was tasked with running the live golf competition was fired, and the remaining staff never resumed the contest. The brokering licensee further indicated that it forgot about the contest until it received the FCC’s LOI, and, after receiving the LOI, the second phase of the contest occurred and was completed by January 2010. The brokering licensee indicated that it had provided additional prizes of a $25 golf store gift card and a catered lunch to each finalist in the second phase given the delay in conducting the contest.

Section 73.1216 of the FCC’s Rules requires that a station-sponsored contest be conducted “substantially as announced or advertised” and must fully and accurately disclose the “material terms,” including eligibility restrictions, methods of selecting winners, and the extent, nature and value of prizes involved in a contest.

The Enforcement Bureau determined that the contest was not conducted as announced or advertised because the rules were changed during the course of the contest and the contest was not conducted within the promised time frame. The Bureau further found that the licensees failed to fully disclose the material terms of the contest as required by the Commission’s rules. According to the Bureau, the on-air announcements broadcast by the stations failed to mention all of the prizes the licensee planned to award and failed to describe any of the procedures regarding how prizes would be awarded or how the winners would be picked. The brokering licensee argued in its response to the LOI that the full rules were included online, which was a better way to make sure that potential contest participants were not confused. However, the Bureau found that while licensees can supplement broadcast announcements with online rules, online announcements are not a substitute for on-air announcements.

The base fine for failure to conduct a contest as announced is $4,000. The Bureau determined that, contrary to the argument presented in response to the LOI, “neither negligence nor inadvertence” due to the overseeing employee’s departure “can absolve licensees of liability.” The Bureau also said that providing additional prizes to make up for the delay does not overcome the violation of Section 73.1216. Finally, the FCC found that the licensees had failed to disclose the material terms of the contest because the advertisements that were broadcast over the air did not mention certain prizes.

The FCC proposed to impose the base fine amount of $4,000 against the time-brokered station after determining that the licensee had violated Section 73.1216. For the brokering licensee, the FCC proposed an increased fine of $8,000 because of the licensee’s “pattern of violative conduct, and because it conducted the Contest over four stations, not one, thus posing harm to a larger audience.”

Nine Years of Unauthorized Operation and Interference to Wireless Operator Lead to Large Fine

The FCC recently issued a Forfeiture Order to the former licensee of a Private Land Mobile Radio Service (“PLMRS”) station. The Forfeiture Order follows an NAL that the FCC released in July of 2012 proposing a fine of $20,000 for the former licensee of the facility for operating without a license for nine years and causing interference to another wireless service provider.

The former licensee initially received the license for the PLMRS station in April 1997 for a five-year term. Three months before the expiration of the license, the FCC sent the licensee a reminder to renew the license, but the licensee never filed a renewal application. Therefore, the license expired in April of 2002. Nevertheless, the licensee continued operating the station, and on July 31, 2011, filed a request for Special Temporary Authority (“STA”) with the Wireless Telecommunications Bureau of the FCC. The licensee stated in the application that it had recently discovered that its license had expired and that it needed an STA to continue operating the station. The Wireless Bureau granted the STA three days later for a period of six months, until the end of January 2012. Continue reading →

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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:

  • Inadequate Sponsorship ID Ends with $44,000 Fine
  • Unattended Main Studio Fine Warrants Upward Adjustment
  • $16,000 Consent Decree Seems Like a Deal

Licensee Fined $44,000 for Failure to Properly Disclose Sponsorship ID
For years, the FCC has been tough on licensees that are paid to air content but do not acknowledge such sponsorship, and an Illinois licensee was painfully reminded that failing to identify sponsors of broadcast content has a high cost. In a recent Notice of Apparent Liability (“NAL”), the FCC fined the licensee $44,000 for violating its rule requiring licensees to provide sponsorship information when they broadcast content in return for money or other “valuable consideration.”

Section 317 of the Communications Act and Section 73.1212 of the FCC’s Rules require all broadcast stations to disclose at the time the content is aired whether any broadcast content is made in exchange for valuable consideration or the promise of valuable consideration. Specifically, the disclosure must include (1) an announcement that part or all of the content has been sponsored or paid for, and (2) information regarding the person or organization that sponsored or paid for the content.

In 2009, the FCC received a complaint alleging a program was aired without adequate disclosures. Specifically, the complaint alleged that the program did not disclose that it was an advertisement rather than a news story. Two years after the complaint, the FCC issued a Letter of Inquiry (“LOI”) to the licensee. In its response to the LOI, the licensee maintained that its programming satisfied the FCC’s requirements and explained that all of the airings of the content at issue contained sponsorship identification information, with the exception of eleven 90-second spots. In these eleven spots, the name of the sponsoring organization was identified, but the segment did not explicitly state that the content was paid for by that organization.

Though the licensee defended its program content and the disclosure of the sponsor’s name as sufficient to meet the FCC’s requirements, the FCC was clearly not persuaded. The FCC expressed particular concern over preventing viewer deception, especially when the content of the programming is not readily distinguishable from other non-sponsored news programming, as was the case here.

The base forfeiture for sponsorship identification violations is $4,000. The FCC fined the licensee $44,000, which represents $4,000 for each of the eleven segments that aired without adequate disclosure of sponsorship information.

Absence of Main Studio Staffing Lands AM Broadcaster a $10,000 Penalty
In another recently released NAL, the FCC reminds broadcasters that a station’s main studio must be attended by at least one of its two mandatory full-time employees during regular business hours as required by Section 73.1125 of the FCC’s Rules. Section 73.1125 states that broadcast stations must maintain a main studio within or near their community of license. The FCC’s policies require that the main studio must maintain at least two full-time employees (one management level and the other staff level). The FCC has repeatedly indicated in other NALs that the management level employee, although not “chained to their desk”, must report to the main studio on a daily basis. The FCC defines normal business hours as any eight hour period between 8am and 6pm. The base forfeiture for violations of Section 73.1125 is $7,000.

According to the NAL, agents from the Detroit Field Office (“DFO”) attempted to inspect the main studio of an Ohio AM broadcaster at 2:20pm on March 30, 2010. Upon arrival, the agents determined that the main studio building was unattended and the doors were locked. Prior to leaving the main studio, an individual arrived at the location, explained that the agents must call another individual, later identified as the licensee’s Chief Executive Officer (“CEO”), in order to gain access to the studio, and provided the CEO’s contact number. The agents attempted to call the CEO without success prior to leaving the main studio.

Approximately two months later, the DFO issued an LOI. In the AM broadcaster’s LOI response, the CEO indicated that the “station personnel did not have specific days and times that they work, but rather are ‘scheduled as needed.'” Additionally, the LOI response indicated that the DFO agents could have entered the station on their initial visit if they had “push[ed] the entry buzzer.”

In August 2010, the DFO agents made a second visit to the AM station’s main studio. Again the agents found the main studio unattended and the doors locked. The agents looked for, but did not find, the “entry buzzer” described in the LOI response.

The NAL stated that the AM broadcaster’s “deliberate disregard” for the FCC’s rules, as evidenced by its continued noncompliance after the DFO’s warning, warranted an upward adjustment of $3,000, resulting in a total fine of $10,000. The FCC also mandated that the licensee submit a statement to the FCC within 30 days certifying that its main studio has been made rule-compliant.

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Headlines:

  • FCC Begins to Move on Pending Video News Release Complaints
  • Failure to Monitor Tower Lighting Results in $12,000 Penalty

Video News Releases Garner $4,000 Fines for Two Television Broadcasters
After a flurry of complaints from advocacy groups a few years ago raised the issue at the FCC, the Commission has been pondering how to treat Video News Releases (VNRs) with respect to its sponsorship identification rule. The result has been a growing backlog of enforcement investigations involving VNRs. However, the release of two decisions proposing fines for stations that aired all or part of a VNR without identifying the material on-air as being sponsored appears to indicate that the dam is about to break. In its first VNR enforcement actions in years, the FCC fined two unrelated television stations $4,000 each for violating the sponsorship identification requirements found in Section 317 of the Communications Act and Section 73.1212 of the FCC’s Rules.

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You may have noticed that more and more television shows these days seem to be including “product placement,” a form of advertising in which a product, corporate logo, or brand name is positioned as a “prop” in a program or is used as an integral part of the story line. We have all seen the prominently displayed Coca-Cola cups placed on the judges table in front of Simon, Randy and Paula during American Idol. And although Apple stated that it made no payment for what seemed like an entire episode of Emmy Award winning Modern Family devoted to the iPad, many in the media and the public wondered if what amounted to a half-hour advertisement for the iPad was legal.

Does the FCC have rules regarding product placement? Are program producers and broadcasters required to disclose placement deals to viewers?

The simple answer is yes. The FCC considers product placement to be “embedded advertising” that is subject to the FCC’s “sponsorship identification” rule. The rule says that if a program producer, broadcast station, or a station employee receives anything of value, directly or indirectly, in exchange for causing material to be broadcast, the sponsorship and the identity of the sponsor must be disclosed on-air.

Congress decided long ago that members of the public have a right to know when someone has paid to have material aired by a TV or radio station. As a result, if a station or network enters into a placement deal, the deal must be disclosed on the air. Undisclosed product placement can amount to illegal payola.

The FCC’s rules and the Communications Act aren’t limited to just requiring that broadcasters make the necessary disclosures. They also require program producers to notify the broadcaster if they have a deal to include any sort of product placement in a program. This allows the broadcaster to then make the necessary on-air disclosures.

More than two years ago, the FCC began considering whether it should adopt more stringent rules on how television programmers and broadcasters let viewers know when “props” in television shows are actually paid pitches made by an advertiser. However, the FCC has not yet resolved the question. The FCC’s proceeding was fashioned as a “Notice of Inquiry,” which means that the FCC will subsequently need to issue a Notice of Proposed Rulemaking before any new rule can be adopted. Because of this, we are not likely to see the matter resolved soon.

While the FCC’s product placement/embedded advertising proceeding is currently in limbo, broadcasters, networks, and program producers need to keep in mind that product placement deals — when not disclosed on-air — violate the FCC’s sponsorship identification rule. The use of product placement in advertising is only going to increase as advertisers respond to a changing industry, including the use of DVRs, online availability of content, and other tools that let viewers skip traditional commercials. When entering into product placement deals, program producers, networks and broadcasters need to remember that the FCC, and not just the public, may be watching.

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Having spent a good portion of last week on the road and on conference calls talking about the latest Performance Tax developments, I heard a lot from broadcasters on the subject. For those blissfully unaware of this legislative battle, the recording industry has been seeking a financial parachute from broadcasters to help slow the rate of its descent into an economic abyss. The irony of course is that if illegal music downloads on the Internet are what has caused the recording industry’s plunge, reaching out to drag broadcasters into the abyss with them merely weakens an ally in the battle to protect content from illegal distribution over the Internet.

Famously dubbed a performance “tax” by broadcasters, the legislation sought by the recording industry would require broadcasters to pay royalties to the recording industry for playing music on-air. Beyond the obvious short term benefit of royalty checks from broadcasters that choose to retain a music-based format, the recording industry hopes the passage of a U.S. law requiring such royalties for broadcasts in the U.S. will cause foreign countries to release royalties already being collected for airplay of U.S. artists in those countries. Unfortunately, because most of the record companies are now foreign-owned, much of that money, along with royalties paid by U.S. broadcasters, would wind up in foreign hands, undercutting any argument for this “found money” being an economic benefit in the U.S. All of the royalty funds would come from the U.S., but only a portion of those funds would stay in the U.S. However, one would hope that at least some of those royalties, if they do come to pass, would actually reach the U.S. artists responsible for creating the music that the recording industry has been selling and reselling to us over the years.

Broadcasters have been successful in blocking Performance Tax legislation because of good grass roots efforts to remind Congress that radio promotes the sale of music at no charge to the record labels or to the artists that have ridden radio airplay to fame (and whose records and concert tickets continue to sell because of radio airplay). The long, sordid history of payola — the record labels’ efforts to curry airplay via cash and other payments to radio station programmers — supports broadcasters’ proposition that the “value” of radio airplay exceeds any “costs” it imposes on the recording industry.

It was therefore with great surprise that many radio broadcasters heard last week that negotiating teams for the two industries were floating a multi-part proposal to resolve the legislative impasse — a compromise that would require, for the first time, that artist (as opposed to songwriter) royalties be collected on broadcast airplay of music. While the proposal has some attractive features for broadcasters (most importantly the inclusion of FM receiving chips in cellphones), I got an earful from broadcasters absolutely incensed at the notion of promoting music and concert sales, and then being charged for doing it.

If any member of Congress thinks that “radio promotes music sales” is just a broadcaster talking point for meetings, encountering a broadcaster last week would have decisively corrected that impression. Some broadcasters I talked to had such a visceral reaction to the very concept of such payments that it didn’t matter to them what the beneficial points of the proposal were. For them, it was as if someone had told them to “pay the ransom to the kidnappers and hope for the best.” Some appreciated that it could be the pragmatic thing to do to put the issue behind them, but still found the very concept reprehensible. To be sure, there is money involved and that can sway a person’s thinking. However, a number of the broadcasters I spoke with were so fundamentally opposed to the concept that they would reject the idea even if other parts of the proposal actually resulted in more money coming in from the proposal than going out.

I understand that perspective, but lawyers are trained to assess the options, and to assist their clients in choosing the best option for that client. Often, but not always, the “best” option is the one most economically beneficial to the client. Here, some broadcasters are not interested in the economics, but in the unfairness of being forced to pay a performance royalty as any part of the package. Despite that, all broadcasters should give the compromise proposal a careful look, if only to sharpen their understanding of the numerous issues in play and how they might affect the future of radio broadcasting. There are any number of reasons why the proposal might not gain momentum, or even be possible given the dynamics of Washington, and I hope to address those in a future post. For now, radio broadcasters should suppress the instinct to reflexively ignore it, and instead talk to their colleagues and counsel about the issues this proposal raises for their future, and for the future of their industry.

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Topics include:

  • FCC Imposes a Reduced $17,500 Fine on Wyoming Commercial AM/FM Station Combo for Multiple Violations
  • Pennsylvania TV Station Fined $32,000 for Violating FCC’s Sponsorship ID Rule
  • Licensee Fined $13,000 for Antenna Structure Violations
  • FCC Fines California Noncommercial FM Station $9,000 for Failure to Properly Maintain a Public Inspection File

FCC Imposes a Reduced $17,500 Fine on Wyoming Commercial AM/FM Station Combo for Multiple Violations
The FCC has released a Forfeiture Order asserting that the licensee of a Wyoming AM/FM station combination failed to maintain an operational EAS system, failed to consistently prepare and include programs/issues lists in its public inspection file, and failed to operate a wireless radio service station from its authorized location. Specifically, the FCC’s Order cited Sections 11.35, 11.52(d), 11.61(a), 73.3526(e)(12), 1.903(a), 1.929 and 74.532(e) of the FCC’s Rules, which require broadcasters to use common EAS protocols, ensure operability of EAS equipment, conduct regular tests of a station’s EAS system to ensure such operability, prepare and include quarterly programs/issues reports in the public inspection file, and operate wireless radio service facilities as specified in their current authorizations.

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August 2009
The volatile combination of broadcast employees concerned about their income and job security, and cash-strapped businesses looking for cheap and effective ways to promote themselves in difficult economic times, creates an unusually fertile ground for payola and plugola violations. Complicating matters are state efforts to prohibit “payola” activities that are legal under federal payola law. Even being accused of payola can be devastating to a broadcaster, and stations must be extremely diligent in uncovering and preventing payola and plugola violations.

Payola is the undisclosed acceptance of, or agreement to accept, anything of value in return for on-air promotion of a product or service. It is forbidden by Sections 317 and 507 of the Communications Act of 1934, and by Sections 73.1212 (broadcast) and 76.1615 (cable) of the FCC’s Rules. Its sibling, Plugola, occurs when someone responsible for program selection promotes on-air a venture in which he or she has a financial interest without disclosing that interest to the station licensee and to the public. A payola or plugola violation by an employee usually results in the employer violating the FCC’s sponsorship identification rule as well.

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