Section 616: The Wheels of Justice Roll (albeit slowly) At the FCC.

Back last November, the FCC considered reforming various rules designed to limit cable market power. While the FCC did adopt rules limiting the size of cable operators to 30% of the market and lowering the rates for leased access, the FCC failed to move forward on reform of its rules for how independent programmers can file complaints against cable operators for unfairly discriminating against them based on affiliation or lack thereof.

But now things are looking up. Last Friday, the Media Bureau addressed several pending complaints and designated them for a hearing before an Administrative Law Judge. Unsurprisingly, the NFL got the media attention, but the more typical case was that of WealthTV — and it is that case that is therefore likely to have more long term impact on the industry (not that the NFL and MASN cases weren’t important as precedent).

This doesn’t eliminate the need for an Order that would clarify how the process works and set a reasonable time table for complainants and defendants, but it does help to move things along for those who dared to trust the process by filing a complaint, and may put heart into the rest of the independent programming industry to hang in there and keep trying.

More below . . .

The Usual Extensive and Shamelessly Biased Background For Those Just Joing Us.

Section 616 of the Communications (47 U.S.C. 536) makes it illegal for a cable operator to discriminate against a programmer because of affiliation or lack of affiliation, or to demand an equity share or exclusive carriage rights as a price of carriage. To make this a bit more confusing, the law makes it clear that companies can “in good faith” bargain for such things, and that cable operators can reject independent programming because they don’t want to carry it for any reason not prohibited by law. Finally, the law also requires the FCC to create rules that discourage frivolous complaints or efforts by programmers to unfairly leverage the process against cable operators.

But while this is hard, it is hardly impossible. The current FCC rules require the Media Bureau to determine whether a complainant has produced enough evidence to make a prima facie case. While it is not entirely clear what this means exactly, the general idea is that the complainant needs to bring enough credible evidence to show that it is worth referring the matter to an Administrative Law Judge (ALJ) for a full evidentiary hearing to resolve the factual disputes, determine whether the cable operator discriminated against the programmer for an illegal reason, and decide on an appropriate remedy.

Since the FCC adopted these rules in 1993, only a handful of complaints have been filed and even fewer (only two if we exclude the regional sports networks using the special arbitration procedures set up in the Adelphia transaction for disputes with Time Warner and Comcast) made it from complaint to a resolution of the prima facie case question by the Bureau. Why so few? Well, either because everything is utterly happy in cable land, as the cable operators say, or because the process is severely broken, as a bunch of independent programmers and advocates such as yr hmbl obdn’t blogger keep saying. Since the independent programming market has been shrinking to non-existence, and both cases referred to an ALJ were immediately settled by the cable operator rather than permit discovery, I would suggest the evidence favors me — but if I didn’t believe that, I wouldn’t be wasting my time on this issue.

The notorious example of Mid-Atlantic Sports Network (aka MASN, the guys who own the rights to Oriels and Nationals games), in which it took the FCC staff over a year and a total bitch slapping by the Commission to find that enough evidence existed to refer the matter for a hearing to resolve the dispute, stands as perhaps the most obvious example of why independent programmers generally don’t trust the current complaint process. No one believes the Bureau is going to actually issue a decision, and will rather wait to see if the parties settle or the independent programmer dies. Other problems include a total lack of clarity on what evidence it takes to make a prima facie case, and the fact that the rest of the cable cartel will “blackball” a programmer that files a complaint.

Last year, Martin tried to ram through changes to the Sec. 616 process (which my employer, Media Access Project, and a number of others supported). That got caught up in the very ugly fight around 70/70, ownership limits, and other measures designed to limit cable market power. A number of independents, including Hallmark and the NFL, decided they would never have a better opportunity and came out of the woodwork to press for reform. At the end of the day, however, Sec. 616 ended up falling by the wayside in a rather bitter Commission meeting filled with accusations of bad faith, finger pointing, and enough ill-feeling all around to get the holiday season off to a roaring start.

When Martin failed to get his reforms for carriage complaint process voted out of the FCC last November, a number of the independents that had tried to hang on gave up. Hallmark surrendered to Comcast, signing a carriage agreement for far less per sub than lower-rated affiliated channels. To further reenforce the utter hopelessness of the situation for independent programmers, Commissioner Tate aplauded the new Hallmark-Comcast carriage agreement as the kind of free market negotiation that produces win-wins for everybody. Small wonder that independents like the Weather Channel and Oxygen sold out to major conglomerates. With a handful of cable operators dominating the market, and the FCC uninterested in enforcing existing law or making it easier to file complaints, there seemed little point in trying to stay independent.

Nevertheless, sensing some possible change in the winds and a ray of hope from tough talk against cable market power, a number of independent programmers decided to take the risk of retaliation from the cable industry and file complaints. These included WealthTV, a stand alone programmer, the NFL, and the Mid-Atlantic Sports Network (MASN) — which was having problems getting onto other systems. Meanwhile, the rest of the remaining independent programming industry held its breath and waited to see what the FCC would do.

Wonder of wonder and miracle of miracles! In what can only be described as a very special High Holiday season, the Media Bureau last Friday issued an Order resolving the pending Sec. 616 carriage complaints filed since November 2007 and designated them for hearing.

So What Happened And What Does It Tell Us?

Complainant WealthTV: Complainant WealthTV is an independent programmer that, beginning in 2003-04, started producing high-end HD content targeting “the good life.” Especially given the latest market gyrations, they will tell you that anyone regardless of income level should watch their programming to live well and within their means. But regardless of whether one thinks there is a market for WealthTV and its programming after this past month, they are exactly the sort of small, independent programmer with a novel concept Congress intended to protect with Section 616. WealthTV is producing and distributing real programming, and has carriage agreements with other video providers like the telcos, depriving the cable cos of the argument used against The America Channel that they weren’t a “real” network because they hadn’t yet produced programming. WealthTV is out there, programming its little heart out, and good enough to carriage on competing platforms that don’t have affiliated programming.

You can see WealthTV’s complaints against several cable operators here. Basically, WealthTV developed their programming and started marketing it in 2003-04. They got preliminary interest from some cable systems owned by Time Warner, Comcast, and other cable operators. But national HQ of these cable companies kept them dangling on a string. Meanwhile, Time Warner and the other cable operators named in individual complaints developed MOJO, an HD channel with programming amazingly similar to that developed first by WealthTV. But whereas Time Warner and the other cable operators gave MOJO national distribution, they cold shouldered WealthTV. And — surprise! — once WealthTV filed its carriage complaint against Time Warner, none of the other incumbent cable operators wanted to even talk to WealthTV about carrying their programming.

What Time Warner Argued: Time Warner basically argued that while local Time Warner systems may have been initially interested in WealthTV and that HQ had expressed some modest interest, there was no evidence that Time Warner had stolen WealthTV’s programming idea or favored its affiliate over WealthTV because the two channels were totally different.

What the Bureau found: The Bureau found that WealthTV had provided enough information to meet its prima facie burden. The Bureau did not make a finding of fact. i.e., the Bureau did not say “there is obvious discrimination here.” What they said was “WealthTV has brought enough evidence that it seems credible that Time Warner made its decision to favor MOJO rather than WealthTV because it owns a piece of MOJO. We therefore send this on to the ALJ.”

What does this mean? For WealthTV, it means they get their day in court. Historically, the cable guys have opted to settle if a complainant makes it this far, rather than have an ALJ order discovery and make a formal finding based on a truckload of evidence. But if the cable guys fear that the Commission is actually going to start processing complaints and sending them to an ALJ in a timely fashion, the cable guys may start fighting more vigorously to slow things down and keep independent programmers from filing new complaints.

More broadly, it does send a signal that the FCC is starting to take its responsibilities under Sec. 616 seriously. It still took a long time (about 8 months) to get from the close of the pleading cycle to the determination on the prima facie case — but that is not entirely the Bureau’s fault. Cable issues are highly political, as I have observed before, and it does not surprise me that Martin green-lighted this when the cable industries Congressional buddies were out campaigning against greed or that the Bureau released this order late Friday afternoon before Columbus Day. The Order gives a 60-day time limit for the ALJ to make a decision, and the ALJ is empowered to order a remedy.

Mind you, it doesn’t resolve any of the uncertainty around what exactly you have to show to meet the prima facie case burden, and WealthTV has been sitting out there exposed to retaliation throughout the process. Also, given that the Commission will likely undergo major change in the next few months, I do not expect to see a rush of independent programmers complaining until after the complaint is resolved and the appeal process (at the Commission) complete. But it should encourage the independent programmers and public advocates like myself that the FCC really does care about cable market power issues.

Sport Network Complainants: The other two significant complainants resolved in Friday’s order were the NFL Network and the Mid-Atlantic Sports Network. Here, the NFL provided evidence that Comcast refused to negotiate in good faith to distribute The NFL Network on basic tier, and insisted on putting the NFL only on a digital sports tier. This significantly cut the NFL’s audience reach. The NFL argued that Comcast placed its affiliated sports channels on basic tier, and its refusal to put the NFL on a basic tier derived from its desire to protect affiliated sports programming networks. MASN, although carried on some Comcast systems, filed a complaint because Comcast has refused to carry it on systems throughout the territory Major League Baseball and the NFL provide for the sports teams to which MASN has video distribution rights. MASN, like the NFL, argued that Comcast treated its affiliated national sports networks and regional sports networks (RSNs) in a much more favorable manner, and that Comcast’s refusal to negotiate in good faith emanated from discrimination based on affiliation.

Comcast argued that the issue was one of cost and capacity constraint. The NFL and MASN charge a good deal for its programming, and carrying their programming on basic tier would require all viewers to share the cost and would displace other programming of more general interest carried on the basic tier. NFL and MASN responded with evidence that the charges asked for are commensurate with their ratings performance, and that Comcast gives far more generous license terms to affiliated sports programming given the much lower ratings these affiliates receive.

From a legal perspective, these cases are somewhat more interesting. Certainly one of the elements that enters into consideration of carriage is cost. Comcast’s argument that the NFL or MASN simply wants too much money whereas its own affiliated programming comes cheaper is not inherently unreasonable. Nor is this similar to WealthTV and MOJO, in that Comcast did not develop sports programming only after NFL and MASN came along and developed the concept. Nevertheless, the NFL and MASN also have a plausible case. After all, in a competitive market, we would expect licensing fees to closely track ratings. Instead, they much more closely track affiliation. That strongly suggests that the impermissible consideration of affiliation, rather the permissible consideration of cost, is the real motive for refusing to engage in substantive negotiations (assuming Comcast did so refuse, which Comcast denies).

What the Bureau found: The Bureau (correctly, IMO) found that both NFL and MASN had met their prima facie burden. This sort of dispute is common in discrimination cases, and where the need to develop an evidentiary record, hold a hearing, and question participants in the negotiations and decisionmakers under oath before an ALJ assessing the credibility is highest. The NFL and MASN did not produce enough evidence to prove their case. How could they? Comcast controls all the evidence that would prove Comcast’s “real” motive. But NFL and MASN did provide sufficient evidence that Comcast’s constant favoring of affiliated sports programming and its overall conduct toward the independent programmer complainants made it believable that Comcast acted to protect affiliated programming from competing with unaffiliated programming rather than because the NFL and MASN wanted too much money for content of insufficient general interest.

What does this mean? As a matter of precedent, it still doesn’t entirely clarify what a complainant needs to show to meet its prima facie case burden. On the plus side, it does show that the Bureau will find discrimination credible in something more complicated than a refusal to carry programming or an outright demand for an ownership interest. That’s very good news. Often discrimination is subtler than a refusal to carry, and a plausible excuse can be offered in any individual case. It takes discovery and a trial to develop a record that can prove discrimination in such cases. That’s why the rules distinguish between the prima facie screen used by the Bureau, which is designed to prevent complainants from abusing the process, from the actual finding of discrimination made by the ALJ after discovery and a hearing.

Do We Still Need A Sec. 616 Order?

So given these cases, do we still need the FCC to issue an Order to fix the Carriage Complaint process. Absolutely! First of all, many of the reforms MAP and others have pushed for go beyond what this set of cases does. We’ve asked the FCC to clearly define the prima facie burden, make it clear that the Commission will punish a cable operator for retaliating for the filing of a complaint, and create a “shot clock” so that complainants and cable operators can have some certainty about how the process will work and how long it will take. These changes (which would merely require clarification of existing rules rather than creating any new rules) would make the process workable, give real protection to independent programmers against cable market power, while not encouraging a flood of bogus complaints as a negotiating ploy.

In the last year or so, “process” has become the hot issue for the FCC — especially for those who dislike Martin and claim he runs roughshod over it. But the Section 616 Carriage Complaint rules don’t offer any process to those who need it most. They are too vague, and leave extremely vulnerable independent programmers at the mercy of the cable operators for some indeterminate length of time. As a result, under the existing rules, any independent programmer that files a complaint risks its very existence on a regulatory roll of the dice. That doesn’t exactly inspire confidence in the process, or deter unlawful conduct. It would therefore behoove the Commission, and Martin’s critics Congressional and otherwise, to support a Section 616 Order that would bring some transparency and accountability — i.e. due process — to the Carriage Complaint rules.

Stay tuned . . . .

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