Newsletter

Communications Law Bulletin, April 2006

5/3/2006

In this issue:

Month in Brief

Perhaps the most important, if not surprising, development of the month for the communications industry was the President’s announcement, on April 26, that he will nominate Federal Communication Commission ("FCC" or "Commission") Chairman Kevin Martin to a second term.  That nomination now must be confirmed by the Senate.

If a Republican candidate is elected President in 2008, Chairman Martin’s new term with the Commission can be expected to continue until 2011.

Also, there is some indication that the legislative delay in the confirmation of Robert McDowell to the Commission may be lifted.  Specifically, Sen. Landrieu (D‑LA) agreed to end her opposition to the nomination after the Administration announced its support for additional Hurricane Katrina clean-up funds.  Unless other senators block the McDowell nomination, his name may come up for a vote soon.

This issue of our Bulletin covers a number of other developments, and includes our usual list of deadlines for your calendar.

Federal Trade Commission Clarifies Jurisdiction Over Newly-Deregulated Broadband Internet Access Services

In response to a letter from Representative Sensenbrenner (R-Wis.) of the House Judiciary Committee, Federal Trade Commission ("FTC") Chairman Deborah Majoras clarified that the recent deregulation of broadband Internet access services by the FCC now subjects those services to the FTC’s jurisdiction, as these information services no longer fall within the common carrier exemption in the FTC Act.  Accordingly, providers of these services are now subject to FTC rules on competition and deceptive business practices.  The letter noted, however, that broadband Internet access services provided on an elective common carrier basis would likely fall within the exception and remain subject instead to FCC jurisdiction. 

With respect to pending Congressional legislation, urged Congress to ensure that any new statutory authority for the FCC with respect to these services should not "oust" the FTC from its established jurisdiction.  With respect to the FCC’s Title I ancillary jurisdiction over broadband Internet access services, Chairman Majoras stated that the FTC will coordinate with the FCC regarding any concurrent jurisdiction. 

In addition, Chairman Majoras noted that the FTC will hold hearings later this year on consumer protection issues in Global Marketing and Technology, in which various broadband Internet access issues are likely to be discussed.

House Defeats Net Neutrality, but Issue Remains Alive and Well in the Senate and at Least One State

In early April, the House Telecom and Internet Subcommittee voted down (by a vote of 23-8) a "beefed-up" net neutrality amendment (to the video franchise bill — see separate article) that would have barred broadband providers from charging a fee for priority traffic.   As ultimately passed, the bill only provides FCC enforcement authority for its existing general net neutrality principles, with fines of up to $500,000 for violations, and explicitly bars the FCC from creating new net neutrality rules.  Proponents of the stronger amendment nonetheless vowed to continue to press the issue in full committee and on the floor of the House. 

The bill then went to a full committee markup at the end of April, at which the House Energy and Commerce Committee again rejected the Democratic-backed net neutrality amendment (this time by a vote of 34-22). 

In the Senate, however, net neutrality still shows some signs of life.  Senators Snowe (R-Maine) and Dorgan (D-ND) are reported to be circulating draft net neutrality legislation (the Internet Neutrality Act) that would establish a basic nondiscrimination policy for the Internet.  Although the bill has not yet been introduced, it reportedly would allow network operators to manage their networks to prevent congestion and spam, but would also require nondiscrimination for content, applications and services (to ensure quality and service consistent with that provided to affiliates) and would bar additional charges to non-affiliates for such content, applications or services.  The bill therefore appears similar to the bill released by Senator Wyden (D-Oregon) and reported in our March edition. The Snowe-Dorgan bill reportedly would require the FCC to establish Net neutrality rules, to issue temporary cease and desist orders (pending a final ruling) after the filing of any complaint that makes a prima facie showing, and to act on complaints under these new rules within 90 days of their filing. 

Although this is a Democratic bill, both Senate Commerce Chairman Stevens (R-Alaska) and ranking member Inouye (D-Hawaii) have stated that some form of net neutrality legislation will be contained in any telecom reform bill passed out of the Commerce Committee. 

Meanwhile, pursuant to a 2005 telecom deregulation law, the Texas Public Utilities Commission ("PUC") has opened a proceeding to determine whether state laws appropriate ensure network neutrality.  The Texas PUC has set a comment deadline of June 13th and has scheduled a workshop on the issue for the same day.  The deregulation law requires the PUC to report on the issue by the end of the year. 

Finally, at the FCC, Chairman Martin has stated that he believes that the FCC already has sufficient authority to address net neutrality and has shown a "willingness to step in" when faced with blocking complaints.

Video Franchise Bills Advance in Congress and the State Legislatures

The House video franchise bill discussed in last month’s Bulletin was approved by a 27 to 4 vote of the House Telecommunications Subcommittee after a nearly six-hour markup session on April 5 and by the full House Commerce Committee by a 42-12 vote on April 26.  The bill would enable telephone companies to apply for a nationwide license to offer video service, rather than having to negotiate a local franchise with every municipality.  Commerce Committee Republicans turned back Democrats’ attempts to add strict buildout requirements, by a 22-33 vote, and net neutrality provisions, by a 22-34 vote.  Those amendments had met a similar fate in the Subcommittee markup.  Commerce Committee Chairman Barton (R. Tex.) won the support of Ranking Member Dingell (D. Mich.) on a manager’s amendment that defines franchise area and that defines revenues for the purpose of franchise fees. 

Chairman Barton opposed both the buildout and net neutrality amendments, saying that the competition unleashed by the bill would make buildout requirements unnecessary and that he did not think that "the draconian things they say will happen are going to happen if we don’t adopt" the net neutrality amendment.  AT&T and Verizon have pledged to let consumers access anything they want on the Internet, but they also want to offer private Internet-based services with faster download speeds for services such as movies.  The Net neutrality amendment proposed by Subcommittee Ranking Member Markey (D. Mass.) would have addressed competitors’ concerns about "fast-lane" access by allowing all content to be eligible for fast-lane access without charge.  Although the amendment was defeated, net neutrality advocates were encouraged by the vote.  Although ultimate House passage seems likely, Senate action on a bill and reconciliation with the House appear to be major obstacles.

In response to the FCC’s request for comment on its annual multichannel video competition report, parties submitted a variety of views on April 3 addressing the "70/70 test" for measuring the extent of video competition (discussed in last month’s Bulletin).  The National Cable & Telecommunications Association ("NCTA") stated that increasing competition from DBS, over-the-air broadcasters and the Internet are pushing national cable subscriber rates far below the 70% threshold and that additional steps to spur video competition thus are not needed.  NCTA asserted that "the concern that motivated Congress to adopt the 70/70 test — a fear the cable operators would increasingly become the sole source of video programming in a community — has been overtaken by marketplace developments." 

That view was disputed in an ex parte filing by a consortium of open media and consumer advocates arguing that video competition has declined and that DBS has not curbed cable price increases.  Another public interest group urged more active regulation to ensure diversity in programming.  They argued that non-affiliated programmers appear to have been deterred from using leased access to gain entry, which has "further entrenched cable operators’ hold on video programming."  Verizon stated in its comments that the FCC should adopt rules that ease competitive entry into the video market, regardless of whether the 70/70 threshold has been met.  In their reply comments, filed on April 25, AT&T, Verizon and various public interest groups argued that the FCC has the authority to adopt any rules it deems necessary to promote diversity of information sources. 

The public debate over á la carte cable programming also continues to rage.  At a meeting with Commissioner Tate, Viacom officials presented an economic analysis by Stanford University Professor Bruce Owen concluding that government-imposed á la carte programming would likely result in higher prices for many consumers and reduced viewing of many networks.  It was reported on April 11 that Commissioner Adelstein said at a luncheon meeting during NCTA’s National Show that the FCC should give cable á la carte a fresh look because dueling FCC reports have created confusion, which was not resolved by a recent Congressional Research Service study endorsing neither report.  The more recent FCC report, backed by Chairman Martin, which supported more unbundled programming, has been criticized by NCTA, Disney and Viacom.  Commissioner Adelstein did not specifically call for another study and said that he was not asking for a notice of proposed rulemaking on the issue.  He also mentioned, in response to a question, that local franchise authorities want video competition.  "They’re falling over themselves to award these franchises."

The Commissioners’ legal advisors also expressed divergent views during a panel discussion at the NCTA National Show as to the need for prompt action on the pending Media Bureau proceeding regarding the possible preemption of video franchising barriers.  Heather Dixon, Legal Advisor for media issues to Chairman Martin, stressed that "delay in getting authorization is critical for a business, . . . [so] I think we’re going to try to work quickly."  Rudy Brioche, Legal Advisor for media issues to Commissioner Adelstein, responded that the time-consuming nature of multiple local video franchise applications would not qualify as the kind of problem that should trigger FCC preemption, given the "fact-specific" character of each case.  Analysts believe that FCC action is only likely if federal video franchise legislation fails to pass.   

It was reported on April 3 that state video franchise bills advanced in Florida and Iowa after they were amended to provide incumbent cable operators ways to opt out of existing municipal franchises when a state-franchised competitive video provider enters the market.  A Florida House committee approved a bill that would preempt municipal franchise authority and shift franchising to the Florida Department of State.  A similar Iowa Senate bill is poised for a final vote.  Telephone companies with local telephone franchises would obtain state video franchises automatically.  The Iowa bill would also cap franchise fees at five percent and ban buildout requirements and income-based redlining.

On April 7, Kansas Governor Kathleen Sibelius signed into law the similar bill discussed in last month’s Bulletin transferring video franchising authority from municipalities to the state.  The law caps franchise fees at five percent and allows incumbent cable companies to request, when a state-franchised competitor enters the market, that the municipal franchise authority amend any franchise terms that differ from those for the state-franchised entrant.  Franchised telecommunications carriers are franchised automatically by the state for video services.  The law bars buildout requirements and income-based redlining.  AT&T is assessing whether to roll out its video service in Kansas under the new franchising regime.  A similar bill failed to pass the Missouri Senate, and sponsors have conceded defeat.             

California Assembly Speaker Fabian Nunez (D.) and Assemblyman Lloyd Levine (D.) are cosponsoring a bill to shift video and cable franchising from municipalities to the state.  The bill includes buildout requirements that discourage "cherry picking" and bars income-based redlining.  The California Cable & Telecom Association said it would oppose the bill unless it is amended to address incumbents’ competitive concerns, but AT&T welcomed the bill as "the first step to bring video choice to California consumers."  The NAACP, the California Hispanic Association for Corporate Responsibility and the Communications Workers of America announced their support for the bill during a news conference held in conjunction with its introduction.  It was reported on April 27 that the California Assembly Utilities and Commerce Committee referred the bill to the Assembly Appropriations Committee without making any of the changes proposed in hearings that would have given municipalities a role in consumer protection and franchise enforcement, strengthened redlining protections and preserved public access programming.

The Texas PUC is currently conducting several rulemaking proceedings to implement the first statewide video franchising law in the nation, passed last year.  Commissioner Barry Smitherman sent a memorandum to other regulators stating that the PUC should examine what its role should be in resolving customer complaints regarding video service, particularly in areas served by a single, state-franchised video provider.  He noted that the legislature did not intend for the PUC to take on the investigation and resolution of video customer complaints, which the law leaves up to competitive market forces.

AT&T has also turned to the courts in its efforts to enter the video service market.  It was reported on April 10 that AT&T sued two Chicago suburbs in U.S. District Court challenging their authority to impose video franchise obligations on its attempts to deploy its Project Lightspeed fiber optic network, which it intends to use to provide IP-enabled video service.  AT&T maintains that, because its video service is IP-based, it is an upgrade of the DSL service it already provides, rather than a cable video service requiring a municipal franchise.  AT&T argues that it is being denied its right as a telecommunications carrier to build in public rights of way.  The towns argue that application to new video service entrants of the same franchising requirements that have been met by incumbent cable video providers is necessary to maintain "a level playing field." 

On April 13, a federal court dismissed an AT&T claim that a Walnut Creek, Cal. mandate that it obtain a franchise before upgrading its network to provide video service is preempted by federal law.  The court also refused to act on AT&T’s claim that California law authorizes it to send video programming over its telephone lines without obtaining a separate franchise from the city, stating that AT&T could refile that claim in state court.

Alcatel and Lucent to Merge

Alcatel SA ("Alcatel") and Lucent Technologies Inc. ("Lucent") agreed in April to merge in a deal valued at $13.4 billion.  The merged company, which has yet to be named, would be one of the largest manufacturers of telecommunications equipment in the world, with revenues of around $25 billion, 88,000 employees and a global customer base. 

Several reasons have been given for the merger.  The two companies are considered to be a good fit because of their complimentary product lines and geographic focus.  Alcatel, based in Paris, France, has strong sales in high-speed digital subscriber line equipment and derives more than two-thirds of its business from Europe, Latin America, the Middle East and Africa.  Lucent, based in Murray Hill, New Jersey, specializes in wireless technology and servicing telecom networks and obtains more than two-thirds of its business in the United States.  In addition, the recent consolidation trend among telecom operators has reduced the number of available customers and shifted pricing leverage to the operators, putting pressure on equipment manufacturers to merger. 

The deal is styled as a "merger of equals" even though the combined company will be based in Paris, its shares will be listed in Paris and Alcatel shareholders will own about 60% of the combined company to 40% for Lucent shareholders.  The combined company’s board will consist of six members from each of Alcatel’s and Lucent’s boards, and two new board members who will be citizens of European countries.  Serge Tchuruk of Alcatel will serve as chairman of the combined company, and Patricia Russo of Lucent will serve as CEO.  The companies have announced that they plan to cut approximately 10% of the combined workforce, or 9,000 jobs, in their effort to achieve $1.7 billion in savings within three years. 

The deal must be approved by both companies’ shareholders and U.S. and European regulators.  There may be heightened regulatory scrutiny in the US due to the classified work that Lucent’s Bell Labs unit does for the military and intelligence agencies.  In an attempt to satisfy those concerns, the companies have announced that Bell Labs will be placed in an independent subsidiary governed by a board of three US citizens.  There may be regulatory concerns on the other side of the Atlantic, as well, due to Alcatel’s joint ownership with the French government of satellite manufacturer Thales SA.  The deal is expected to close in 6 to 12 months. 

Broadcast Developments

Broadcasters Seek Court Review of the FCC’s Indecency Decision and File Oppositions to Fines at the FCC

On April 13 and 14, major broadcasters filed petitions for review in two federal courts of appeals challenging recent indecency decisions issued by the FCC.  Fox and CBS petitioned the U.S. Court of Appeals for the Second Circuit for review of the Commission’s March 15 Memorandum Opinion and Order finding that programs broadcast by the networks’ affiliates were indecent.  ABC and Hearst-Argyle Television filed a similar petition for review in the U.S. Court of Appeals for the District of Columbia Circuit with respect to an ABC network program.  NBC and its affiliates have filed a motion to intervene in the Second Circuit case.  Numerous interested parties are expected to intervene, and the cases are likely to be consolidated.

The petitioners seek review of the Commission findings that language aired on the following shows was indecent:  The Early Show, a CBS program aired in 2004 in which a cast member of Survivor described a fellow contestant as a "bullshitter;" Fox’s broadcast of Cher’s use of the word "fuck" on the 2002 Billboard Music Awards; Fox’s broadcast of the 2003 Billboard Music Awards in which Nicole Richie said the words "fuck" and "shit;" and multiple episodes of ABC’s NYPD Blue broadcast in the first half of 2003 in which the words "bullshit" and "bullshitter" were uttered.  The FCC did not issue fines in these cases because the incidents occurred before the Commission clarified its indecency standard in 2004 to state that almost any broadcast of certain expletives would be considered profane and indecent.  In a joint statement, the petitioners said that they "are seeking to overturn the FCC decisions that the broadcast of fleeting, isolated — and in some cases unintentional — words rendered these programs indecent."

While none of these cases involved NBC, the network and its owned and operated stations filed a petition to intervene on behalf of the other networks and stations.  In the motion to intervene, NBC and its owned and operated stations state that "[t]he Order represents a significant expansion of the Commission’s content regulation of broadcasters’ speech, characterizing as ‘indecent’ or ‘profane’ even the most brief and spontaneous utterances of expletives on network TV."  They further argue that "[t]he Order impermissibly regulates free speech under the First Amendment, oversteps the Commission’s regulatory authority, and reflects an arbitrary and capricious exercise of agency action."  NBC also said that the Commission’s definition of indecency, expanded to include the word "shit," will "chill the speech of broadcasters."

Broadcasters also are opposing forfeiture decisions at the Commission.  Fox station KTVI filed an opposition to the Commission’s proposed forfeiture for its broadcast of The Pursuit of D.B. Cooper.  CBS also has opposed a proposed forfeiture for its broadcast of Without a Trace.  Public television station KCSM plans to oppose the Commission’s proposed forfeiture for its broadcast of The Blues: Godfathers and Sons.

In opposition to the proposed indecency forfeiture for broadcast of The Pursuit of D.B. Cooper, Fox argues that the Commission’s indecency rules are unconstitutional because "[t]he massive expansion of cable and satellite video programming, together with the advent of the Internet, renders obsolete the second-class treatment of broadcasters under the First Amendment."  Fox also argues that the Commission’s decision to label Fox’s broadcast indecent deviates from recent FCC precedent.  Addressing the Commission’s Saving Private Ryan decision in 2005 — in which the FCC determined that the broadcast of "fuck" and "shit" was not indecent — Fox argues that "[t]here is no logical reason why material that was deemed essential to tell a war story in Saving Private Ryan should be any less essential when portraying a fugitive on the run."

CBS argues before the Commission that the unprecedented forfeiture proposed for its airing of Without a Trace "is unsupported by the record before the Commission, is inconsistent with the Commission’s indecency standards, and cannot be reconciled with the Communications Act and the FCC’s Forfeiture Policies."  In particular, CBS argues that the FCC has not attempted to measure "community standards for the broadcast medium." CBS also argues that the proposed fine violates the First Amendment because it "vastly exceeds the limited authority under FCC v. Pacifica Foundation and calls into question the continuing validity of the FCC’s indecency policy."  CBS argues, among other things, that technological changes have created less restrictive means to regulate indecent speech.

Meanwhile, the FCC rescinded $260,000 in indecency fines levied against certain Indiana television stations after some of the stations informed the FCC that it had erred when it concluded that they were in the Central time zone, rather than the Eastern time zone, and that the broadcasts of indecent material were outside the 10:00 p.m. to 6:00 a.m. safe harbor.

FCC’s Payola Settlement Talks Frustrate New York State Attorney General Eliot Spitzer

The FCC is proceeding to issue letters of inquiry to Clear Channel Communications Inc., CBS Radio Inc., Entercom Communications Corp. and Citadel Broadcasting regarding compliance with the Commission’s payola regulations.  Commissioner Adelstein, in a prepared written statement about the letters of inquiry, said, "I am pleased that we have launched this formal phase of the payola investigation.  This should put to rest any question about the FCC’s commitment to enforce the law.  Our investigation will be a thorough and complete review of the industry’s alleged payola practices."

Meanwhile, the FCC reportedly is holding settlement negotiations with the four broadcasters identified in its payola investigation.  Press reports state that Clear Channel is prepared to settle in the $1.5 million to $3 million range while Citadel and Entercom are reportedly offering around $1 million each.  Reports suggest that CBS Radio has not made an offer yet.

These developments come after New York State Attorney General Eliot Spitzer last month sued Entercom, the nation’s fifth largest radio chain, alleging that the company "traded airplay for revenue."  According to the Associated Press, Mr. Spitzer has said that settlement talks could undermine his work.  The suit, filed in Manhattan state court, alleged that gifts, trips and cash were traded for airplay for certain songs at Entercom’s radio stations.  "We have moved from the label side, those who put out the records and are forced to pay for air time," said Spitzer, "and switched to the radio conglomerates . . . that are extracting money."  The complaint also alleges that the company "falsely promot[ed] records up the music charts" in reports it provided to trade publications about the airplay of songs.  Two major recording companies agreed last year to settle with Spitzer to end payola investigations.  Warner Music Group Corp. said it would pay $5 million, and Sony BMG Music Entertainment agreed to pay $10 million.  Spitzer contends that the FCC has been "asleep at the switch" with regard to payola and should consider revoking licenses.  The FCC sharply disputed this characterization.

Martin’s Speech Focuses on Dropping Cross-Ownership Restrictions

At a Newspaper Association of America convention in Chicago on April 4, 2006, FCC Chairman Kevin Martin said that the Commission’s failure to end the broadcast-newspaper cross‑ownership ban "may adversely impact the quality of news and localism."  Chairman Martin also said that newspapers’ financial struggles have led to a 4.1 percent drop in newspaper newsroom staff employment from 2001-2005.  Despite a decade of Commission promises to review and revise the newspaper-broadcast cross-ownership ban, it has not changed since 1975, he said.  The ban has persisted, he noted, in the face of dramatic changes in the marketplace.  "The rule that is in place today was based on a market structure that bears little resemblance to the current environment.  That rule was adopted in an era with little cable penetration, no local cable news channels, fewer broadcast stations, and no Internet."  He also observed that at least 300 daily papers have stopped publishing since the cross-ownership rule was adopted.  Chairman Martin said that the Commission should issue a "neutral" notice of proposed rulemaking to address the issues remanded to the Commission by the Third Circuit.  After a record is developed, "we will look at whether it makes sense to address all of the rules together or if it makes more sense to address issues separately."

McDowell Appointment Is the Trigger for a Broad Media Ownership Inquiry

FCC Chairman Martin is calling for a Commission vote on a broad media ownership inquiry soon after the U.S. Senate approves Robert McDowell’s delayed appointment, according to reports.  Easing media ownership limits is a priority on Martin’s agenda.  Adoption of the media ownership notice of proposed rulemaking will be delayed until the third Republican commissioner is confirmed, which is expected soon.  For his part, Commissioner Copps has said that the Commission must create a better record than in the past. "We ought to have ownership hearings around the country.  Not just one . . . It’s very hard to generalize" about the issues.  "If we go in and do our homework and compile a granular record," Copps added, "you could craft a series of rules that would virtually sail through the court system."

FCC Commissioners Copps And Adelstein React to Widespread Video News Release Abuses

Following a study by the Center for Media & Democracy that 77 television stations used 36 video news releases ("VNRs") almost 100 times without revealing their sources, Commissioners Copps and Adelstein have called for tougher enforcement.  "The public," Commissioner Adelstein said in a written statement, "has a legal right to know that people who present themselves to be independent, unbiased experts and reporters are not shills hired to promote a corporate — or governmental — agenda."  Commissioner Adelstein has suggested that the television stations alleged to have aired unattributed VNRs should apologize to viewers.  Commissioner Copps echoed Commissioner Adelstein, calling for a crackdown use of VNR material without attribution.  Free Press and The Center for Media & Democracy have asked the FCC to initiate an investigation.  Their complaint states that violations have occurred in the 10 largest U.S. markets and that "[a] list of the worst possible offenders includes stations owned by Sinclair Broadcast Group, News Corp./Fox Television Stations, Clear Channel Communications, Tribune Company and Viacom/CBS Corp."  While an FCC spokesman said that the Commission "will review the complaint carefully," Commissioner Adelstein went farther, saying that the stations "clearly misled their audience[s]" because "[i]t’s often impossible for viewers to tell the difference between news and propaganda."  Commissioner Adelstein added that the alleged violations could result in hefty civil fines and even criminal punishment.  Any evidence of criminal conduct should be referred to the FBI and Justice Department for investigation and possible prosecution, he said.  Commissioner Copps was blunt: "We need to come down hard on this."  "When legitimate news is scrapped in favor of outright propaganda," Copps added in a written statement, "viewers are in trouble."  Adelstein hinted at tougher regulation: "It certainly appears as if the industry is incapable of effectively regulating itself.  It is now incumbent on the FCC to take the necessary steps to protect the viewing public."  Chairman Martin and Commissioner Tate have not commented on the matter.

FCC Issues New Designated Entity Rules and Proposes Additional Rule Changes

The FCC released its long awaited Second Report and Order and Second Further Notice of Proposed Rulemaking ("Report and Order" and "Further Notice") revising its general competitive bidding rules governing the benefits reserved for designated entity licensees ("DEs").  DEs benefits include receiving bidding credits and license set-asides during spectrum auctions for small and very small businesses.  The FCC deliberately released the item in time for the new rules to apply to the Advanced Wireless Service ("AWS") auction scheduled for June 29, 2006 (see separate article regarding the auction).  The new rules will become effective thirty days after their publication in the Federal Register.

Material Relationships.  The Report and Order makes significant changes to the FCC’s DE rules by including certain "material relationships" as factors in determining DE eligibility, modifying its unjust enrichment rules, and imposing new reporting requirements on DEs.  Specifically, except in certain circumstances, an applicant or licensee now has an "impermissible material relationship" when it has agreements with one or more other entities for the lease or resale of more than 50 percent of its spectrum capacity of any individual license.  An "impermissible material relationship" renders the applicant or licensee: (1) ineligible for DE benefits; and (2) subject to the repayment of unjust enrichment on a license-by-license basis. 

Furthermore, an applicant or licensee now has an "attributable material relationship" when it has one or more agreements with any individual entity (including entities and individuals attributable to that entity) for the lease or resale of more than 25 percent of the spectrum capacity of any individual license that is held by the applicant or licensee.  The "attributable material relationship" with that entity will be attributed to the applicant or licensee for the purposes of determining the applicant’s or licensee’s: (1) eligibility for DE benefits; and (2) liability for unjust enrichment on a license-by-license basis.

The Report and Order provides that the new eligibility restrictions based on "material relationships" will be applied on a prospective basis.  Thus, the FCC will not reconsider any DE benefits previously awarded to licensees prior to the release date of the Report and Order or to determine DE benefits for assignment, transfer of control and lease applications filed before the release date of the Second Report and Order that are still pending approval.  In addition, an applicant will not be ineligible for DE benefits based solely on a "material relationship" provided that the agreement that forms the basis of the relationship: (1) is otherwise in compliance with the FCC’s DE eligibility rules; (2) was entered into prior to the release date of the Report and Order; and (3) is subject to a contractual prohibition that prevents the affiliate from contributing to the DE’s total financing.

Unjust Enrichment.  The Report and Order also modifies significantly the FCC’s unjust enrichment rules by extending the unjust enrichment period to ten years (rather than five years).  Thus, for the first five years of the license term, if a DE loses its eligibility for a bidding credit, 100 percent of the bidding credit, plus interest, must be repaid.  For years six and seven of the license term, 75 percent of the bidding credit, plus interest, must be repaid.  For years eight and nine, 50 percent of the bidding credit, plus interest, must be repaid.  For year ten, 25 percent of the bidding credit, plus interest, must be repaid. 

Moreover, the entire bidding credit amount owed, plus interest, must be repaid if a DE loses its eligibility for a bidding credit prior to notifying the FCC that the construction requirements applicable at the end of the license term have been met.  For example, the Report and Order explains, if a DE assigns a bidding credit license to an entity that is ineligible for bidding credits eight years after the grant of the license and prior to the filing the construction notification, 100 percent of the bidding credit, plus interest, must be repaid (rather than the 50 percent unjust enrichment payment that would be due had if the construction notification was filed). 

Existing DEs with impermissible and attributable material relationships that were in existence prior to the release date of the Report and Order are grandfathered under the new unjust enrichment rules.  The FCC will enforce the unjust enrichment rules by: (1) reviewing all agreements to which DE applicants and licensees are parties; (2) requiring that applicants and licensees seek advance approval for all events that may affect their ongoing DE eligibility; (3) imposing periodic reporting requirements on DEs; and (4) conducting random audits of DEs.  The FCC also commits to audit the eligibility of every DE that wins a license in the AWS auction as least once during the initial license term.

Further Notice.  The FCC seeks comment in Further Notice regarding whether it should implement additional rules to ensure that DE benefits are awarded to appropriate entities and for the purposes intended by Congress.  The FCC seeks comment on four particular areas:

(1) Defining the Class.  Whether a certain class of entity, if any, should trigger any additional restrictions regarding DEs and whether a class should be based on a specific financial threshold.

(2) In-Region Limitations for Class of Entities.  Whether the FCC should adopt an in-region component to defining relationships with any particular class or type of entity that trigger additional eligibility restrictions.

(3) Material Relationships.  Whether the FCC’s DE rules should be further modified to include other types of agreements in the definitions of "impermissible material relationships" or "attributable material relationships."

(4) Personal Net Worth.  Whether personal net worth should be included in determining DE eligibility and, if so, whether Council Tree’s proposal to prohibit individuals with a net worth of $3 million or more from having a controlling interest in a DE should be adopted.

Comments and replies to the Further Notice are due 60 and 90 days, respectively, after it is published in the Federal Register.

FCC Adopts New "Junk Fax" Rules as Collections Industry Requests Clarification of Scope of Telemarketing Requirements

On April 6, 2006, the FCC released its Report and Order and Third Order on Reconsideration ("Order") implementing the Junk Fax Prevention Act of 2005 ("JFPA").

The JFPA was a critical piece of legislation for companies that engage in fax advertising.  Before the JFPA was enacted, the FCC had determined that advertisers may no longer send fax advertisers to recipients with whom the sender had an established business relationship ("EBR") unless the sender had first obtained the recipient’s prior, written permission to do so.  As a result, many fax advertisers were faxed with the costly, cumbersome prospect of obtaining written permission to continue sending faxes to their vendors and business customers.  The JFPA brought this process to a halt by directing the Commission to adopt new rules that would permit commercial faxes to be sent to recipients with whom the sender has an EBR, so long as each such fax defines a mechanism by which the recipient can "opt out" of receiving faxes from that sender in the future.

Among other provisions, the Order announces the following rules and decisions:

  • For purposes of the fax advertising rules, an EBR will be defined as "a prior or existing relationship formed by a voluntary two‑way communication between a person or entity and a business or residential subscriber with or without an exchange of consideration, on the basis of an inquiry, application, purchase or transaction by the business or residential subscriber regarding products or services offered by such person or entity, which relationship has not been previously terminated by either party." 
  • The sender of a fax ad is responsible for demonstrating the existence of an EBR, although senders are not required to keep any specific records for this purpose. 
  • Even where the sender and recipient have an EBR, the sender must have obtained the fax number directly from the recipient, or the recipient must have voluntarily made the fax number available in a directory, advertisement, or Internet site that is accessible to the public.  An exception to this requirement applies if the EBR was formed prior to July 9, 2005. 
  • No time limit is placed on EBRs, but the FCC will revisit the time limit question, based on any history of complaints to the Commission, within one year of the Order’s effective date. 
  • The first page of each fax ad must include a notice stating that the recipient is entitled to request that the sender not send any future unsolicited ads.  The notice must include a direct contact telephone number and a fax number for the recipient to transmit such an "opt out" request, and must provide at least one cost‑free mechanism for transmitting the request. 
  • The opt-out notice must be "clear and conspicuous," but no rules are imposed concerning font type, size and wording.  However, the notice must be distinguishable from the advertising material. 
  • Senders must honor opt out requests within 30 days. 
  • An unsolicited advertisement will be defined as "any material advertising the commercial availability or quality of any property, goods, or services which is transmitted to any person without the person’s prior express invitation or permission, in writing or otherwise."  The final four words of the definition are an addition to the Commission’s previous definition, as required by the Junk Fax Act. 
  • Prior express invitation or permission may be given by oral or written means, including email, fax and Internet, but always must be given before the fax is sent. 

In another electronic marketing development, the FCC put out on Public Notice a petition for expedited declaratory ruling filed by ACA International, a group that represents credit and collection companies.  ACA’s petition asks the Commission to rule that collections calls are not covered by the Commission’s prohibition against use of autodialers to call numbers assigned to cellular telephone services.  The petition points out that debtors frequently provide mobile numbers as points of contact in credit applications, and argues that Congress did not intend to prohibit collections calls to the mobile numbers of those customers.

Comments on the ACA petition are due May 11, 2006, and reply comments must be filed on or before May 22, 2006.

Finally, the General Accountability Office ("GAO") released a report on April 5, 2006, issued a critical report on the state of FCC enforcement of its fax advertising regulations.  According to the GAO, enforcement is hampered by inefficient data management and lack of coordination between the FCC’s Consumer & Governmental Affairs Bureau and the Enforcement Bureau.

Anti-Pretexting Bill Clears House, FCC Announces Intention to Fine Cbeyond

Late on April 25, 2006, the House of Representatives unanimously passed a bill aimed at data brokers that obtain consumers’ telephone records by means of "pretexting."  HR 4709 authorizes prison terms of up to ten years, and fines of up to $250,000 for individuals and $500,000 for organizations.  The bill now will go to the Senate.

In the meantime, the House Commerce Committee issued subpoenas to 12 data brokers that had refused to respond to requests for voluntary disclosure of information, and the FCC announced its intention to fine Cbeyond Communications $100,000 for failure to comply with the Commission’s customer proprietary network information ("CPNI") regulations.

FCC Issues $715,000 Forfeiture Order Against Globcom, Inc. for Repeated USF and TRS Contribution Violations

On April 19, the FCC issued a forfeiture order requiring Globcom, Inc., a long distance resale carrier, to pay a penalty of $715,031 for its willful and repeated failures to contribute to the Universal Service Fund ("USF") and Telecommunications Relay Service ("TRS") fund and to file complete and accurate interstate and international revenue information.  This proceeding was initiated in 2003 by a Notice of Apparent Liability and Order ("NAL") issued against Globcom proposing a forfeiture of $806,861 for unpaid USF and TRS contributions for 2001-03.

In its response to the NAL, Globcom asserted that: its revenue filings actually overstated its revenue; it should be given credit under the limited international revenue exception; the forfeiture calculation in the NAL differed from the method used in earlier similar cases; and it could not afford to pay the forfeiture amount.  Based on Globcom’s revised revenue reports for 2002, the Universal Service Administrative Company ("USAC") reduced Globcom’s USF contribution debt, reflecting the application of the expanded international exemption.  Nevertheless, because Globcom failed to submit any timely revenue reports since the NAL and paid nothing to either the USF or TRS funds since early 2003, Globcom’s unpaid USF contribution balance increased to almost $1,120,000.

The FCC rejected Globcom’s argument that, because the forfeiture was calculated in a different manner from previous similar cases, the higher resulting amount violates the Administrative Procedures Act.  The forfeiture amount is less than the maximum amount authorized by Section 503 of the Communications Act, and the FCC had warned in previous cases that it would impose greater USF contribution-related forfeitures in the future based on more stringent methodologies, if necessary to deter violations.  The FCC noted that Globcom clearly had not been deterred, since it "has yet to pay even the money it admits to owing."  Moreover, delinquent carriers may obtain a competitive advantage over carriers complying with their contribution obligations.  The FCC also rejected Globcom’s claim that, because of its low margins on its resale business, it is unable to pay the forfeiture.  The FCC noted that it has repeatedly found that gross revenues are the best measure of a carrier’s ability to pay a forfeiture and that Globcom’s gross revenues are much greater than the forfeiture amount.  

This forfeiture order continues and escalates the FCC’s crack-down on USF contribution and revenue reporting violations (reported in the July-August 2005 issue of the Bulletin).  Particularly in cases of repeated violations, the FCC can be expected to make good on its previous threats to impose greater penalties, using more stringent penalty calculation methodologies, for nonpayment of USF and other contribution obligations.

FCC Adopts Procedures for AWS Auction

The FCC at its April 12 open meeting adopted a public notice setting forth key details regarding the procedures for Auction No. 66 in which it will auction more than 90 MHz of Advanced Wireless Service ("AWS") spectrum.  Pursuant to the public notice, the auction remains scheduled to begin on June 29, 2006.  Although the FCC maintained many of the same auction procedures utilized in prior auctions, it also modified certain significant aspects, including the potential that the identities of bidders will not be publicly disclosed throughout the auction.

The FCC previously had proposed to implement blind bidding for the first time in a spectrum auction in order to block collusion and other anti-competitive behavior.  However, both small and larger carriers objected to implementing such a dramatic and untested change in procedures to an auction that has been hailed as one of the largest and most important in FCC history.  Industry members have argued that limiting disclosure of bidding data would, in fact, provide certain bidders with a competitive advantage while placing others at a disadvantage, potentially leading to some carriers to decide to not participate in the auction at all.

The FCC ultimately concluded that it would adopt key aspects of a compromise bidding plan proposed by T-Mobile USA, Inc.  Specifically, the FCC will examine the "threshold eligibility ratio" of the auction prior to the start of the auction to determine whether the auction would be sufficiently competitive to limit the likelihood of anti-competitive behavior.  If the ratio is three or greater — i.e., the amount of upfront payments for the auction as a whole equals an average of three bidders per license — the FCC will conduct the AWS auction as it has in the past by disclosing bidder data after each bidding round.  (T-Mobile had proposed a threshold eligibility ratio of two.)  If the threshold is not met, however, the FCC will withhold the license selections each bidder chose on their short form applications and the bidder identities and other bidding information during the auction.  The FCC would reveal the gross amount of the bids after each bidding round. 

Whether bidder information will be disclosed will not be known until after the short form applications are filed and upfront payments are made.  Although the FCC has not calculated the threshold eligibility ratio of prior auctions, one market participant has estimated that based on its own calculations Auction No. 5 (PCS C Block) had an eligibility ratio of 6.72, Auction No 58 (mainly PCS C and F Blocks) had an eligibility ratio of 2.94, and Auction No. 4 (PCS A and B Blocks) had an eligibility ratio of 1.93.

The FCC also decided that the AWS spectrum would be auctioned in a single sale using a simultaneous multiple-round format, which is the traditional auction format used in prior auctions.  The FCC previously had sought comment on whether the spectrum should be auctioned using package bidding.  In addition, the FCC reduced minimum opening bids and upfront payments for rural licenses.  Further, the FCC adopted a minimum reserve price for the entire auction such that the total winning bids, net of any bidding credits, must exceed $2.059 billion.  If this reserve price is not met, the auction will be cancelled.

FCC Commissioners Copps and Adelstein issued concurring votes for the AWS auction procedures.  Commissioner Copps stated that he did not have sufficient time to "determine with confidence that we can successfully change so many long-standing auction procedures."  Commissioner Adelstein remarked that it "is unclear to me what specific harms this [blind bidding] proposal is intended to address" and that "the full Commission did not have the opportunity to shape the original proposal or add questions that may have helped inform the decision-making process."

The FCC also has released an order and further notice of proposed rulemaking that modifies the FCC’s rules regarding designated entities ("DEs") (see separate article).  The Democratic Commissioners have long been urging a rulemaking to reform the DE rules to limit the ability of national wireless carriers to partner with small businesses.  The rules adopted in the new order apply to the AWS auction.

The FCC and the National Telecommunications and Information Administration ("NTIA") also have released joint coordination procedures for relocating government users from the AWS band.  Use of the AWS licenses will be conditioned on the commercial licensees coordinating frequency usage with known co-channel and adjacent channel incumbent federal users.  Under the joint procedures, both commercial and government licensees must coordinate fully and make reasonable efforts to resolve and technical problems.  Prior to operations, AWS licensees must contact the appropriate government agency to obtain information necessary to perform an interference analysis.  If the agency does not respond within 30 days, the AWS licensee may contact NTIA for assistance.  The AWS licensee then must send its interference analysis to the agency for review.  If the agency does not raise any objections within 60 days, the AWS licensee may commence operations. 

FCC Revises Rules for Transitioning to New Brs/Ebs Band

On April 12, the FCC adopted an order revising several key elements of the plan for transitioning to the new band for broadband radio services ("BRS") and educational broadband services ("EBS").  The BRS/EBS industry supported many of these changes.  For example, the FCC revised its rules to permit licensees within "basic trading areas," rather than larger "major economic areas," to transition to the new BRS/EBS band.  The FCC also allowed BRS and EBS licensees the option to self-transition to the new band.  Additionally, the FCC allowed EBS licensees to lease their capacity for terms of up to 30 years, but required that leases with terms of 15 years or longer must allow EBS licensees the right to revisit certain requirements of the leases every five years after 15 years.  Because the full text of the order has not been released yet, many of the details of the FCC order remains unclear. 

Legislative Developments

In late March, House Energy and Commerce Committee Chairman Barton (R-Tex.) released a draft telecommunications bill, despite the lack of support from key Democratic members of the committee.  The draft bill would allow cable operators and others to bypass local franchising requirements and obtain national franchising authority from the FCC.  Franchise fees would be set at five percent of an operator’s gross revenue.  The draft bill also would prohibit the FCC from adopting Net neutrality rules, but would allow the FCC to enforce Net neutrality principles in complaint proceedings.  It would grant interconnection rights to VoIP providers, but require them to provide E911 capability.  Additionally, the draft bill would remove state bans against the provision of telecommunications, cable, or broadband services by municipalities.

Telephone companies, cable operators, and other network operators have responded fairly favorably to the draft bill, while consumer groups and Internet content providers criticized major portions of the bill, such as the Net neutrality and national franchise provisions.  Meanwhile, the Senate Commerce Committee has been continuing work on its version of a comprehensive telecommunications bill, and it is uncertain how different the Senate and House bills will be.

Universal Service Developments

Reform of the universal service program, which has been a focus of the FCC and Congress for some time, recently received additional attention with new legislation proposed in the House and FCC Chairman Kevin Martin reviving an old idea of a "reverse auction" allocation method for high-cost support.  Both the new bill and Martin’s proposal would significantly change the universal service program.  In addition, those defrauding the universal service schools and libraries program, also known as the E-rate program, continue to be prosecuted.

Representatives Lee Terry (R., Neb.) and Rick Boucher (D., Va.) introduced the Universal Service Reform Act of 2006 ("USF Act"), which is intended to reflect a year of consultation with industry and other interests.  The USF Act would broaden the base of contributors to the universal service fund ("USF") to include any service provider that uses telephone numbers, IP addresses, or their functional equivalents to provide voice services.  This would include voice over Internet protocol ("VoIP") services, regardless of whether the services are provided over DSL, power lines, or cable modems.  The USF Act allows the FCC to decide the contribution methodology for the USF.  If a revenue-based method is chosen, the FCC is authorized to base a carrier’s contribution on intrastate, interstate and international revenues. 

In addition, if adopted as introduced, the USF Act would place a cap on the fund for high-cost support.  USF support for schools, libraries, rural health care facilities, and the Lifeline and Link-up programs would not be subject to the cap.  The USF Act also would limit the number of eligible telecommunications carriers ("ETCs") by specifying specific criteria that must be met to receive USF support, including providing universal service, demonstrating the ability to remain functional in emergencies, and satisfy certain customer protection and quality of service standards.  Support to ETCs would be based on actual costs of providing service.  The USF Act, however, prohibits the FCC from adopting a primary-line restriction.

The new also bill proposes to provide USF support for providing broadband services, but imposes a five-year build out requirement on support recipients.  Further, it is supposed to address "phantom traffic" concerns by requiring carriers to identify all traffic originating on their networks and requiring intermediate carriers to pass through appropriate call data.  In addition, the USF Act permanently exempts the USF from the Anti-Deficiency Act.

Chairman Martin at a public speaking event proposed using a "reverse auction" for high-cost universal service support to battle the ever-increasing USF.  Under the proposal universal service support would be allocated for the network of the lowest bidder in a particular geographic region rather than multiple operators in one region.  In exchange for receiving USF monies for five years, a carrier would be designated the carrier of last resort.  According to Chairman Martin, subsidizing multiple wireline and wireless carriers "might be a good thing" if there is "a limitless amount of money."  However, paying wireless carriers high-cost support when customers also keep their landline phones contributes to the growth of the USF, which must be curbed. 

Opponents to the reverse auction concept argue that it would discourage investment and network upgrades, including investments in VoIP and other new services.  According to opponents, although the auction process may reduce pressure on the USF, it does not take into consideration real world characteristics of building and maintaining high-cost, capital-intensive networks.  

In related events, the government continues to prosecute those that attempt to defraud the E-rate program.  Networking company NextiraOne LLC, a subsidiary of Platinum Equity LLC, has been charged with defrauding the E-rate program and the Oglala Nation Educational Coalition member schools, which are located on the Pine Ridge Reservation in South Dakota.  NextiraOne is charged with inflating equipment prices, submitting fraudulent invoices and failing to deliver and install certain equipment that was paid for through the E-rate program.  NextiraOne has entered into a plea agreement under which it will pay a $1.9 million criminal fine and forfeit more than $2.6 million in reimbursement for uncompensated work previously performed at other school districts.  A federal grand jury in South Carolina also has returned a 12-count indictment against the former technology director of Bamberg County School District One in Bamberg, South Carolina for submitting fraudulent E-rate funding applications and fraudulently obtaining more than $468,000 in E-rate support.

State Deregulation Developments and Customer Contract Developments

States continue their efforts to deregulate telecommunications services, although the rapid pace of the last few months seems to be slowing down.  This may signal that this effort has run its course and that future regulatory initiatives will be in other areas, such as video franchising.  In the meantime, a number of public utility commissions and state legislatures continue to consider how to adapt regulations to the increasingly competitive markets for telecommunications services in their jurisdictions. 

On April 11, the New York Public Service Commission ("NYPSC") adopted a policy that grants Verizon and Frontier virtually unlimited pricing flexibility for most retail telecommunications services.  The order is part of the NYPSC’s proceeding to examine issues related to intermodal competition, initiated in June of last year.  After hearing from interested parties and reviewing a staff report released last fall, the NYPSC concluded that wireless, cable, and VoIP services provide sufficient intermodal competition to justify deregulating Verizon’s and Frontier’s non-basic retail services.  The order points to significant access line loss for both companies in recent years and the staff estimate that 90% of New Yorkers have at least two intermodal alternatives to the incumbents’ wireline networks.  These carriers must continue to offer a basic service subject to a regulated price cap that may be increased in accordance with certain conditions that will allow basic services to better reflect cost.  Wholesale services will continue to be regulated.  Independent incumbent carriers also are allowed some pricing flexibility but, unlike Verizon and Frontier, the incumbents must offset any price increases by decreasing access charges, unless they can cost-justify retaining the increased revenues.  In addition, the NYPSC will commence a proceeding to consider modifying service quality and consumer protection regulations and a separate proceeding to evaluate pole attachment rates.

The Governor of Kansas just signed a deregulation bill in that state.   The Kansas law, passed in the final days of the 2006 legislative session, removes from the Corporation Commission the authority to set rates in certain telephone exchange areas.  Prices for bundled and stand-alone services will be completely deregulated in exchanges with more than 75,000 local access lines, only basic exchange rates for customers purchasing 5 or fewer lines would continue to be regulated.  The law applies to carriers currently subject to price regulation.  In exchanges with less than 75,000 access lines, a carrier can request price deregulation of business services if the carrier can demonstrate that two or more non-affiliated carriers, at least one of which is facilities-based, provide services to business customers. 

The Governor of Kentucky just signed the deregulation bill in that state as well.  The law will create "basic local exchange" and "non-basic" classes of service and restricts the Public Service Commission’s authority to certain consumer issues and to FCC-delegated authority over wholesale transactions.  Basic local exchange rates would be frozen for five years and subject to ongoing PSC oversight afterwards.

The past month also has seen state activity overseeing the contracts between telecommunications carriers and their customers.  Perhaps as the next phase in the evolution of telecommunications deregulation, the governor of West Virginia signed a bill intended to "improve competition among telephone public utilities providing landline services."  The bill, now law, prohibits telephone public utilities from using automatic renewal provisions in their landline customer services agreements; requires notice of the end of the service agreement; provides that after initial term of landline customer services agreement the term shall be on a month-to-month basis unless customer signs new landline customer services agreement; and limits termination fees charged by telephone public utilities for landline service and providing method of computing termination fee. 

In Michigan, a federal district court (Eastern District) has denied SBC’s (now AT&T’s) motion for summary judgment to dismiss a complaint filed by a customer, Diamond Computer System, who claimed that SBC had failed to honor promises made by the sales representative as to the installation date of the services and other commitments that were not included in the written contract.  SBC had argued that the contract expressly disclaimed any liability for promises not made in writing as part of the contract.  The court disagreed, concluding that the plaintiff’s claim of promissory fraud could withstand summary judgment despite the "merger" and "no-reliance clauses" in the contract.  Important to the court’s analysis was the fact that, at the time the contract was entered, SBC did not have in place the facilities needed to provide the contract services and would not have them by the installation date promised by the sales representative.

CFIUS Reform on Senate Lawmakers’ Agenda

Foreign companies seeking to acquire U.S. telecommunications assets need to be increasingly aware of the Exon-Florio approval process in addition to any necessary FCC approvals.  Specifically, the role of the Committee on Foreign Investment in the United States ("CFIUS") and its review of foreign investment in the United States received considerable media scrutiny in connection with the proposed acquisition by Dubai Ports World ("DP World") of P&O Navigation, including operations at six U.S. ports.  Following CFIUS approval of the transaction, congressional action threatening to block the transaction resulted in DP World announcing that it would sell the U.S. operations of P&O Navigation to a U.S. entity.

The CFIUS approval of the DP World transaction has raised congressional concerns over the secretive CFIUS foreign investment review process and its effectiveness in protecting U.S. national security priorities.  Lawmakers in both the House of Representatives and in the Senate have drafted various legislative proposals aimed at revising the CFIUS review and approval process.  At last count, there were 12 bills in the Senate and 11 in the House.  The general theme of the various legislative proposals is towards greater transparency in the national security review process, congressional notification of transactions, and in certain cases express limitations on foreign ownership of certain U.S. assets, including (under many of the bills) telecommunications infrastructure. 

On March 30, 2006, the Senate Banking Committee unanimously approved the "Foreign Investment and National Security Act of 2006," which was introduced by Senator Shelby (R‑AL).  This legislation would substantially reform the CFIUS process by, among other things, expanding the initial 30-day CFIUS review by an additional 30 days if there are national security concerns with the transaction, and mandating an extended 45-day investigation of transactions involving critical infrastructure.  In addition, the bill would create a secret "national security" ranking system of countries.  Because the Senate Banking Committee has already considered and approved this bill, it is likely to be the CFIUS reform legislation considered by the full Senate.

In the House, Representative Hunter (R-CA), Chairman of the House Armed Services Committee, introduced legislation entitled the "National Defense Critical Infrastructure Protection Act of 2006."  The most noteworthy provision of this legislation prohibits an entity from owning, or being authorized to manage or operate, any system or asset that is included on a (to-be-determined) national defense critical infrastructure list, unless the entity meets specified national security management requirements.  These requirements include the entity being majority owned by U.S. citizens and having a majority of its board members approved by the Department of Defense. 

It is anticipated that hearings on the House bills will be scheduled in May.  There has been considerable concern among the domestic and international business community that restrictions on foreign ownership of U.S. assets could have a chilling effect on foreign investment in the United States.  Accordingly, the business community has engaged in lobbying efforts to limit the possible adverse impact of any CFIUS reform legislation.  While it is too early to determine the final form of any new CFIUS legislation, it is widely expected that such legislation will be passed prior to the November 2006 mid-term elections.  

FCC Continues to Wrestle with Foreign Ownership Calculations

The FCC recently issued an order on TelCove’s petition for declaratory ruling seeking permission for foreign ownership in a wireless licensee above the 25% statutory benchmark.  This order, which involved complex calculations involving several investment funds, was interesting in several respects:

  • First, the licensee was unable to obtain foreign ownership information from several small investment funds.  As a result, the FCC treated these unidentified owners as non-WTO owners for purposes of the foreign ownership calculation.
  • Second, the licensee was unable to obtain specific ownership information from a few large presumably US investors, who declined to provide detailed information in light of their relatively small investments.  Although the FCC grudgingly treated this obviously US ownership as US, it cautioned that any additional investment by these investors would be treated as non-WTO foreign investment unless the investors provided the required information.
  • Third, the FCC seemed to tighten up considerably in its application of the "home market" test.  This multi-factored test, which determines the nationality of a particular foreign investment, has traditionally been applied on a "balance of the factors" basis.  In this order, however, the FCC appears to have treated (in some cases) an investor with even a single foreign indicator as foreign investment. 
  • Fourth, the FCC emphasized that nunc pro tunc approvals (i.e., approvals after the violation has already occurred) will be granted very sparingly — typically only when an application has been dismissed in error or when "exceptional" public interest factors are present.  The FCC emphasized that bankruptcy did not constitute such an exceptional factor. 

In short, the FCC continues to wrestle with increasingly complex foreign ownership calculations and seems to be applying an increasingly strict "home market" test for assessing foreign ownership.  As a result, wireless licensees/applicants need to be vigilant with respect to the current guidance on foreign ownership calculations and need to regularly recalculate their foreign ownership to ensure that they remain in compliance.

FCC Starts Punishing Carriers for E911 Violations

The FCC issued a $750,000 Notice of Apparent Liability ("NAL") against Dobson Communications, a Tier II wireless carrier, for multiple violations of the FCC’s Enhanced 911 ("E911") rules.  Specifically, the NAL penalizes Dobson, which uses a network-based (rather than handset-based) E911 solution, for 50 alleged violations of the FCC’s rules by not timely implementing its Phase I and Phase II E911 obligations in response from service requests by public safety answering points ("PSAPs"). 

The FCC concluded that Dobson’s violations were willful, repeated and particularly egregious given that the E911 rules promote the safeguarding of life and property.  The FCC stated that multiple PSAP requests had been pending for two to three years.  Nine of the alleged violations are for failing to implement Phase I requirements, which have been in effect for more than seven years.  According to the FCC:

Dobson has not shown that it exercised the level of diligence expected of carriers in addressing the deployment of E911 services to warrant any mitigation.  Rather, the record indicates that Dobson may not have dedicated sufficient resources and attention to E911 implementation at a time when it was actively expanding its wireless market holdings and converting its network from TDMA to GSM technology.  Moreover, it appears that many of the violations stemmed, in part, from a lack of corporate oversight of the Dobson employee charged with the important function of managing Dobson’s deployment of E911.

The FCC concludes that a $750,000 total fine is warranted in Dobson’s case.  The FCC appears to focus on Dobson’s size and financial resources and the desired deterrent effect of the penalty, but otherwise does not explain the basis for the $750,000 amount.  There is no base penalty for E911 violations under the FCC’s rule, although the FCC can assess a forfeiture of up to $130,000 for each violation, or for each day of a continuing violation up to a maximum of $1.325 million. 

After months of waiting, it also appears that the FCC may be ready to act against Tier I wireless carriers that missed a December 31, 2005 E911 deadline.  Specifically, carriers deploying a handset E911 solution were required that 95 percent of their handsets be location capable.  Waivers of the December 2005 deadline have been filed for large and small carriers alike. 

The ultimate outcome likely will be based on each carrier’s particular situation and likely will be a combination of waivers and forfeitures.  Multiple carriers reportedly have been contacted by the FCC’s Enforcement Bureau already.  Carriers’ handset penetration rates vary widely.  For example, Verizon Wireless’ penetration rate reportedly hovers slightly below the 95 percent threshold and Sprint Nextel reportedly has an approximate 84 percent penetration rate.  Multiple smaller and rural carriers also have lower penetration rates because subscribers are not purchasing new handsets and some are loath to give up old analog handsets because they may have better coverage in rural areas compared to digital handsets that are location capable.

Upcoming Deadlines for Your Calendar 

Note: Although we try to ensure that the dates listed in the PDF document are accurate as of the day this edition goes to press, please be aware that these deadlines are subject to frequent change. If there is a proceeding in which you are particularly interested, we suggest that you confirm the applicable deadline. In addition, although we try to list deadlines and proceedings of general interest, the list below does not contain all proceedings in which you may be interested.

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