Telecommunications / Real Estate December 2007 ALBANY AMSTERDAM ATLANTA BOCA RATON BOSTON CHICAGO DALLAS DELAWARE DENVER FORT LAUDERDALE HOUSTON LAS VEGAS LOS ANGELES MIAMI NEW JERSEY NEW YORK ORANGE COUNTY ORLANDO PHILADELPHIA PHOENIX SACRAMENTO SILICON VALLEY TALLAHASSEE TAMPA TYSONS CORNER WASHINGTON, D.C. WEST PALM BEACH ZURICH Strategic Alliances with Independent Law Firms BRUSSELS LONDON MILAN FCC Prohibits Exclusive Contracts Between Cable TV Operators and Residential Housing Developers; Proposes to Ban Exclusive Marketing Agreements and Bulk Service Agreements On October 31, 2007, the Federal Communications Commission (FCC) determined that exclusive agreements between cable television operators and developers of multiple dwelling units (MDUs) and other real estate developments harm competition and broadband deployment. For that reason, the FCC has banned execution of such agreements and enforcement of existing exclusivity agreements. In addition, the FCC has proposed to prohibit exclusive marketing arrangements between cable operators and developers, as well as bulk service arrangements in which video and other services provided by the cable operators are bundled in fees charged to residents of such developments. While there are significant legal questions as to the FCC s interpretation of the applicable law and the scope of its own authority to interfere with such contractual relationships, it is clear that the FCC action has created new challenges for residential housing developers efforts to contract with video service providers and perhaps other telecommunications providers. Developers and homeowners associations should be mindful of this FCC rule (and proposed additional rules) when negotiating with providers of video services and in structuring such agreements. For years, residential housing developers have contracted with cable operators and other providers of multichannel video services. Typically, these agreements afford the service provider exclusive rights to provide their services in the apartment complex or housing development in exchange for compensation. Such compensation often is paid by the service provider to the developer on a per home or per unit basis and is generally referred to in the industry as door fees. Such agreements take various forms. Sometimes, they are limited to allowing use of the developer s rights-of-way to install video transmitting equipment; in other cases, they also include grants of exclusive rights to market service on premises, as well as bulk service arrangements that effectively lock in residents to the cable operator s service by bundling cable television charges in residents homeowners association fees. ROME TOKYO GREENBERG TRAURIG, LLP ATTORNEYS AT LAW WWW.GTLAW.COM
Scope of MDUs and Other Real Estate Developments Much of the media attention surrounding the FCC decision has focused on the MDU portion of the rule. While much of the media coverage (as well as the FCC s own pronouncements) noted that the ruling would benefit low income persons, many of whom reside in MDUs, in fact, the FCC prohibition against exclusive agreements covers broad portions of the residential housing market without regard to the economic status of MDU residents. The FCC rule prohibiting exclusive agreements extends to multiple dwelling units, such as apartment buildings and condominium and cooperative buildings, and to any other centrally managed residential real estate developments, such as gated communities, mobile home parks and garden apartments. (The MDU ruling does not apply to time share units, college campuses and dormitories, military bases, hotels, rooming houses, prisons, jails, halfway houses, hospitals, and nursing homes or other assisted living facilities). What Exclusive Agreements are Prohibited? In discussing the scope of exclusive agreements between cable operators and MDUs, the FCC distinguished between several types of exclusivity. The prohibition announced by the FCC is limited to what it calls building exclusivity (also referred to as exclusive access). As described by the FCC, building exclusivity prohibits any other provider of multichannel video service from any access whatsoever to the premises of the MDU or other real estate development. Although not subject to the prohibition, the FCC also described wire exclusivity which allows multiple video providers into the MDU or other real estate development but forbids those other providers from using existing wires. Also not subject to the new rule but mentioned by the FCC is the notion of marketing exclusivity which allows other video providers to service residents in the MDU or other real estate development but does not allow them to market their services on the MDU or other real estate development premises. It should be noted that nothing in the FCC s recent action limits availability of satellite-based multichannel video services, such as those provided by companies like DirecTV and EchoStar. A provision in the 1996 Telecommunications Act and an FCC rule allows residents of MDUs to install satellite receiver antennas of one meter or less on portions of the units that they control, notwithstanding any contractual exclusivity which may exist in agreements between cable operators and MDUs. Legal Basis for FCC s Prohibition of Building Exclusivity The FCC concluded that its authority to prohibit such exclusive cable-developer agreements is derived from Section 628(b) of the Communications Act. That provision states that: [i]t shall be unlawful for a cable operator... to engage in unfair methods of competition or deceptive acts or practices, the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers. While the literal language of this provision proscribes the conduct of cable operators, there is little doubt that the impact of the FCC s conclusion will extend to those developers and homeowners
associations who become parties to such agreements with cable operators. It seems probable that the FCC rule will be challenged in court on various grounds, including that the FCC has no jurisdiction to prohibit or render void contracts entered into by developers regarding use of the developers private property. Neither is it certain that the FCC s expansive interpretation of its authority under Section 628(b) will be sustained. Many believe that the unfair methods of competition and deceptive practices prohibited in that section contemplate programming access, not control of service to apartment buildings and housing developments. Nonetheless, unless and until the FCC s rule is reversed by a reviewing court, clients should operate on the assumption that the rule is valid and structure their relationships with video service providers accordingly. What Companies are Covered by the FCC Prohibition on Exclusive Agreements? The FCC rule applies to all cable operators as that term is defined by the Communications Act. This includes all providers of multichannel video service whose transmission systems cross public rights-ofway, including so-called incumbent cable operators, as well as those newer cable system operators who compete with the incumbents (such entities sometimes are referred to as overbuilders ). The rule also will cover those telephone companies offering multichannel video service. It will not include private cable operators, i.e., those companies who provide packages of video channels but whose systems do not use public rights-of-way (for example, satellite master antenna systems). Nor does it include direct broadcast satellite providers. What Services are Affected by the FCC s Prohibition on Exclusive Agreements? While the FCC prohibition is specifically directed at multichannel video service provided by cable operators, few cable operators today limit their offerings to traditional cable service. Most offer other services, including high speed Internet access and voice telephone service. Some providers are actively marketing bundled packages containing all three (video, Internet, voice), commonly referred to as the triple play. The FCC ruling is not applicable to Internet or telephone service. However, the FCC noted that in 2000 it prohibited exclusive access agreements between commercial real estate developers and telecommunications companies, and proposed extending that prohibition to residential developers. The FCC never acted on the 2000 proposal but it has now committed to doing so within two months of the effective date of the cable MDU decision. Thus, it is quite possible that within a matter of a few months, the prohibition against exclusive access to residential MDUs regarding video service may extend to telecommunications service. Proposed Additional FCC Rules In addition to adopting the rule prohibiting exclusive access to MDUs and other real estate developments, the FCC has proposed several further rules. First, it has proposed extending the prohibition against exclusive access agreements to cover those video providers who are not cable operators within the scope of Section 628, specifically, private cable operators and satellite companies. Since those companies are not subject to Section 628 of the Communications Act, the FCC will need to find another legal basis if it seeks to extend the exclusive access prohibition to those entities offering video services.
Of perhaps greater concern to developers and homeowners associations, the FCC has proposed banning exclusive marketing agreements and bulk service agreements. Marketing agreements are an important aspect of the business relationships between cable operators and MDUs. In general, they permit the cable operator to distribute promotional materials on premises, to contact individual residents at the time of settlement or move-in (and on other occasions) to market their services, to conduct service demonstrations and other events on premises. They often allow for demonstration units in lobbies, meeting rooms and other common areas. Bulk service agreements provide for specified levels of cable television programming (and sometimes Internet service) to be sold on a discounted bulk basis to the developer or homeowners association. That entity is responsible for payment to the cable operator of the bulk bill. The fees are then bundled into residents periodic homeowners association dues. Thus, residents pay for cable service whether or not they wish to receive the service from the provider serving the MDU. Such agreements do not prohibit other video service providers from offering service in the building, but they reduce the likelihood that residents will choose other providers. Conclusion Developers of MDUs and other real estate developments who are concerned that the FCC might follow through on its proposals to ban exclusive marketing agreements and/or bulk service agreements should consider communicating those concerns to the FCC. Comments on those proposals will be due 30 days following publication in the Federal Register (publication has not yet occurred, but is imminent). Also, developers and homeowners associations who have entered into agreements with cable operators or who are considering such arrangements should be mindful of the limitations imposed by the FCC s recently-enacted rule and its proposed additional rules, and should structure those agreements with due regard for those exclusivity restrictions.
This GT Alert was prepared by Mitchell F. Brecher in Washington, D.C. Questions about this information can be directed to Mr. Brecher at 202.331.3152 (brecherm@gtlaw.com). Albany 518.689.1400 Amsterdam + 31 20 301 7300 Atlanta 678.553.2100 Boca Raton 561.955.7600 Boston 617.310.6000 Chicago 312.456.8400 Dallas 214.665.3600 Delaware 302.661.7000 Denver 303.572.6500 Fort Lauderdale 954.765.0500 Houston 713.374.3500 Las Vegas 702.792.3773 Los Angeles 310.586.7700 Miami 305.579.0500 New Jersey 973.360.7900 New York 212.801.9200 Orange County 714.708.6500 Orlando 407.420.1000 Philadelphia 215.988.7800 Phoenix 602.445.8000 Sacramento 916.442.1111 Silicon Valley 650.328.8500 Tallahassee 850.222.6891 Tampa 813.318.5700 Tysons Corner 703.749.1300 Washington, D.C. 202.331.3100 West Palm Beach 561.650.7900 Zurich + 41 44 224 22 44 This Greenberg Traurig Alert is issued for informational purposes only and is not intended to be construed or used as general legal advice. The hiring of a lawyer is an important decision. Before you decide, ask for written information about the lawyer s legal qualifications and experience. Greenberg Traurig is a trade name of Greenberg Traurig, LLP and Greenberg Traurig, P.A. 2007 Greenberg Traurig, LLP. All rights reserved.