United States: Communications Law Bulletin February 2006

February saw continued fallout from the deceptive practices of online "data brokers," strong action by the Federal Communications Commission ("FCC" or "Commission") Enforcement Bureau, and developments affecting cable television, broadcasting and other segments of the communications industry. All of those events are covered in this February issue of our Bulletin, along with the usual list of deadlines for your calendar.

Despite House Commerce Committee Chairman Barton’s (R-TX) announcement in early February that he expects to introduce a bipartisan bill in March, prospects for comprehensive telecommunications reform before the November elections seem dim. Accordingly, discussions on the Broadband Internet Transmission Services ("BITS") bill appear to have ended. On the other hand, more limited legislative action on targeted topics – such as video franchising (see related article) – is still possible.

On February 8, Senator Burns (R-MT) introduced a universal service fund ("USF") bill that would require USF recipients to invest in broadband services and would seek to ensure that contributions are assessed in a competitively neutral manner. The bill also would impose sanctions on anyone who knowingly violates the terms of the controversial Schools and Libraries Program, which has been plagued by claims of waste and abuse. Although Senator Burns had been engaged in bipartisan negotiations with Senator Rockefeller (D-WV), those negotiations broke down and Senator Burns introduced the bill without co-sponsors.

Additionally, a bill to overhaul USF is expected to be introduced soon in the House of Representatives. Sponsors of the House bill indicated that the timing of the bill’s formal introduction may depend on negotiations with rural telephone companies, which are reluctant to accept a cap on USF funding.

Congress, the FCC, the Federal Trade Commission ("FTC") and state legislatures are investigating, and seeking solutions to, the use of deceptive practices to obtain telephone subscribers’ call detail records and billing records. As discussed in last month’s edition of this Bulletin, the issue was given particular prominence by press disclosures concerning the activities of online "data brokers" that offer to obtain subscribers’ confidential records for a fee.

The FCC is continuing its investigation of data brokers and is coordinating that inquiry with the FTC staff. FCC Chairman Martin also has asked Congress to consider dropping the requirement that non-licensees be cited before punitive action can be taken against them by the Commission. Chairman Martin also recommended raising the existing maximum penalties and lengthening the one-year statute of limitations for bringing of enforcement actions. In Chairman Martin’s view, these measures would improve the Commission’s ability to respond to abusive practices by non-licensed parties.

The Commission also is investigating the adequacy of, and considering new rules concerning, the carriers’ protection of customer proprietary network information ("CPNI"). On the investigatory side, the Commission sent formal letters of inquiry ("LOIs") to several carriers, asking for information concerning the carriers’ information security policies and practices. On the rulemaking side, the Commission granted a petition for rulemaking filed last year by the Electronic Privacy Information Center ("EPIC"), and asked for comment on a number of possible data security measures, including: (1) mandatory, consumer-selected passwords for access to subscriber information; (2) audit trails that document the details of each disclosure of CPNI; (3) encryption of CPNI stored in carriers’ databases; (4) deletion requirements for customer records that no longer need to be retained; and (5) a requirement that customers be notified of breaches of the security of their confidential information. The Commission also requests comment on additional proposals, including mandatory annual reporting of consumer complaints concerning unauthorized releases of CPNI and actions taken against data brokers. Comments on the proposed rules must be filed within thirty days of their publication in the Federal Register, and reply comments must be filed thirty days thereafter.

In the meantime, hearings and deliberations continued on Capitol Hill concerning possible federal legislation to deal with data brokers. In the statehouses, lawmakers introduced a number of bills intended to protect consumers from unauthorized disclosure of telephone billing and call detail records. Notably, on February 23, the Illinois Senate passed Senate Bill 2554, which would make it unlawful to use deceptive means to acquire personal identification information or transaction records of another person. Similarly, a bill introduced in the New York legislature would ban the release of telephone account records to anyone other than the account holder, and would criminalize the sale of telephone records by third parties. In Washington State, the Senate unanimously passed Senate Bill 6776, which would make pretexting unlawful. According to news reports, anti-pretexting bills are pending in the legislatures of at least 20 states.

On February 16, 2006, the FCC’s Enforcement Bureau gave a forceful reminder to radiofrequency equipment makers that they remain subject to FCC certification requirements.

Specifically, the FCC released a Notice of Apparent Liability ("NAL") against Behringer USA, Inc. ("Behringer"), an audio equipment manufacturer, proposing a forfeiture of $1,000,000 for its willful and repeated failures to comply with the FCC’s equipment authorization requirements. The NAL stated that Behringer continued to import and market 50 models of unauthorized digital audio music devices for more than a year after the Enforcement Bureau initiated an inquiry into Behringer’s compliance with these requirements.

The FCC’s equipment authorization program requires that radio frequency equipment be tested for compliance with technical requirements designed to avoid interference with radio services. In the case of Class B digital devices, such as digital audio music devices, such testing must be conducted under the FCC’s verification procedures prior to marketing. If such devices are imported into the United States, the importer must submit a declaration to Customs indicating that the devices meet one of the conditions for entry into the country.

On March 29, 2004, in response to a complaint that Behringer was marketing digital audio equipment that was not labeled and thus might not have been properly authorized, the Bureau issued Behringer a letter of inquiry. In response to the LOI, Behringer admitted that, since January 2000, it had imported, marketed and sold 66 different models of digital audio equipment, totaling 1.17 million units. It also admitted that it had not verified compliance of any of the 66 models with the FCC’s technical standards, but stated that a "range" of its devices had been tested and passed "European Conformity" directives. Behringer also represented that, after receiving the LOI, it initiated procedures to ensure compliance with the FCC’s equipment verification standards and related requirements, including testing of all digital products and submission of test results to the FCC.

Behringer supplemented its LOI response with copies of test reports for 14 of its 66 models but continued to market the remaining models without such testing. In response to a second LOI issued on February 15, 2005, Behringer admitted that, since the date of the first LOI, it had imported 93,620 units and sold 100,304 units of digital devices that had not been tested for compliance and had failed to submit the appropriate declaration to Customs. Following receipt of the second LOI, Behringer submitted test results for an additional 14 models.

In the NAL, the FCC noted that Behringer tested and verified a total of only 16 of its 66 equipment models in the period preceding February 16, 2005, one year prior to the date of the NAL, leaving 50 models subject to enforcement liability. The FCC accordingly proposed base forfeitures of $7,000 for each of the 50 models of unauthorized digital devices marketed in the United States within the last year prior to the NAL, for an aggregate base forfeiture of $350,000. Based on Behringer’s repeated violations, importing and selling 1.17 million unauthorized units since January 2000 and continuing to import and sell another 93,620 units after receiving the first LOI, the FCC also proposed an upward adjustment of $650,000 based upon a number of factors, including Behringer’s continued import and sale of unauthorized devices after receiving the first LOI and the substantial economic gain derived by Behringer from its marketing of the unauthorized devices. Behringer has 30 days in which to pay the forfeiture or file a response to the NAL. Behringer also must file an affidavit stating whether it has complied with the FCC’s equipment authorization requirements as to each model it is importing and marketing and, if not, providing its plans for full compliance.

AT&T unexpectedly announced during oral arguments that it was withdrawing part of its appeal of an FCC decision directing the company to contribute to the federal USF fund based upon revenues from one of its prepaid calling card services. The FCC had concluded in early 2005 that AT&T’s "enhanced" prepaid calling card services are not; in fact, information services as defined in the Communications Act and are subject to USF contribution and access charge obligations. In its oral argument AT&T stated that it would only pursue the case as it applies retroactively – i.e., it challenges the portion of the FCC order requiring AT&T to pay past due universal service fees – but is not challenging the decision as it applies prospectively.

AT&T’s attorney noted that the company is no longer providing this particular prepaid calling card service, which may account for its decision to drop part of the appeal. The shift also may reflect the fact that the appeal raises significant issues regarding the payment of intrastate access charges, pitting one side of AT&T against another given its recent merger with SBC. Although the FCC’s 2005 decision did not make a specific finding that AT&T must pay intrastate access charges, it did make clear that AT&T’s service is not exempt from such charges – a finding that opened the door to several lawsuits from other carriers seeking payment such charges. One of those lawsuits was filed by SBC, and subsequently was settled for $60 million soon after the merger was announced.

FCC Chairman Kevin Martin has warned that the Commission will continue to take a tough stance on requests by wireless carriers for partial waivers of their Enhanced 911 ("E911") obligations. Specifically, Tier I wireless carriers that have adopted a handset-based E911 solution (rather than a network-based solution) have requested an extension of the January 31 deadline requiring that 95 percent of their subscribers use handsets that are capable of identifying their locations. According to Chairman Martin, the FCC is "pretty dedicated to making sure that 911 is being deployed across all technologies…. We’ve been strict on issues like that in the past and I think we’re going to generally continued to be so."

The FCC, however, has recently granted limited extensions of similar requirements at the request of smaller Tier III carriers. The grant of the Tier III waiver requests may indicate that the FCC is considering a similar approach to the waiver requests of Tier I carriers. The Tier III extensions are generally conditioned on certain customer notification and compliance reporting requirements and the obligation to continue to work with public safety organizations regarding E911 deployment. In the past month the FCC granted year-long extensions of a December 31, 2005 deadline requiring that 95 percent of handsets used by those carriers’ subscribers be location-capable to LL License Holdings, Inc.; Cal-One Cellular L.P. d/b/a Cal-North; and Cellular Network Partnership d/b/a Pioneer Cellular. The FCC also granted the NTELOS Companies an extension until November 1, 2006; gave Midwest Wireless Holdings LLC an extension until June 30, 2006; and granted Thumb Cellular LLC an extension until July 31, 2006. In addition, the FCC granted Farmers Mutual Telephone Company and Virginia Cellular LLC extensions until February 22, 2007.

Programmers and media activists petitioned the FCC to modify how its Children’s Television rules count promotional material, including online information, toward advertising limits. Disney, Fox, NBC Universal and medical groups reached a deal in December on the Children's TV Act after protracted legal battles. The parties asked the Commission to count the display of Web addresses toward advertising limits and to restrict the use of characters appearing in Children’s Television shows in Internet content directed at children age 12 and younger. The group also requested that the FCC relax some limits it had proposed. The parties argued that the Commission should void its rules mandating that Children’s Television shows cannot be preempted by other programming more than 10 percent of the time. The Commission probably will seek public comment on the request, according to Gloria Tristani, a former FCC Commissioner now representing the United Church of Christ, a participant in the filing. The companies have agreed to adhere to the new rules beginning March 1, 2006, irrespective of whether the FCC approves them.

The Media Bureau in February addressed some violations of the children’s television programming rules in the context of license renewal applications. Those rules limit the amount of commercial matter that may be aired during children’s programming and also prohibit "program-length" commercials.

In two license renewal applications, the applicants disclosed de minimis violations of these rules, involving in one case a single instance in which the limit was exceeded by 15 seconds and in the other case two instances in which the limit was exceeded by 34 seconds. In both of these cases, the Media Bureau concluded that these de minimis violations did not warrant further consideration in the renewal proceeding.

In the third case, however, the applicant disclosed four violations, including one 15-second overage, one 90-second overage and one program-length commercial. The applicant attributed the overages to errors by the company that inserts commercial content into the network’s programming and attributed the program-length commercial to human error.

The program-length commercial allegedly involved a Gameboy Advance E-Reader commercial that aired during a Pokemon program. In this commercial, a few Pokemon cards were shown for approximately 1 second with only a portion of the word "Pokemon" visible and none of the characters visible. The Media Bureau, however, reiterated how seriously it takes the program-length commercial rule. It further stated that the duration of the appearance of the program-related product in the commercial is not relevant because any such appearance creates a prohibited program-length commercial.

With respect to the two overages, the Media Bureau emphasized that neither human error nor a licensee’s reliance on a programmer or producer excuses any violations.

The Media Bureau admonished the licensee for these violations and noted that more severe sanctions could be imposed for future violations.

February saw the introduction of new video franchise legislation in the House and Senate, as the FCC released its 12th Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming. House Commerce Committee Ranking Member Dingell has proposed streamlined video franchise legislation that would provide 90 days for a municipality and a new video entrant to hammer out a franchise agreement. Press accounts report that the proposal would permit new entrants to offer service under a "default national franchise or under the incumbent cable operator’s franchise" in the absence of a negotiated agreement, with either party able to restart talks after that. The national default franchise would recognize local authority to manage rights of way, would set franchise fees at 5 percent of gross revenue, would require new entrants to comply with public, educational and governmental ("PEG") channel carriage requirements, would require cities to provide new entrants access to channels, and would establish 10-year build out requirements as well as anti-redlining rules. The legislation reportedly allows the incumbent cable operator to opt into the streamlined process after a new entrant has attained 15 percent market share.

In mid-February, Senator John McCain (R.-NV.) announced at a Senate Commerce Committee hearing on video franchising that he would introduce a bill encouraging à la carte cable offerings. After assailing the cable industry over rising rates and stating that consumers have few competitive options, Senator McCain announced that he plans to introduce a bill that would free new cable competitors from local franchising regulations if they agree to provide à la carte video channels. Under McCain’s bill, video providers would remain subject to franchise fees and other duties, but could enter into less burdensome statewide or nationwide agreements. News media reports stated that an aide to Senator McCain explained that cable operators would not be required to renegotiate existing franchise agreements. McCain's legislation keeps à la carte proposals alive in Congress, to the disappointment of Senate Commerce Chairman Stevens (R.-AK). Although Senator Stevens has indicated that he is content with "family tiers" and is not pursuing à la carte channels, he has left himself some room to maneuver on à la carte requirements. According to news reports, Senator Stevens stated in early February that if à la carte is "not more expensive for consumers," he might support it after exploring the "downside" with video providers.

This Hill activity comes on the heels of an FCC report endorsing à la carte as a low-cost option, a reversal of previous Commission policy. The FCC reports that the multichannel video market continues to grow, but that cable subscribership declined slightly in the past year. The FCC competition report said that cable’s share of the multichannel video audience fell to about 69.4% in 2005 from 71.6% in 2004, "according to the FCC’s traditional measure."

The FCC found that data submitted in the record this year raise questions as to whether the so-called "70/70 test" has been satisfied. Section 612(g) of the Communications Act provides that when cable systems with 36 or more activated channels are available to 70 percent of households within the United States, and when 70 percent of those households subscribe to them, the Commission may promulgate any additional rules necessary to promote diversity of information sources. The FCC is seeking further public comment on the best methodologies and data for measuring the 70-percent thresholds and, if the thresholds have been met, what action might be warranted to achieve the statutory goals. If the FCC decides that the thresholds have been met, the agency will issue a notice to open a proceeding. Press reports suggest that Chairman Martin most likely wants expanded authority to require cable operators to offer more bundles of channels.

Meanwhile, news accounts of the FCC’s meeting in Keller, Texas, the birthplace of telco entry into video competition, report FCC Chairman Martin as saying, without elaboration, that "some commenters [were] not sure the second prong was triggered." Commissioners Adelstein and Copps said that the report was more comprehensive than before but needed improvement. "There is more that can be done," Commissioner Adelstein said. Commissioner Copps said that he wants "independent, verified data . . . . I also believe we have to conduct some audits of the information we received." Commissioner Adelstein added that programmers are hindering video providers’ ability to sell individual channels, something Martin has pushed for.

Most of the FCC meeting in Keller centered on a debate over video franchising. Telco entry into video "could bring the most substantial new competition into the video marketplace that this country has ever seen," Adelstein said in a statement. Copps said the report "shows an enormous potential for increased competition in the video programming market."

Indeed, the FCC Video Competition Report found that local exchange carriers ("LECs") such as SBC (now AT&T) and Verizon hold promise to become a growing presence in the marketplace. The FCC also found significant competition to cable coming from DBS operators that air local broadcast channels, additional sports and international programming, and advanced set-top boxes with digital video recorder ("DVR") capabilities. Similarly, broadband service providers continue to offer a triple play of video, voice, and Internet access service and have proved to be price competitive with cable. LECs also are upgrading their traditional copper facilities to high-speed digital subscriber line ("DSL") and fiber-based platforms that allow them to offer a suite of video, telephone, and data services.

Vonage Holdings Corp. ("Vonage"), the largest independent provider of Voice over Internet Protocol ("VoIP") phone service in the U.S., filed for a $250 million initial public offering ("IPO") with the Securities and Exchange Commission. The filing did not specify a value for the company as a whole or indicate the number of shares to be offered or the price per share. Vonage previously raised about $645 million through venture capital funding and private placements of convertible notes. Prior to the IPO filing, Vonage unsuccessfully attempted to sell itself for $2 billion or more.

Vonage has been growing rapidly, boasts about 1.4 million subscribers and had revenue in the first three quarters of 2005 totaling $174 million. But Vonage, which lost $189.6 million in that same period, is not profitable, and expects to lose money for the foreseeable future. Its business plan stresses market share growth over profits and cash flow. Accordingly, Vonage spent about $214 on marketing for each new customer in the first three quarters of 2005, and plans to continue to increase its marketing expense.

Intense competition is developing in the VoIP industry. Other independent VoIP companies, cable companies, traditional telephone companies and Internet companies offer, or plan to offer, Internet phone services that threaten to chip away at Vonage’s market share. In addition, VoIP providers could be saddled with extra costs if proposed regulatory changes are adopted that would allow traditional phone companies to charge extra fees to Internet phone providers for carriage of VoIP calls. In light of these challenges, analysts will look to the Vonage IPO as an indicator of the viability of the VoIP industry.

The proposed acquisition of New Skies Satellites Holdings Ltd. ("New Skies") by SES Global S.A. ("SES") moved a step closer to completion in February when the shareholders of New Skies approved the transaction and the U.S. Department of Justice completed its review.

The parties announced in December that SES planned to acquire New Skies by way of an amalgamation of New Skies and a wholly owned subsidiary of SES under the laws of Bermuda. Conditions to the closing of the acquisition include the approval of the FCC and U.S. and German antitrust agencies. Furthermore, SES is not obligated to close if there is a Total Loss of a New Skies satellite. "Total Loss," with respect to most of New Skies’ satellites, is defined as (i) the loss or complete destruction of the satellite or (ii) the loss of at least 50% of the operational capability of the satellite.

The U.S. Department of Justice completed its review of the acquisition on February 3 and announced that the transaction required no further clearance from that agency. On February 10, New Skies’ shareholders approved the acquisition at a meeting attended in person or by proxy by the holders of 74% of outstanding New Skies shares, with approximately 99% of the shares voting in favor of the transaction. If the remaining conditions to closing are satisfied or waived, the acquisition is expected to close in the second quarter of 2006.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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