United States: FCC Bans Exclusivity Clauses for the Provision of Video Services to Apartment Buildings

Last spring, we discussed a proposal that has been under consideration by the Federal Communications Commission (FCC) to regulate exclusive arrangements between cable television operators and apartment building owners. (See our April 4, 2007 Telecom Alert.) In a recent decision, the Commission opted to prohibit exclusivity clauses altogether — even in existing contracts.

In particular, the FCC's decision bars enforcement of contractual clauses under which wire-based providers (in FCC parlance, multi-channel video programming distributors or "MVPDs") are granted exclusive access to apartment and similar residential buildings (multiple dwelling units or "MDUs") for the provision of video service.

While the beneficiary of such exclusivity is typically a franchised CATV company, the ruling is not limited to those entities; rather, it includes any wire-based provider, including local telephone companies, seeking to offer video service.

MDUs include apartment buildings, co-ops and condos. MDUs also include gated communities and other centrally managed real estate developments. However, MDUs do not include time-share units, dormitories, hotels, hospitals, and the like, i.e., premises characterized by transience and relatively little control by residents over the uses of the dwelling space.

The ruling does not compel building owners to grant access to any particular new entrant; building owners retain their rights under state law to deny access to any particular provider as long as the denial is not pursuant to an exclusivity clause of the type referenced above.

The ruling does not apply to the provision of telecommunications service to residential buildings, such as ordinary telephone service. These services are the subject of a separate rulemaking that the FCC expects to conclude within a couple of months.

Nor does the ruling extend to Digital Broadcast Satellite (DBS) providers or other wireless video providers, to exclusive marketing arrangements between building owners and video providers, or to bulk-billing arrangements. These are likewise the subject of a further rulemaking.

The FCC's decision was based on a concern that exclusivity clauses were being used by franchised cable systems to deter competition from new providers such as telephone companies. In the agency's view, these clauses have the potential to deprive tenants of benefits in the form of price reductions and increased service options. In addition, the FCC Order expresses a concern that barriers to entry posed by exclusivity clauses inhibit the spread of broadband Internet access services, especially offerings that comprise the so-called "triple play" of voice, video and Internet.

The Commission's ruling follows an earlier decision in which the Commission barred execution of exclusivity clauses between telecommunications providers and tenants in commercial office buildings.

The Commission based its authority for the decision primarily on Section 628 of the Communications Act. In the Commission's view, Section 628 is designed to increase competition and diversity in the multi-channel video marketplace and spur the development of new technologies. The Commission Order concludes that exclusivity clauses constitute an unfair method of competition in violation of Section 628, in that they tend to "lock-up" MDUs, and thus prevent tenants from receiving the benefits of competition.

Cable industry interests argued that the Commission's authority under Section 628 is limited to methods of competition that tend to deny competing multi-channel video providers access to programming. The agency rejected this argument on the grounds that the statute directs the Commission to promote competition in the MVPD marketplace and enhance the development of new technologies. The Commission also maintained that its ancillary authority under Titles I and III of the Communications Act provides it with a sufficient basis to prohibit exclusivity clauses.

The Commission's decision to ban exclusivity clauses in existing contracts is controversial. One of the Republican Commissioners, Robert McDowell, notes in his concurrence that just four years ago, the FCC unanimously agreed that there was insufficient evidence to warrant FCC intervention, and that the cable industry relied on that order in deciding to incur the expense of wiring or upgrading older buildings. McDowell thus questions whether the FCC should not have provided for some grace period for existing contracts.

The Commission's ruling may be of importance to numerous clients. The implications of the decision, however, for any given client necessarily turns on that client's particular circumstances.

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