FCC Law Blog

Proposed Easing of Satellite Export Controls Could Benefit U.S. Satellite Industry

Sheppard Mullin — Mon, 07 May 2012 10:10:20 -0500

By Curt Dombek, Brian Weimer, Dan Brooks, and Reid Whitten

Since 1999, strict controls on the export of U.S. satellites and satellite components have drastically eroded U.S. manufacturers’ market share in the global satellite industry. On April 18, 2012, the U.S. Departments of State and Defense released the “1248 Report” containing findings related to reducing some of those controls. The 1248 Report assesses the national security risks of removing certain satellites and related components from the tightly controlled United States Munitions List (USML) and transferring them to the generally less restrictive Commerce Control List (CCL). The report concludes that most communications satellites, lower-performing remote sensing satellites, and related components could be transferred from the USML to the CCL without harming U.S. national security. The transfer of these items to the CCL could greatly benefit the U.S. satellite industry by significantly easing the export controls placed on its products.

Background

Commercial satellites and related components are unique in that they are the only category of items required by law to be placed on the USML and the only dual-use items (i.e., items with both civilian and military applications) controlled as munitions. Typically, the President has the authority to determine whether a controlled item should be placed on the CCL and controlled under the Export Administration Regulations (EAR) or placed on the USML and controlled under the International Traffic in Arms Regulations (ITAR). In 1999, however, Congress removed the President's authority to change the jurisdictional status of commercial satellites and related components following revelations that U.S. satellite manufacturers had improperly transferred missile design information to China. In 2010, Congress passed legislation requiring the Secretary of State and the Secretary of Defense to assess the national security risks of removing satellites and related components from the USML and to make general recommendations for improving U.S. space export control policy.[1]

The 1248 Report

In a finding that could present new export opportunities for U.S. satellite manufacturers, the report concludes that many controls on satellites and related technologies are no longer necessary and that maintaining these items on the USML leaves U.S. satellite manufacturers at a distinct competitive disadvantage. The report notes that the United States is the only country that controls all items modified in any way for use with a commercial satellite. The report also recognizes that the United States is the only country that controls the reexport of foreign-origin satellites containing U.S.-origin satellite-related items and is the only country that classifies all commercial satellites and related items as munitions. The report suggests that subjecting commercial satellite systems, components, and related technologies to strict ITAR controls is anachronistic, because a substantial number of these items have moved from military use to predominantly civil use over the past fifteen years and therefore no longer properly belong on the USML.

In order to keep the regulations current and ease the export controls placed on satellites and related components, the report proposes transferring the following items to the CCL:

Communications satellites that do not contain classified components;
Remote sensing satellites with performance parameters below certain thresholds; and
Systems, subsystems, parts, and components associated with these satellites and with performance parameters below certain thresholds specified for items remaining on the USML.

Items that provide the United States a military or intelligence advantage in space would remain on the USML, including the following:

Satellites that perform a purely military or intelligence mission;
Remote sensing satellites with high performance parameters;
Systems, subsystems, parts, and components unique to the above satellite types and not common to dual-use satellites; and
Services in support of foreign launch operations for USML and CCL designated satellites.

Benefits for U.S. Satellite Exporters

The proposed changes to the CCL could vastly expand the export opportunities available to U.S. satellite manufacturers. As the report notes, the rules governing items listed on the CCL “provide[] for flexible controls that can be applied or removed as technology becomes readily available on the global market and transitions away from predominantly military uses to commercial purposes.” Notably, the proposed changes also would allow U.S. exporters to take advantage of the Strategic Trade Authorization license exception implemented in June 2011, which permits the export without a license of many items listed on the CCL to thirty-six countries, including NATO members and other close U.S. allies.

Transferring commercial satellites and related components to the CCL would also broaden export opportunities for U.S. satellite manufacturers by making it easier to reexport satellite components without having to obtain an additional license. Unlike the CCL, there is no de minimis exception for items listed on the USML. Thus, satellite components incorporated into foreign-made satellites always require a license for reexport. Transferring commercial satellites and related components to the CCL would allow industry to take advantage of the de minimis exception, which would permit the reexport of satellite components to most countries as long as they were incorporated into a foreign satellite containing less than 25% by value of controlled U.S.-origin material.

Limitations

The proposed changes to the CCL would not open the gates for export to every county. Under the report’s recommendations, the CCL would continue the current policy of prohibiting the export of satellites and related components to certain destinations and end-users, including embargoed countries and China. The report argues that China in particular warrants “special scrutiny” because it “implements active and effective technology acquisition techniques that target U.S. space-related technologies . . . .” The de minimis rule described above also would not apply to transfers of controlled items to embargoed countries and China. Thus, the export to any of these countries of a foreign-made satellite containing even a negligible amount of U.S.-controlled material would still require an additional license, and applications for such a license would be subject to a policy of presumptive denial.

Special Export Controls

The report also makes recommendations that would lower or eliminate the cost of Special Export Controls (SECs) for certain satellites and components. The report recommends a more flexible application of SECs for items that remain on the USML. SECs such as Department of Defense (DoD) monitoring are currently required for exports of satellites and related items for launch in a foreign country unless the country is a NATO member or other major U.S. ally. Certain SECs, however, are discretionary for other activities licensed under the ITAR. The industry is currently required to reimburse DoD only for monitoring costs associated with mandatory SECs. Allowing DoD to waive or exempt certain activities from monitoring and require reimbursements from industry for all SECs likely could shift the costs and controls associated with lower-risk activities to higher-risk activities that are not currently subject to monitoring.

Conclusion

Although the proposals contained in the report hold the potential to benefit U.S. satellite exporters immensely, they are still a long way from becoming law. In order for the transfer of commercial satellites and related components from the USML to the CCL to occur, Congress first would need to pass legislation returning the authority to determine the export control jurisdictional status of such items to the President. The proposed transfer also would require a formal notice-and-comment rulemaking procedure and Congressional notification. The potential upside of such changes, however, is clear: the United States would stand in a better position to regain a broader share of the global satellite industry.

[1] This requirement was published in Section 1248 of the National Defense Authorization Act for Fiscal Year 2010 (Pub. L. No. 111-84), thus the report is often referred to as the “1248 report.”

FCC Proposes to Grant DISH's Wish

Sheppard Mullin — Fri, 23 Mar 2012 12:28:00 -0500

By Brian Weimer and Dan Brooks

In a striking move by the FCC, the Commission has proposed to eliminate the ancillary terrestrial component ("ATC") rules from the 2 GHz Mobile Satellite Service ("MSS") band and repurpose the spectrum for pure terrestrial use (while retaining the mobile satellite allocation in the band). While the proposal is a long way from being adopted, DISH Network Corporation stands to gain tremendously now that it has become the only 2 GHz licensee after acquiring both DBSD and TerreStar out of bankruptcy earlier this month. The FCC postponed for another day the question as to what to do about the ATC rules for Big LEO MSS (i.e., Globalstar) and L-band MSS (i.e., LightSquared).

Background

In 2003, the FCC adopted ATC rules that allowed MSS licensees to use their MSS spectrum to provide terrestrial services, provided that the licensees met certain "gating" criteria. The ATC gating criteria required each MSS licensee to provide "substantial satellite service" (i.e., by providing continuous satellite service in specified geographic areas, maintaining one or more spare satellites, and making MSS commercially available throughout the licensee's required coverage area) and to "integrate" its terrestrial services with its satellite services (e.g., through the use of a dual-mode handset).

DBSD and TerreStar were granted ATC authority in 2009 and 2010, respectively. However, both companies filed for bankruptcy after failing to successfully offer an MSS/ATC service. DISH acquired both DBSD and TerreStar out of bankruptcy earlier this month, but its plans for making use of the companies' ATC authority were temporarily halted when the FCC denied its request for a waiver of the ATC gating criteria. In denying DISH's waiver request, the FCC was doubtlessly seeking to avoid a debacle similar to what ensued after the Commission granted a similar waiver request to LightSquared in January 2011. In that case, the FCC was harshly criticized for granting the LightSquared waiver outside of the formal rulemaking context and was forced to recommend that the waiver be revoked after the National Telecommunications and Information Administration issued a letter concluding that LightSquared's terrestrial operations would cause insurmountable interference to GPS receivers and devices.

While the 2 GHz MSS spectrum has remained essentially unused since it was first allocated in 1997, the FCC has recently been under increasing pressure to make more spectrum available for broadband use. The National Broadband Plan recommended that the Commission make 500 MHz of spectrum available for broadband use within ten years, that 300 MHz of this spectrum be made available for mobile use within five years, and that the FCC should "accelerate terrestrial deployment" in 90 MHz of MSS spectrum, including in the 2 GHz band.

Notice of Proposed Rulemaking

On Wednesday, the FCC released a Notice of Proposed Rulemaking ("NPRM") and Notice of Inquiry ("NOI") proposing to rebrand the 2 GHz MSS spectrum as "AWS-4" spectrum and adopt terrestrial service rules that would largely follow the Commission's rules for miscellaneous wireless communications services. The ATC regulations in the 2 GHz band will be eliminated, and the Commission has signaled that it will address the ATC rules for Big LEO and L-band MSS in a future proceeding.

The uplink and downlink pairing designations for the AWS-4 spectrum will likely remain at 2000-2020 MHz and 2180-2200 MHz, respectively, though the Commission is also seeking comment on alternative plans in which the uplink band could be shifted up 5 MHz to 2005-2025 MHz or shifted up 10 MHz and compressed to 2010-2025 MHz. The AWS-4 spectrum would be licensed in 10-MHz blocks using a geographic area licensing approach, and the FCC would apply existing AWS power limits to the AWS-4 band. New licenses would be assigned on an Economic Area basis to provide spectrum access opportunities for smaller carriers. The licenses would likely have a ten-year term that could be renewed, though the Commission has requested comments on whether the license term should be matched to the 15-year term of the satellite licenses.

In an effort to preempt another LightSquared debacle, the Commission has also requested comments on whether any special interference rules protecting GPS are warranted for the AWS-4 band, whether there is any potential for receiver overload interference between AWS-4 operations and operations in any spectrum adjacent to AWS-4 spectrum, and whether any other interference-related issues should be considered. The FCC is also proposing to apply AWS-1 signal strength limits to AWS-4 to ensure that licensees do not cause interference to co-channel systems operating along common geographic borders, and AWS-4 licensees will be required to protect 2 GHz MSS licensees from harmful interference as well.

The NPRM proposes to assign all AWS-4 licenses in the 2 GHz band to the incumbent MSS licensee (i.e., DISH) by modifying DISH's MSS licenses to add terrestrial authority and obligations that would apply to all AWS-4 service areas. The Commission's rationale for this proposal is that current technology does not permit separate MSS and terrestrial mobile services to operate simultaneously in the band unless they are controlled by a single licensee.

In terms of build-out requirements, AWS-4 licensees would be required to provide signal coverage and offer service to at least 30% of their total AWS-4 population within three years (the "Interim Build-out Requirement") and to at least 70% of the population in each of their license authorization areas within seven years (the "Final Build-out Requirement"). If an AWS-4 licensee fails to meet the Interim Build-out Requirement, all of that licensee's AWS-4 license authorizations will automatically terminate, and in the event that an AWS-4 licensee fails to meet the Final Build-out Requirement in any of its license authorization areas, its AWS-4 license for each license authorization area in which it fails to meet the build-out requirement will automatically terminate as well. The failure to satisfy a build-out requirement would also trigger the automatic termination of the MSS authorization in any area in which the terrestrial authorizations are terminated. Competitive bidding would be used to resolve any mutually exclusive applications for any AWS-4 licenses that are automatically terminated or that otherwise become a part of the FCC's spectrum inventory.

The NPRM also seeks comment on whether AWS-4 licensees should be permitted to partition their service areas or disaggregate their spectrum into new licenses. The Commission has also proposed to allow AWS-4 licensees to enter into spectrum manager lease arrangements (in which the licensee retains both de jure and de facto control of the license) and to allow de facto transfer arrangements (in which the licensee retains de jure control but relinquishes de facto control of the license) to the extent that the Commission permits disaggregation and partitioning.

Notice of Inquiry

In addition to the proposals contained in the NPRM, the FCC is also seeking comment on an alternative band plan that would reallocate the 1695-1710 MHz band from Federal to commercial use and would create two new blocks of spectrum, the PCS-Extension block and the AWS-Extension block. This "2 GHz Extension Band Concept" would consist of the existing MSS downlink band at 2180-2200 MHz paired with an uplink band at 1695-1710 MHz and a 30-MHz PCS-Extension block (which could be subdivided into smaller blocks) consisting of the existing MSS uplink band at 2000-2020 MHz, the lower portion of the AWS-2 J block at 2020-2025 MHz, and the upper portion of the AWS-2 H block at 1995-2000 MHz, all of which would be converted to downlink use.

The 2 GHz Extension Band Concept would sever the current 2000-2020 MHz pairing from the 2180-2200 MHz band, which could require moving DISH's assigned uplink spectrum from 2000-2020 MHz to 1695-1710 MHz. This would likely result in DISH either forgoing the mobile uplink portion of its existing satellite spectrum and converting it to a one-way satellite transmit system or requiring it to launch another satellite to provide MSS using 1695-1710 MHz. The resulting 30-MHz PCS-Extension block would be auctioned as downlink spectrum and would either be paired with a matching uplink block or licensed as an unpaired downlink block. The FCC could also choose to conduct an incentive auction for the MSS uplink band. However, the legislation authorizing the FCC to conduct incentive auctions contemplated at least two "competing licensees." Having acquired both DBSD and TerreStar out of bankruptcy earlier this month, DISH is now the only licensee in the 2 GHz band and it is therefore unclear whether the FCC has the authority to conduct such an auction.

CFIUS Submits Annual Report To Congress

Sheppard Mullin — Wed, 01 Feb 2012 12:18:10 -0500

The Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) recently submitted its annual report to Congress for calendar year 2010. The report, which provides general information on notices filed, reviews and investigations completed by CFIUS during the year, and the types of security arrangements and conditions that the Committee has employed to mitigate national security concerns, reveals that a larger number of reviews are proceeding to the investigation stage and that the Committee is increasingly conditioning its tacit approval of transactions upon the parties’ adoption and implementation of various mitigation measures.

Background

Section 721 of Title VII of the Defense Production Act of 1950, as amended (“Section 721”), authorizes the President to suspend or prohibit transactions that could result in control of a U.S. business by a foreign person (“covered transactions”) if there is credible evidence to suggest that the foreign person might take action that threatens to impair U.S. national security. CFIUS is a multi-agency committee chaired by the Secretary of the Treasury that reviews and advises the President on such transactions. Section 721 authorizes the President to order the divestiture of any assets acquired through a covered transaction if the parties fail to notify CFIUS and obtain a termination letter (which effectively authorizes the transaction) from CFIUS beforehand. Parties therefore generally prefer to file a voluntary notice with CFIUS containing detailed information on the transaction and the parties involved prior to closing the transaction.

The initial CFIUS review period lasts 30 days, after which CFIUS may either “conclude all action” with respect to the transaction or commence an additional 45-day investigation if it determines that the transaction raises national security concerns. Upon completion or termination of the 45-day investigation period, the Committee will either advise the President to suspend or prohibit the transaction or conclude all action with respect to the transaction. The Committee may also require parties to implement measures to mitigate any national security concerns as a precondition to its tacit approval of the transaction. Absent special circumstances, CFIUS and the President are barred from taking any further action under Section 721 once CFIUS has advised the parties that it has concluded all action with respect to a covered transaction.

The Report

93 notices of covered transactions were filed with CFIUS in 2010—a 43% increase compared to the 65 notices filed in 2009, though significantly fewer than the 155 notices filed in 2008. Because parties often withdraw a filing and submit a new notice in order to restart the 30-day review period if the Committee is unable to reach a decision within the applicable time period, the total number of notices filed does not necessarily equal the number of distinct covered transactions. CFIUS conducted an investigation with respect to 35 of the 93 notices filed in 2010. Twelve of the 93 notices were withdrawn. The parties filed new notices in seven of those cases, and in the remaining five cases the parties decided to abandon their transactions.

Roughly two-thirds of the total notices filed in 2010 were filed by foreign investors in the United Kingdom (26 notices), Canada (9), Israel (7), Japan (7), China (6), and France (6). As in 2009, transactions involving Chinese investors accounted for approximately 6% of all notices filed in 2010. The Committee also reviewed one notice for a covered transaction involving a Hong Kong acquirer. (CFIUS considers Hong Kong and Taiwan separately from China for purposes of determining an acquirer’s home country.) Because CFIUS considers both the nature of the U.S. business over which control is being acquired as well as the identity of the foreign person that is acquiring control, the fact that an acquirer’s home country is a strong ally of the United States does not necessarily mean that a covered transaction does not present national security considerations or that submitting a voluntary notice is not advisable. In 2010, for example, more than one-third of the total notices filed involved acquirers from the United Kingdom and Canada.

As in 2009, CFIUS investigated approximately 38% of all notified transactions in 2010. In contrast, the Committee investigated only 4% of all notified transactions in 2007 and 15% of all notified transactions in 2008. Investigations beyond the initial 30-day period are thus becoming more customary, with nearly two out of every five cases proceeding to the investigation stage of the CFIUS review process.

The data provided in the report also indicate that CFIUS is increasingly requiring the adoption and implementation of mitigation measures negotiated with various CFIUS member agencies as a precondition to its tacit approval of a covered transaction. In 2010, mitigation measures were utilized in 10% of all covered transactions. In contrast, mitigation measures were utilized in only 1% of all covered transactions in 2008 and 8% of all covered transactions in 2009. As in 2009, the use of mitigation measures in 2010 was limited to acquisitions of U.S. companies in the computer software, telecommunications, and energy sectors. Such measures may require the businesses involved to establish guidelines and terms for handling existing U.S. government contracts and customer information; notify relevant U.S. government parties of any material introduction, modification, or discontinuation of a product or service, as well as any awareness of any vulnerability or security incidents; or establish a corporate security committee, security officers, and other mechanisms to ensure compliance with all required actions. CFIUS may monitor and enforce compliance with mitigation measures by means of on-site compliance reviews, periodic reporting, investigations, and third-party audits.

Although no covered transaction resulted in a Presidential decision in 2010 (the last occurred in 2006), parties to covered transactions typically prefer to withdraw their notices before reaching this stage of the CFIUS review process in order to avoid the negative publicity of an adverse Presidential decision. As we previously reported here, there are a number of recent transactions in which the parties withdrew their notice after receiving indication from the Committee that it intended to recommend that the President block the transaction. Many of these deals involved proposed acquisitions of U.S. businesses by Chinese acquirers. In 2009, for example, the parties to a transaction in which a Chinese company sought to acquire a 51% equity interest in a U.S. company that operated a mine in Nevada abandoned the deal after CFIUS advised them that the proximity of the mine to a U.S. Naval air base presented insurmountable national security concerns.

The Committee’s report also analyzes foreign direct investment in the United States by countries that boycott Israel or do not ban terrorist organizations. The report cites Algeria, Iraq, Iran, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, Sudan, the United Arab Emirates, and Yemen as countries that boycott Israel (with the caveat that Iraq’s status remains under review). The Committee’s list is more expansive than the Treasury Department’s list of countries that require or may require participation or cooperation in an international boycott. (Treasury’s list does not include Algeria, Iran, Iraq, and Sudan.) The report cites Cuba, Eritrea, Iran, North Korea, Syria, and Venezuela as countries that do not ban terrorist organizations. According to the report, seven transactions involving investors from countries that boycott Israel were completed in 2010, and CFIUS reviewed notices for two of them. The remaining five transactions were not notified to CFIUS, and the Committee has not requested – at least to date – that the parties to those transactions provide any additional information or submit a voluntary notice. No transactions involving countries that do not ban terrorist organizations were completed in 2010.

Conclusion

Because CFIUS considers a number of factors in determining whether a covered transaction raises national security concerns, buyers, sellers, and investors need to be mindful of the CFIUS review process even when the acquirer’s home country is a strong ally of the United States. The Committee’s 2010 report also suggests that parties to covered transactions should plan for a lengthier CFIUS review process than in previous years. With more Committee reviews proceeding beyond the initial 30-day period to the investigation stage, companies should be prepared for a process that could last up to 75 days or more. Finally, parties to such transactions should be prepared to negotiate and implement mitigation measures to assuage CFIUS of any potential national security concerns, especially when the transaction involves the acquisition of a U.S. company in the computer software, telecommunications, or energy sectors.

Proposed ITAR Rule To Relax ITAR Licensing For Components Incorporated Into Commercial Products

Sheppard Mullin — Thu, 17 Mar 2011 13:18:24 -0500

The author is a member of the Firm's Government Contracts & Regulated Industries Practice Group. For additional articles and postings concerning this and related topics, please refer to Sheppard Mullin's Government Contracts Blog, which can be found at www.governmentcontractslawblog.com.

On March 15, 2011, the State Department Directorate of Defense Trade Controls published a proposed new rule that marks a significant change in the approach to ITAR regulation. Historically, ITAR controls have always applied to commercial end products incorporating any ITAR controlled components. This was the basis of the highly publicized QRS chip case, in which the State Department asserted continuing ITAR control over avionics chips that had originated on a military program but had come to be widely used in civilian jet aircraft. That case resulted eventually in a special exception to allow jet aircraft to remain in production and passenger service with the QRS chip and without ITAR licensing.

The new rule, §126.19, sets out conditions under which an ITAR license will not be required for the export or reexport of a defense article incorporated into an end-item that is subject to the EAR. The conditions are that:

The defense article would be destroyed (i.e., rendered useless beyond the possibility of restoration) by its removal from the end-item, or the end-item would be rendered inoperable by the removal of the defense article and the value of the defense article is less than 1% of the value of the end-item;
No technical data for development or production are transferred with the defense article; and
The incorporation of the defense article does not provide and is not related to a military application.

The rule provides expressly that export of the ITAR controlled components as replacement parts would remain subject to ITAR licensing.

The new rule will not go into effect until the Department of Commerce amends the EAR such that the ITAR and CCL provide complimentary coverage of the articles in question. The Federal Register notice invites comments on the new rule through April 14, 2011.

Once it takes effect, this ITAR change has the potential to create new opportunities for commercial exploitation of technology in U.S. manufacturing by allowing EAR controlled equipment made in the United States to incorporate ITAR controlled components meeting the above conditions and be exported without ITAR licensing. The need for continued ITAR licensing of replacement parts will largely limit its impact, however, to products where repair and maintenance could be structured to provide for replacement of the entire EAR controlled end item or assembly.

If you have questions about this ITAR change and the new exporting opportunities it may create, please feel free to contact us.

For further information concerning our Government Contracts Practice, contact our Practice Group Leaders, Bryan Daly in Los Angeles at (213) 617-5466 and Anne Perry in Washington, D.C. at (202) 218-6875.

Authored by:

Curt Dombek
213-617-5595
cdombek@sheppardmullin.com

FCC Approves Controversial Net Neutrality Rules

Sheppard Mullin — Tue, 04 Jan 2011 16:14:41 -0500

On December 21, 2010, the FCC approved controversial net neutrality rules in a party-line vote. Democratic Commissioners Copps and Clyburn joined Chairman Genachowski in approving the Order, despite concerns that it did not go far enough. Republican Commissioners McDowell and Baker wrote lengthy dissents, arguing that the FCC had stepped far beyond its regulatory authority in approving Internet regulations.

According to the Order, the rules can be summarized as achieving three main objectives: (i) transparency; (ii) no blocking; and (iii) no unreasonable discrimination. More specifically, "fixed and mobile broadband providers must disclose network management practices, performance characteristics, and terms and conditions of their broadband services." Additionally, "[f]ixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites or block applications that compete with their voice or video telephony services." Finally, "[f]ixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic."

The regulations have garnered much criticism. Those who believe the FCC has overstepped its regulatory authority have called for reversal either by Congress or the courts. Indeed, Hill Republicans have vowed to reverse the new FCC rules. Commissioners McDowell and Baker both expressed dismay at the FCC's attempt to regulate a sector of the economy that, in their view, needs no fixing, particularly in light of the D.C. Circuit's recent decision that enforcement of net neutrality principles is beyond the FCC's authority.

Those who believe the Order did not go far enough complain that the rules apply primarily to fixed broadband providers, leaving wireless providers largely exempted, and that the rules do not expressly prohibit "paid prioritization," which would allow content providers to pay for faster transmission of their data.

Chairman Genachowski has defended the new regulations, stating in an interview with Gary Shapiro, head of the Consumer Electronics Association, "Our hope is that there's an outcome here that preserves a free and open Internet [that will] promote innovation, protect the free flow of information … and preserve and accelerate the kind of economic activity that we've seen out of this platform for the last several decades."

Whether the FCC's net neutrality rules can withstand judicial review and Congressional challenge remains to be seen.

Authored By:

Christopher S. Huther
(202) 772-5374
chuther@sheppardmullin.com

and

Megan H. Troy
(202) 772-5373
mtroy@sheppardmullin.com

and

Brian D. Weimer
(202) 469-4904
bweimer@sheppardmullin.com

and

Celia V. Cohen
(202) 469-4947
ccohen@sheppardmullin.com

FCC And FDA Focused On Convergence Of Communications And Medical Systems

Sheppard Mullin — Wed, 04 Aug 2010 10:24:47 -0500

Last week, the Federal Communications Commission ("FCC") and the Food and Drug Administration ("FDA") launched a joint initiative to clarify the approval process and regulatory requirements for converged communications and health care devices. In a two-day joint meeting held on July 26-27, 2010, the two agencies solicited comments from industry representatives "to gain a better understanding of the convergence of communications technologies and medical devices, the future of wireless health technologies, and the challenges they face." The goal of the initiative is "to enhance coordination between FDA and FCC for future devices and applications, and to clarify and delineate the respective areas of expertise and jurisdiction between the agencies."

The joint collaboration implements a key recommendation of the FCC's National Broadband Plan, released in March 2010, which cautioned that a lack of clarity regarding the appropriate regulatory approach could stifle innovation, slow the application approval processes, and deter adoption of convergent technologies in the health care industry. Such technologies include, for example, mobile applications that allow individuals to monitor their health conditions, wireless patch-like sensors that transmit data to practitioners and caregivers, and neural pathway replacements that stimulate muscle movement. FCC Chairman Julius Genachowski described the joint initiative as a key component of a larger strategy for the health care industry that also seeks to increase broadband access to rural clinics and increase spectrum availability. He noted that broadband technology is especially promising for the industry because of its ability to enable remote diagnostics and health care, remote medical monitoring, and remote access to health records.

Industry representatives generally reacted positively to the meeting, noting that the current lack of clarity as to whether the FDA or FCC has ultimate authority over medical device product safety issues related to signal interference often discourages venture capitalists from investing in the industry, and that parallel approval processes for the two agencies tend to be duplicative and time-consuming.[1]

The FDA and FCC are currently seeking comments on how they may clarify and identify each agency's respective jurisdiction and how to best improve, coordinate, and simplify the regulatory approval process. The deadline for filing comments is August 16, 2010.

Authored By:

Brian D. Weimer
(202) 469-4904
bweimer@sheppardmullin.com

and

Peter S. Reichertz
(202) 772-5333
preichertz@sheppardmullin.com

and

Daniel Brooks
(202) 469-4916
dbrooks@sheppardmullin.com

[1] See Monica Hogan, FDA Partners with FCC to Spur Wireless Health Technology Development, "The Gray Sheet," Aug. 2, 2010; Monica Hogan, Philips Healthcare CTO: "The Right Things are Happening" in Wireless, "The Gray Sheet," Aug. 2, 2010.

Comments Received In FCC Reclassification Proceeding

Sheppard Mullin — Thu, 22 Jul 2010 12:25:16 -0500

The FCC received thousands of comments last week in response to its Notice of Inquiry (NOI) regarding the appropriate regulatory classification for broadband Internet service. At issue is the hotly-debated topic of whether and how broadband services should be regulated after the DC Circuit's recent Comcast decision, which held that the FCC lacked the authority to regulate a broadband service provider’s network management practices. See FCC Law Blog Post (Apr. 7, 2010).

At issue in the NOI are three regulatory alternatives:

Maintain the status quo and continue to classify broadband service as an "information service" under Title I, thereby effectively ensuring that the regulation of broadband Internet services will remain extremely light to non-existent.
Reclassify broadband service as a "telecommunications service" under Title II and apply the full weight of "common carrier" regulations to broadband providers.
Reclassify broadband service as a "telecommunications service" under Title II, but simultaneously forebear from all but a handful of the Title II regulations (an approach that has commonly been referred to as the "Third Way").

The NOI also asks how wireless broadband services should be treated. That is, the NOI does not assume that terrestrial wireless and satellite-based broadband Internet services will necessarily be treated the same as wireline and cable-based technologies.

The Commission is currently split (3-2) on which approach to pursue. The three Democratic Commissioners (Chairman Genachowski and Commissioners Copps and Clyburn) favor the "Third Way." They believe that only through reclassification will the Commission be able implement President Obama's (and Chairman Genachowski's) communications policy initiatives. In particular, in the wake of the DC Circuit’s Comcast decision, they believe that the FCC needs the additional regulatory authority provided by Title II to achieve its universal service and net neutrality objectives, to advance the goals of the National Broadband Plan, and to implement a variety of consumer protection initiatives.

The two Republican Commissioners (McDowell and Baker) favor the first approach. They prefer maintaining the status quo, keeping broadband service classified as an "information service," and pursuing a largely hands-off approach to regulating the Internet. They fear that reclassification under Title II – even if the "Third Way" is adopted – would create unacceptable regulatory uncertainty, lead to years of litigation, and reduce incentives for investment in broadband infrastructure.

The comments received last week largely mirror these concerns. Public interest groups such as The Center for Media Justice, Consumers Union, and internet search engine giant, Google, support reclassification under Commissioner Genachowski’s "Third Way." Some groups, such as the Media Access Project, argue that the "Third Way" does not go far enough. Under Genachowski's proposal, the FCC would forbear from all Title II provisions except Sections 201, 202, 208, 222, 254 and 255. These groups claim that the Commission should go further and "may not and need not forbear from any provisions that place an obligation on the Commission itself and do not constitute regulations applicable to a telecommunications carrier or telecommunications service."

Those in favor of maintaining the currently minimal approach to broadband regulation vigorously object to reclassification of any kind. These commenters predict that any move to reclassify broadband services under Title II will be subject to almost certain legal challenge, and that protracted litigation will inevitably ensue. Opponents also note that the public interest groups that favor reclassification are expected to challenge any attempt by the FCC to restrict the reach of Title II regulation through forbearance. If such a challenge is successful, the broadband industry may experience the worst of both worlds – not only will it now be regulated, but it would be subject to the full array of requirements and prohibitions under Title II. These commenters also note that, even if such challenges to forbearance were to fail, the composition of the FCC is certain to change over time, creating great uncertainty as to whether future Commissioners will chose not to forebear.

Members of Congress have also weighed in. Notably, in a single week, 282 members of Congress (171 House Republicans, 74 House Democrats and 37 Republican Senators) sent letters to Chairman Genachowski urging him to abandon his plans to reclassify broadband as a Title II service. These lawmakers believe that, before any action is taken by the FCC, Congress should be given the opportunity to revise the Communications Act and clarify the FCC’s authority in this area – a position with which parties such as AT&T agree, arguing that "the Commission should work with Congress to bring the Communications Act into the 21^st century." Other Members have threatened to eliminate any funds from the FCC's budget that may be used to implement Chairman Genachowski's "Third Way."

The FCC is asking for reply comments by August 12, 2010 – a deadline that should provide the Commission sufficient time to vote on reclassification before the November mid-term elections.

Authored By:

Christopher S. Huther

and

Megan H. Troy

and

Jennie Eskin Ekdahl

Replacement of the Legacy High-Cost Universal Support Fund with a Connect America Fund: Key Economic and Legal Considerations

Sheppard Mullin — Tue, 04 May 2010 13:41:49 -0500

A Note by Christopher Huther and Megan Troy of Sheppard Mullin Richter & Hampton LLP and Christian Dippon of NERA Economic Consulting

On April 21, 2010, the Federal Communications Commission (FCC) released a Notice of Inquiry (NOI) and a Notice of Proposed Rulemaking (NPRM) that seek the public's input on the FCC's effort to replace the legacy high-cost universal service fund (USF) with a broadband "Connect America" fund (CAF). In effect, the FCC seeks to implement cost-cutting measures for existing voice support and create a new fund to support the provision of broadband communications in areas that would be unserved without such support or that depend on universal service support for the maintenance of existing broadband service.

In this note, Christopher Huther and Megan Troy of Sheppard Mullin Richter & Hampton LLP and Christian Dippon of NERA Economic Consulting identify key economic and legal considerations raised by the FCC's first step towards comprehensive universal service reform. As the note highlights, the path that the FCC will take on sizing the CAF and reforming the USF will have a significant impact on existing subsidy regimes and on the competitive landscape in the United States communications industry.

To request a copy of the note, please contact Christopher Huther at chuther@sheppardmullin.com, (202) 772-5374 or Megan Troy at mtroy@sheppardmullin.com, (202) 772-5373.

FCC Loses Net Neutrality Suit

Sheppard Mullin — Wed, 07 Apr 2010 15:33:33 -0500

On Tuesday, the U.S. Court of Appeals for the D.C. Circuit ruled that the FCC lacks the authority to regulate Internet service providers' network management practices. The unanimous decision by a three-judge panel immediately throws into question the FCC's ability to require Internet providers to treat all network traffic equally (a concept known as "net neutrality"). The ruling may also hinder the FCC's efforts to move forward with key aspects of its National Broadband Plan for expanding high-speed Internet service nationwide.

At issue in the case was the FCC's decision in 2008 that Comcast had improperly interfered with its customers' use of peer-to-peer programs, which allow users to share large files directly with one another and hence consume substantial amounts of bandwidth. While conceding that it lacked the express authority to prevent Internet service providers from blocking or slowing Internet traffic, the FCC argued that it possessed "ancillary" authority under Title I of the Communications Act to regulate network management practices as "reasonably ancillary to the . . . effective performance of its statutorily mandated responsibilities." The D.C. Circuit disagreed, concluding that the FCC had "failed to make that showing."

In responding to the decision, FCC spokesperson Jen Howard emphasized that the court had not "closed the door to other methods" for implementing its open Internet regulations and that the FCC was committed to finding a "solid legal foundation" for its policies. While the FCC did not specify whether it plans to appeal the court's decision or what "other methods" it may employ to achieve its objectives, the FCC may attempt to reclassify broadband Internet access as a traditional telecommunications service, which would provide the FCC with regulatory authority under Title II of the Communications Act. The easiest solution, of course, would be for Congress to clarify the FCC's authority in this area, though it is likely to be difficult to find time this year to enact any such legislation.

Authored By:

Christopher S. Huther
(202) 772-5374
chuther@sheppardmullin.com

and

Megan H. Troy
(202) 772-5373
mtroy@sheppardmullin.com

and

Brian D. Weimer
(202) 469-4904
bweimer@sheppardmullin.com

and

Daniel Brooks
(202) 469-4916
dbrooks@sheppardmullin.com

National Broadband Plan Recommends Lower, Uniform Pole Attachment Rates

Sheppard Mullin — Tue, 23 Mar 2010 07:30:22 -0500

The Federal Communications Commission ("FCC") released its long-awaited National Broadband Plan (the "Plan") on March 16, 2010. The Plan emphasizes that encouraging and facilitating access to infrastructure, such as utility poles, is critical to the continued deployment and enhancement of broadband facilities in America. The Plan states that, "[c]ollectively, the expense of obtaining permits and leasing pole attachments and rights-of-way can amount to 20% of the cost of fiber optic deployment." Plan at 109. The Plan notes that "[t]hese costs can be reduced directly by cutting fees" and "can also be lowered indirectly by expediting processes and decreasing the risks and complexities that companies face as they deploy broadband network infrastructure." Plan at 110.

Accordingly, the Plan recommends the following:

(1) Establish pole attachment rental rates that are as low and close to uniform as possible. The Plan notes in particular the fact that incumbent local exchange carriers ("ILECs") are subject to almost three times the rates charged to cable television ("CATV") providers, while using similar amounts of space. The Plan states that "[a]pplying different rates based on whether the attacher is classified as a 'cable' or 'telecommunications' company distorts attachers' deployment decisions." Id. The Plan thus recommends that the rate currently charged to CATV providers – a rate that has been held to be just and reasonable and fully compensatory to utilities – should be applied to telecommunications carriers. The Plan leaves the door open for the application of such a rate to ILECs.

(2) Implement rules to lower the cost of pole attachment "make-ready" work. The Plan recognizes that make-ready charges are often the source of significant cost and delay when building broadband networks. The Plan acknowledges that "[r]eform of this inefficient process presents significant opportunities for savings." Plan at 111. To lower the costs of make-ready work and speed up the process, the Plan recommends (among other things): (a) establishing a schedule of charges for the most common types of work; (b) allowing prospective attachers to use independent, utility-approved and certified contractors to perform the make-ready work; (c) mandating that existing attachers take action to accommodate new attachers within a specified timeframe (e.g., 30 days); and (d) linking make-ready payments to the performance of the work, as opposed to requiring that all payments be made up front."

(3) Establish a comprehensive timeline for the attachment process and create a forum for dispute resolution. Currently, no federal regulations address the duration of the process for obtaining access to poles, ducts, conduit and rights-of-way. As such, prospective attachers can spend months or even years attempting to gain access to necessary infrastructure. The Plan therefore recommends the creation of a federal timeline, applicable to all forms of communications attachments, to cover each step of the Section 224 access process (from application to issuance of the final permit). The Plan also takes issue with the lack of procedures for the timely resolution of pole attachment disputes. Accordingly, the Plan advises the FCC to consider approaches that not only speed up the attachment process, but also provide guidance to the industry. Among the things to be considered are creating specialized fora and processes for attachment disputes, establishing target deadlines for dispute resolution, and awarding compensation based upon the date access was denied as a means of expediting dispute resolution.

(4) Improve the collection and accessibility of information regarding the location and availability of poles, ducts, conduits and rights-of-way. The Plan states that the FCC "should ensure that information about utility poles and conduits is up-to-date, readily accessible and secure, and that the costs and responsibility of collecting and maintaining data are shared equitably by owners and users of these vital resources." Plan at 112. The database should be easily searchable, identify the owner of each pole, and contain up-to-date records of attachments and make-ready work that has been performed. The Plan recognizes that the collection of such information would assist pole owners and attachers by ensuring accurate and efficient application processing and fee collection.

(5) Amend Section 224 to establish a harmonized access policy for all poles, ducts, conduits and rights-of-way. The Plan notes that "without statutory change, the convoluted rate structure for cable and telecommunications providers will persist," and that "due to exemptions written into Section 224 [for poles owned by municipalities, cooperatives and utilities in states that have adopted their own pole attachment regulatory regime], a reformed FCC regime would apply to only 49 million of the nation's 134 million poles." Id. The Plan thus recommends amending or replacing Section 224 with a "harmonized and simple policy that establishes minimum standards throughout the nation." Id. This new statutory framework would: (a) establish a minimum set of criteria for all poles, ducts, conduits and rights-of-way; (b) provide all broadband providers (whether wholesale or retail) the right to access pole attachments, ducts, conduit, and rights-of-way based on reasonable rates, terms and conditions; (c) mandate that infrastructure access be provided with standard timelines established by the FCC and give the FCC the authority to award damages for non-compliance; and (d) allow the FCC to compile and update a comprehensive database of physical infrastructure assets.

(6) Establish a joint task force with state, Tribal and local policymakers to develop guidelines for rates, terms and conditions for access to public rights-of-way. The Plan requests that the task force make its recommendations within six months of the task force's creation.

Of course, the aforementioned proposals are recommendations, and thus have not been formally adopted or imposed upon industry participants. We expect the FCC to initiate or revive multiple rulemaking proceedings in the coming months to address in greater depth these suggestions, as well as the rest of the recommendations contained in the National Broadband Plan.

Authored By:

Christopher S. Huther
(202) 772-5374
chuther@sheppardmullin.com

and

Megan H. Troy
(202) 772-5373
mtroy@sheppardmullin.com

and

Jeremy Keim
202) 741-8429
jkeim@sheppardmullin.com

FCC Initiates Net Neutrality Rulemaking

Sheppard Mullin — Mon, 02 Nov 2009 13:12:05 -0500

In its latest move in the "net neutrality" debate, the Federal Communications Commission (FCC) issued a Notice of Proposed Rulemaking (NPRM) in late October 2009 that breaks from the FCC's historically restrained approach to Internet regulation and proposes a host of new prohibitions and requirements on broadband providers. While some have praised the move as a necessary means to ensure continuing investment in innovative content and competition in the Internet access market, others have argued that formal regulation will discourage broadband providers from investing in infrastructure, stifle broadband-related job creation, and lead to congested, slow-moving networks. In addition, some opponents of the move have questioned whether the FCC even possesses the legal authority to regulate Internet network management.

As expected, the proposed rules would codify four existing Internet principles established by the FCC in 2005 as mere "guidelines." These four principles are the following:

1.Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from sending or receiving the lawful content of the user's choice over the Internet.

2.Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from running the lawful applications or using the lawful services of the user's choice.

3.Subject to reasonable network management, a provider of broadband Internet access service may not prevent any of its users from connecting to and using on its network the user's choice of lawful devices that do not harm the network.

4.Subject to reasonable network management, a provider of broadband Internet access service may not deprive any of its users of the user's entitlement to competition among network providers, application providers, service providers, and content providers.

The proposed rules would also establish two new "nondiscrimination" and "transparency" rules:

5.Subject to reasonable network management, a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner.

6.Subject to reasonable network management, a provider of broadband Internet access service must disclose such information concerning network management and other practices as is reasonably required for users and content, application, and service providers to enjoy the protections specified in [the FCC's net neutrality principles].

Under the proposed definition of "reasonable network management," broadband providers would still be able to manage their networks to reduce congestion and address quality-of-service concerns, address harmful traffic or traffic that is unwanted by users, and prevent the unlawful transfer of content. Thus, while it may be reasonable for a broadband provider to temporarily limit usage during periods of congestion or to charge subscribers based on usage rather than a flat monthly fee, it would not be reasonable to block or degrade VoIP traffic but not other services that similarly affect bandwidth usage, or to block or deprioritize particular content on the basis of viewpoint alone. Similarly, it would be reasonable under the proposed rules for a broadband provider to prevent the unlawful distribution of copyrighted works or to block spam, child pornography, or content that a particular individual has requested be blocked.

Despite the vast expenditure of energy that has gone into debating whether the FCC should promulgate net neutrality rules and what form those rules should take, many commentators have questioned whether the FCC possesses the legal authority to regulate Internet network management. The FCC has argued in the Comcast/BitTorrent proceeding that it has ancillary jurisdiction over broadband Internet access service because the subject matter falls within the FCC's general statutory grant of jurisdiction and the regulation is "reasonably ancillary to the effective performance of the Commission's various responsibilities." While this position was echoed by Chairman Genachowski and Democratic Commissioners Copps and Clyburn in the FCC's NPRM, the merit of the argument is far from clear. Republican Commissioners McDowell and Baker have both expressed doubts, and the Comcast/BitTorrent proceeding is currently on appeal before the U.S. Court of Appeals for the D.C. Circuit. Oral arguments in the case are currently scheduled for January 8, 2010, which presents interesting timing for the case given the FCC's desire to complete its rulemaking next year. In addition, Senator John McCain (R – AZ) has introduced a bill (S. 1836) that would prohibit the FCC from regulating Internet services altogether.

The FCC is currently seeking comments from the public as to what form the final rules should take and whether the FCC possesses legal authority to regulate Internet network management in general. Comments are due on January 14, 2010 and reply comments are due on March 5, 2010.

Authored By:

Christopher S. Huther
(202) 772-5374
chuther@sheppardmullin.com

and

Megan H. Troy
(202) 772-5373
mtroy@sheppardmullin.com

and

Brian D. Weimer
(202) 469-4904
bweimer@shepparmullin.com

and

Daniel Brooks
(202) 469-4916
dbrooks@sheppardmullin.com

D.C. Circuit Strikes Down Cable Ownership Cap

Sheppard Mullin — Thu, 10 Sep 2009 09:42:24 -0500

On August 28, 2009, the Court of Appeals for the District of Columbia Circuit issued an opinion in Comcast Corporation v. FCC, which vacated the FCC's 30% limit on the number of subscribers to which a cable operator could offer service.

The 30% cap, created in 1993, was initially intended to promote competition in the cable television market and increase consumer access to diverse network programming. In 1993, however, the cable television market was dominated by large companies that had exclusive monopoly franchises in particular geographic areas. Since that time, the cable television landscape has changed dramatically. Now, direct broadcast satellite companies provide programming to approximately one-third of subscribers, consumers have access to significantly more channels of programming than ever before, competitive wireline providers are expanding rapidly, and alternate transmission methods of video media are playing ever-increasing roles in the lives of consumers.

Despite these fundamental changes, however, the FCC refused to alter or eliminate the 30% subscriber limit to better reflect market realities. Moreover, the FCC applied the cap not only to incumbent cable providers, but to competitive wireline providers – telephone companies providing fiber optic video services – which, ironically, decreased competition by limiting the total number of subscribers to which these new providers could offer service.

Citing to the “substantial competition” in the cable television marketplace today, the D.C. Circuit struck down the FCC’s 30% limit as arbitrary and capricious. The Court found the record “replete with evidence of ever increasing competition among video providers,” and properly observed that “the broadcast industry is dynamic in terms of technological change; solutions adequate a decade ago are not necessarily so now, and those acceptable today may well be outmoded 10 years hence.” Refusing to ignore this “crucial fact about the nature of the video industry,” the Court vacated the FCC's 30% subscriber limit.

Though the D.C Circuit did not “think that prospect looms large,” the FCC will have another opportunity to justify the 30% limit. In weighing this decision, the FCC would be wise to remember that competitive markets consistently prove themselves superior to regulatory fiat in fostering investment and innovation and in protecting consumers' interests and serving their needs. The FCC thus should promote robust competition and avoid placing unnecessary restrictions on cable operators – particularly competitive wireline providers, who, by definition, have never possessed bottleneck monopoly power over access to video programming. In light of the Court's ruling and the realities of the cable market, it appears unlikely that the FCC will be able to justify any future cap-based regulation.

Authored by:

Christopher S. Huther
(202) 772-5374
chuther@sheppardmullin.com

and

Megan H. Troy
(202) 772-5373
mtroy@sheppardmullin.com

and

Jeremy Keim
(202) 741-8429
jkeim@sheppardmullin.com

Increased Prospects for Broadband Deployment under Obama

Sheppard Mullin — Thu, 18 Dec 2008 13:31:02 -0500

A broad coalition of telecommunications companies and organizations has called upon President-elect Barack Obama to prioritize broadband deployment and stimulate investment in broadband services. This large coalition – which includes AT&T, Verizon, Google, Alcatel-Lucent, organizations representing the cable and wireless industries, organizations representing state and local governments, as well as consumer groups – emphasizes both infrastructure deployment and demand stimulation to foster broadband investment, adoption and utilization. Specifically, the coalition advocates, among other things, expanding the coverage of broadband networks to areas where there are currently none, obtaining higher speed connections in areas where networks already exist, and providing subsidies to low-income individuals to purchase a computer or pay for a broadband connection. To achieve these objectives, the group favors tax incentives, grants, low-cost loans and loan guarantees, and universal service subsidies.

President-elect Obama has already made clear that he intends to make broadband deployment a priority. In his December 6^th radio address, the President-elect announced plans to make substantial new investments in national infrastructure to stimulate the economy, including funds to increase broadband availability. The Obama Transition also has indicated that it will look at reforming the Universal Service Fund, making better use of the nation’s wireless spectrum, promoting next-generation facilities, technologies and applications, and providing new tax and loan incentives as means by which to encourage the deployment of next generation broadband. While specific details of the proposed stimulus package have not yet been made public, it is likely to include some, if not all, of these initiatives. Recent meetings with a wide range of telecommunications companies also suggest that President-elect Obama’s Transition Team will consider input from the telecom industry in determining which measures will be included in the stimulus package.

With Congress expected to pass a large economic stimulus package in early 2009, broadband deployment appears likely to get a boost from any legislation ultimately adopted. House Speaker Nancy Pelosi, who is taking the lead on the stimulus package in Congress, has signaled her support for action on broadband deployment. This support in Congress, coupled with the support of the incoming administration and the telecommunications industry in general, means that investment in broadband is likely to be part of any stimulus funding approved in the coming year.

Authored by:

Christopher S. Huther

(202) 772-5374

chuther@sheppardmullin.com

and

Megan H. Troy

(202) 772-5373

mtroy@sheppardmullin.com

and

Karin Hunter Johnson

(202) 218-0008

kjohnson@sheppardmullin.com

Senate Passes FISA Bill With Telecom Immunity

Sheppard Mullin — Wed, 16 Jul 2008 15:55:33 -0500

The Senate recently voted 69-28 in favor of a bill (H.R. 6304) that will provide retroactive legal immunity to telephone companies that participated in the Bush administration's warrantless surveillance program. The bill’s passage ended more than a year of legislative debate over whether to immunize phone companies from lawsuits filed by subscribers alleging that the companies violated their civil rights by participating in the program.

The warrantless surveillance program began shortly after the terrorist attacks of September 11, 2001, when the White House issued an executive order authorizing the National Security Agency ("NSA") to eavesdrop on international phone calls and email messages of Americans and others inside the U.S. without obtaining the court-approved warrants that are normally required under the Foreign Intelligence Surveillance Act of 1978 ("FISA") for domestic spying. Prominent telephone companies such as AT&T, Verizon, and others participated in the program by granting the NSA access to private communications data. After the program was disclosed in late 2005, telephone subscribers filed over forty class action lawsuits against the companies, arguing that their civil rights had been violated by the disclosure of their personal information. The lawsuits threatened the telephone companies with billions of dollars in potential liability.

The recently passed bill, which President Bush has promised to sign into law quickly, will grant retroactive legal immunity to phone companies that participated in the program. Under the legislation, district courts will "promptly dismiss" the lawsuits upon determining that the defendant companies received directives from the administration to participate in the program. Because the Senate Intelligence Committee has made clear that the firms did, in fact, receive such directives, dismissal of the suits is now a virtual inevitability.

In addition to providing retroactive legal immunity to telephone companies, the legislation will allow the government to monitor foreign communications more easily. The government will not have to obtain warrants to monitor foreigners whose communications pass through or are stored by U.S. communications hubs, or to monitor U.S. residents communicating with suspected foreign terrorists (provided that the U.S. resident being monitored is not the target of the surveillance and that efforts are made to minimize the surveillance of his or her communications). Warrants will still be necessary to monitor U.S. residents who are themselves the targets of surveillance, and for Americans traveling abroad as well. In certain "exigent" circumstances—e.g., attorney general certification that there is probable cause to believe that a target is linked to terrorism—the government will be able to conduct emergency wiretaps on Americans for up to seven days without obtaining a warrant. In a concession to Democrats, the bill also reaffirms that FISA is the "exclusive" means of conducting surveillance wiretaps, a provision designed to prevent comparable programs from evading court scrutiny in the future. All provisions of the bill will sunset at the end of 2012.

As expected, the Senate rejected proposed amendments that would have weakened the bill's immunity provisions. Proponents of the legislation praise the bill as vital for national security and important for ensuring that phone companies acting in good faith are not punished for their assistance with the program. Critics, on the other hand, argue that the legislation will prevent the administration from being held accountable for its actions and that, because most members of Congress have not been briefed on the warrantless surveillance program, granting retroactive immunity at this point is ill advised. Senate majority leader Harry Reid (D-NV), a critic of the bill, has promised to review the law next year, and lawyers representing plaintiffs in the lawsuits have vowed to challenge the immunity provision in federal court.

Authored by:

Christopher S. Huther

(202) 772-5374

chuther@sheppardmullin.com

and

Megan H. Troy

(202) 772-5373

mtroy@sheppardmullin.com

FCC Steps Up DTV Enforcement

Sheppard Mullin — Thu, 17 Apr 2008 18:28:18 -0500

The FCC’s recent DTV enforcement actions made one thing clear – the Commission is being vigilant in the enforcement of its digital television (or “DTV”) regulations. On April 9, 2008, the FCC adopted notices of apparent liability (“NALs”) against eleven companies for mislabeling analog-only television sets with no digital tuners, leaving full V-chip functionality out of DTV sets, and shipping analog-only sets with no digital tuners. The proposed fines total $6.6 million. The FCC also issued consent decrees against seven companies that collectively agreed to pay $3,445,000 for V-chip violations.

Of the eleven NALs, seven were issued against large retail chains for allegedly failing to warn customers that analog-only television sets will not work after the switch to digital broadcasting in 2009. They include Sears and Kmart ($1.1 million in proposed fines); Wal-Mart and Sam’s Club ($992,000); Circuit City ($712,000); Fry's Electronics ($384,000); Target ($296,000); Best Buy ($280,000); and CompUSA ($168,000). In total, the seven retailers were assessed a total of $3,928,000 in NALs, with Sears and Kmart being the hardest hit (a total of 137 alleged violations). According to FCC Chairman Kevin Martin, in testimony before the Senate Commerce Committee on April 8, the FCC inspected 2,716 stores as well as 36 web sites searching for violations.

The FCC also adopted two NALs – proposing a total of $1.6 million in fines – against companies alleged to have violated the DTV tuner mandate. One NAL proposed fines of $357,900 against Precor Inc. for allegedly shipping workout equipment containing TVs without digital tuners, while the other proposed fines of $1,266,100 against Syntax Brillian for shipping televisions in interstate commerce that also lacked digital tuners tuners.

Finally, Polaroid and Proview Technology face fines of $775,000 and $300,000, respectively, for violations of the FCC’s requirement that digital televisions recognize digital V-chip technology. The FCC signed consent decrees with seven other manufacturers accused of V-chip violations. The largest settlement was with LG Electronics, which agreed to pay $1,700,000. Settlements were also reached with Philips ($450,000), Sanyo ($375,000), Vizio ($370,000), Panasonic ($320,000), Westinghouse ($210,000), and Audiovox ($20,000).

Authored by:

Megan H. Troy

(202) 772-5373

mtroy@sheppardmullin.com

and

Christopher Huther

(202) 772-5374

chuther@sheppardmullin.com

and

Richard Siegel

(202) 772-5392

rsiegel@sheppardmullin.com

Incumbents Big Winners in 700 MHz Auction

Sheppard Mullin — Tue, 01 Apr 2008 14:39:29 -0500

The FCC recently announced the results of auctions for newly available 700 MHz radio spectrum. Altogether, 1090 licenses were sold to 101 different bidders. Over $19 billion was raised by the auction – an amount that far exceeds the sum raised in any single spectrum previously conducted and went beyond Congressional estimates by about $9 billion.

The biggest winners of the auction were the incumbent providers, with Verizon Wireless purchasing licenses covering 475 million POPS (population) for $9.63 billion, and AT&T Mobility purchasing licenses covering 175.8 million POPS for $6.64 billion. Combined, the two companies were responsible for over $16.25 billion of the approximately $19.6 billion spent by winning bidders. As expected, Google did not win any of the C block licenses. It had bid $4.7 billion on the 8-region package covering all 50 states, but lost to Verizon for 7 of those regions and to Triad-700 for Alaska.

The spectrum, which is presently used for UHF television broadcasts, will be returned to the FCC next year as a result of the conversion to digital television. The FCC intends to use the money raised in the auction to aid in that conversion. Among the benefits of this spectrum, it is believed that the 700 MHz frequencies will penetrate buildings better than current cellular service, which operates between 850 and 1900 MHz, thereby allowing greater reception and service within buildings than is currently available. In addition to increased quality, it is expected that the new spectrum will lead to greater choices for consumers in both devices and services.

One block of spectrum, the "D-block," was not purchased as no bidder reached the FCC's reserve price for the auction. The FCC is currently considering how to go about re-auctioning that block.

Authored by:

Megan H. Troy

(202) 772-5373

mtroy@sheppardmullin.com

and

Christopher S. Huther

(202) 772-5374

chuther@sheppardmullin.com

and

Richard Siegel

(202) 772-5392

rsiegel@sheppardmullin.com

Washington Update - July/August 2007

Sheppard Mullin — Thu, 13 Sep 2007 14:29:42 -0500

I. Legislative Branch Activity

A. Senate Committee Passes Three Telecom Bills.

On July 19, the Senate Commerce Committee approved three telecommunications bills: a broadband data bill (S-1492), a number porting measure (S-1769), and an indecency bill (S-1780). The broadband data bill, as passed by the Committee, directs the Commission to use Form 477 data to determine broadband service tiers, creating a separate tier for advanced services. The requirements for Form 477 would be altered to identify actual numbers of broadband connections associated with subscribers. In addition, the FCC would be allowed to choose whether to utilize 5-digit or 9-digit zip codes, or census tract information.

The controversial indecency bill would punish broadcasters for "fleeting expletives" and single words or images that air. Some groups warn that passage of such a bill reverses the recent U.S. Court of Appeals case that threw out a FCC policy of fining stations for such expletives, and will only invite further litigation.

B. Senate Bill to Increase Funding for Interoperability.

On July 27, the House passed HR-1, a bill based on the recommendations of the 9/11 Commission. Included in the massive bill was $400 million to upgrade the nation's 911 service and promote increased interoperability of emergency services. The funds will arrive in FY 2009 and will be allocated through grant programs, which will be administered by the Department of Homeland Security. President Bush signed the bill into law on August 3.

C. New Parental Control Bill Clears Senate Committee.

The Child Safe Viewing Act of 2007 (S-602), introduced by Sen. Mark Pryor (D-AR), was approved in a Senate Commerce Committee markup. The bill asks the FCC to examine newer blocking technologies than the current V-chip. These new devices could be used on TVs, DVD players, cable set top boxes, and satellite receivers. The filter itself would be independent of the preexisting TV rating system and would filter language based on closed captioning.

D. Legislative Calendar.

The House and Senate reconvened September 4 and are in session until October 8.

II. Federal Communications Commission (FCC) Activity

A. July FCC Meeting.

Commission Adopts Rules for the 700 MHz Band.

The Commission passed a single order at the July 31 FCC Open Meeting -- rules for the 700 MHz band that is being vacated by television stations as a result of the DTV transition. The new rules are intended to promote the creation of a nationwide interoperable broadband network for public safety, as well as to promote new wireless services for consumers. Per the rules adopted, 22 MHz of the spectrum is allocated for open access, 10 MHz for a public-private partnership, and another 10 MHz for the nationwide wireless broadband network.

The Order also set reserve prices for the auction. The C-block of spectrum, allocated for open access, has a minimum bid of $4.6 billion, while the nationwide public-private partnership band is set at $1.3 billion. If the reserve is not met for the C-block, the space will be reauctioned without any open access provisions.

The band space is to be auctioned off by the Congressionally mandated deadline of January 28, 2009.

B. Other July FCC Activity.

1. DTV Transition NPRM Approved (Docket 07-148).

On July 30, the Commission released a Notice of Proposed Rulemaking that seeks comment on possible DTV consumer education initiatives that broadcasters, MVPDs, retailers, and manufacturers would have to undertake. Comments are due on September 17 and reply comments on October 1.

2. Studies on Media Ownership Released (Docket 06-121).

The FCC published on July 31 ten studies concerning media ownership. The studies are intended to inform the Commission during its review of broadcast ownership policies. Comments are due 60 days after release of the public notice, on October 1, with reply comments due October 16. The following are the topics and authors:

Study 1: How People Get News and Information

Author: Nielsen Media Research, Inc.

Study 2: Ownership Structure and Robustness of Media

Authors: Kiran Duwadi, Scott Roberts, and Andrew Wise, FCC

Technical Appendix: C. Anthony Bush, FCC

Study 3: Television Station Ownership Structure and the Quantity and Quality of TV Programming

Author: Gregory S. Crawford, Department of Economics, University of Arizona

Study 4: News Operations

Section I: The Impact of Ownership Structure on Television Stations’ News and Public Affairs Programming, Author: Daniel Shiman, FCC

Section II: Ownership Structure, Market Characteristics and the Quantity of News and Public Affairs Programming: An Empirical Analysis of Radio Airplay, Author: Kenneth Lynch, FCC

Section III: Factors that Affect a Radio Station’s Propensity to Adopt a News Format, Author: Craig Stroup, FCC

Section IV: The Effect of Ownership and Market Structure on News Operations, Author: Pedro Almoguera, FCC

Study 5: Station Ownership and Programming in Radio

Author: Tasneem Chipty, CRA International, Inc.

Study 6: The Effects of Cross-Ownership on the Local Content and Political Slant of Local Television News

Author: Jeffrey Milyo, Center for Applied Economics, University of Kansas, School of Business; Department of Economics and Truman School of Public Affairs, University of Missouri

Study 7: Minority and Female Ownership in Media Enterprises

Authors: Arie Beresteanu and Paul B. Ellickson, Duke University

Study 8: The Impact of the FCC’s TV Duopoly Rule Relaxation on Minority and Women Owned Broadcast Stations 1999-2006

Author: Allen S. Hammond, IV, Santa Clara University

Study 9: Vertical Integration and the Market for Broadcast and Cable Television Programming

Author: Austan Goolsbee, University of Chicago, Graduate School of Business; American Bar Foundation; and National Bureau of Economic Research

Study 10: Review of the Radio Industry, 2007

Author: George Williams, FCC

C. August FCC Meeting.

The August Open Meeting also had only one item on its agenda: automatic roaming rules. The approved Report and Order and Further Notice of Proposed Rulemaking requires carriers to offer automatic roaming to customers of other carriers. Some data, such as text messaging, was included in the Order. Wireless broadband was not, however, and the FCC agreed to open a rulemaking on the subject. Of some controversy, though, was the stipulation that to qualify for roaming protection, carriers must not only have bought licenses in the area, but have built out their networks. Companies who bought licenses in last year's Advanced Wireless Auction may be affected, as many have not built out yet.

D. Other August FCC Activity.

1. USF Protections Strengthened.

On August 29, the FCC released an order that expands the scope of punishment for defrauding the Universal Service Fund ("USF"). Previously, participants could only be debarred if they defrauded schools and libraries, known as the E-Rate Program. Now the possibility of sanctions has been expanded to encompass all aspects of the USF, including high-cost, rural health care and low-income programs.

2. Long Distance and Local Rules for Bells Lessened.

Late on August 31, the FCC gave Bell Operating Companies ("BOCs") more opportunity to integrate their long distance and local service. BOCs like AT&T and Verizon will not face tariffs and other penalties for not separating the services. The Commission is believed to have acted because of an AT&T Forbearance Petition on the same matter that would have taken effect Friday.

E. Next Commission Meeting.

The September open meeting is scheduled for Tuesday the 11^th at 9:30 AM.

III. National Telecommunications and Information Administration (NTIA)

IBM Team to Lead DTV Coupon Program.

In August, the NTIA awarded an IBM-led team a $120 million contract to organize and implement the DTV coupon program. On February 17, 2009, televisions will not longer receive analog signals and by then consumers must have converter boxes for digital signals. The move won high praise from consumer groups such as CEA and NAB.

IV. Antitrust Agency Activity/Deal Announcements

Parties File Comments on XM-Sirius Merger.

In July, parties filed comments on the proposed merger between satellite radio providers XM and Sirius. NAB contended that, when the FCC set up satellite digital audio radio service (DARS) in 1997, it intended the service to contain two distinct competitors. Any merger between those two, NAB argued, would constitute a monopoly and thereby raise prices and reduce programming for consumers. Other opponents, such as Media Access Project (MAP), claimed that the satellite radio providers use a overly broad definition of their service when they posited inclusion with a market including broadcast radio, iPods, and CDs. MAP maintained that XM and Sirius represent a distinct market and should be treated as such.

Supporting comments were filed by former Attorney General Edwin Meese, a few consumer groups, and supply companies. Most argued that satellite radio providers should be considered within the larger audio market; they also touted the benefits the merger would provide consumers in terms of programming choice and availability.

Washington Update - June 2007

Sheppard Mullin — Tue, 03 Jul 2007 09:18:58 -0500

I. Legislative Branch Activity

A. Senate Committee Passes Caller ID Spoofing Bill.

On June 28, the Senate Commerce Committee, by a voice vote, passed an anti-spoofing bill (S-704). This bill orders the FCC to write rules within 6 months of enactment and would impose civil and criminal penalties up to $10,000 per violation, capped at $1 million. The House passed a similar bill on June 12 (HR-251), which was referred to the Senate Commerce Committee. Little debate occurred and the effort maintains strong bipartisan support.

B. Legislative Calendar.

The House and Senate are not in session from July 2 until July 6.

II. Federal Communications Commission (FCC) Activity

A. June FCC Meeting.

On June 28, the Commission met in Portland, Maine putatively to discuss localism, though attending Commissioners (Chairman Martin remained in Washington, DC) used the forum to discuss topics ranging from ownership diversity to broadcast license renewals to childhood obesity. The one item on the agenda, a NPRM concerning plug-and-play devices, was pulled just 24 hours before the meeting.

B. Other May FCC Activity.

1. Pleading Cycle Established for XM-Sirius Merger (MB Docket 07-57).

The FCC, on June 8, approved the pleading cycle for the merger of XM Satellite Radio Holdings and Sirius Satellite Radio Inc. Comments or Petitions to Deny are due July 9, and the Reply Comments or Oppositions follow on July 24.

Back on February 19, XM and Sirius signed a merger agreement, which calls for the two companies to combine their programming. The merger will have to be approved by both the Department of Justice and the FCC. The sticking point will be what constitutes the market for satellite radio, whether it is narrowly defined or should be expanded to allow competition with FM and AM stations, people with access to the Internet, or owners of other digital music media such as iPods.

2. Comment Period Extended in Multiple Dwelling Unit NPRM (Docket 07-51).

The Commission granted a Motion for Extension of Time submitted by Real Access Alliance and pushed the comment deadline back to July 2. Reply Comments are now due August 1. The Motion argued that commenters needed more time to analyze the Inside Wiring Order (FCC 07-111), which the FCC released on June 8. In March, the FCC adopted a Notice of Proposed Rulemaking that sought comment on exclusive contracts for video services in multiple dwelling units (MDUs), such as apartment buildings.

3. Commissioner Tate to Be Re-Nominated.

The White House announced its intention to re-nominate Commissioner Tate to serve a 5 year term, which will end in 2012. Commissioner Tate has been filling the unexpired term of Chairman Powell. Her term was to have ended June 30, 2007.

4. FCC Acts Upon Set-Top Box Waiver Requests.

On Friday June 29, the Commission released six separate orders concerning set-top box rules and waiver requests. As of July 1, 2007, set-top boxes with integrated security may no longer be deployed by cable systems. In the Commission's latest order, those cable systems which have converted to all-digital carriage and those that will become all-digital by February 17, 2009, were granted an omnibus waiver. The FCC denied a waiver filed by NCTA, which filed on behalf of all cable operators.

On the same day, the FCC released a Third Further Notice of Proposed Rulemaking concerning the bi-directional capability of CableCARDs and whether these rules should apply to all MVPDs.

C. Next Commission Meeting.

The July open meeting date and agenda are not yet available.

III. Litigation

A. Judge Hears Oral Arguments in Vonage-Verizon Case.

On June 25, oral arguments were held in the Vonage-Verizon patent dispute case before the U.S. Court of Appeals for the Federal Circuit. Lawyers for Vonage argued that U.S. District Court Judge Claude Hilton did not give sufficient instructions to the jury. Specifically, Vonage accused Judge Hilton of misinterpreting conditional access and failing to define two other terms – translation and destination access. Verizon countered that such arguments have their place and time in the lower court, but were too late now.

One of the three judges on the panel, Judge Timothy Dyk, offered some hope to Vonage when he stated that there could be some "middle ground" for those patent infringers that might be put out of business due to a ruling. He asked whether Vonage should be allowed time to develop a workaround as a part of the injunction.

B. FCC Indecency Policy Found Unlawful.

On June 5, the U.S. Court of Appeals for the Second Circuit sided with the broadcast networks by striking down FCC policy concerning "fleeting expletives." The divided panel of judges sent the case back to the Commission to be rewritten, finding that such fleeting expletives may be used out of frustration or excitement, and do not always have obscene connotations. They cited uses of such language by President Bush and Vice-President Cheney, examples also given by the network lawyers. Chairman Martin expressed disappointment with the ruling and stated that the FCC is considering whether to appeal the case before all the judges of the appeals court, or to take the case directly to the Supreme Court.

Washington Update - May 2007

Sheppard Mullin — Tue, 05 Jun 2007 16:44:20 -0500

I. Legislative Branch Activity

A. Inouye Introduces Broadband Deployment Bills.

On May 24, Sen. Inouye (D-HI) presented a bill (S.1492), which seeks to improve upon the quality of data collection used for FCC broadband status reports. Instead of the current standard use of 5 digit zip codes, the bill calls for expansion to 9 digit codes, thus highlighting underserved areas more precisely. Sen. Inouye's bill demands that the FCC reevaluate its 200 kbps definition of high-speed service, and it would create a "2^nd generation" level that has enough bandwidth for uses like streaming video.

B. Legislative Calendar.

The House and Senate will reconvene from Memorial Day break on June 4.

II. Federal Communications Commission (FCC) Activity

A. May FCC Meeting.

1. FCC Implements Katrina Panel Recommendations.

The Commission adopted an Order (FCC 07-107) that implements several recommendations of the FCC’s Independent Panel Reviewing the Impact of Hurricane Katrina on Communications Networks. This panel was intended to improve emergency response capabilities of first responders and ensure all levels of government can communicate effectively during a crisis. The Order extends Special Temporary Authorizations that exempt Bells from enforcement of section 272 by one year. This would allow them to share non-public network information with their section 272 and other affiliates when planning for a disaster.

The Order also states that LECs and CMRS providers must have emergency back-up sources for infrastructure powered by local commercial power (including cell sites, central offices, remote switches, and digital loop carrier system remote terminals). These LECs and CMRS providers, as well as some VoIP providers, will have to submit reports to verify the strength and resiliency of their 911 systems.

2. FCC Seeks to Enhance 911 Accuracy and Reliability.

The Commission approved a Notice of Proposed Rulemaking (FCC 07-108) on possible alterations to 911 accuracy and reliability requirements for wireless carriers and for VoIP providers. Among other matters, the NPRM tentatively concludes that wireless carriers should be required to meet Phase II location accuracy standards under Section 20.18(h). The Commission also asks whether wireless carriers should be afforded a delay to implement any such rule change.

3. Commission Attempts to Strengthen EAS.

The FCC adopted a Second Report and Order and Further Notice of Proposed Rulemaking (FCC 07-109) that hopes to strengthen the nation's emergency alert system ("EAS"). The Order promotes the development of fully digital technologies and delivery systems. Specifically, it requires that EAS participants accept text, audio, and video messages on a common platform, to ensure more efficient transmission.

The FNPRM seeks comment on methods to deliver better warnings to persons with disabilities and non-English speakers.

4. Disability Access Requirements Extended to VoIP Services.

Also at the May open meeting, the Commission sought to extend the disability access requirements of Sections 225 and 255 of the Communications Act, which currently apply to traditional phone services, to providers of VoIP services and to manufacturers of specially designed equipment used to provide those services. The full text of the Report and Order (07-110) has not yet been released.

5. Changes to Multi-Unit Building Service Rules.

The Commission amended its inside wiring rules with the intent of increasing competition for telephone and video services in multi-unit dwellings. Specifically, the FCC clarified that video service competitors need not cut through sheet rock to connect cable wiring and that competing telephone companies must be allowed access to incumbent's inside wire subloops at the terminal block in order to install service. Multi-unit buildings may still, however, sign contracts with one carrier to provide sole access, excluding competitors. The full text of the Report and Order and Declaratory Ruling (FCC 07-111) has not yet been released.

B. Other May FCC Activity.

Joint Board Recommends Universal Service Changes.

On May 1, the Federal-State Joint Board on Universal Service advocated that the Commission take action to inhibit the growth of high-cost universal service support payments. Specifically, the Board recommended an immediate cap be imposed to limit what eligible telecommunications carriers may receive. On May 14, the Commission issued a Notice of Proposed Rulemaking (FCC 07-88) seeking comment on this topic.

C. Next Commission Meeting.

The next open Commission meeting is scheduled for June 28, 2007. The agenda is not yet available.

III. Litigation

A. Vonage, Verizon Battle in Courts over Patent Dispute.

On May 3, the U.S. Court of Appeals, Federal Circuit, refused to remand Vonage's patent infringement case against Verizon back to U.S. District Court Judge Claude Hilton. Vonage had asked for the remand after the Supreme Court decision in KSR v. Teleflex, which modified the standard used by judges in reviewing patent claims. Meanwhile, the appeals court is considering a broader appeal by Vonage challenging Judge Hilton's initial ruling. Vonage's brief on that appeal was filed May 9 and the oral arguments are scheduled for June 25.

B. FCC Indecency Policy Takes Hit.

On June 5, the U.S. Court of Appeals for the Second Circuit sided with the broadcast networks by striking down FCC policy concerning "fleeting expletives." The divided panel of judges sent the case back to the Commission to be rewritten, arguing that such fleeting expletives may be used out of frustration or excitement, and do not always have obscene connotations. They cited uses of such language by President Bush and Vice-President Cheney, examples also given by the network lawyers. Chairman Martin expressed disappointment with the ruling and stated that the FCC is considering whether to appeal the case before all the judges of the appeals court, or to take the case directly to the Supreme Court.

IV. Antitrust Agency Activity/Deal Announcements

Private Equity Firms to Acquire Alltel for $27.5 Billion.

On May 21, the private equity firms TPG Capital and GS Capital Partners made a $27.5 billion bid to purchase telecom company Alltel. Conditioned on the approval of the Justice Department and FCC, the buyout will be one of the largest in telecom history, behind only the Cingular/AT&T and Sprint/Nextel mergers. Merger approval is seen as likely.

Washington Update - March/April 2007

Sheppard Mullin — Fri, 04 May 2007 13:58:23 -0500

I. Legislative Branch Activity

A. Senate Commerce Committee Meets to Discuss Universal Service.

On March 1, the Senate Commerce Committee invited Commissioners Tate and Copps, as well as other regulatory officials, to discuss the Universal Service Fund (USF). Senators from rural areas demanded that broadband needs to play a part in the USF program. Commissioner Copps endorsed adding broadband, but added that he could probably not gather the two additional votes necessary. Commissioner Tate said, while she believes the FCC has the authority to make the change, that adding broadband to the USF requires further study. Other panelists insisted that Congressional action would be necessary to ensure that USF issues are addressed quickly, as changes by the FCC could take several years.

B. House Increases Oversight Over Telecom.

Rep. Markey (D-MA), Chairman of the House Subcommittee on Telecommunications and the Internet, has increased oversight over the FCC and National Telecommunications and Information Administration (NTIA) with numerous hearings. Throughout March and April, the Committee held a total of seven hearings concerning media, broadband, spectrum management and wireless issues, and general oversight over the FCC and NTIA.

C. Universal Service Fund Bills Introduced to House.

On April 26, Reps. Rick Boucher (D-VA) and Lee Terry (R-NE) introduced the Universal Service Fund Act of 2007. Their bill, using language from a bill Sen. Stevens' (R-AK) submitted earlier in the 110^th Congress, aims to use USF monies for broadband while curbing the overall growth of the Fund. The bill would expand the base of contributors to include VoIP, Cable Internet, DSL, WiMAX, and broadband over power lines. The FCC would still have to decide the correct contribution formula.

D. Senate Judiciary Passes Data Mining Bill.

On April 12, the Senate Judiciary Committee passed the Federal Agency Data-Mining Reporting Act of 2007. The bill, which passed on a voice vote, requires the head of each federal department or agency to report to Congress any use of data mining. It also requires annual updates on any new uses. Except when dealing with classified programs, these reports must be released to the public.

E. Legislative Calendar.

The House and Senate will not be in session from May 28 through June 1.

II. Federal Communications Commission (FCC) Activity

A. April FCC Meeting.

1. FCC Requires Retailers to Fully Inform Consumers About Analog TV Equipment Limitations as Transition to Digital Approaches.

The FCC adopted an Order that requires retailers to inform consumers when equipment is being sold as analog only. The FCC reasoned that because many consumers are not aware of the February 17, 2009 cut-off date, retailers must be explicit when selling analog televisions.

2. FCC Initiates Third Review of DTV Transition. (Docket 07-91)

The Commission initiated its third review of the transition from analog to digital television through a Notice of Proposed Rulemaking, which proposes deadlines to facilitate the digital transition of full-power stations. According to the FCC, the NPRM takes the following actions to assist in that transition:

Restricts the grant of future extensions of time to construct digital facilities;
Offers expedited processing to stations applying for a construction permit for their post-transition channel based on the new DTV Table of Allotments;
Examines the circumstances in which stations may reduce or terminate analog service to facilitate construction of post-transition facilities;
Permits stations that have different pre-transition and post-transition channels to devote their resources to building their post-transition channel;
Requires stations by December 1, 2007 to file a form with the Commission detailing the current status of the station’s digital transition, the additional steps the station must take before the transition deadline, and a plan for how the station intends to meet the deadline; and
Establishes February 17, 2009 as the construction deadline for stations with new channel allotments in the upcoming new DTV Table of Allotments.

3. FCC Seeks Comment on Dual Analog/Digital Broadcast Signal Delivery After the Digital Television Transition. (Docket 98-120)

Also at the April meeting, the FCC issued a Second Further Notice of Proposed Rulemaking seeking comment on proposals designed to ensure that cable subscribers with analog televisions will receive must-carry local channels after the February 17, 2009 transition. Noting that many cable subscribers still have analog cable, the FNPRM seeks comment on whether rules should be adopted to require cable operators to: "(1) carry the signals of all must-carry stations in an analog format to all analog cable subscribers, or (2) for all-digital systems, carry those signals only in digital format, provided that all subscribers have the necessary equipment to view the broadcast content."

4. FCC Addresses Rules Governing Commercial Wireless and Public Safety Licenses in the 700 MHz Spectrum Band.

A closely watched item on the agenda was the adoption of rules for the 700 MHz auction. Disagreements within the Commissioners delayed the meeting for over 8 hours, and even with this added time they were not able to agree upon a specific band plan. Instead, the FCC adopted a FNPRM that seeks comment on several different ideas. Chairman Martin had pressed to divide the upper 700 MHz band into large blocks, which would enable a bidder to win a nationwide license. It would also contain no cellular market areas (CMAs) in the upper band and only one CMA block in the lower 700 MHz band. Democratic Commissioners, joined by Commissioner McDowell, strongly opposed the plan. Text of the rulemaking has not been released yet. The Commission has limited time to act, as Congress has set January 28, 2008 as the final day the auction can begin.

B. Other April FCC Activity.

1. FCC Attempts to Prevent Pretexting.

In an effort to protect personal phone records, the FCC adopted additional safeguards to prevent unauthorized access to customer proprietary network information (CPNI). Some of those safeguards include: carrier authentication requirements, notice to customers of account changes, notice of unauthorized disclosure of CPNI, joint venture and independent contractor use of CPNI, and annual CPNI certification.

2. FCC Terminates Proceeding on the Use of Cellular Phones Onboard Aircraft. (Docket 04-435)

The FCC released a Memorandum Opinion and Order that ends its proceeding on cell phone use aboard airplanes. They cited insufficient technical information concerning possible interference, as well as incomplete research from the airlines, manufacturers, and wireless carriers.

3. Broadcasters Pay $12.5 Million to Resolve Possible "Payola" Violations.

On April 13, the FCC agreed to consent decrees with CBS Radio, Citadel Broadcasting, Clear Channel, and Entercom Communications worth $12.5 million. The payments closed investigations into allegations that each violated the FCC's sponsorship identification rules, which is commonly called payola. In other words, each entity accepted payments from record labels in exchange for airplay, and did not disclose those transactions.

4. FCC Begins Inquiries on Broadband Data and Broadband Deployment. (Docket 07-45 for NOI and Docket 07-38 for NPRM)

On April 16, the FCC released two documents concerning broadband deployment. First, a Notice of Inquiry (NOI) attempts to determine whether broadband services are getting to all Americans in a reasonable and timely manner. Among other questions, the NOI asks: whether the definition of broadband should change based on technological advances; whether consumers are adopting new services; and whether rural and hard-to-serve areas are on a level playing field.

At the same time, the Commission issued a Notice of Proposed Rulemaking to improve upon the data collection which would set broadband policy in the future. Topics include: possibly modifying speed tier information, improving collection of data concerning wireless broadband service, the best way to measure subscribers of VoIP, and gathering more accurate data on current broadband deployment in general.

C. March FCC Meeting.

The Commission held an open meeting on March 22, 2007 to discuss numerous topics.

1. FCC Initiates Rulemaking to Evaluate Access to Multiple Dwelling Units for Video Providers. (Docket 07-51)

The FCC adopted a Notice of Proposed Rulemaking that seeks comment on exclusive contracts for video services in multiple dwelling units (MDUs), such as apartment buildings. The NPRM will determine the current environment for service providers attempting to gain access to MDUs and the impact of exclusive contracts on consumer choice and video competition. The Commission tentatively concluded in the NPRM that it has the authority to regulate exclusive contracts in MDUs when it deems that competition and deployment are being impeded.

2. FCC Adopts Rules for Digital Audio Broadcasting. (Docket 99-325)

The Commission adopted a Second Report and Order, First Order on Reconsideration, and Second Further Notice of Proposed Rulemaking, which includes several rules to allow terrestrial radio broadcasters to increase local service in their communities.

The Order:

Refrains from imposing a mandatory conversion schedule for radio stations to commence digital broadcast operations;
Allows FM radio stations to operate in the extended hybrid digital mode, which allows for a higher bit-rate;
Requires that each local radio station broadcasting in digital mode to simulcast a digital signal of at least comparable audio quality to its analog signal;
Permits a radio station to transmit high quality audio, multiple program streams, and data casting services at its discretion;
Allows radio stations to time broker unused digital bandwidth to third parties, subject to certain regulatory requirements;
Applies existing programming and operational statutory and regulatory requirements to all free DAB programming streams;
Authorizes AM nighttime operations;
Dismisses several pending Petitions for Reconsideration and Petitions for Rulemaking that asked, inter alia, the Commission to reconsider the adoption of iBiquity’s in-band, on-channel (IBOC) system as the technology chosen for DAB transmission
Seeks further comment on appropriate limits to the amount of subscription services that may be offered by radio stations; and
Seeks comment on whether the Commission should adopt any new public interest requirements for digital audio broadcasters.

3. FCC Evaluates 76 Noncommercial Educational FM Application Groups.

The Commission resolved several long pending mutually exclusive applications for new or modified noncommercial educational (NCE) FM broadcast service to 76 different communities. The Commission plans to open a filing window for new NCE FM stations in the fall of 2007. This Order provides a chart summarizing the outcome of these potential new applicants.

4. FCC Approves Citadel/Disney Radio Transaction.

The FCC approved a transaction in which Citadel Broadcasting Corporation will acquire 24 radio stations from subsidiaries of The Walt Disney Company.

5. FCC Grants 182 E-Rate Appeals. (Docket 02-06)

The FCC granted 182 separate appeals from schools or libraries which had either been denied or received reduced funding under the E-rate program. In every case, the FCC held that the entity had been denied funding due to a technicality or minor error. Under the E-rate program, eligible schools and libraries may apply for discounts for telecommunications services, Internet access and internal connections. The FCC remanded the applications back to the Universal Service Administrative Company and directed them to complete review in 90 to 120 days.

6. FCC Launches Inquiry into Broadband Market Practices. (Docket 07-52)

The Commission issued a Notice of Inquiry that seeks information on the behavior of broadband market participants, including: how providers are managing increased traffic, price differences for different Internet speeds, possible policy differences for those providers that charge end users for access versus those that do not, and how consumers are affected by these policies. Comments are due on June 15 and replies a month later on July 16.

7. FCC Grants Application for Transfer of Control of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) from Verizon Communications, Inc. to America Movil, S.A. de C.V.

The FCC adopted a Memorandum Opinion and Order and Declaratory Ruling that grants the application for transfer of control of Telecomunicaciones de Puerto Rico, Inc. (TELPRI) and petition for declaratory ruling filed by Verizon Communications, Inc. and América Móvil, S.A. de C.V. (América Móvil).

8. FCC Adopts Annual Report on State of Competition in Satellite Industry. (Docket 06-67)

As directed by Congress, the FCC issued its first annual report describing the state of competition in the communications satellite service industry. The report covers data from 2000 to 2006 in both the wholesale and retail markets. The Commission finds sufficient competition at present, and reports that the satellite industry provides many benefits to consumers, the government, and American industry.

9. FCC Classifies Wireless Broadband Internet Access Service as an Information Service.

As expected, the FCC declared that wireless broadband Internet service should be classified as an information service under the Communications Act. This places wireless access under the same regulatory rules that other broadband providers face. By definition, the Commission understood wireless service to be that which uses spectrum, wireless facilities, and technologies to provide high-speed access. Specifically, the Commission found that the “transmission component” behind wireless access is "telecommunications" and that the “provision of this telecommunications transmission” as a part of a wireless network is an information service.

10. FCC Seeks Comment on Permitting the Use of Smaller Antennas by Fixed Service Operators in the 11 GHz Band.

The FCC adopted a Notice of Proposed Rulemaking that seeks comment on the installation of smaller antennas by Fixed Service operators in the 10.7-11.7 GHz band, and whether this service would be in the public interest or would cause too much interference.

11. FCC Addresses Rules for Private Land Mobile Radio Systems to Transition to 6.25 kHz Narrowband Technology. (Docket 99-87)

Finally, the Commission issued a Third Report and Order that declined to establish a fixed date for private land mobile radio systems to transfer from the 150-174 MHz and 421-512 MHz to 6.25 kHz narrowband technology. It does strongly urge licensees to make that transition directly, however, rather than first adopting the 12.5 kHz technology as a stopgap. The Order also moves the implementation date of the 6.25 kHz technology to January 1, 2011.

D. Other March FCC Activity.

1. FCC Releases Text of AT&T Inc.-BellSouth Corp. Merger Order.

On March 26, the Commission released a Memorandum Opinion and Order approving the merger of AT&T and BellSouth. The FCC concludes that five benefits to consumers will result from the merger: deployment of broadband through more areas, increased competition for advanced pay television, improved wireless products, enhanced national security, and better disaster response and preparation. In its analysis of competitive effects of the merger, the Commission focused on six key groups of services: special access competition, retail enterprise competition, mass market voice competition, mass market Internet competition, Internet backbone competition, and international competition. The Order also details the conditions of merger approval.

2. FCC Approves Transfer of Univision Communications Inc., and Enters Into $24 Million Consent Decree With Univision Concerning Children's Programming Requirements.

On March 27, the FCC approved transfer of control of Univision Communications, from current shareholders to Broadcasting Media Partners. In a related action, the FCC and Univision agreed upon a $24 million consent decree to resolve disputes concerning violations of the FCC's children’s programming rules.

E. Next Commission Meeting.

The next open Commission meeting is scheduled for May 31, 2007. The agenda is not yet available.

III. NTIA

NTIA Issues Final Rule on Converter Box Coupon Program.

On March 12, the NTIA released its final order concerning digital-to-analog converter boxes. In the order, the NTIA states that each household will be eligible to apply for up to two $40 coupons in order to purchase such converter boxes. An initial allotment of $990 million is available, and the coupons may begin to be acquired on January 1, 2008. If initial funds are used up, another $510 million is available, but this time coupons will only be available to those households without pay-TV subscriptions.

IV. Litigation

A. Vonage, Verizon Battle in Courts over Patent Dispute.

Throughout March and April, Vonage and Verizon waged legal battles over certain patents, which Verizon claims Vonage infringed upon. Back on March 8, a federal jury decided that Vonage must pay $58 million in damages to Verizon for infringing upon three of the five patents under review. It did, however, decide that Vonage's actions were not willful, which kept the damages lower. Matters became worse for Vonage when, on March 26, U.S. District Court Judge Claude Hilton issued, but did not sign, a permanent injunction barring use of Verizon patents. Since it is speculated that Vonage does not have a technological work-around, an injunction could cripple Vonage service.

On April 4, Judge Hilton issued a stay on the injunction, which would allow existing Vonage customers to continue using the Verizon patents. Some legal confusion then arose as Vonage filed an appeal the same day with the U.S. Appeals Court, Federal Circuit. An emergency full stay was granted. This stay would override Judge Hilton's partial stay, and would allow Vonage to apply these patents to new and existing customers while legal battles continue. Verizon is appealing the emergency full stay on the ground that Judge Hilton's partial stay was never formally issued, and therefore, it cannot be appealed. Both Verizon and Vonage filed comments on the emergency stay late in April and a decision is still pending.

B. Powers Under Tunney Act More Limited.

On March 30, U.S. District Judge Emmet Sullivan gave approval to the SBC-AT&T and Verizon-MCI mergers, saying portions under his jurisdiction to review were deemed in the public interest. Judge Sullivan added that his role, under the Tunney Act, is limited to determining if consent decrees are in the public interest. He is not to examine whether mergers violate antitrust laws or whether they, in their entirety, meet the public interest. Judge Sullivan wrote that arguments against the consent decrees went beyond the narrow scope of the Tunney Act and DOJ responses were reasonable.