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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 Twelve of the 93 notices were withdrawn.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.

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:
 

1. 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;
    
2. No technical data for development or production are transferred with the defense article; and
    
3. 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

At issue in the NOI are three regulatory alternatives:
 

1. 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.
    
2. Reclassify broadband service as a “telecommunications service” under Title II and apply the full weight of “common carrier” regulations to broadband providers.
    
3. 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

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.

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

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

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

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

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

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.

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.

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. 

A. FCC Commissioners Go Before Senate Commerce Committee.

On February 1, all five FCC Commissioners met with the newly Democratically controlled Senate Commerce Committee. Committee Chairman Senator Inouye (D-HI) expressed concern over a special access provision in the AT&T/BellSouth merger and questioned Chairman Martin about his stated qualms over its legality. Many lawmakers were eager to discuss the country’s low standing worldwide in broadband deployment. Martin responded that making wireless broadband an information service might be possible and would ease regulations that inhibit expedited growth.  Other matters brought up by Senators included the privacy of phone records, E-911, the Universal Service Fund, and public input on any new broadcast ownership rules.

B. Future Committee Hearings.

On March 1, the Senate Commerce Committee will meet at 10:00 am to discuss Universal Service. Commissioners Copps and Tate will be present, along with industry leaders and regional public service commissioners.

Also on March 1, at 10:30 am, the House Energy and Commerce Subcommittee on Telecommunications and the Internet will meet. Their topic will be the “Digital Future of the United States: Part I — The Future of the World Wide Web.” The House Judiciary Committee is holding a meeting on February 28 concerning the proposed XM-Sirius merger.

C. Legislative Calendar.

The House and Senate are in session for all of March.

II. Federal Communications Commission (FCC) Activity

A. FCC Meeting.

The Commission held an open meeting in Harrisburg, PA on February 23, 2007 to discuss the 2006 broadcast ownership proceeding. This was the third in a series of six meetings concerning broadcast ownership. 

B. Other FCC Activity.

1. FCC Budget for 2008 Announced.

In February, President Bush released his budget for the fiscal year 2008. The proposed budget includes $313 million allocated for the FCC. Currently, the FCC receives $289.8 million annually. The amount covers all operations as well as $1.5 million for education on the DTV transition.

2. Staff Changes at the FCC.

·        Derek Poarch was named Public Safety and Homeland Security Bureau Chief.

C. Next Commission Meeting.

The date and agenda for the March public meeting is not yet available.

III. Antitrust Agency Activity/Deal Announcements

XM-Sirius Announce Proposed Merger.

On February 19, XM Satellite Radio Holdings and Sirius Satellite Radio Inc. 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.

IV.  NTIA

NTIA Cedes Control of Public Safety Program to DHS.

The NTIA, in a Memorandum of Understanding, agreed to pay the Department of Homeland Security (DHS) to run the Public Safety Interoperable Communications (PSIC) Grant Program, which is supposed to enable first responders to communicate better. These responders are more familiar with the DHS system, a central reason behind the switch according the DHS. House Telecom Subcommittee Oversight Chairman Stupak (D-MI) was angered with the announcement. He said that the NTIA was the intended administrator under the DTV law and that both parties are clearly ignoring Congressional intent. 

A. Optimism for Major Telecom Legislation Waning.

As Congressmen settled into the new Congress in January, staffers for Senate Commerce Committee Chairman Daniel Inouye confirmed that he will seek to pass smaller, more targeted communications bills in this session. The key telecom companies such as Verizon, BellSouth, and AT&T, who supported GOP-led legislation, are expected to withdraw support for any major Democratic measures. Inouye has called for a hearing on the state of the telecom marketplace for February 1. All five FCC commissioners will be there to present their testimonies and answer what are expected to be tough questions from Democrats.

In the House, House Energy and Commerce Telecommunications and the Internet Subcommittee Chairman Rep. Edward Markey is planning a series of hearings on net neutrality. In January, Rep. Markey introduced stand-alone legislation on the topic.

B. Legislative Calendar.

The House and Senate will adjourn on February 19 and resume on February 26 due to President’s Day.

II. Federal Communications Commission (FCC) Activity

A. FCC Meeting.

The Commission held an open meeting on January 17, 2007 to hear presentations regarding implementations of the agency’s strategic plan and a comprehensive review of FCC policies and procedures.  Panelists included Chiefs of the Consumer & Governmental Affairs Bureau, the Enforcement Bureau, the Public Safety and Homeland Security Bureau, the Wireless Telecommunications Bureau, the Office of Engineering and Technology, the International Bureau, the Media Bureau, and the Wireline Competition Bureau.

B. Other FCC Activity.

1. FCC Releases Declaratory Ruling Concerning Interstate TRS Fund.

On January 11, the FCC released the Declaratory Ruling concerning IP captioned telephone service (IP CTS).  In December, the FCC had stated that it is a form of telecommunications relay service (TRS) and is therefore eligible for the Interstate TRS Fund. The ruling was in response to a petition filed by Ultratec, Inc., and received widespread support from the disability community.

IP CTS should give consumers the choice of using a computer, PDA, or wireless device to make a call, without having to purchase special telephone equipment.

2. FCC Addresses E-911 Compliance.

The FCC released orders addressing nine Petitions for Waiver from wireless companies concerning the E-911 location-capable handset penetration deadline. The Commission referred four companies, Sprint, Alltel, U.S. Cingular, and Nextel to the Enforcement Bureau. Others, Verizon, Leap, QWest Wireless, and Centennial were warned to come into compliance, but were not referred. Wireless carriers had been ordered to have 95% of customer’s phones contain location-capable handsets by December 31, 2005. Forfeitures from these proceedings, especially for Sprint, are expected to reach millions of dollars.

3. Staff Changes at the FCC.

• Fred Campbell was named Chief of the Wireless Telecommunications Bureau;
• Monica Desai was named Chief of the Media Bureau;
• Catherine Seidel was named Chief of the Consumer and Governmental Affairs Bureau;
• Deputy General Counsel Eric D. Miller is leaving and will be replaced by Joseph R. Palmore.

C. Next Commission Meeting.

The next Commission meeting is currently scheduled for 9:30 AM on Friday, February 23, 2007. The agenda is not yet available.

III. Antitrust Agency Activity/Deal Announcements

News Corp. Files for Transfer of DIRECTV.

On January 29, News Corp. filed an application with the FCC to ask permission for the transfer of its interest in DIRECTV to Liberty Media. Liberty will also receive three regional sports networks (RSNs) and $550 million in cash. In return, Liberty has agreed to give up its stake in News Corp. and will abide by the program access and RSN conditions that were established when News Corp. acquired is interest in DIRECTV.  The petition argues that the agreement would reduce the vertical integration of DIRECTV by placing them in a company with less ownership in broadcast stations and RSNs.

IV. Litigation

Supreme Court Refuses to Hear Distant Networks Case.

The U.S. Supreme Court refused to hear EchoStar’s appeal over Judge William Dimitrouleas’ decision to block distant network service for over 900,000 customers.  EchoStar had argued that the injunction unfairly shuts off service to 850,000 of its customers. The decision does not impact the customer’s ability to receive signals from an outside company, National Programming Service (NPS). The National Association of Broadcasters has challenged the third-party involvement, stating that EchoStar is attempting to evade the injunction.