• An array of technology firms, including major computer and TV-set manufacturers, is pressing federal regulators to enforce new set-top-box rules against the cable industry. Cable operators are resisting implementation of an FCC rule that would ban the deployment of new integrated set-tops after July 1, 2006, effectively meaning that all new boxes would need to function with the CableCARD conditional-access device. The CableCARD mandate is designed to establish a retail set-top market, and the technology firms maintained that the creation of such a market requires that cable operators support the CableCARD in all new boxes that they provide their customers. Cable insists that the mandate would drive up box costs without creating new value for consumers. In a separate letter, Hewlett-Packard joined 11 other companies, including Sharp Electronics Corp. and Dell Inc., in urging the FCC to reject cable’s proposal that the agency should eliminate the ban or postpone its effective date by 18 months. “The only way to ensure that consumers enjoy the benefits of a competitive marketplace is to maintain the requirement that devices supplied by cable operators rely on the same CableCARDs for security that must be used by equipment supplied through competitive retail outlets,” the companies told the FCC in a Feb. 18 letter. One proposal under review calls for retaining the ban but exempting low-cost boxes, but a price level defining “low-cost” was not provided. FCC member Jonathan Adelstein has said it is important for the agency to move quickly on this matter because if the ban is affirmed, cable operators need time to place orders to meet the July 1 deadline.

• On February 22, at least two federal judges indicated that the FCC likely exceeded its authority by imposing rules designed to protect broadcast-TV programming from rampant Internet piracy. The FCC’s broadcast-flag rules – adopted in August 2003 at the urging of Hollywood studios and others – required a wide range of receiver equipment to recognize codes within TV signals that determine the extent to which the programming can be copied and transmitted over the Internet. In doing so, the FCC, for the first time, relied on its “ancillary authority,” rather than on a clear directive from Congress, to impose technical requirements for the design of equipment that receives digital-TV signals. Judge Harry T. Edwards of the U.S. Court of Appeals for the D.C. Circuit stated several times that the FCC’s reliance on its ancillary authority was not only unprecedented, but also far-reaching in terms of expanding the agency’s power over all kinds of industries. FCC attorney Jacob Lewis said the agency’s broadcast-flag rules were tied to its authority to regulate digital-TV stations, both to ensure that digital-TV programming wasn’t stolen and that “high-value” content owners, fearing theft, didn’t prefer cable and satellite because those technologies scramble programming. Lewis said failure to protect digital-TV programming would frustrate the agency’s effort to promote the transition to digital television. The three-judge panel, which also included Judge Judith Rogers, heard 50 minutes of oral arguments in an appeal filed by the American Library Association (“ALA”), the Consumer Federation of America, the Electronic Frontier Foundation and others. These groups are concerned that in its broadcast-flag rules, the FCC, without congressional endorsement, decided to amend copyright law in a way that tightens the fair use of copyrighted material. But the case might not be decided on the merits. Sentelle questioned whether the ALA and other groups had legal standing to challenge the FCC rules, claiming that courts usually don’t extend review to cases that fail to demonstrate specific injury. ALA lawyer Pantelis Michalopoulos said the groups had standing because the FCC’s rules would increase consumer prices and encroach on fair-use rights protected by copyright law. He added that the FCC does not have copyright jurisdiction.

• Also on February 22, SBC Communications Ins. (“SBC”) and AT&T Corp. (“AT&T”) submitted joint filings with the FCC and U.S. Department of Justice, kicking off the formal federal review process aimed at determining that their merger is in the public interest. On January 31, SBC, the second-largest regional phone company in the nation, announced it would buy AT&T, the biggest U.S. long-distance carrier, for about $16 billion. The transaction will make SBC the largest U.S. telecommunications company and ends AT&T’s independence after suffering a two-decade decline after losing its U.S. monopoly. SBC will become the largest U.S. provider of landline and wireless communications service to homes and businesses with about $90 billion in annual revenues.

• On February 10, the FCC resolved two significant issues related to digital cable carriage in a Second Report and Order and First Order on Reconsideration (CS Docket No. 98-120) (“Order”). According to the FCC press release, the Order: (1) affirms the Commission’s tentative conclusion not to impose a “dual carriage” requirement on cable operators (which would have required them to simultaneously carry broadcasters’ analog and digital signals); and (2) affirms the Commission’s prior determination that cable operators are not required to carry more than a single digital programming stream from any particular broadcaster. The Order found that mandatory dual carriage is not necessary either to advance the governmental interests as identified by Congress and the Supreme Court, or to achieve the digital television transition. Regarding the digital multicasting issue, the Commission affirmed its earlier conclusion and declined to require cable operators to carry any more than one programming stream of a digital television station. Although the Commission found that the operative statutory language at issue is ambiguous on the subject of multicast must carry, it also found on the current record, that such a requirement is not necessary to further the purposes of the must carry statute, as defined by the Supreme Court. In the First Report and Order and Further Notice of Proposed Rulemaking (CS Docket No. 98-120) adopted January 2001, the Commission concluded that the statute neither requires nor prohibits the carriage of both a television station’s digital and analog signals, but left the issue of dual carriage to the discretion of the FCC. The FCC sought comment on its tentative conclusion that a dual carriage requirement would violate the First Amendment rights of cable operators. In the First Report and Order the Commission also found that the statutory requirement that cable providers carry the ‘primary video’ of broadcasters meant that broadcasters were entitled to carriage of one digital programming stream, and not multiple programming streams (i.e. “multicasting”).

Authored by:
Olev Jaakson
213-617-5528
ojaakson@sheppardmullin.com