Exclusive Service Contracts for Provision of Video Services in Multiple Dwelling Units
 
November 15, 2007
 
Eric Fishman - New York

In a long-awaited Report and Order and Further Notice of Proposed Rulemaking released November 12, 2007, the FCC has banned the use of exclusivity clauses for the provision of video services to multiple dwelling units (MDUs) and other real estate developments. Such clauses are typically found in contracts between MDU owners, on the one hand, and cable operators or other multichannel video programming distributors (MVPDs), on the other. In reaching this decision, the Commission found that such clauses harm competition by barring new entry and competition for both video and the so-called “triple play” of video, voice and broadband Internet access service, as well as discouraging the deployment of broadband facilities to American consumers.

The Scope of the FCC’s Ruling

What Is a MDU?

Finding that nearly 30 percent of all Americans live in MDUs, and that these numbers are growing, the FCC has defined the term MDU in its ruling to apply to most but not all centrally managed real estate developments, including but not limited to apartments, cooperatives, condominium buildings, gated communities, mobile home parks and garden apartments. In each case, these developments are characterized as being collections of private individual households with residents remaining for lengthy, indefinite periods of time, each in a dwelling space that is distinctly separate with some shared common spaces that require central management. The term MDU does not include time share units, academic campuses and dormitories, military bases, hotels, rooming houses, jails, prisons, halfway houses, hospitals, nursing and other assisted living places, and other group quarters characterized by institutional living, high transience and, in some cases, a high need for security.

What Is an Exclusivity Clause?

For purposes of its ruling, the FCC has defined the term “exclusivity clause” to mean a contract provision which grants to a cable operator or other provider of MVPD services an exclusive right to provide any video programming service (alone or in combination with other services) to a MDU. Such a “building exclusivity” clause would prohibit any other MVPD from any access whatsoever to the premises of the MDU building or real estate development. For purposes of the FCC’s ruling, the term does not include “wire exclusivity” clauses, which allow more MVPDs in a MDU or real estate development but prohibit them from using the existing wires in the MDU or real estate development (which may be owned by the MVPD or by the MDU owner), or “marketing exclusivity” clauses which allow other MVPDs into a MDU or real estate development, but prohibit the owner from marketing their services. For the time being, these latter types of exclusivity provisions are lawful.

Which Providers Does the New Rule Govern?

The FCC’s prohibition on exclusive arrangements extends to all cable television operators and other entities that are subject to Section 628 of the Communications Act of 1934, as amended, 47 U.S.C. § 628. In pertinent part, Section 628 of the Act makes it “unlawful for a cable operator … to engage in unfair methods of competition or unfair or deceptive acts or practices, the purpose or effect of which is to hinder significantly or to prevent any multichannel video programming distributor from providing satellite cable programming or satellite broadcast programming to subscribers or consumers.” Section 628 further provides that its provisions apply to common carriers or affiliates that provide video programming by a means direct to subscribers and to operators of open video systems. The prohibition, however, does not apply to all MVPDs. Excluded from its ambit are direct broadcast satellite services, wireless multichannel multipoint distribution services, television receive-only satellite program distributors, and so-called private cable operators, or PCOs (also known as SMATVs (Satellite Master Antenna Television providers)) which operate video distribution facilities using closed transmission paths without using any public right-of-way.

Prohibition of Exclusivity Clauses

The FCC’s prohibition of exclusivity clauses is both prospective and retroactive. Specifically, 30 days after the Commission’s Report and Order appears in the Federal Register, no cable operator or MVPD subject to Section 628 of the Act may enforce or execute any provision in a contract that grants it the exclusive right to provide any video programming service (alone or in combination with other services) to a MDU. The new rule prohibits both the enforcement of existing exclusivity clauses and the execution of new ones. Any such exclusivity clause will be null and void. The new rule, however, does not require that any new entrant be given access to any MDU. A MDU owner still retains the rights it has under relevant state law to deny a particular provider the right to provide service to its property. Nor does the new rule affect other provisions in contracts containing exclusivity clauses.

Further Notice of Proposed Rulemaking

As noted above, the FCC’s new rule is limited to those MVPDs covered by Section 628 of the Act, and is limited in its scope in other ways as well. In a Further Notice of Proposed Rulemaking attached to the Report and Order, the FCC has invited public comment on the following two issues:

1) Should the prohibition on exclusivity clauses extend to DBS providers, PCOs and other MVPDs that are not subject to Section 628 of the Act and, if so, by what authority?

2) Should the FCC prohibit exclusive marketing and bulk billing arrangements? If so, should this prohibition be retroactive, or prospective only?

Outstanding Issues and Considerations for Residential and Commercial Property Owners

As the real estate industry is aware, the FCC’s order this week is the latest in a series of efforts by the Commission to promote competition for telecommunications and video services in the commercial marketplace. Over the past few years, these initiatives have included:

• the adoption of rules prohibiting exclusive access agreements between telecommunications service providers and owners of office buildings and other commercial multitenant environments¹

• the adoption and expansion of the so-called OTARD (Over the Air Reception Devices) rules which generally prohibit MDU owners from unreasonably restricting residents’ use of receiving dishes for DBS and other wireless services

• the revision of inside wiring rules which enable building owners to acquire cable inside wiring installed by operators after the terms of their access agreements expire²

The Commission is likely to expand these policies still further in the near future, as the agency has announced that it will soon address the pending issue of whether to bar exclusivity clauses for telecommunications services in residential MDUs.

Both residential and commercial property owners are well advised to keep these regulatory developments in mind as they negotiate and review access agreements with telecommunications service providers, cable operators and other MVPDs. Until recently, the ability of property owners to negotiate these types of agreements has been relatively limited, since in many cases service providers have enjoyed a monopoly for their respective services in their designated service areas. That situation, however, has changed dramatically over the past few years, with the emergence of new technologies, and the leverage of property owners to conduct arms-length discussions on fees, the quality of service, outages and other variables.

Holland & Knight, whose attorneys authored the first model access agreement for telecommunications service providers and commercial building owners on behalf of the Real Access Alliance, continues its active involvement in this area, helping to advise clients as new legal developments and new technologies emerge.

For more information, email Eric Fishman at eric.fishman@hklaw.com or call toll free, 1-888-688-8500.

¹ See Fishman, “Building Access and Speeding the Process with the Model Agreement,” in Holland & Knight Property Writes, Volume 6, Issue 3 (2002).

² See Fishman, “Inside Wiring and Abandoned Cabling: An Update,” in Holland & Knight Property Writes, Volume 10, Issue 1 (2006).