October 17, 2005

Payola and Plugola Scandals Return to Center Stage

Holland & Knight Alert
Charles R. Naftalin

Payola and plugola have been violations of FCC regulation and frequently considered actionable fraud for at least a generation, but recent events have returned them to the public eye. This is especially true based upon the July 2005 settlement between the Office of the New York Attorney General, led by Eliot Spitzer, and music recording giant Sony BMG, and the recent FCC guidance and proceedings concerning so-called video news releases (VNRs). Under the agreement between Sony BMG and the New York Attorney General, Sony BMG agreed to stop inducing radio stations from playing music from Sony BMG record labels with secret payments of cash and gifts, issue a statement acknowledging improper conduct, and make a $10 million payment to state of New York charities focused on music and education appreciation. (A copy of the Attorney General’s press release describing the settlement may be read here. The press release, which states that further investigation is underway, also describes many of the Sony BMG practices which were deemed to be improper as payola or “pay-for-play.”)

Payola is the term used to describe broadcast program material that has been provided to, and aired by, a station for cash or other valuable consideration which lacks accurate sponsorship identification. Plugola is a broadcast endorsement of some kind for which consideration was paid or provided that lacks sponsorship identification.

Provisions of the federal Communications Act and the FCC’s rules require adequate sponsorship identification for all paid programming. “Payment” may be direct or indirect, and in cash, barter, services or anything else of value. For most advertising, no special identification announcement is needed because the ad itself makes it clear what entity purchased the spot. Programming that is not obviously advertising, but for which some consideration was provided to the station, or to an individual at the station who arranged to broadcast the programming, would run afoul of the payola/plugola prohibition. Typical examples are songs (as in the case of Sony BMG), promotional announcements, and in recent times, VNRs.

In addition to cash payments, there are many subtle examples of actionable violations, including the following:

  • A station or DJ is furnished with many extra copies of CDs – more than are needed for routine broadcast purposes – with an express or implied understanding that the music will be broadcast, or broadcast more frequently, because of the “gift” of extra CDs.
  • A station or DJ is provided with “gifts” of concert tickets or extra CDs with an express or implied understanding that the DJ or station will “hype” the artist or event.
  • The provider of a product or service furnishes many more “free samples” than will be needed for a customary “give-away” show, with the understanding that the extras will be kept in return for broadcast opportunities.
  • A government agency, industry group or company provides prepackaged programming for broadcast that resembles a news report (i.e., a VNR), which is not obviously produced by that entity, along with some form of consideration tendered.

Earlier this year, in what may have been the first policy position taken by the Commission under Chairman Martin, the Commission “reminded” all broadcasters of their obligation to identify sponsors of all paid programming, especially VNRs. In addition, Congress approved temporary legislation to prohibit agencies from funding VNRs unless they contain “clear notice” of preparation by the agency. Pending is permanent VNR legislation called the “Truth in Broadcasting Act of 2005,” which would require full sponsorship identification of “prepackaged” news stories provided by any federal agency for broadcast, without regard to the payment of consideration.

FCC or Communications Act-based penalties for payola/plugola violations may be severe. They include fines and imprisonment for up to one year, as well as potential licensing problems in the long-run. There may be serious federal and state or local legal problems as well, as evidenced by the actions prosecuted by the New York Attorney General.

The FCC received an enormous amount of investigative material from the New York Attorney General’s office and it is widely believed that the FCC intends to make payola/plugola its next enforcement “cause.” Once the FCC deals with a number of pending indecency complaints, and has dealt with the substantial telecommunications service issues raised by Hurricane Katrina, investigation of payola and plugola will be a major undertaking. If they have not already, all broadcasters would be well advised to ensure that they observe all relevant best practices to be able to demonstrate full compliance.

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