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Just two months after assessing nearly $2 million in fines to cable operators for airing ads for the movie Olympus Has Fallen containing false EAS tones, the FCC today granted an 18-month extension of its 2013 waiver allowing the Federal Emergency Management Agency to continue to use false emergency tones in Public Service Announcements.

In this case, the tone being used is not the “broadcast” EAS tone, but the Wireless Emergency Alert (WEA) tone transmitted to cell phones and other wireless devices in an emergency. In the words of the FCC, “[t]he WEA Attention Signal is a loud, attention-grabbing, two-tone audio signal that uses frequencies and sounds identical to the
distinctive and familiar attention signal used by the EAS.”

According to the FCC’s waiver extension order, the FEMA PSAs are a reaction to the public being “startled or annoyed” when hearing the WEA tone for the first time, and then seeking to turn off all future alerts. The PSAs are aimed at teaching the public how WEA works and how their mobile devices will behave when receiving a WEA alert.

Given these facts, on May 31, 2013, the FCC granted an unprecedented waiver of the prohibition on airing false emergency tones to permit FEMA PSAs containing the WEA tone to be aired. However, that waiver was limited to one year. Since that year is about up, FEMA recently sought an extension, and by today’s order, the FCC has extended the waiver for an additional 18 months.

While FEMA indicates that it believes the announcements have been a success, it continues to receive negative media coverage and individual complaints about the WEA alerts. As a result, it wishes to continue distributing the PSAs for airing and needed today’s waiver to accomplish that.

Of course, while FEMA is the party that sought the waiver, it is broadcasters and cable operators that are typically found liable when a false emergency tone airs. Both of those groups should therefore be concerned that the FCC did not grant an unconditional waiver, but instead extended the waiver only to announcements that “mak[e] it clear that the WEA Attention Signals are being used in the context of the PSA and for the purpose of educating the viewing or listening public about the functions of their WEA-capable mobile devices and the WEA program.” As a result, the FCC warned that “leading off a PSA with a WEA Attention Signal, without warning, may be an effective attention-getting device, but it would violate the conditions of this waiver because of the effect that it could have on the listening or viewing public.”

Broadcasters and cable operators will therefore need to screen all FEMA PSAs containing an emergency tone to ensure it is a WEA (and not an EAS) tone, and that the PSA meets the FCC’s waiver conditions and therefore does not pose a risk of confusing the public as to whether an emergency is actually occurring. In other words, if FEMA runs afoul of this requirement in a future PSA, it is the broadcasters and cable operators airing it who will be facing the emergency.

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Earlier today, the FCC held its monthly Open Meeting, where it adopted rules to implement the Broadcast Television Incentive Auction.You can watch a replay of the FCC’s Open Meeting on the FCC’s website.

Thus far, the FCC has released three documents relating to the actions it took today in this proceeding, as well as separate statements from four of the five commissioners, providing at least some initial guidance to affected parties: (1) a News Release, (2) a summary of upcoming proceedings, and (3) a staff summary of the Report & Order.

At the meeting, the commissioners noted that, when released, the Report and Order will contain a number of rule changes to implement the auction. The major takeaways are:

  • The reorganized 600 MHz Band will consist of paired uplink and downlink bands, with the uplink bands starting at channel 51 and expanding downwards, followed by a duplex gap and then the downlink band;
  • These bands will be comprised of five megahertz “building blocks”, with the Commission contemplating variations in the amount of spectrum recovered from one market to the next, meaning that not all spectrum will be cleared on a nationwide basis, and in some markets, repacked broadcasters will be sharing spectrum with wireless providers in adjacent markets;
  • The FCC anticipates there will be at least one naturally occurring white space channel in each market for use after the auction by unlicensed devices and wireless microphones;
  • The auction will have a staged structure, with a reverse auction and forward auction component in each stage. In the reverse auction, broadcasters may voluntarily choose to relinquish some or all of their spectrum usage rights, and in the forward auction, wireless providers can bid on the relinquished spectrum;
  • In the reverse auction, participating broadcasters can agree to accept compensation for (1) relinquishing their channel, (2) sharing a channel with another broadcaster, or (3) moving from UHF to VHF (or moving from high VHF to low VHF);
  • The FCC will “score” stations (presumably based on population coverage, etc.) to set opening prices in the auction;
  • The FCC will use a descending clock format for the reverse auction, in which it will start with an opening bid and then reduce the amount offered for spectrum in each subsequent round until the amount of broadcast spectrum being offered drops to an amount consistent with what is being sought in the forward auction;
  • The auction will also incorporate “Dynamic Reserve Pricing”, permitting the FCC to reduce the amount paid to a bidding station if it believes there was insufficient auction competition between stations in that market;
  • The rules will require repurposed spectrum to be cleared by specific dates to be set by the Media Bureau, which can, even with an extension, be no later than 39 months after the repacking process becomes effective;
  • The FCC will grandfather existing broadcast station combinations that would otherwise not comply with media ownership rules as a result of the auction; and
  • The FCC continues to intend to use its TVStudy software to determine whether a repacked station’s population coverage will be reduced in the repacking process, despite NAB’s earlier protests that the current version of the software would result in reduced coverage for nine out of ten stations in the country.

Finally, the FCC will be asking for public input on numerous additional issues, such as opening bid numbers, bid adjustment factors, bidding for aggregated markets in the forward auction, dealing with market variations, setting parameters for price changes from round to round, activity rules, and upfront payments and bidding eligibility. The FCC will consider in future proceedings ways to mitigate the impact of repacking on LPTV/TV translators, how to address interference between broadcast and wireless operations, and how best to facilitate the growth of “white spaces” devices in the unlicensed spectrum.

Although today’s Open Meeting and these preliminary documents provide some guidance on many complex incentive auction issues, they only scratch the surface, and there are many blanks the FCC will need to fill in between now and the auction. One of those that broadcasters will be watching very carefully is how the Media Bureau will be handling reimbursement of stations’ repacking expenses. That has turned out to be a very challenging issue in past FCC efforts at repurposing spectrum, and the fact that the amount set aside by Congress for reimbursement might well fall short of what is needed has many broadcasters concerned.

We will know more about this and many other issues when the Report and Order is released, hopefully in the next week or two, but the real answers are going to reveal themselves only very slowly over the next year or two. The FCC has to hope that they will still have broadcasters’ attention by the time we reach that point.

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The FCC just gave broadcasters another reason to answer the door graciously. Earlier this week, the FCC whacked a Pennsylvania Class A Television broadcaster with an $89,200 Notice of Apparent Liability (NAL) for refusing to allow FCC inspectors to inspect the station’s facilities, not just once, but on three different occasions. It is rare to see the FCC show its irritation in an NAL, but the language used by the FCC in this particular NAL leaves no doubt that the Commission was not happy with the licensee, particularly with what the FCC believed was blatant disregard for its authority. As the FCC put it, “this is simply unacceptable.”

Regarding specific rule violations by the licensee, the FCC alleged violations of Section 73.1225(a), which requires a broadcaster to make its station available for inspection by the FCC during normal business hours or at any time of operation; Section 73.1125(a), which requires a broadcaster to maintain a main studio location staffed with at least two employees during regular business hours; and Section 73.1350(a), which requires a broadcaster to operate its station in compliance with the FCC’s technical rules and in accordance with its current station authorization.

The NAL indicated that local field agents from the Enforcement Bureau’s Philadelphia Office attempted a station inspection during regular business hours once on August 17, 2011, and twice on September 30, 2011, without success. Physical access to the main studio of record was blocked by a locked gate.

After calling the station, the field agents were met at the locked gate by the station manager, who indicated that he was on his way to a doctor’s appointment, that no one else was available at the station to facilitate an inspection, and that the field agents would have to return the next day in order to gain access to the station. After leaving the site of the main studio, one field agent attempted to call the sole principal of the licensee but was forced to leave a voicemail requesting that the owner return the call to discuss the inaccessibility of the main studio. The field agent also called the main studio and left a voicemail. The call was later returned by the station manager, who indicated that he was still at his doctor’s appointment. According to the NAL, the agent identified the caller ID number on the returned call as being that of the main studio. When questioned about it, the station manager indicated “that the Station used his personal cellular number as the Station’s main studio number.”

On the second inspection attempt, the field agents again encountered the locked gate. The station manager, who met them at the gate, asked the field agents to wait outside the gate until he returned from the main studio building. The field agents left “after waiting more than ten minutes for the Station Manager to return….” The field agents returned later that day and once again encountered the locked gate. An agent called the main studio and spoke to the station manager, who indicated that, the “gate must remain locked for security reasons and that the public must contact the station to obtain access.” The field agents noted that there was no signage or other information posted at the locked gate to indicate such a requirement.

After their departure, one of the agents again attempted to contact the station owner in order to discuss the inaccessibility of the main studio. The agent was forced to leave a second voicemail, reiterating his request for a return call. Neither call was returned by the owner.

In March 2012, a local field agent determined that, after monitoring the station’s transmissions, the station was operating from a tower structure that was not specified in its current authorization. The agent, with the collaboration of the tower owner, determined that the station was operating from a tower approximately two-tenths of a mile away from its authorized transmitter site. Both towers were owned by the same tower company.

The NAL noted that the FCC has previously fined broadcasters for failure to provide access for inspection, but that “none of those cases involved repeated, direct, in-person refusals of access by the highest level of a broadcast station’s management, as well as multiple failures by the licensee’s sole principal to return FCC agent calls concerning the refusals.” The NAL also stated that, “continued refusal…is an egregious violation of the Commission’s rules warranting stringent enforcement action.” These events led to the maximum fine of $37,500 for each day the field agents were refused access. The $75,000 was then added to the fines for the main studio and unauthorized operation violations. The main studio base forfeiture is $7,000. The unauthorized operation base forfeiture is $4000, but the FCC elected to upwardly adjust that amount by another $3200. At the end of the day, the licensee was assessed a fine of $89,200.

In hindsight, it seems very unlikely that, even had the station been in a state of disarray or total chaos, any potential fine from the FCC could have exceeded the nearly $90,000 fine the licensee instead received for refusing access.

The obvious lesson learned here if is that if the FCC comes knocking at your door, let them in.

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April 2014

Pillsbury’s communications lawyers have published FCC Enforcement Monitor monthly since 1999 to inform our clients of notable FCC enforcement actions against FCC license holders and others. This month’s issue includes:

  • FCC Proposes $12,000 in Fines for Contest Violations
  • $20,000 Fine for Unlicensed Operation and Interference
  • Violations of Sponsorship Identification and Indecency Rules Lead to $15,000 Consent Decree

Changing Rules and Delay in Conducting Contest Lead to $12,000 in Fines

Late last month, the FCC’s Enforcement Bureau issued two essentially identical Notices of Apparent Liability for Forfeiture (“NALs”) against two radio station licensees for failure to conduct a contest as advertised. Although the stations have different licensees, one licensee provided programming to the second licensee’s station through a time brokerage agreement. The brokering station’s response to a letter of inquiry (“LOI”) addressed both licensees’ actions with regard to the contest. In the subsequent NALs, the FCC’s Enforcement Bureau proposed a $4,000 fine against the brokered licensee and an $8,000 fine against the brokering licensee.

In July of 2009, the FCC received a complaint that several radio stations held a weekly contest called “Par 3 Shoot Out” but did not conduct the contest substantially as announced or advertised. Specifically, the complaint maintained that at least one participant did not receive a promised prize of a golf hat and was not entered into a drawing to win a car or other prizes (as was promised in the contest’s rules). About four months later, the FCC issued an LOI to the licensee conducting the contest about the claims made in the complaint. In its response to the LOI, the licensee conducting the contest indicated that the contest consisted of two phases. The first was an 18-week, online golf competition where the highest-scoring contestant each week would win a hat from a golf club. Each weekly winner and one write-in contestant would be able to participate in the second phase of the contest, a real golf competition consisting of taking one shot at a three par hole. As was publicized online, the prize for the winner of the second phase was a $350 golf store gift certificate, and if anyone hit a hole-in-one, they would win a Lexus car.

According to the brokering licensee, the first phase of the contest took place between June and November 2008. The contest took place entirely online, and although the second phase was scheduled to begin in November 2008, it was postponed due to inclement weather and ultimately did not occur at all because the employee who was tasked with running the live golf competition was fired, and the remaining staff never resumed the contest. The brokering licensee further indicated that it forgot about the contest until it received the FCC’s LOI, and, after receiving the LOI, the second phase of the contest occurred and was completed by January 2010. The brokering licensee indicated that it had provided additional prizes of a $25 golf store gift card and a catered lunch to each finalist in the second phase given the delay in conducting the contest.

Section 73.1216 of the FCC’s Rules requires that a station-sponsored contest be conducted “substantially as announced or advertised” and must fully and accurately disclose the “material terms,” including eligibility restrictions, methods of selecting winners, and the extent, nature and value of prizes involved in a contest.

The Enforcement Bureau determined that the contest was not conducted as announced or advertised because the rules were changed during the course of the contest and the contest was not conducted within the promised time frame. The Bureau further found that the licensees failed to fully disclose the material terms of the contest as required by the Commission’s rules. According to the Bureau, the on-air announcements broadcast by the stations failed to mention all of the prizes the licensee planned to award and failed to describe any of the procedures regarding how prizes would be awarded or how the winners would be picked. The brokering licensee argued in its response to the LOI that the full rules were included online, which was a better way to make sure that potential contest participants were not confused. However, the Bureau found that while licensees can supplement broadcast announcements with online rules, online announcements are not a substitute for on-air announcements.

The base fine for failure to conduct a contest as announced is $4,000. The Bureau determined that, contrary to the argument presented in response to the LOI, “neither negligence nor inadvertence” due to the overseeing employee’s departure “can absolve licensees of liability.” The Bureau also said that providing additional prizes to make up for the delay does not overcome the violation of Section 73.1216. Finally, the FCC found that the licensees had failed to disclose the material terms of the contest because the advertisements that were broadcast over the air did not mention certain prizes.

The FCC proposed to impose the base fine amount of $4,000 against the time-brokered station after determining that the licensee had violated Section 73.1216. For the brokering licensee, the FCC proposed an increased fine of $8,000 because of the licensee’s “pattern of violative conduct, and because it conducted the Contest over four stations, not one, thus posing harm to a larger audience.”

Nine Years of Unauthorized Operation and Interference to Wireless Operator Lead to Large Fine

The FCC recently issued a Forfeiture Order to the former licensee of a Private Land Mobile Radio Service (“PLMRS”) station. The Forfeiture Order follows an NAL that the FCC released in July of 2012 proposing a fine of $20,000 for the former licensee of the facility for operating without a license for nine years and causing interference to another wireless service provider.

The former licensee initially received the license for the PLMRS station in April 1997 for a five-year term. Three months before the expiration of the license, the FCC sent the licensee a reminder to renew the license, but the licensee never filed a renewal application. Therefore, the license expired in April of 2002. Nevertheless, the licensee continued operating the station, and on July 31, 2011, filed a request for Special Temporary Authority (“STA”) with the Wireless Telecommunications Bureau of the FCC. The licensee stated in the application that it had recently discovered that its license had expired and that it needed an STA to continue operating the station. The Wireless Bureau granted the STA three days later for a period of six months, until the end of January 2012. Continue reading →

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Back in March, the FCC’s Public Safety and Homeland Safety Bureau (PSHSB) issued a Public Notice seeking to update the record on a 2005 Petition for Immediate Interim Relief regarding proposals to make fundamental changes to the FCC’s EAS Rules with respect to requiring broadcast stations to air multilingual EAS alerts. Yesterday, the PSHSB released a Public Notice extending the comment deadlines in the proceeding. Comments are now due by May 28, 2014 and replies are due by June 12, 2014.

The March Public Notice seeks comments on a number of issues, but the most-discussed issue is the Petitioner’s proposal to have the FCC adopt a so-called “designated hitter” requirement for multilingual EAS.

The Public Notice quotes the Petitioner in describing the proposal:

Such a plan could be modeled after the current EAS structure that could include a “designated hitter” approach to identify which stations would step in to broadcast multilingual information if the original non-English speaking station was knocked off air in the wake of a disaster. Broadcasters should work with one another and the state and/or local government to prepare an emergency communications plan that contemplates reasonable circumstances that may come to pass in the wake of an emergency. The plan should include a way to serve all portions of the population, regardless of the language they speak at home. One market plan might spell out the procedures by which non-English broadcasters can get physical access to another station’s facilities to alert the non-English speaking community – e.g. where to pick up the key to the station, who has access to the microphones, how often multilingual information will be aired, and what constitutes best efforts to contact the non-English broadcasters during and after an emergency if personnel are unable to travel to the designated hitter station.

The March Public Notice asked for comment on a number of questions related to this proposal. The Commission also acknowledged in the March Public Notice that broadcasters have raised concerns that a multilingual EAS requirement using the designated hitter approach would require them to hire additional personnel capable of translating emergency alert information into one or more additional languages.

Given that there is a nine year record in this proceeding and that any multilingual EAS requirements will have wide-ranging implications, those wishing to file comments in the proceeding now have some additional time to make that happen.

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Yesterday, the U.S. Supreme Court heard oral arguments in the Aereo case, providing the first indication of how the Justices view the case pitting Aereo against content providers, particularly broadcast networks. For background on Aereo’s technology and the previous lower court cases, Scott Flick of our office has written extensively on the subject, and a variety of his writings on Aereo can be found here. While trying to read the Court’s mind solely through the questions asked by the Justices can be risky, it is fair to say that Aereo encountered some skepticism on its claim to be an innovator and not a copyright infringer.

Given the significant amount of lower court litigation preceding Tuesday’s oral arguments, there wasn’t much in the way of surprises in the arguments made, many of which focused on the question of whether Aereo engages in a “public performance” when it transmits content to paying subscribers requesting that programming. A transcript of the proceeding can be found here. A number of the Justices focused on the question of whether Aereo’s fabled sea of mini-antennas served any purpose beyond seeking to circumvent the Copyright Act of 1976. Chief Justice Roberts noted that Aereo’s system seemed designed specifically “to get around the copyright laws,” and Justice Ginsburg asked Aereo’s counsel if there is any “technical reason” Aereo needed to have 10,000 dime-size antennas to operate, or if it was merely designed that way to “avoid the breach of the Copyright Act.”

What was a bit of a surprise was the extent to which the Justices’ questions focused on Aereo’s strategic effort to cloak itself as just another provider of cloud services. A number of the Justices indicated concern that there might not be an elegant way of ruling against Aereo without risking a ripple effect to cloud-based services, and it was obvious that none were interested in seeing that happen. Justice Kagan sought clarification regarding how Aereo could be distinguished from other cloud service companies, asking:

What if –­­ how about there are lots of companies where many, many thousands or millions of people put things up there, and then they share them, and the company in some ways aggregates and sorts all that content. Does that count?

Counsel for the broadcasters and the Justice Department attempted to respond to this concern, largely reiterating the position taken in the DOJ’s amicus brief:

The proper resolution of this dispute is straightforward. Unlike a purveyor of home antennas, or the lessor of hilltop space on which individual consumers may erect their own antennas . . . [Aereo] does not simply provide access to equipment or other property that facilitates customers’ reception of broadcast signals. Rather, [Aereo] operates an integrated system–i.e., a “device or process”–whose functioning depends on its customers’ shared use of common facilities. The fact that as part of that system [Aereo] uses unique copies and many individual transmissions does not alter the conclusion that it is retransmitting broadcast content “to the public.” Like its competitors, [Aereo] therefore must obtain licenses to perform the copyrighted content on which its business relies. That conclusion, however, should not call into question the legitimacy of businesses that use the Internet to provide new ways for consumers to store, hear, and view their own lawfully acquired copies of copyrighted works.

The catchphrase for this idea in the oral arguments became a “locker” in the cloud, where consumers could safely store their lawfully obtained content, but which would cross the copyright line if stocked for the consumer for a fee with infringing content by a commercial service like Aereo. While a useful analogy, it did not appear to put an end to the Justices’ concern that the line between a fair use and infringement might not always be clear in the cloud. That is certainly true, but it is also true outside the cloud, where copyright questions are notoriously complex and difficult.

Of course, the most interesting aspect of the Court’s diversion into an examination of cloud services is that it is technically irrelevant to the case at hand. It is safe to say that when Congress enacted the Copyright Act of 1976, cloud computing wasn’t even a distant dream. Imputing an intent on the part of Congress to draft the law in 1976 so as to neatly exclude such services from what might have then been considered copyright infringement is an unrealistic expectation. As a result, courts have always been faced with the task of applying existing copyright law to evolving applications of technologies, with the understanding that Congress will need to step in and change the law if the results cease to be satisfactory.

Having said that, it is the policy of the Supreme Court to narrowly rule on questions before it wherever possible, and drafting a decision addressing only Aereo without reaching the broader question of copyright law in the cloud is certainly the judicious approach, and what most expect the Court to do when a decision is released this summer.

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Oral arguments before the Supreme Court are less than a week away in the Aereo case, and broadcasters are feeling pretty good about their chances. With the Department of Justice, Professor Nimmer (who, along with his father, quite literally wrote the book on copyright), and a host of other luminaries filing in support of the broadcasters’ position, the storyline looks a lot like broadcasters have portrayed it from the beginning: that this is a simple case of copyright infringement hidden behind a veil of modern technological obfuscation.

Sensing that such a storyline is fatal to its prospects, Aereo has responded by casting this case as an attack on consumers’ use of the cloud, and has attracted some allies based on that storyline. However, it is a pretty thin storyline, as few think that the country’s highest court is so careless as to draft a broadcast retransmission rights decision that accidentally destroys the world of cloud computing. The two are not tough to distinguish, and even if the Court secretly disliked cloud computing, it hardly needs to opine on the copyright implications of cloud computing to decide the Aereo question.

Still, lower courts have disagreed on these issues, and only a fool enters the Supreme Court certain that the court will rule in his favor. There are many moving parts, and if a case were easy to decide, it would not have made it to the Supreme Court. That is why both sides will be anxiously watching the oral arguments for hints as to where the various justices stand on the matter.

As of today, however, broadcasters have one less reason to sweat about the outcome. The Court announced yesterday that Justice Alito, who had previously recused himself from the case, is now able to participate. This is a significant development for broadcasters. Because the 2nd Circuit decision being appealed was in Aereo’s favor, Alito’s earlier recusal meant that the case would be heard by the remaining eight justices. That created the risk of a 4-4 tie, which would leave the adverse 2nd Circuit decision in place.

In that scenario, broadcasters would need to win 5 of the 8 possible votes in order to overturn the lower court decision. That can be a tall order, and impossible if it turns out that four justices are firmly on the Aereo side of the fence. With Alito no longer recused, broadcasters now have an additional avenue for scoring that fifth vote. In other words, it’s easier to attract 5 votes out of 9 than it is to get 5 votes out of 8. That means broadcasters are unlikely to find themselves losing on a tie vote, and if the rest of the court should split 4-4, Alito’s entry into the fray effectively gives broadcasters a free throw opportunity at the buzzer to score his vote and break that tie. Now broadcasters just need to convert on that opportunity.

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After Monday’s FCC meeting left television broadcasters facing higher expenses and lower revenues by restricting the use of Joint Sales Agreements and joint retransmission negotiations, broadcasters were due for some good news. Where the FCC is the bearer of bad news, it has often fallen to the courts to be the bearer of good news, generally by overruling the adverse FCC decision. Unfortunately, that process can take years, meaning that in Washington you have to take a very long term view of “the good outweighs the bad.”

This week, however, the FCC’s bad news was followed very quickly by the Supreme Court’s decision today in McCutcheon v. Federal Election Commission. In McCutcheon, the Court ruled that while limits on political contributions to individual candidates continue to be permissible, overall limits on contributions to candidates and party committees are unconstitutional. In other words, the government can limit how much you donate to an individual candidate or party committee, but cannot limit the number of candidates or party committees you support with your donations.

While campaign finance reform will continue to be a hot-button issue, a direct effect of today’s decision will be to increase the war chests of candidates and parties through greater political donations. Much of those increased funds will ultimately be used for political advertising, redounding to the benefit of media in general, but particularly to local broadcasters.

The Court’s 5-4 decision was not particularly a surprise, as many saw McCutcheon as the sequel to 2010’s Citizens United decision, in which the Court found restrictions on political expenditures by corporations and unions to be unconstitutional. When the Supreme Court released its decision in Citizens United, we all understood the immediate financial implications for media, but no one was quite sure just how great that impact would be. It turned out to be very substantial, completing the multi-decade transition of political advertising from being a “not worth the regulatory headaches” obligation of broadcasters to now being a highly sought after segment of the overall advertising market. Indeed, there is no stronger validation of this than the fact that cash flow multiples used in station acquisitions are based on two-year averages, balancing political year revenue with revenue from a non-political year.

As in 2010, the question is not whether today’s decision will result in more ad revenue for media outlets, but how much more. Given that in recent years the number of donors bumping up against the now-unconstitutional cap measured in the hundreds rather than the thousands, the economic impact of today’s decision is unlikely to match that of Citizens United. However, it may have a more interesting effect. The limit on overall donations effectively forced a political contributor to pick and choose a small number of candidates to support with the maximum ($2600 at the moment) donation, and to turn away others because of the cap. The practical result was that donors tended to focus their contributions on candidates in hotly contested races where the contribution could have the most impact.

With today’s elimination of the overall cap, a donor can make the maximum individual donation to every federal political candidate it wishes to support. The likely result is an increased flow of political contributions to candidates in races previously deemed to be lost causes, creating tighter races through the influx of political ad dollars.

From a political standpoint, this means the number of hotly contested races around the country will increase. From an economic standpoint, it means political ad dollars will flow on a more geographically diverse basis, ensuring that a larger number of local stations benefit, rather than just those in swing states and swing districts. This will be welcome news for stations that previously found themselves missing out on political ad dollars while candidates and parties flung large sums at stations in nearby swing districts. By itself, it may not entirely remove the sting of Monday’s FCC actions, but given enough time, the courts may eventually produce some good news in that regard as well.

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While it has been around since 2009, Bitcoin has seen substantial media coverage in the past few months. Media outlets (as well as many other businesses) have been increasingly dabbling in the Bitcoin world, if for no other reason than to show they are up to date with the latest consumer fixations.

While numerous businesses have begun accepting Bitcoin transactions, the most likely place to find them in the media world is as contest prizes or as part of an advertiser promotion. Of course, one of the principal reasons for the novelty of Bitcoin is its goal of being an electronic currency unregulated by governments. As a result, how businesses have been treating their usage of bitcoins from an accounting and legal perspective is highly variable, since it is in many ways a new frontier.

That frontier changed significantly yesterday, when the IRS ruled that virtual currencies like Bitcoin are to be treated as property for federal tax purposes, with transactions using virtual currency subject to much the same tax treatment as those involving U.S. currency. Our own Jim Gatto, head of Pillsbury’s Social Media and Games Team, distributed a Pillsbury Client Alert discussing the ruling. In that Alert, Jim notes that the impact of the IRS ruling includes:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by the employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue IRS Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
  • For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received.

The Client Alert provides additional detail, but if you are using bitcoins for any type of transaction, whether as contest prize, currency for purchases on your website, or payments to employees and vendors, the IRS has made clear that you will need to follow the same procedures (and pay taxes) as though the transaction had occurred in dollars.

While that is a big issue for businesses doing large Bitcoin transactions, businesses dabbling in small and occasional Bitcoin transactions will need to pay even closer attention than they would to a transaction using traditional currency. For example, if the prize in a station contest is one bitcoin, the station will need to assess whether awarding the prize triggers the need for issuing IRS Form 1099 to record the awarding of the prize. In a cash prize contest, that is straightforward, since the Form 1099 currently specifies a prize of $600 or more as the threshold for needing to issue the form. As I write this, however, the current Bitcoin exchange rate is roughly $582 U.S. dollars per bitcoin. That means a one bitcoin prize would not trigger the need for a Form 1099, but a two bitcoin prize would.

Similarly, yesterday’s IRS ruling seems to indicate that the bitcoin must be valued for tax purposes at the time it is received. As a result, the station holding the contest would need to check the value of a bitcoin on the day the prize is awarded to see if it is above or below the $600 threshold for tax purposes. Of course, given the volatility of the Bitcoin exchange rate, this raises other questions, such as how do you value the bitcoin for tax reporting if the exchange rate was below $600 for part of that day and above $600 for part of that day, or if the day the prize is “sent” is not the same day as the prize winner receives or “cashes” it.

Like so many things, Bitcoin appears to be another example of something meant to simplify life, but which is turning out to only make life more complicated. Look for life to get even more complicated as individual states formally adopt a similar approach in treating virtual currency transactions as taxable events.

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March 2014

Pillsbury’s communications lawyers have published FCC Enforcement Monitor monthly since 1999 to inform our clients of notable FCC enforcement actions against FCC license holders and others. This month’s issue includes:

  • FCC Proposes $40,000 Fine for Public Inspection File/License Renewal Violations
  • Short-Term License Renewal and Hefty Fine for Missing QIP Lists
  • $5,000 Fine for FM Station’s Failure to Maintain Minimum Operating Hours


Failure to Disclose Rules Violations Leads to $40,000 Fine

Late last month, the FCC issued two essentially identical orders against co-owned Milwaukee and Chicago Class A TV stations in response to a number of missing Quarterly Issues/Programs Lists and Children’s Television Programming Reports and for not reporting the missing issues/programs lists in the stations’ license renewal applications. The FCC’s Media Bureau proposed a $20,000 fine against each station, for a total fine of $40,000.

In late December of last year, the FCC issued Notices of Apparent Liability for Forfeiture (“NAL”) for the two stations, noting that the stations had mentioned in their license renewal applications that they had failed to timely file numerous Children’s Television Programming Reports, but had not disclosed the absence from their online public files of over a dozen (each) Quarterly Issues/Program Lists. Section 73.3526 of the FCC’s Rules requires licensees to maintain information about station operations in their public inspection files so the public can obtain “timely information about the station at regular intervals.”

The base fine for failure to file a required form is $3,000, and the base fine for public file violations is $10,000. After considering the facts, the FCC concluded in each NAL that the respective station was liable for $9,000 for the missing Quarterly Issues/Programs Lists, $9,000 for the missing Children’s Television Programming Reports, and an additional $2,000 for failing to disclose the missing Quarterly Issues/Program Lists in their renewal applications.

After receiving the NALs, each station requested that the fine be reduced due to an inability to pay. The FCC will not consider reducing a fine based on a claimed inability to pay unless the licensee submits federal tax returns for the last three years, financial statements, or other documentation that accurately demonstrates its financial status. In this case, each station submitted appropriate documentation about its financial condition. However, the FCC was not persuaded that the amount of the fines exceeded each station’s ability to pay, and declined to reduce the fines.

Public Inspection File Violations Lead to $46,000 in Fines and Limited License Terms
In connection with recent license renewal applications, the FCC issued four essentially identical Memorandum Opinions and Orders and Notices of Apparent Liability for Forfeiture, resulting in $46,000 in fines for a Washington radio licensee. In addition, three of the licensee’s four stations’ license renewal applications were granted for only a four-year term rather than the normal eight-year term.

The first three of the licensee’s stations were missing, respectively, 24, 26, and 20 Quarterly Issues/Programs Lists for various periods during the license term. The fourth station’s public inspection file was missing 12 reports for a two-year period spanning from 2006 to 2008. Continue reading →