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If all goes well, next week I’ll fulfill one of my secret ambitions: to discuss how retransmission consent is affecting the business of television distribution. I’ve participated in many panel discussions on retransmission consent policy (because I work in Washington, and policy is what we talk about here).

On Tuesday I’ll be in New York at the SNL Kagan TV and Radio Finance Summit where I’ll finally have a chance to talk about the business, financial and investment aspects of retransmission consent (because that’s what they talk about in New York). To me, those are the far more intriguing topics, because if you don’t totally understand the market, you can’t credibly defend your policy positions.

SNL has assembled an all-star panel, including senior execs from Fisher Communications, SJL Broadcast Management Corporation, Communications Corporation of America, Moodys, and the resident FCC Media Bureau Chief, Bill Lake. SNL’s Robin Flynn (who always comes armed with thoughtful and well-presented data) will moderate. So Robin, here are some of the questions I’d like to hear debated by my fellow panelists, and I may have an opinion of my own here and there.

  • Why are retransmission fees still so low relative to viewing and why aren’t they rising faster? What should the government do to help bring sports programming back to broadcast television?
  • According to SNL research, some groups get much higher retransmission rates than others. Does this reflect real differences or reporting anomalies? Will this differential continue? How will it affect the market?
  • What are the biggest negotiation and deal mistakes groups make?
  • Is there any way to protect against the unexpected, like Aereo and Ad Hopper?
  • Is Aereo really a “retrans killer”? What happens to different market segments if it is? Could some broadcasters be better off if Aereo prevailed?
  • Has retransmission consent fundamentally changed the network-affiliate model, or simply adjusted the dollar flow?
  • Is cord-cutting equally bad for all programmers?
  • Apart from retransmission consent, is there a growth case for broadcast groups?
  • Do rising retrans fees really make the pie bigger (and drive up consumer costs), or do they just move the slices around? Which networks will benefit most long term?
  • And most important: What happens to the price of a Happy Meal when corn futures triple (and what does this tell us about retransmission consent?)
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May 2012
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 Fines Noncommercial Educational Station $12,500 for Ads
  • Public Inspection File Violations Lead to Three Short Term License Renewals
  • Main Studio Violations and Unauthorized Operations Garner $21,500 Fine

Noncommercial Educational Station Airs Expensive Ads
A recent fine against a noncommercial educational station serves as a warning to noncommercial licensees to be mindful of on-air acknowledgements and advertisements. In concluding a preceding that began in 2006, the FCC issued a $12,500 fine against a California noncommercial FM licensee for airing commercial advertisements in violation of the FCC’s rules and underwriting laws.

In August 2006, agents from the Enforcement Bureau inspected the station and recorded a segment of the station’s programming. During the inspection, the agent determined that the recorded programming included commercial advertisements on behalf of for-profit entities. In January 2007, the Bureau issued an initial Letter of Inquiry (“LOI”) regarding the station’s commercial advertisements and additional technical violations. At the same time, the Bureau referred the matter to the Investigations and Hearings Division for additional investigation. The Division issued additional LOIs in 2008 and 2009, to which the licensee responded three times. In its responses, the licensee admitted to airing four commercial announcements over 2,000 times in total throughout an eight-month period in 2006. It also acknowledged that it had executed contracts with for-profit entities to broadcast the announcements in exchange for monetary payment.

According to Section 399(b) of the Communications Act and the FCC’s Rules, noncommercial educational stations are not permitted to broadcast advertisements, which are defined as program material that is intended to promote a service, facility, or product of a for-profit entity in exchange for remuneration. Noncommercial stations may air acknowledgments for entities that contribute funds to the station, but the acknowledgments must be made for identification purposes only. Specifically, such acknowledgments should not promote a contributor’s products or services and may not contain comparative or qualitative statements, price information, calls to action, or inducements to buy or sell. In addition to these rules, the FCC requires that licensees exercise “good faith” judgment in airing material that serves only to identify a station contributor, rather than to promote that contributor.

In this case, the FCC determined that the materials aired were prohibited advertisements because they favorably distinguished the contributors from their competitors, described the contributors with comparative or qualitative references, and included statements intended to entice customers to visit the contributors’ businesses. As a result, the FCC proposed a $12,500 fine in June 2010.

In response, the licensee argued that the FCC should reduce or cancel the fine because (1) the announcements complied with the FCC’s Rules and “good faith” precedent, (2) the announcements did not contain a “call to action,” and (3) the FCC had not previously prohibited the language used in the announcements. The licensee also claimed that the investigation of the station was improper because the FCC had previously indicated it would not monitor stations for underwriting violations, but would respond solely to complaints.

The FCC refused to cancel or reduce the fine, finding that both the fine and the investigation were warranted given the licensee’s violations. In its Order, the FCC defended its determination that the materials aired by the station were promotional advertisements because they contained comparative phrasing, qualitative statements, and aimed to encourage the audience to purchase the goods or services of the for-profit entities. In addition, the FCC rejected the notion that the investigation was in any way improper, noting that the FCC has broad authority to investigate the entities it regulates, including through field inspections.

Here, as in other underwriting cases, the FCC’s decision to issue a fine came down to a necessarily subjective interpretation of language–is a given statement promotional in nature or does it merely identify a source of funding? The FCC has acknowledged that it is sometimes difficult to distinguish between the two, hence the requirement that licensees exercise “good faith” judgment in airing underwriting announcements. Noncommercial educational stations must therefore carefully review the content of their on-air announcements to ensure the language is not unduly promotional in order to avoid a fate similar to the licensee in this case.

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The FCC has announced that the preliminary television channel sharing rules in the FCC’s Report and Order in the Innovation in Broadcast Television Bands proceeding will become effective on June 22, 2012. The rules establish the basic framework by which two or more full-power/Class A television stations can voluntarily choose to share a single 6 MHz channel. Channel sharing is integral to clearing the television broadcast spectrum so that the FCC can auction it for wireless broadband as called for in the National Broadband Plan. The rules follow the signing of the “Middle Class Tax Relief and Job Creation Act of 2012”, which we discussed in detail in a previous post. Also called the “Spectrum Act,” that law gives the FCC authority to conduct incentive auctions to encourage television broadcasters to get out of the business or find new business models that rely on less spectrum, such as doubling up with another station on a single 6 MHz channel.

The FCC’s new rules allow a station to tender its existing 6 MHz channel to the FCC, making it available for the “reverse” or “incentive” spectrum auction. The tendering station can set a reserve price below which it won’t sell. To encourage more stations to participate in the auction, the FCC is also permitting stations, in advance of the auction, to agree to share a single 6 MHz channel after the auction. In this scenario, one of the two stations would tender its channel into the auction, and both stations would share the proceeds and operate on the remaining 6 MHz channel after the auction. The FCC’s Order makes clear that channel sharing arrangements will be voluntary, and that stations will be “given flexibility” to control some of the key parameters under which they will combine their operations on a single channel, including allocation of auction proceeds among the parties.

Each station sharing a 6 MHz channel will be required to retain enough capacity to transmit one standard definition stream, which must be free of charge to viewers. Each will have its own separate license and call sign, and each will be subject to all of the Commission’s rules, including all technical rules and programming requirements. Stations that agree to share a channel will retain their current cable carriage rights. Commercial and noncommercial full-power and Class A TV stations are permitted to participate in the incentive auction and enter into channel sharing agreements, but low power TV and TV translator stations are not.

Many more details will have to be resolved prior to the incentive auction. We recently discussed the procedural uncertainties surrounding the auction in a detailed and comprehensive interview conducted by Harry Jessell of TVNewsCheck. The transcript of the interview can be found here. At bottom, we concluded that the largest obstacle facing the FCC will be designing the auction so that a sufficient number of broadcasters find it attractive to participate.

The FCC invited us and other industry experts to participate in a Channel Sharing Workshop earlier this week. In the meantime, other Pillsbury attorneys have been actively helping stations assess the risks and opportunities of the incentive auctions, including spectrum valuation and strategies for the forward and reverse auctions and spectrum repacking. Many of the issues raised at the FCC’s Channel Sharing Workshop dealt with the intricacies of the arrangements broadcasters will have to craft to govern their relationship with a channel sharing partner. These ranged from how multiple channel “residents” will manage capital investments in facilities upgrades, to what might happen if one licensee on a shared channel goes bankrupt, sells, or turns in its license. A recording of the Workshop can be accessed here.

The FCC acknowledged that much work lies ahead of it. To that end, the FCC announced at the Workshop that the first of a series of Notice of Proposed Rulemakings concerning issues raised during the Workshop will be released in the Fall. The FCC did not predict a timeframe for completing the auction design process and establishing service rules.

As these and other issues take the fore, television broadcasters must remain engaged, shaping the process to allow them the maximum flexibility to develop relationships and business models that can thrive in the post-auction environment.

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There has been a recent uptick in class action lawsuits against video programming distributors under the Video Privacy Protection Act. The VPPA was enacted in 1988 in response to the disclosure of the video tape rental records of Supreme Court nominee Robert Bork during his confirmation hearings. Reflecting the era of its passage, the law refers to information regarding “video cassette tapes”, but is much broader, requiring those who are involved in renting, selling or distributing “prerecorded video cassette tapes or similar audio visual materials” to discard consumer information after a period of time (generally one year) and to get consumers’ consent before disclosing information about an individual’s viewing habits.

In this day and age of apps that share the songs individuals listen to and the newspaper articles they read, the VPPA has been cited as a major impediment to similar online sharing regarding video downloads and rentals. Congress has considered legislation that would amend the VPPA to permit social media sharing of an individual’s video viewing without requiring that individual’s consent on a title by title basis. While it may seem an anachronism to those accustomed to rampant social sharing, the VPPA’s requirements, and those of similar state privacy laws, apply to far more than just local video rental stores.

The attached Client Alert discusses a recent California case in which an individual brought a class action lawsuit against Sony. The suit claimed that Sony had retained the history of customers’ PlayStation Network movie and video game purchases and rentals, and that it disclosed such information to the new owner of the PlayStation Network when the network was transferred, and that the new owner then disclosed that information to advertisers.

As a review of the Client Alert reveals, any video on demand provider, whether cable, satellite, or online, needs to be knowledgeable of the requirements of the VPPA. The VPPA provides an avenue for individuals to bring class actions on behalf of thousands of affected customers, and to seek actual, liquidated, and/or punitive damages for the violation, as well as legal fees. Because of this, the financial stakes can be quite high for what might be an entirely unintentional violation of consumers’ privacy.

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The FCC has issued its latest annual Notice of Proposed Rulemaking containing regulatory fee proposals for Fiscal Year 2012. Those who wish to file comments on the FCC’s proposed fees must do so by May 31, 2012, with reply comments due by June 7, 2012.

The FCC’s NPRM includes an interesting twist. Citing the “rapid transformation” of the communications industry, the FCC indicates that it plans to re-examine its regulatory fee program which has remained largely the same since the program was first introduced in 1994. According to the NPRM, the FCC will be undertaking two separate “Reform Proceedings” in the near future to address the Commission’s regulatory fee program. In the first phase, the FCC will consider the allocation percentages of core bureaus involved in regulatory fee activity and how it calculates those percentages. In the second phase, the FCC states that it will review other outstanding substantive and procedural issues. According to the FCC, “given the breadth and complexity of the issues involved, the issuance of two separate Notices of Proposed Rulemaking will permit more orderly and consistent analysis of the issues and facilitate their timely resolution.”

We will be publishing a full Advisory on the FY 2012 Regulatory Fees once they are officially adopted (likely this summer) and will keep you posted regarding the Phase I and Phase II Reform Proceedings. You may also immediately access the FCC’s FY 2012 proposed fee tables in order to estimate the payments (barring changes) that you will owe in September.

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The FCC created a stir in the broadcast community when, after proclaiming for more than a year that surrendering broadcast channels for the planned broadband spectrum auction would be entirely voluntary, it began to “volunteer” Class A stations it concluded had not complied with all FCC rules. I first raised this issue in a February post on the day the FCC released the first sixteen Orders to Show Cause demanding that the recipient Class A TV stations submit evidence as to why the FCC should not revoke their Class A status for infractions that would have previously drawn only a fine.

Loss of Class A status not only eliminates protection from being displaced by full power TV stations (or by a spectrum auction), but also disqualifies the station from sharing a post-auction channel with a full power station or seeking any compensation for its spectrum in the auction. Downgrading Class A stations to LPTV status therefore allows the FCC to sweep them aside involuntarily to clear spectrum for the auction, and avoid sharing the proceeds of the spectrum auction with that licensee.

It was therefore not too surprising when that initial batch of FCC orders was followed by dozens of subsequent FCC actions against Class A stations, some of which proposed substantial fines and indicated that the licensee had been earlier informed it could avoid a fine by notifying the FCC it wished to relinquish its Class A status.

Having put scores of stations on notice that their Class A status was either directly at risk or that they could avoid a fine by agreeing to relinquish Class A status, the FCC turned up the heat further this past week when it began issuing follow up orders revoking stations’ Class A status. While the writing was already on the wall for many of these stations given the FCC’s earlier actions against them, one of the orders offers a particularly disturbing insight into the determination with which the FCC is moving to thin the ranks of Class A stations (old FCC motto for Class A stations–“last bastion of independent voices in a consolidated TV world”; new FCC motto for Class A stations–“old and in the way”).

Station KVHM is (or at least was) a Class A station that received a pair of investigatory letters from the FCC in late March and early August of 2011. According to the FCC, the letters noted that the station had failed to file required children’s television reports and provided the licensee with thirty days to respond, making the first response due at the end of April 2011. However, as the FCC itself notes in the Order, the licensee, Humberto Lopez, died in May of 2011. According to his obituaries, Mr. Lopez, who owned multiple TV and radio stations and was an inductee of the Tejano Roots Hall of Fame, died “on May 16 after battling a long illness.”

In the last few weeks of his life, he apparently didn’t find time to respond to the FCC’s March letter, and was certainly unable to respond to its August letter. His failure to respond led the FCC to issue a February 2012 Order to Show Cause demanding that Lopez demonstrate why his Class A status should not be revoked. When, not surprisingly, the licensee was unable to deliver that message from beyond the grave, the FCC issued last week’s Order, stating “Lopez did not file a written statement in response to the Order to Show Cause, and, therefore, we deem him to have accepted the modification of the KVHM-LP license to low power television status.” Talk about being tough on a licensee; the FCC demanded not just that Lopez rise from the grave to defend his Class A status, but that he do so in writing.

While it is easy enough to ridicule an FCC Order that is on its face so completely preposterous as to invite comparison with the worst cinematic portrayals of soulless bureaucracy, the real lesson of this case can be found by delving a bit deeper into the facts. On the FCC’s side of the ledger, it is true that the first investigatory letter did arrive while the licensee was still alive, and that it was at least theoretically possible the licensee could have responded. Had the FCC’s Order been based on this fact alone, rather than on the licensee’s failure to respond long after his death to the 2012 Order to Show Cause, its action would have been hard-hearted, but perhaps defensible. The FCC could have argued that, given the licensee’s failure to meet the original response deadline, his estate lacked the “clean hands” necessary to protest the loss of Class A status, and that the FCC was just playing the hand it was dealt. However, as it turns out, the FCC lacked clean hands as well.

Why, you may ask, did the licensee’s estate not step up to oppose the Class A revocation? Apparently because it is still waiting for the FCC to grant the application to transfer control of the station from the deceased licensee to the licensee’s estate (controlled by an Executor). Despite the fact that such post-death transfers are normally accorded nearly automatic grants, that application remains pending at the FCC since early November 2011. Worse, the apparent reason why the transfer application is hung up at the FCC is because the FCC has still not acted on the station’s 2006 license renewal, which also remains pending. To be blunt, the licensee literally died waiting for the FCC to act on his license renewal application. While the FCC will often sit on a transfer application until the underlying station’s license renewal is granted based on the theory that the “seller” shouldn’t profit from the transfer of a station unless the FCC can first determine he was qualified to own it, the licensee here is beyond caring about such profit.

So in the fair world we like to think we live in, the FCC would have promptly granted the station’s transfer application (and perhaps its license renewal application as well), transferring control of the station to the Executor of the licensee’s estate. Without altering its timetable one iota, the FCC could then have proceeded to issue its February Order to Show Cause, and the Executor would have had a reasonable opportunity to try to defend the station’s Class A status. Instead, in its apparent haste to clear “voluntary” spectrum for auction, the FCC cut all of these procedural corners, leaving Lopez’s wife and (according to the obituary) twelve children with an asset of significantly diminished value, and no opportunity to seek their share of any spectrum auction proceeds.

What is particularly ironic is that the Lopez family is the archetype of the kind of licensee the FCC has argued will be interested in participating in the auction–a licensee that may no longer be as interested in running the station as in monetizing it to pay estate taxes and to split any remaining proceeds among the many heirs. The FCC has placed itself in the role of the cattle baron who dams up the stream, depriving his neighbors of water so that he can obtain their land for next to nothing (or in this case, nothing). If the FCC’s thirst for broadcast spectrum has become so intense that it is willing to sacrifice fundamental fairness and “widows and orphans” to get it, all broadcasters need to be looking over their shoulders for the next regulatory lightning bolt encouraging them to also “volunteer” their spectrum. Like death and taxes, it appears the FCC is determined to make surrendering spectrum for the auction an unavoidable fact of life (and death).

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April 2012
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:

  • The FCC’s $10,000 fines for items missing from the public inspection file continue
  • License cancellation no obstacle to FCC proposing $18,000 fine against former broadcaster

FCC Again Issues $10,000 Fines for Public Inspection File Violations

As we have reported on numerous occasions, $10,000 has become the standard fine for even minor public inspection file violations. That proved true again this month, with the FCC issuing a number of $10,000 fines for failure to include all Quarterly Issues/Programs Lists in a station’s public inspection file.

The FCC’s public inspection file requirements are found at Sections 73.3526 (commercial stations) and 73.3527 (noncommercial stations) of the FCC’s Rules. They require broadcast licensees to maintain particular information in their files, including the Quarterly Issues/Programs Lists, and to update the material in the file regularly throughout the license term.

In one decision, the FCC assessed a $10,000 fine against a noncommercial radio station in Louisiana for excluding twenty-four Quarterly Issues/Programs Lists (six years’ worth) from its file over a seven-year period. The licensee had disclosed the problem in its license renewal application. In a second decision, the FCC fined a South Carolina commercial radio station $10,000 for ten absent Quarterly Issues/Programs Lists over a four-year period. Like the first case, the fact that the documents were missing from the file was disclosed in the station’s license renewal application. The station belatedly placed the missing documents in the file when it filed its license renewal application.

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To follow up on my post from last week regarding the FCC’s open meeting on implementing its proposals to require online posting of TV station public inspection files, including the political file, the FCC today voted to require television broadcasters to post their entire public inspection files online. FCC Commissioner McDowell dissented regarding the requirement that TV stations’ political files be included online.

According to statements made in the FCC’s meeting today, all TV stations will have six months to move their public inspection files online. The FCC has agreed to host TV public inspection files on its own website. With respect to the political file, online posting will be a “phased in” process. Stations affiliated with the top-four national networks in the top-50 Nielsen markets will be required to begin placing their political files online, with all other TV stations to follow on July 1, 2014. The FCC also indicated that it plans to issue a Public Notice in a year to evaluate the effectiveness of the process.

In adopting its Order, the FCC rejected a compromise proposal advanced last Friday by the National Association of Broadcasters, the ABC, CBS, NBC, Fox, and Univision networks, State Broadcasters Associations, as well as various television station groups. The compromise proposal would have permitted TV stations to provide summary information online, including the total amount of an advertising buy and the total amount of money a candidate has spent at that station on ads during a particular election window. The compromise proposal would have kept commercially-sensitive per unit rate information out of the online public file, while still including this information in the hard copy of the political file for candidates to inspect regarding lowest unit rate and other political advertising requirements.

Much more on these issues to follow, including further specifics on the details of the FCC’s Order in this proceeding.

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As many of you know by now, very few topics were hotter during the NAB Show in Las Vegas this week than the FCC’s looming April 27 public meeting vote to decide how to implement its proposals to require online posting of TV station public inspection files. As Laurie Lynch Flick reported previously here, the FCC is proposing to require television broadcasters to replace their existing locally-maintained public inspection files with digital public inspection files to be maintained online, including stations’ political records. The online public file has broadcasters concerned because creating and maintaining a centralized online public file substantially increases their public inspection file burdens, while the political portion of the file contains sensitive competitive and pricing information that broadcasters would prefer not be made available to competitors online on a near real-time basis.

The proposals have proven to be so controversial that earlier today the National Association of Broadcasters (NAB) filed a request with the FCC to grant a two business day delay of the commencement of the “sunshine period” in the FCC’s online public file proceeding. For those who are not familiar with the “sunshine period” requirement, the term refers to the week before one of the Commission’s monthly public business meetings (known as “open meetings”) during which time all contacts with Commission staff concerning the matters to be decided at the meeting are prohibited, until such time as the text of the Commission’s decision is publicly released. The sunshine period for the online file proceeding is scheduled to commence today, and the NAB is asking the FCC to delay the effective date until next Tuesday, April 24, in order to allow interested parties to continue to discuss the FCC’s proposals with FCC staff members.

To make matters even more interesting, yesterday a media placement company asked the FCC to refrain from going forward at the April 27 meeting with any requirements regarding placing political files online.

The precise details of the FCC’s online public file requirements, including those for the political file, aren’t likely to be released until the FCC’s April 27 monthly meeting. However, during discussions at the NAB Show, FCC staff informed broadcasters that the FCC’s Order is expected to, at a minimum, require online posting of public inspection files by all television stations this year, with the posting of the online political file portion of the public file to be phased in, initially applying to network-affiliated stations in the top 50 markets. All other television stations would be required to move their political files online within the next two years.

Regardless of the precise approach taken by the FCC for putting political file information online, stations would be wise to ensure that their current political file is complete and that their political sales practices comply with the numerous legal requirements. Moving a poorly kept political file online is an invitation to trouble.

A good place to start for ensuring your political file compliance is with our Political Broadcasting Advisory, which is regularly updated and is a comprehensive guide for broadcasters to use to help them comply with the FCC’s political broadcasting rules, including the political file requirements. The time to fix any public file/political file and political sales problems is now, before the data has to be posted on the Internet.

As the details of the Order the FCC is expected to release on April 27 leak out, the FCC continues to revise its positions and there may be a few more twists and turns before we are done. The FCC has moved this item to the front burner of its agenda about as fast as any in recent memory. What makes it more of an immediate concern for TV broadcasters is that the item will be released just prior to the time TV stations are preparing for what is expected to be the most expensive presidential campaign advertising blitz on record.

As the online public file/political file debate rages on, there can be no doubt we will have plenty more to discuss regarding these issues in the coming days and weeks ahead.

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It’s that time of year. Broadcasters, brokers, bankers, and broadcast lawyers hop on the proverbial bus and head to Las Vegas to seek their fortunes. In contrast to the last few recessionary years, during which the crowds were thinner and many attendees had the glassy-eyed look of disaster survivors, indications are that 2012 will mark the return of the dealmaking, equipment buying, and venture launching that animate the industry. More broadly, cautious optimism about the state of the industry and the economy seems to be giving way to genuine enthusiasm about moving forward. It is a welcome sight.

Attending the show this year to help that process along are eight of our communications attorneys, including myself, Dick Zaragoza, Cliff Harrington, Lauren Lynch Flick, Miles Mason, Paul Cicelski, Lauren Birzon, and our newest addition, partner Lew Paper.

If you see us at the show, say hello, or better yet, buy us a drink and we’ll regale you with tales of great legal battles (buy us two drinks, and we promise not to talk about law at all!). You can reach us by email at the Show by clicking on the name links above. They will take you to our respective bios at Pillsbury where you can find our email addresses.

For those of you headed to the Show, we look forward to seeing you there. For those who aren’t going, we hope to see you there next year.

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