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Anyone who has enjoyed March Madness knows that Lady Luck often intervenes in a team’s journey to the NCAA Final Four. But is getting to the game a literal roll of the dice for spectators too? The Seventh Circuit Court of Appeals in Chicago has recently ruled that a lawsuit can go forward which claims that the NCAA’s ticket sales for the NCAA tournament are an illegal lottery akin to a game of poker or roulette.

Those who run sweepstakes and contests live in fear of having such an accusation leveled against their promotional campaigns. While they know that they must avoid combining the three elements of a lottery: (1) prize, (2) chance, and (3) consideration (such as money), those who are new to the industry can often be heard to say “it’s not like this is real gambling or anything.” Much of the time, the focus is on how to make sure that “chance” or “consideration” (or both) are not present in your promotional game. There is very rarely any debate as to whether there is a “prize,” as there is usually little point to having a promotion without one. Yet, it is that issue which is at the heart of the case against the NCAA. More to the point, the Court seems to have been influenced by the fact that Final Four tickets are highly sought after, so the chance to buy them in and of itself could be a “prize.”

For years, the NCAA has used random selection to determine who will be allowed to purchase tickets to its Final Four basketball games. According to the plaintiffs in this case, to have a shot at scoring a pair of tickets, they were required to pay the NCAA in advance for both the face value of the tickets and a “non-refundable handling” fee of $6-$10. To maximize the chance of being selected, each person could enter up to ten times, submitting the face value of ten tickets plus handling fees, although participants would only be allowed to purchase a single pair of tickets if selected, regardless of the number of entries submitted. After the random selection process, “winning” entrants would receive two tickets and a refund of the face value of the other nine entries, while those who were not selected would receive a refund of the face value of ten pairs of tickets. However, none of the applicants received a refund of the handling fees.

The plaintiffs filed a class action lawsuit alleging that the ticket distribution process is an illegal lottery. They allege that the opportunity to purchase a pair of Final Four tickets at face value is a prize, that the prize is distributed by chance, and that they paid consideration for that chance in the form of the handling fees that were not refunded. From this assessment, the plaintiffs conclude that the NCAA is engaged in illegal gambling in the sale of Final Four tickets.

The trial court initially dismissed the case based on an Indiana court of appeals case, Lesher v. Baltimore Football Club, which held that the Indianapolis Colts were not engaged in gambling when they used a similar ticketing system. In Lesher, however, the handling fees were refunded for all but the tickets that were actually purchased. The Lesher court decided that there was no “prize” involved in the Colts ticket distribution scheme because a “prize” is “something of more value than the amount invested.” Ticket purchasers “invested the price of the tickets and received in exchange either the tickets or the entire amount invested . . . those receiving tickets got nothing of greater value than those who received refunds.” With regard to the NCAA’s ticket sales, though, the Seventh Circuit faulted the trial court for relying on Lesher. According to the Seventh Circuit, the plaintiffs had adequately argued the existence of a “prize” because they asserted that the fair-market value of the NCAA Final Four tickets was much greater than the face value at which the winners had purchased them, and that the plaintiffs had “invested” the handling fees to participate in the random drawing.

While the trial court will ultimately have to decide these issues, the Seventh Circuit’s ruling certainly nudges the trial court in an interesting direction, and the result may expand the definition of what qualifies as a “prize.” This case is a reminder of the importance of structuring promotions with care to avoid the legal morass and potential liability facing the NCAA in this class action lawsuit. Marketers and broadcasters cannot merely rely on doing things the way they were done in the past to protect against lawsuits and prosecution. That approach is, quite simply, a gamble.

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You may have noticed that more and more television shows these days seem to be including “product placement,” a form of advertising in which a product, corporate logo, or brand name is positioned as a “prop” in a program or is used as an integral part of the story line. We have all seen the prominently displayed Coca-Cola cups placed on the judges table in front of Simon, Randy and Paula during American Idol. And although Apple stated that it made no payment for what seemed like an entire episode of Emmy Award winning Modern Family devoted to the iPad, many in the media and the public wondered if what amounted to a half-hour advertisement for the iPad was legal.

Does the FCC have rules regarding product placement? Are program producers and broadcasters required to disclose placement deals to viewers?

The simple answer is yes. The FCC considers product placement to be “embedded advertising” that is subject to the FCC’s “sponsorship identification” rule. The rule says that if a program producer, broadcast station, or a station employee receives anything of value, directly or indirectly, in exchange for causing material to be broadcast, the sponsorship and the identity of the sponsor must be disclosed on-air.

Congress decided long ago that members of the public have a right to know when someone has paid to have material aired by a TV or radio station. As a result, if a station or network enters into a placement deal, the deal must be disclosed on the air. Undisclosed product placement can amount to illegal payola.

The FCC’s rules and the Communications Act aren’t limited to just requiring that broadcasters make the necessary disclosures. They also require program producers to notify the broadcaster if they have a deal to include any sort of product placement in a program. This allows the broadcaster to then make the necessary on-air disclosures.

More than two years ago, the FCC began considering whether it should adopt more stringent rules on how television programmers and broadcasters let viewers know when “props” in television shows are actually paid pitches made by an advertiser. However, the FCC has not yet resolved the question. The FCC’s proceeding was fashioned as a “Notice of Inquiry,” which means that the FCC will subsequently need to issue a Notice of Proposed Rulemaking before any new rule can be adopted. Because of this, we are not likely to see the matter resolved soon.

While the FCC’s product placement/embedded advertising proceeding is currently in limbo, broadcasters, networks, and program producers need to keep in mind that product placement deals — when not disclosed on-air — violate the FCC’s sponsorship identification rule. The use of product placement in advertising is only going to increase as advertisers respond to a changing industry, including the use of DVRs, online availability of content, and other tools that let viewers skip traditional commercials. When entering into product placement deals, program producers, networks and broadcasters need to remember that the FCC, and not just the public, may be watching.

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As we reported in a previous Client Alert, full payment of all applicable Regulatory Fees for Fiscal Year 2010 must be received no later than today, August 31, 2010, at the Commission’s St. Louis, Missouri address by 11:59 PM, Eastern Daylight Time.

As in previous years, failure of a licensee to submit the required regulatory fees in a timely manner will subject it to a late payment penalty of 25% in addition to the required fee. In order to pay the fees, licensees must generate an FCC Form 159 using the FCC’s online “Fee Filer System” which can be found at: www.fcc.gov/feefiler. In order to access the Fee Filer System, you must have a valid FCC Registration Number (FRN) and password. Once you have successfully accessed the System, you will have the ability to review your fees. Licensees are required to either pay online with a credit card, pay online using a bank account, pay by mailing a check, or pay by sending a wire. The FCC’s instructions for filing fees can be found at: www.fcc.gov/fees/regfees.

For more information on annual regulatory fees, including assistance in preparing and filing them with the FCC, please contact any of the lawyers in the Communications Practice Section.

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Posted in: Fees
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Having spent a good portion of last week on the road and on conference calls talking about the latest Performance Tax developments, I heard a lot from broadcasters on the subject. For those blissfully unaware of this legislative battle, the recording industry has been seeking a financial parachute from broadcasters to help slow the rate of its descent into an economic abyss. The irony of course is that if illegal music downloads on the Internet are what has caused the recording industry’s plunge, reaching out to drag broadcasters into the abyss with them merely weakens an ally in the battle to protect content from illegal distribution over the Internet.

Famously dubbed a performance “tax” by broadcasters, the legislation sought by the recording industry would require broadcasters to pay royalties to the recording industry for playing music on-air. Beyond the obvious short term benefit of royalty checks from broadcasters that choose to retain a music-based format, the recording industry hopes the passage of a U.S. law requiring such royalties for broadcasts in the U.S. will cause foreign countries to release royalties already being collected for airplay of U.S. artists in those countries. Unfortunately, because most of the record companies are now foreign-owned, much of that money, along with royalties paid by U.S. broadcasters, would wind up in foreign hands, undercutting any argument for this “found money” being an economic benefit in the U.S. All of the royalty funds would come from the U.S., but only a portion of those funds would stay in the U.S. However, one would hope that at least some of those royalties, if they do come to pass, would actually reach the U.S. artists responsible for creating the music that the recording industry has been selling and reselling to us over the years.

Broadcasters have been successful in blocking Performance Tax legislation because of good grass roots efforts to remind Congress that radio promotes the sale of music at no charge to the record labels or to the artists that have ridden radio airplay to fame (and whose records and concert tickets continue to sell because of radio airplay). The long, sordid history of payola — the record labels’ efforts to curry airplay via cash and other payments to radio station programmers — supports broadcasters’ proposition that the “value” of radio airplay exceeds any “costs” it imposes on the recording industry.

It was therefore with great surprise that many radio broadcasters heard last week that negotiating teams for the two industries were floating a multi-part proposal to resolve the legislative impasse — a compromise that would require, for the first time, that artist (as opposed to songwriter) royalties be collected on broadcast airplay of music. While the proposal has some attractive features for broadcasters (most importantly the inclusion of FM receiving chips in cellphones), I got an earful from broadcasters absolutely incensed at the notion of promoting music and concert sales, and then being charged for doing it.

If any member of Congress thinks that “radio promotes music sales” is just a broadcaster talking point for meetings, encountering a broadcaster last week would have decisively corrected that impression. Some broadcasters I talked to had such a visceral reaction to the very concept of such payments that it didn’t matter to them what the beneficial points of the proposal were. For them, it was as if someone had told them to “pay the ransom to the kidnappers and hope for the best.” Some appreciated that it could be the pragmatic thing to do to put the issue behind them, but still found the very concept reprehensible. To be sure, there is money involved and that can sway a person’s thinking. However, a number of the broadcasters I spoke with were so fundamentally opposed to the concept that they would reject the idea even if other parts of the proposal actually resulted in more money coming in from the proposal than going out.

I understand that perspective, but lawyers are trained to assess the options, and to assist their clients in choosing the best option for that client. Often, but not always, the “best” option is the one most economically beneficial to the client. Here, some broadcasters are not interested in the economics, but in the unfairness of being forced to pay a performance royalty as any part of the package. Despite that, all broadcasters should give the compromise proposal a careful look, if only to sharpen their understanding of the numerous issues in play and how they might affect the future of radio broadcasting. There are any number of reasons why the proposal might not gain momentum, or even be possible given the dynamics of Washington, and I hope to address those in a future post. For now, radio broadcasters should suppress the instinct to reflexively ignore it, and instead talk to their colleagues and counsel about the issues this proposal raises for their future, and for the future of their industry.

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The FCC has opened a rulemaking proposing reforms to its broadband health care initiatives for rural and tribal areas. The FCC’s Notice of Proposed Rulemaking originally released in July was published in the Federal Register today, which establishes the deadline for submitting Comments and Reply Comments in the proceeding. Comments in response to the Notice of Proposed Rulemaking are due on September 8, 2010. Reply Comments are due on September 23, 2010.

Chief among the proposals contained in the Notice of Proposed Rulemaking are:

• Creating a health infrastructure program that would support up to 85% of the construction costs of new regional and statewide broadband networks serving public and non-profit health care providers where broadband is currently unavailable or insufficient;
• Creating a health care broadband services program that would subsidize 50% of the monthly recurring costs of access to broadband services for eligible public or non-profit rural health care providers; and
• Expanding the class of health care providers eligible to receive these funds to include skilled nursing facilities, renal dialysis centers and facilities, and certain off-site administrative offices and data storage centers that perform support functions for health care providers.

We discussed the details of this Notice of Proposed Rulemaking in a recent Client Advisory. Health care providers, as well as rural and tribal communities interested in improving their broadband access for local health care services, should get involved in this proceeding. It is important to provide the FCC with real world examples of the needs and problems faced in providing modern health care services in your community so that those needs are taken into account as the FCC attempts to craft its rural health care initiative.

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Posted in: Internet & Online
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The FCC is moving quickly to implement the Satellite Television Extension and Localism Act of 2010 (STELA). STELA is the latest law to extend and update the original Satellite Home Viewer Act of 1998, allowing direct to home satellite carriers to deliver the signals of local television stations to subscribers. The Commission has commenced two rulemakings which, because Congress gave the FCC a deadline of November 2010 to wrap up its proceedings and adopt implementing rules, have very short comment periods.

The first proceeding deals with satellite carriers’ ability to import distant, but significantly viewed, television signals into a local station’s television market. The FCC’s proposals could result in an increase in importation of significantly viewed signals by satellite providers. Therefore, stations should familiarize themselves with their rights concerning significantly viewed signals. Comments in this proceeding are due on August 17 and Reply Comments are due on August 27. An in-depth analysis of this proceeding can be found in our Client Advisory.

The second proceeding deals with the method by which the FCC determines whether a subscriber is eligible to receive the imported signal of a distant network-affiliated station. The FCC is examining both its computerized predictive model for determining whether a particular household is “served” by the local station, as well as its methodology for making actual on-site signal strength measurements. Where a satellite subscriber seeks to receive the signal of a distant network-affiliated station, the FCC’s predictive model is used to assess whether the subscriber can receive the local network affiliate over the air. A household that is found to be “served” by the local affiliate is generally not eligible to receive the imported signal of an out of market affiliate of the same network. However, the subscriber can challenge the results of the FCC’s predictive model by seeking an on-site measurement of the local station’s signal.

STELA directs the FCC to update its predictive methodology to account for the completion of the nationwide transition to digital television, as well as to make specific modifications to the definition of “unserved” households. Comments in this proceeding are due on August 24 and Reply Comments are due on September 3. A detailed discussion of the FCC’s proposals in this proceeding can be found in a second Client Advisory released today.

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Posted in: Congress & Legislation
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The FCC has announced that full payment of all applicable Regulatory Fees for Fiscal Year 2010 must be received no later than August 31, 2010.

As mentioned in a July 9, 2010 Report and Order, the Commission will mail assessment notices to licensees/permittees reflecting payment obligations for FY 2010, but intends to discontinue such notifications beginning in 2011. Be aware that the notices sent may not include all of the authorizations subject to regulatory fees, and do not take into account any auxiliary licenses for which fees are also due. Accordingly, you should not assume that the notice is correct or complete. Similarly, if you do not receive a notice letter, that does not mean your authorizations are exempt from regulatory fees. It is the responsibility of each licensee/permittee to determine what fees are due and to pay them in full by the deadline.

Annual regulatory fees are owed for most FCC authorizations held as of October 1, 2009 by any licensee or permittee which is not otherwise exempt from the payment of such fees. Licensees and permittees may review assessed fees using the FCC’s Media Look-Up website – www.fccfees.com. Certain entities are exempt from payment of regulatory fees, including, for example, governmental and non-profit entities. Section 1.1162 of the FCC’s Rules provides guidance on annual regulatory fee exemptions. Broadcast licensees that believe they qualify for an exemption may refer to the FCC’s Media Look-Up website for instructions on submitting a Fee-Exempt Status Claim.

For more information on annual regulatory fees, including assistance in preparing and filing them with the FCC, please contact any of the lawyers in the Communications Practice Section.

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In my recent commentary on the Senate version of the DISCLOSE Act (Senate Disclose Act Bill Raises Serious Concerns For Broadcasters), I highlighted provisions related to the Lowest Unit Charge which had the potential to cause a very significant adverse impact on broadcast station revenues from federal election advertising.

Senator Schumer introduced today a revised version of the DISCLOSE Act. While retaining other campaign finance reform provisions, the new version thankfully eliminates the LUC provisions that were the focus of my concern.

The Act has not yet been passed, and could still be modified either in the Senate or in a Conference Committee with the House. We will continue to monitor the bill and let you know if further attempts are made to reinstate the troublesome LUC concepts.

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At a recent presentation on legislative matters affecting the communications industry, I noted that broadcasters, while lately feeling much under siege, should not underestimate their part in the digital future. It is true that the government wants broadcasters’ spectrum (the National Broadband Plan), cable operators want broadcasters’ programming, ideally for free (the retransmission battles in Congress and at the FCC), politicians want broadcasters’ airtime (the DISCLOSE Act), musicians want broadcasters’ money (the Performance Tax), and the Internet would love to have broadcasters’ audiences. However, the conclusion to be drawn from those facts is that broadcasters have what everyone else wants, and need to themselves capitalize on those important assets.

Let there be no doubt that broadcasters are in for some challenging times fending off those who covet their riches, but that is a far better position than having no riches to covet in the first place. As the possibilities for television and radio multicasting become better developed through experimentation and innovation, mobile video gains the prominence in the U.S. that it is experiencing overseas, and broadcasters continue to refine how best to leverage their content on multiple platforms, broadcasters have as good an opportunity as anyone to make their mark in a digital future, while others fall by the wayside as “one-idea wonders.”

Unfortunately, government has begun to place its thumb on the scale, discouraging broadcasting while encouraging other wireless uses. The latest example is this week’s introduction of the Spectrum Measurement and Policy Reform Act (S. 3610) by Senate Communications Subcommittee Chairman John Kerry (D-Mass.) and Senator Olympia Snowe (R-Maine). The legislation would encourage broadcasters to abandon spectrum for a share of the government’s auction proceeds for that spectrum, and authorize the government to impose spectrum fees on broadcasters. In other words, the FCC can use spectrum fees to “encourage” broadcasters to relinquish their spectrum.

This government push is propelled by one of the oldest myths regarding broadcasting, and one of the newest myths. The first myth is that broadcasters are the only licensees who have not paid for their spectrum, and therefore merit less leeway in how they use it, or whether they get to use it at all. Of the thousands of broadcasters I have worked with over the years, however, only a handful actually received their spectrum for free. The vast majority bought their stations (and FCC licenses) from another party, paying full market price, and therefore being really no different than the wireless telephone licensee that also bought its FCC authorization from a prior licensee. Whether some earlier, long-gone broadcast licensee that built the station enjoyed some financial windfall doesn’t bring any benefit to the current licensee. The current licensee inherited the dense regulatory restrictions of broadcasting, but not the “free spectrum.”

In addition, new broadcast licensees have generally purchased their spectrum at FCC auction since Congress changed the law in 1997, just like wireless licensees. Despite that, no one has suggested that even these more recent licensees should be released from FCC broadcast regulations because they paid the government for their spectrum.

The second and newer myth, propogated by advocates of the National Broadband Plan, is that broadcasting is a less valuable use of spectrum than wireless broadband since spectrum sold for wireless uses goes for more money at auction than broadcast spectrum. That is, however, a distorted view of value. Everyone, including the FCC and the wireless industry, has denoted broadcast spectrum as “beachfront property” from a desirability standpoint, meaning that it is not the spectrum, but the regulatory limits placed on it, that is creating the difference in cash value at auction. An alternate way of viewing it is that the public receives that difference in auction value every day from broadcasters in the form of free programming and news, rather than in the form of a one-time cash payment to the government. That the public receives more value for their spectrum from continuing broadcast service than from a one-time auction payment (that is swallowed by the national deficit in a matter of seconds) becomes more obvious when you realize that the public will then spend the rest of their lives leasing “their” spectrum back from the auction winner in the form of bills for cellular and broadband service.

An apt analogy is national parks. Would selling them outright for industrial use bring in more cash than keeping them and allowing them to be enjoyed by the public? Certainly. Is selling them for industrial use therefore the most valued use of parkland? Hardly.

Broadcasters have been good tenants of the government’s spectrum, paying the public every day for the right to remain there. If they stop those public service payments, they lose their license, making way for a new tenant. This new legislation aims to entice these paying tenants from their spectrum so that the spectrum can be sold outright to the bidder who perceives the greatest opportunity to extract a greater sum than the auction payment from the public. That may be poor public policy, but it is at least voluntary for the broadcaster, though not for the public. Threatening to tax broadcasters with spectrum fees until they surrender their spectrum is not marketplace forces at work, but the government forcing the marketplace to a desired result. Proponents of wireless broadband must have little confidence in their value proposition if they feel they can come out ahead only if they first devalue broadcast facilities by imposing yet more legal and financial burdens on broadcasters.

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Last month, the House of Representatives passed the DISCLOSE Act (“Democracy is Strengthened by Casting Light on Spending in Elections Act”), H.R. 5175. The bill responds to the decision of the U.S. Supreme Court in Citizens United v. Federal Election Commission which held that corporations (and presumably unions and other associations) have a constitutional right to make independent expenditures in election campaigns. The bill would, if it becomes law, impose significant new disclosure requirements related to political expenditures, prohibit government contractors from making campaign expenditures, and ban such expenditures by U.S. corporations owned 20% or more by foreign nationals or which have certain other foreign ties.

The Senate’s companion DISCLOSE Act bill, S. 3295, was introduced on April 29 by Senators Schumer, Feingold, Wyden, Bayh and Franken, and remains pending at this time. The focus of this commentary is on a provision in the Senate bill, but not the House version, that we believe has the potential to have a very significant adverse impact on broadcast station revenues from federal election advertising.

In our previous discussions of the DISCLOSE Act here and here, we pointed out that the Senate bill would allow national committees of any political party (including a national congressional campaign committee of a party) to take advantage of Lowest Unit Charge (LUC) rights previously only available to legally qualified candidates or their official committees. Similarly, it would extend Reasonable Access rights to national party committees which are now only available to federal candidates. In addition, it would effectively make all federal candidate and party committee advertising non-preemptible, regardless of the class of advertising purchased. Stations would also be required to promptly list all requests of candidates and party committees to purchase time on the stations’ web sites.

While troublesome, these and other provisions in the DISCLOSE Act pale in significance, in our view, to the proposed amendment to the LUC provisions of Section 315 of the Communications Act. Under Section 315, as currently in effect, legally qualified candidates for elective office are entitled to receive during specified pre-election periods “the lowest unit charge of the station for the same class and amount of time for the same period” that is then clearing on a station. Under the Senate version of the DISCLOSE Act, federal candidates and party committees (but not state or local candidates) would be entitled to receive the “lowest charge of the station for the same amount of time that was offered at any time during the 180 days preceding the date of use.”

This is troublesome for two reasons. First, the bill eliminates the “same class” and “same period” provisions in current law. Because “class” refers to the level of preemption protection which the advertiser has purchased, federal candidates and committees would be entitled to obtain non-preemptible status while paying rates that commercial advertisers would pay for immediately preemptible spots. Similarly, because “period” refers to the day part or rotation involved, stations could not charge more to federal candidates and committees for the most desirable spot placement – fixed position in prime or drive time – than they charge commercial advertisers for the same length spot that runs in the least desirable time period or rotation – late night or run of schedule (ROS).

Second, the new 180 day look-back provision means that stations will be required to give federal candidates and committees the lowest rate that has run on the station in the past half year, rather than which is currently running on the station. Therefore, if the LUC period occurs during a period of strong advertising demand, or a station has increased its rates due to extrinsic factors, such as improved programming or a format change, the station will still be required to give federal candidates and committees preferential rates that no other advertiser can currently obtain.

We view these provisions, if adopted, as creating a perfect storm for broadcasters. The number of entities entitled to reasonable access and lowest unit charge rights will be greatly expanded. Stations will be required to give non-preemptible access to federal candidates and national party committees in their most desirable time periods at their lowest rates for any advertising. Rather than election years being seen as a period of enhanced revenues for broadcasters, this provision might well cause election years to be viewed as a major drag on station revenues.

For some reason, this proposal to dramatically change the prevailing law has received little publicity in the press or in releases from proponents or opponents of the bill. A little sunshine on this part of the bill appears appropriate.

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