Posted on November 27, 2011 by David Oxenford

FCC Says TV Shared Services Agreement and a Combination of Two Top 4 Network Affiliates in One Market is Permissible - For Now

In an eagerly anticipated case involving TV stations in the Honolulu market, the FCC's Media Bureau determined that a programming swap that permitted one company to hold the licenses of both the NBC and CBS affiliates in a single market, and to also provide technical and office services and news programming to a third station in the market, was permissible under current rules.  However, the Commission warned that it would consider in its upcoming Notice of Proposed Rulemaking in its Quadrennial Review of the multiple ownership rules whether similar situations should be permitted in the future, and seemingly implied that even this combination could be subject to further review in future licensing proceedings.  The permissibility of shared services agreements has been a question raised by public interest groups for quite some time (see our post here), and has also been raised by certain cable and satellite television operators as such combinations can result in one broadcaster negotiating carriage agreements for multiple stations in a market.  Based on this case, and the issues raised in connection with previous decisions, this will no doubt be a very controversial topic when the Commission considers the upcoming multiple ownership proceeding.

The Honolulu case began with one owner - Raycom - holding two licenses in the market - one an NBC affiliate, and the other an affiliate of the MyTV Network.  As there are 8 independently owned television stations serving Honolulu, the combination of these two stations, only one of which is a Top 4 station in the market, was permissible.  Raycom then entered into a deal with the owner of the local CBS affiliate, where the parties swapped call letters and network affiliations.  Raycom also purchased many of the non-license assets of the station, and received an option to purchase the station, and agreed to pay the licensee, over time, $22 million.  Raycom also entered into a shared services agreement with the owner of the station that had become the MyTV affiliate where Raycom would provide back office services, sales personnel, and a physical location for the station's studio and transmitting antenna, in exchange for 30% of the stations revenues, and a flat monthly payment.  As detailed below, the Commission determined that the swap of call letters and network affiliations was not subject to review at this time as there was no licensing transaction before the FCC, and the shared services agreement did not violate current FCC policies.

The Media Bureau's decision on the purchase of the CBS affiliation was based on the analysis of the rules that currently prevent the combination of any of the Top 4 rated stations in a market.  As the FCC noted, the rule prohibiting the combination looks at the situation at the time of the acquisition of a station.  The FCC, when it adopted the Top 4 rule, specifically stated that it would not penalize stations that grew their audience.  Thus, an owner with a Top 4 TV station could acquire another low rated station in the market, and if that second station eventually grew its audience so that it also became a Top 4 station in that market, the owner would not be penalized for its success.  The review is limited to occurring at the time of the proposed acquisition of the second station.  As no acquisition was proposed in this case (Raycom already owned the second station), the Bureau determined that there was nothing to review.  The Commission did note, however, that in connection with subsequent licensing decisions (e.g. a sale of the combined operation), the situation could be reviewed again - specifically stating that the combination could not be sold together should both stations remain in the Top 4 and the rules remain unchanged.

The shared services agreement with the new MyTV affiliate was also found to be within the FCC's previous decisions approving such agreements (see, e.g. our summaries of cases here and here).  The licensee was deemed to have an economic interest in the success of the station, as it received 70% of station revenues (from which it would have to pay it's operational costs, plus a $208,333 monthly payment to Raycom for the services that Raycom provides).  The public interest groups contended that the reality of the situation was that the licensee of the MyTV station would probably receive little money from station operations, as the potential profits would be eaten up by the monthly payments to Raycom.  The Media Bureau rejected that assertion, finding that the 70% share from which a payment to the shared service provider was within the scope of prior agreements approved by the FCC.

The FCC also found that the licensee of the MyTV station was in control of the station - that there was no unauthorized transfer of control.  Some of the specific factors looked at by the FCC in determining that the licensee maintained control included the following:

  • The licensee had a full-time General Manager and General Sales Manager, and leased 4 employees from Raycom, and those 4 employees were specifically supervised and answered directly to the station's employees and performed services only for the station (and not for Raycom's stations)
  • The General Manager helped produce the news run on the station (produced with Raycom), and, on a daily basis, vetoed programming offered by the MyTV Network
  • The General Manager scheduled station programming, bid for syndicated programming, and negotiated agreements for local programming
  • The General Manager produced two editorials each week, that were run on the station
  • The General Manager produced a weekly programming report, sent to the station's owner

Based on these facts, and the financial arrangements set out above, the Bureau concluded that the licensee maintained sufficient control over the station based on prior precedent.

 As we wrote last month, Commissioner Copps already stated, when it began its online public inspection file proceeding, that these agreements were an evasion of the ownership rules.  In this case, the Bureau did not seem very comfortable in making the decisions it did, promising to revisit these issues in the upcoming Notice of Proposed Rulemaking on the revisions of the FCC's multiple ownership rules.   Recent press reports indicate that that notice is circulating among the Commissioners now, and will probably be released for public comment soon - probably without any relief from the local TV duopoly rules being proposed.  With the NPRM set to examine shared services agreements, these issues are bound to be matters of serious contention for the next year, as the ownership proceeding makes its way through the Commission.   And this case may not be at an end either, as an appeal to the full Commission is possible.  So look for the very contentious arguments on this very contentious issue to continue. 
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Posted on March 21, 2010 by David Oxenford

FCC Issues $15,000 Fines For Unauthorized Transfer of Control and Main Studio Staffing Violations for LMA Done Wrong

$15,000 per station was the cost of a broadcast licensee’s failure to adequately supervise two stations of which he was the licensee, but which were operated pursuant to time brokerage agreements or LMAs. Like many stations in these tough economic times, this licensee decided to allow a third party to provide the bulk of the programming and retain the bulk of the sales revenues, in exchange for a payment. However, as the licensee remained the licensee, he was required to maintain and exercise control over the station’s operations, and maintain a meaningful staff presence at the station. In reviewing the operations of these stations, the FCC’s Enforcement Bureau in recent decisions (here and here) concluded that the adequacy of that control was insufficient – providing a warning to other station licensees operating under LMA agreements that they must maintain operational control over the stations that they own.

The FCC has long said that a licensee must maintain a meaningful staff presence at a station, even if the station receives the vast majority of its programming from some other source – whether that is a network or programming provided under an LMA. Meaningful presence has required that at least two employees at the station be employed by the licensee, one of whom must be managerial and perform no services for the broker providing the programming under the LMA. This case makes clear that these required licensee employees must be physically present at the station’s main studio on a regular day to day basis – they cannot be located at some distant location supervising the station remotely or only periodically present at the main studio. Failure to have the station’s main studio manned by the required personnel in and of itself accounted for $7000 of the fine in this case.

The decision in the case also faulted the licensee for an unauthorized transfer of control of the station, as the licensee did not adequately control station operations. This was evident to the FCC based not only on the lack of employees, but also based on a number of other factors. First, the LMA agreement by which the station was being operated was not in writing, but was only evidenced by invoices for payment – insufficient in the FCC’s eyes to insure the required degree of control over station operations. The FCC rules require that Time Brokerage Agreements be in writing, with copies in the station's public file.  The licensee was also unable to certify, when asked by the FCC, whether certain station functions (like the maintenance of the public file and the broadcast of required EAS tests), were being accomplished, being only able to state that he was told by the broker that these matters were being dealt with. The unauthorized transfer of control made up the remaining $8000 of the $15,000 fine.

 

After imposing these fines, the FCC said that it would further review the operations of the stations, watching their future operations to insure that the licensee was in fact exercising the required degree of control. For broadcast licensees everywhere, this decision should demonstrate that the FCC is still concerned about the control of your station – make sure that you are doing what is necessary to maintain that control.
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Posted on May 8, 2008 by David Oxenford

Format Noncompete Agreements Can Lead to FCC Fine

In a case just released by the FCC, a broadcaster was fined for enforcing a non-compete agreement that was entered into when a broadcaster sold one of its stations in a market in and agreed that it would not compete in the same format if it ever acquired another station in the same market.  The agreement had prohibited the Seller from competing with the Buyer in a news-talk format.  After the closing of the sale of the station, the Seller acquired another station in the market and adopted a format that a local court found was covered by the non-compete clause in the contract.  The local court issued an injunction against the continuation of the news-talk format.  At that point, the Seller filed a complaint with the FCC, arguing that, by obtaining the injunction, the Buyer had engaged in an unauthorized assumption of control of the station covered by the injunction, without FCC approval.  The FCC agreed with the Seller, and fined the Buyer $8000 for exercising control over the station that Seller had bought.

The FCC's reasoning in this case, citing a similar letter decision from 2006, is that the restriction on format impedes a licensee's control over its own programming, and restricts its ability to adjust its operations to account for changing market conditions.  The Commission concluded that, barring the licensee from utilizing a particular format, even for the limited period of the non-compete agreement, was contrary to the public interest.  By obtaining the injunction to prevent the Seller from using the news-talk format, the Buyer had impermissibly exercised control over the station that it had already sold.  In fact, the Commission went further, and found that the exercise of control over the programming, personnel or finances of the station would be a violation of the rules. 

Interestingly, the Commission reached this conclusion even though the Buyer had obtained a decision from the local court that the non-compete agreement was enforceable.  According to the FCC decision, the Court's decision was strictly one of contract law, not of whether the clause in the agreement was permissible as a matter of FCC policy as to what is in the public interest.  The Commission concluded that the Court could only determine the enforceability of the clause under state law, not the public interest question.  So the FCC made the decision that the non-compete agreement could not be enforced through an injunction without violating FCC rules.  However, the Commission left open the possibility that the Buyer might have a case for damages in state court for the Seller's violation of the non-compete.

The Buyer also argued that the FCC had implicitly approved the non-compete provision as it was included in the agreements filed with the Commission in connection with the application for the approval of the sale of the station from the Seller to the Buyer.  The Commission rejected that argument as well, finding that the Commission, by approving an assignment application, does not approve each and every clause in the assignment documents.  In fact, the Commission admonished both the Buyer and Seller for certifying in the assignment application that the agreements that were filed with that application complied with all Commission rules and policies.  It reminded all applicants filing assignment applications in the future to exercise care in certifying that its agreements comply with all FCC rules and policies.

This case, and the one decided in 2006, make clear that the Commission's current thinking forbids restrictions in non-compete agreements that forbid stations from making any format choices.  Under the reasoning of the decision, it might be possible to include a clause in the contract that called for a deferred payment in the event of the adoption of a competing format in violation of the noncompete (though, given some of the precedent relied on by the Commission, it is likely that such a penalty would have to be reasonably related to the damages that would be incurred as a result of the format change, and not a huge penalty that would effectively preclude the change). In theory, while this decision gives more flexibility to parties to change formats, it could restrict the opportunities of some buyers to acquire stations in the first instance.  An owner of a cluster of stations in a market, who might consider selling a station or two from its cluster, may be reluctant if they know that the buyer can immediately change the station's format and start competing.  Similarly, a buyer of a station in a market may be concerned about buying a station if it knows that the seller of the station can immediately re-enter the market and start competing - regardless of the terms of a non-compete agreement.  Seemingly, contracts will need to provide monetary damages to cover such situations.  Nevertheless, that is the current policy, so take this decision into consideration in drafting any agreement for the sale of a station in a market in which you will continue to compete.
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