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.