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If you need the complete document, download the WordPerfect version or Adobe Acrobat version, if available. ***************************************************************** Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of: ) ) ECHOSTAR COMMUNICATIONS ) CORPORATION ) ) v. ) CSR-5165-P ) FOX/LIBERTY NETWORKS, LLC ) ) FX NETWORKS, LLC ) ) Program Access Complaint ) MEMORANDUM OPINION AND ORDER Adopted: April 15, 1998 Released: April 17, 1998 By the Acting Chief, Cable Services Bureau: I. INTRODUCTION 1. EchoStar Communications Corporation ("EchoStar"), a provider of direct broadcast satellite ("DBS") services, filed the above-captioned program access complaint against FX Networks, LLC ("FX") and Fox/Liberty Networks, LLC ("Fox/Liberty"), alleging that FX has refused to provide its programming to EchoStar because of prohibited exclusive contracts that it has with cable operators across the country. EchoStar alleges that FX's refusal to deal with EchoStar regarding such programming violates the Commission's prohibition on exclusive contracts pursuant to Section 628(c)(2)(D) of the Communications Act of 1934, as amended ("Communications Act"), and Section 76.1002(c)(2) of the Commission's rules. EchoStar also alleges that FX's action in this matter constitutes an unreasonable refusal to sell in violation of Section 628(c) of the Communications Act and Section 76.1002(b) of the Commission's rules and an unfair practice in violation of Section 628(b) of the Act and Section 76.1001 of the Commission's rules. 2. Based upon the record before us and pursuant to the Communications Act and the Commission's rules, we find that FX's actions violate Section 628(c)(2)(D) of the Communications Act's prohibition on exclusive contracts and constitute an unreasonable refusal to sell to EchoStar pursuant to Section 628(c). In light of this finding, we need not address Echostar's allegations relating to Section 628(b) of the Act. II. BACKGROUND 3. Section 628 of the Communications Act prohibits certain unfair or discriminatory practices in the sale of satellite cable and satellite broadcast programming. In enacting Section 628 of the Communications Act, Congress' stated purpose was: to promote the public interest, convenience, and necessity by increasing competition and diversity in the multichannel video programming market, to increase the availability of satellite cable programming and satellite broadcast programming to persons in rural and other areas not currently able to receive such programming, and to spur the development of communications technologies. In the Cable Television Consumer Protection and Competition Act of 1992 ("1992 Cable Act"), Congress found that as a result of increased vertical integration between cable operators and cable programmers, "[v]ertically integrated program suppliers . . . have the incentive and ability to favor their affiliated cable operators over nonaffiliated cable operators and programming distributors using other technologies." 4. Congress instructed the Commission to promulgate regulations that prohibit practices, understandings, arrangements, and activities, including exclusive contracts between cable operators and vertically integrated satellite cable and broadcast programming vendors, that prevent a multichannel video programming distributor ("MVPD") from obtaining satellite cable or satellite broadcast programming for distribution to persons in areas not served by a cable operator as of October 5, 1992, the enactment date of the 1992 Cable Act. In addition, Congress prohibited exclusive contracts between cable operators and vertically integrated satellite cable and broadcast programming vendors in areas served by a cable operator as of October 5, 1992 unless the Commission determines that the exclusive contract is in the public interest as determined by five specific criteria set forth by Congress. Section 628(h) of the Communications Act sets forth an exemption to this general prohibition pertaining to preexisting exclusive contracts if certain conditions regarding "grandfathering" are satisfied. 5. In Implementation of Sections 12 and 19 of the Cable Television Consumer Protection and Competition Act of 1992: Development of Competition and Diversity in Video Programming Distribution and Carriage, First Report and Order ("Program Access Report and Order"), in which the Commission adopted regulations pursuant to Section 628 of the Communications Act, the Commission concluded that non- price discrimination is included within the prohibition against discrimination set forth in Section 628(c). While the Commission did not attempt to identify all types of non-price discrimination that could occur, the Commission stated that "one form of non-price discrimination could occur through a vendor's `unreasonable refusal to sell,' including refusing to sell programming to a class of distributors, or refusing to initiate discussions with a particular distributor when the vendor has sold its programming to that distributor's competitor." The Commission cautioned, however, that "unreasonable" refusals to sell should be distinguished from "certain legitimate reasons that could prevent a contract between a vendor and a particular distributor, such as: (i) the possibility of [the] parties reaching an impasse on particular terms, (ii) the distributor's history of defaulting on other programming contracts, or (iii) the vendor's preference not to sell a program package in a particular area for reasons unrelated to an existing exclusive arrangement or a specific distributor. III. THE PARTIES 6. EchoStar, a provider of DBS programming services, operates two DBS satellites that allow it to provide approximately 120 channels of digital television programming to subscribers throughout the continental United States. EchoStar states that it competes against cable operators in every cable franchise area and is therefore a "multichannel video programming distributor" as defined by Section 76.1000(e) of the Commission's rules. 7. FX is a wholly-owned subsidiary of Fox/Liberty; Fox/Liberty is a joint venture between Fox, Inc. ("Fox"), a subsidiary of The News Corporation, Ltd. ("News Corp."), and Liberty Media Corporation ("Liberty Media"), a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). Thus, through its wholly-owned subsidiary, Liberty Media, TCI, a cable system operator, has a 50% ownership interest in FX. The programming controlled by FX is "satellite cable programming," as defined by our rules, because it is transmitted by satellite and is primarily intended for direct receipt by cable operators for retransmission to cable subscribers. Accordingly, FX is a satellite cable programming vendor in which a cable operator has an attributable interest, and is a vertically integrated programming vendor. IV. POSITIONS OF THE PARTIES 8. EchoStar alleges that it has been unable to obtain access to FX's programming, based on prohibited exclusive contracts that FX has entered into with various cable operators. EchoStar notes, however, that TCI has informed EchoStar that it will not seek to enforce its contracts to prevent EchoStar from obtaining FX's programming and that, accordingly, EchoStar has not named TCI as a defendant to this Complaint. EchoStar further states that after TCI notified EchoStar that it would not seek to enforce its exclusive contract, FX informed Echostar that it was prepared to negotiate only with respect to TCI franchise areas and non-cabled areas. EchoStar then requested that FX identify all cable operators with whom FX has exclusive affiliation agreements. Echostar contends that FX refused to provide such a list stating that the terms of its affiliation agreements are confidential. According to EchoStar, FX's unwillingness to provide this information demonstrates that FX provides programming under prohibited exclusive arrangements with cable operators other than TCI. EchoStar also asserts that FX has not attempted to make the necessary public interest showing required through the filing of a petition for exclusivity in order to justify the continued enforcement of its exclusive contracts. 9. In addition to alleging that FX is attempting to enforce prohibited exclusive contracts, EchoStar also alleges that FX's refusal to negotiate carriage of its programming with EchoStar constitutes an unreasonable refusal to sell in violation of Section 628(c). Finally, EchoStar asserts that FX's unwillingness to negotiate with EchoStar to carry FX's programming, while offering such programming to certain cable operators, constitutes an unfair practice in violation of Section 628(b) of the Communications Act and Section 76.1001 of the Commission's rules. EchoStar also requests that the Commission award it damages in this matter. 10. In response, FX argues that its exclusive contracts were lawful when entered into because FX was not a vertically integrated programmer at the time. According to FX, its subsequent vertical integration does not negate the validity of these agreements. FX asserts that retroactive enforcement of the Commission's rules would expose programming entities that granted legal exclusivity to breach of contract and damage claims from their cable customers. FX also contends that regulating FX's exclusive contracts by extending Section 628 to contracts entered into by non-vertically integrated programmers would infringe upon programmers' First Amendment protected speech. Finally, FX argues that because its exclusive agreements are valid, it has not committed non-price discrimination and unfair practices. FX argues that it is willing to sell its service in any area not served by cable, in any area not covered by a valid exclusive contract, and in any area served by TCI. FX states that it does not intend to extend or renew the exclusivity provisions of its affiliation contracts and is willing to negotiate now for nationwide carriage beginning in 1999, when its exclusive contracts expire. V. DISCUSSION 11. Section 628(c)(2)(D) of the Communications Act prohibit[s in areas served by a cable operator] exclusive contracts for satellite cable programming or satellite broadcast programming between a cable operator and a satellite cable programming vendor in which a cable operator has an attributable interest . . . , unless the Commission determines . . . that such contract is in the public interest. 12. EchoStar argues that FX, a vertically integrated programming vendor, cannot enter into or enforce an exclusive contract with a cable operator in areas not served by a cable operator ("unserved areas"). In areas served by a cable operator ("served areas"), EchoStar notes that Commission rules prohibit entering into such exclusive contracts unless the parties submit a petition for exclusivity and the Commission makes a determination that the contract is in the public interest. Echostar submits that FX has filed no such petition. Echostar argues that this requirement applies not only before entering into an exclusive contract in a served area, but also when "seeking to enforce" such a contract. EchoStar asserts that, in served areas, the Commission's rules prohibit not only "enter[ing] into exclusive contracts," but "engag[ing] in any practice, activity or arrangement tantamount to an exclusive contract" unless the Commission first determines that the practice, activity or arrangement is in the public interest. 13. EchoStar argues that even if a contract does not fall within the exclusivity rules at the time it was executed, it may later become subject to those rules in a situation where, for example, one of the parties to the contract becomes affiliated with a cable operator. EchoStar argues that because FX is now affiliated with TCI, the nation's largest cable operator, FX should be prevented from enforcing its exclusive contracts with cable operators and must offer its programming to all competing MVPDs, including EchoStar. EchoStar argues that with one exception, the grandfathering of exclusive contracts entered into prior to June 1, 1990, the 1992 Cable Act does not draw distinctions based on when an exclusive contract was executed. EchoStar contends that FX does not explain why its contracts should be treated differently than any other exclusive contract entered into after June 1, 1990. 14. FX admits that it is a vertically integrated programming vendor and has exclusive contracts with cable operators throughout the country. In FX's view, however, it should be permitted to enforce these exclusive contracts, despite its subsequent vertical integration with TCI, because FX was not vertically integrated at the time these contracts were entered into and there is no evidence that the contracts were entered into for anticompetitive reasons. FX emphasizes the prospective language of the Commission's orders implementing the program access rules relating to exclusive contracts and practices, citing such language as "any cable operator seeking to execute an exclusive contract" must obtain the Commission's approval "before doing so." According to FX's interpretation, the public interest determination required to be made in these situations applies only to proposed exclusive contracts and is not applicable to an exclusive contract that was lawfully entered into by a non-vertically integrated programmer. FX contends that Congress expressly exempted the vertically-integrated contracts of programmers if they were entered into on or before June 1, 1990 and thus declined to absolutely prohibit exclusive contracts. FX argues that it would be illogical to interpret Section 628 to invalidate exclusive contracts entered into by non-vertically integrated programmers when the statute explicitly allows grandfathered exclusive contracts to remain in effect. 15. With the sole exception of grandfathered contracts permitted by Section 628(h), the program access provisions of the Communications Act prohibit exclusive contracts with cable-affiliated programming vendors unless the Commission makes a determination that the exclusive arrangement is in the public interest. We disagree with FX's argument that only programmers that were vertically integrated at the time Section 628 was enacted are required to file a petition for exclusivity with the Commission. The Communications Act and the Commission's rules acknowledge that exclusive contracts that were once permissible under the Communications Act may subsequently become prohibited. The Commission's rules expressly provide procedures for the Commission to make a public interest determination not only when a vertically integrated programmer "enter[s]" into an exclusive contract, but also when a vertically integrated programmer "seek[s] to enforce" an exclusive contract. In this proceeding, FX seeks to enforce its exclusive contracts with unidentified cable operators to preclude selling its programming to Echostar in such cable operators' franchise areas. Prior to enforcing these contracts as a vertically integrated programmer, FX was required by our rules to obtain a public interest determination permitting such exclusivity. FX did not seek such a determination and therefore is precluded from enforcing the exclusive aspect of such contracts. 16. FX argues that its vertical integration subsequent to entering into the contract creates an exception to Congress' mandate prohibiting exclusivity, but has been unable to demonstrate any basis for that exception in either the statute or the legislative history. We do not think that the Communications Act silently validates the exclusive contracts of programmers that subsequently became vertically integrated. Through its inclusion of the grandfathering exception, Congress demonstrated that it did not intend the prohibition against exclusive contracts in served areas to apply to a certain category of exclusive contracts (i.e., exclusive contracts entered into on or before June 1, 1990) and drafted express language to implement that policy. FX asks us to find that Congress created a second, unwritten exception to the prohibition against exclusive contracts. The plain language of Section 628 contains no such exception. If Congress intended to create such an exception, we are confident that it would have done so expressly as it did with exclusive contracts entered into before June 1, 1990. FX is a vertically integrated programmer, subject to the program access rules and, based on the record, FX's enforcement of an exclusive contract violates the prohibition on exclusive contracts in Section 628(c)(2)(D) of the Communications Act. 17. FX argues that by granting Echostar's complaint, the Commission would impinge upon FX's First Amendment rights. We disagree. The United States Court of Appeals for the District of Columbia Circuit examined the program access provisions of the 1992 Cable Act under the "intermediate scrutiny" standard of review. In holding the program access provisions to be constitutional, the District of Columbia Circuit stated that: the vertically integrated programmer provisions at issue here are likewise justified by . . . special characteristic[s] of the affected companies: both the bottleneck monopoly power exercised by cable operators . . . and the unique power that vertically integrated companies have in the cable market. FX asserts that "the court would have reached a different result had it contemplated the argument that the statute extends to contracts entered into by non-vertically integrated programmers. The court found the statute narrowly tailored specifically because it regulated only the conduct of vertically integrated companies." FX submits no evidence or precedent to support its First Amendment claims. In view of the District of Columbia Circuit's broad affirmance of the constitutionality of the program access provisions, FX has failed to establish that its First Amendment rights have been impinged. FX acknowledges that the District of Columbia Circuit concluded that the statute is narrowly tailored specifically because it regulates only the conduct of vertically integrated programmers supports our decision. It is now a vertically integrated programmer. FX's activities came under the scrutiny of the program access provisions only after FX became vertically integrated and attempted to enforce its prohibited exclusive contracts. 18. FX argues that by granting Echostar's complaint, the Commission would subject FX to breach of contract and damage claims. The program access provisions of the Communications Act, including the exclusivity prohibition and public interest factors, were enacted as part of the 1992 Cable Act. These provisions clearly established that a vertically integrated programmer entering into or enforcing an exclusive contract after June 1, 1990 must seek a public interest determination to validate such contract. It is undisputed that all of the exclusive contracts at issue in this proceeding were entered into well after the enactment date of the 1992 Cable Act. FX knew, or should have known, that, if subsequent to the execution of such exclusive contracts a cable operator obtained an attributable interest in FX, the exclusive aspects of such contracts would be invalid absent a public interest determination by the Commission. The circumstances that brought FX to this juncture were entirely within FX's control. FX entered into exclusive contracts. FX agreed to the business arrangement that caused it to become a vertically integrated programmer. FX failed to seek a public interest determination from the Commission. These were voluntary actions. That these actions have resulted in the instant complaint, and that the exclusivity prohibition of the law subjects FX to breach of contract liability, is not a justifiable defense. 19. We next turn to Echostar's allegation that FX's refusal to sell EchoStar its programming constitutes an unreasonable refusal to sell in violation of Section 628(c) of the Communications Act and Section 76.1002(b) of the Commission's rules, which prohibit discrimination by a satellite cable programming vendor in which a cable operator has an attributable interest in the prices, terms, and conditions of sale of satellite cable programming between competing MVPDs. The Commission has stated that the burden is on the complainant to show that: (i) the defendant is a satellite broadcast programming vendor or a vertically integrated satellite cable programming vendor that meets the attribution standards outlined in the Commission's rules; and (ii) the defendant, as between the complainant and another MVPD competitor, has engaged in some form of non-price discrimination, such as an unreasonable refusal to sell its programming to the complainant. To avoid a decision in favor of the complainant where the defendant has refused to sell its programming to the complainant, the defendant must establish that its refusal to sell its programming to the complainant is not unlawfully discriminatory because it is justified by legitimate business reasons. 20. The first element requires that the defendant must be a satellite broadcast programming vendor or a satellite cable programming vendor that meets the Commission's attribution standards, FX does not dispute and we find that FX is a satellite cable programming vendor in which a cable operator has an attributable interest. The Commission's attribution standard set forth at Section 76.1000(b) and the notes to Section 76.501 of the Commission's rules, state that a cable operator will be considered to have an attributable interest in a programming vendor if the cable operator holds five percent or more of the stock of the programmer, whether voting or non-voting, or if the operator holds limited partnership equity interest of five percent or more. Defendants acknowledge that through its wholly-owned subsidiary, Liberty Media Corporation, TCI has a 50% ownership interest in FX and that FX is a "satellite cable programming vendor" in which a cable operator has an "attributable interest." 21. With respect to the element of discrimination between competing MVPDs, the Commission has stated that in order to establish that another distributor is a competitor for purposes of showing discrimination under Section 76.1002(b), there must be "some overlap in actual or proposed service area." FX has stated that, prior to the formation of a joint venture with News Corporation and TCI, FX entered into distribution agreements with nearly all of the major cable operators in the country. Echostar offers its service on a nationwide basis. We therefore find that Echostar competes with cable operators in every franchise area in the continental United States. In addition, the complainant must show that the defendant discriminates between the complainant and its competitor in the sale of the programming in question. FX, by virtue of its exclusive agreements with cable operators, and its refusal to sell to Echostar, discriminates between the complainant and its competitors. 22. As to the requirement that a complainant show the existence of non-price discrimination by defendant, the Commission has recognized that an "unreasonable refusal to sell" may constitute non-price discrimination under Section 628(c). The Commission, however, has cautioned that unreasonable refusals to sell must be distinguished from refusal to sell based on legitimate reasons. Other than asserting an exclusive contract, FX offers no evidence that its refusal to sell is based on legitimate business reasons. 23. We find that FX unreasonably has refused to sell its programming to Echostar. We do not agree with FX that its once valid exclusive contracts justify its refusal to sell to Echostar. FX offers no additional support which might constitute a legitimate business reason for its refusal to sell its programming to Echostar. We find that FX's refusal to sell is a violation of Section 628(c) of the Communications Act and Section 76.1002(b) of the Commission's rules. 24. In light of our finding in this matter regarding FX's violations of Sections 628(c), we find it unnecessary to address EchoStar's unfair method of competition argument pursuant to Section 628(b) of the Communications Act and Section 76.10001 of the Commission's rules. We also decline to award damages against FX at this time. We will not foreclose, however, the imposition of appropriate administrative remedies, including forfeitures, should FX fail to comply with the directives set forth herein. VI. ORDERING CLAUSES 25. Accordingly, IT IS ORDERED that the program access complaint filed by EchoStar Communications Corporation against Fox/Liberty Networks, LLC and FX Networks, LLC IS GRANTED and FX Networks, LLC is required within 45 days of the release of this order to make its programming available to EchoStar Communications for distribution over its DBS system on nondiscriminatory terms and conditions. 26. This action is taken by the Acting Chief, Cable Services Bureau, pursuant to authority delegated by Section 0.321 of the Commission's rules. FEDERAL COMMUNICATIONS COMMISSION John E. Logan Acting Chief, Cable Services Bureau