A Good Faith Disconnect on Retrans

By Scott Flick, Pillsbury Law

scott-flickThere is an old vaudeville routine I’ve found more useful for understanding lawmaking in Washington than any textbook.  It goes something like this:

(Scene: a nighttime street corner illuminated by a single streetlight; a short man (Joe) is frantically searching for something near the base of the streetlight when a tall man (Bill) enters from stage left.)

Bill:  Hi Joe.  Did you lose something?

Joe:  I was buying a hot dog at the cart down the street, and when he was giving me my change, I dropped a quarter.

Bill:  Well if you dropped it down the street, why are you looking here?

Joe:  Cause the light’s better here.

When constituents are unhappy, no matter the cause, they make sure their representatives in Congress know it.  In turn, a good politician knows that the worst possible response is to say there really isn’t anything government can do to fix the problem.  So the legislator promises to take immediate action to remedy the constituent’s complaint.  Often, however, the constituent’s issue lacks a governmental solution, or the only solution would create yet worse problems.

As a result, the desire to demonstrate responsiveness leads to legislation that does nothing to actually solve the constituent’s problem, and sometimes makes matters worse.  However, as long as the legislation relates in some way to the subject matter of the complaint, the legislator can claim to have addressed the needs of his or her constituents.  Rather than face the difficult task of explaining the complexities of the issue to constituents, and why the system is working as intended (or at least better than any of the available alternatives), legislators will search for an irrelevant solution where “the light’s better.”

I was reminded of this last week by an exception that proves the rule.  Chairman Wheeler announced the FCC would terminate without further action its congressionally-mandated review of the Commission’s rule requiring that parties to retransmission consent negotiations negotiate in good faith.  Congress had urged the review in response to heavy lobbying from the cable and satellite TV industries for changes to the retransmission consent regime, as well as in response to complaints from viewers frustrated by their pay TV provider’s programming disruptions.  Specifically, Congress directed the FCC to “commence a rulemaking to review its totality of the circumstances test for good faith negotiations under clauses (ii) and (iii) of section 325(b)(3)(C) of the Communications Act of 1934.”

To understand this mandate requires going back to 1999, when Congress passed the Satellite Home Viewer Improvement Act (“SHVIA”).  SHVIA changed copyright law to allow satellite TV systems to retransmit local TV stations, putting satellite TV on an equal competitive footing with cable TV for the first time.  Cable operators had been retransmitting local TV stations for decades, but the lack of a broad compulsory copyright license for satellite providers meant that most subscribers were ineligible to receive broadcast programming via satellite.

Given the monopolistic power of most local cable systems at the time, there was a concern that cable operators would apply pressure on local stations to withhold retransmission rights from satellite providers to preserve cable TV’s continued stranglehold on the programming most desired by pay TV subscribers.  To address this fear, Congress included in SHVIA a provision that would “prohibit a television broadcast station that provides retransmission consent from . . . failing to negotiate in good faith ….”  That the purpose of this requirement was not managing the negotiations themselves, but ensuring that all new entrants, including satellite TV, had an opportunity to negotiate for broadcast programming, was made clear by three associated facts.

First is that good faith negotiation was strangely required of only the broadcaster; the pay TV provider had no such obligation.  This imbalance of rights would have been unthinkable had the purpose of the good faith obligation been to ensure fair negotiations, but it made sense where broadcast programming was in such high demand that requiring pay TV providers to engage in negotiations with local TV stations seemed entirely unnecessary.

Second, Congress emphasized in the legislative history that the point of the good faith obligation was to ensure that TV stations could not flatly refuse to negotiate, or, if forced to negotiate, could not just engage in sham negotiations aimed only at preventing a retransmission deal.  The Joint Explanatory Statement of the Committee of Conference clarified that the point of the good faith requirement was to prevent a TV station from

refusing to negotiate in good faith regarding retransmission consent agreements.  A television station may generally offer different retransmission consent terms or conditions, including price terms, to different distributors.  The [Commission] may determine that such different terms represent a failure to negotiate in good faith only if they are not based on competitive marketplace considerations.

In other words, a TV station must show up to negotiate, and if the pay TV provider can demonstrate that it is a sham negotiation (because the station is making crazy asks not based on “competitive market considerations”), then the station has failed to meet its “show up and negotiate” obligation.

Third, if there were any doubt as to the target of Congress’s concern, it was dispelled by Section 1009(a)(2) of SHVIA, which prohibited “a television broadcast station that provides retransmission consent from engaging in exclusive contracts” with pay TV providers.  Congress wanted to make sure that TV stations would not favor incumbent cable TV systems by contractually or otherwise preventing themselves from dealing with new entrants interested in retransmitting broadcast programming.

Ultimately, Congress’s concern that new entrants might be categorically denied the opportunity to negotiate for retransmission rights turned out to be unfounded.  As I wrote here a few years ago, broadcasters had long been wary of local cable monopolies and, far from refusing to negotiate, TV stations welcomed the new entrants with open arms.  It turned out to be a good approach, as the concerted refusal by the cable TV industry to pay to retransmit broadcast programming collapsed a few years later when the addition of local TV programming made satellite TV an effective competitor to cable.

But things started to go astray when the FCC drafted rules to implement SHVIA.  As Congress felt that “show up and negotiate in good faith” wasn’t complicated, it didn’t bother to define “negotiate in good faith” in SHVIA.  Following the precept that any straightforward statute can be made complicated through implementing regulations, the FCC struggled to craft a precise definition of “good faith” for its regulations.  Unfortunately, rather than accept the “show up and negotiate” standard Congress seems to have intended, the Commission looked to labor law for guidance on “good faith negotiations”.  Labor contracts, however, present a much different circumstance, with management usually having far more power in such negotiations than any retrans negotiator on either side of the table.  For example, if a TV station finds itself unable to reach terms with a cable system operator, it can’t just fire the operator and place a more amenable party in charge of the cable system.  As a result, both parties to a retrans negotiation have an incentive to work together to reach an agreement.

The result of the FCC’s approach was a multi-part set of negotiating restrictions composed of “per se” prohibitions on certain specific negotiating practices, and an overarching “totality of the circumstances” test in case the specific prohibitions missed anything.  Far from Congress’s simple “show up and negotiate” mandate, some of these specific restrictions turned retransmission negotiations into an elaborate and unpredictable dance to which the FCC was invited.

For example, one of the FCC’s good faith prohibitions is on putting forth “a single, unilateral proposal.”  This requirement has the perverse effect of preventing parties from merely presenting their bottom line in negotiations, and instead forces them to argue for more than they are actually seeking so they can demonstrate some “give” before reaching their bottom line lest they be accused of having presented a single unilateral proposal.  The result is longer, more complex negotiations with greater confusion and uncertainty, actually increasing the chance of negotiations breaking down before reaching a conclusion.

However, that impact is de minimis compared to the ethereal claim that the “totality of circumstances” indicates a party is negotiating in bad faith.  Negotiations fail when one or both parties overestimate their position, and while experienced negotiators are usually pretty astute at assessing the economics and leverage of a negotiation and generating a contract efficiently, uncertainty fundamentally changes that equation.  It’s the equivalent of introducing jokers to a poker deck—when that long shot of drawing the card needed to fill an inside straight seems more plausible, the player becomes more willing to draw out the betting to take that chance.  Parties are quick to convince themselves that the FCC will take their side in a good faith complaint (or at least that the other party can be threatened with such a complaint), introducing a variable to the negotiations that interferes with orderly progress toward a deal.  The party convinces itself that it might draw a joker from the FCC’s deck, and shifts its focus to posturing for an FCC fight rather than slogging through the negotiations to reach a deal.

It became clear by 2004 that the FCC’s good faith rules had themselves become a source of substantive leverage in negotiations, complicating rather than simplifying efforts to reach a deal.  As a result, that year broadcasters demanded that the good faith requirement apply to both parties, and Congress changed the law accordingly.

By complicating negotiations, the good faith rules made the failure of retrans negotiations more likely without any apparent upside.  A lot of parties wasted a lot of time prosecuting good faith petitions at the FCC (and much more time was wasted posturing for good faith complaints that were never filed), but only one ever led to a finding of bad faith.

That was a petition I filed against a cable system that refused to negotiate because it also refused to stop carrying the broadcaster’s programming when the retransmission agreement expired.  The case is either a vindication of Congress’s “just show up” view of good faith negotiations, or a demonstration that good faith regulations are entirely unnecessary.  The potential copyright liability for the cable system’s unauthorized retransmission was nearly a billion dollars.  Since copyright litigation can be expensive, however, and the only result would be the broadcaster ending up owning the cable system, a good faith petition was the quickest and most efficient way of resolving the pirating of the programming.  It could have been resolved in the courts; it just would have been more expensive.

Unfortunately, even Congress seems to have lost sight of the original purpose of the good faith requirement.  Instead of ensuring that new pay TV entrants have an opportunity to seek local TV station programming, many in Congress now see good faith requirements as a solution for, rather than a cause of, breakdowns in retrans negotiations.  Congress’s 2014 request that the Commission review its totality of the circumstances test no longer focused on good faith requirements as an aid to new entrants, but as a response to constituent complaints about programming disruptions.  In the associated Senate Commerce Committee Report, the Committee expressed concern that TV stations and pay TV providers were engaging in tactics that “push [retransmission consent] negotiations toward a breakdown and result in consumer harm from programming blackouts.”  The Committee added that it “expects the FCC’s totality of the circumstances test to include a robust examination of negotiating practices, including whether certain substantive terms offered by a party may increase the likelihood of the negotiations breaking down.”  Now it was apparently irrelevant whether the terms were based on “competitive marketplace considerations”, but merely whether they made the breakdown of negotiations more likely.

So, to appease disgruntled constituents lacking a TV antenna, legislators encouraged the FCC to actually increase regulatory uncertainty in retrans negotiations.  Rather than accepting that there is little connection between extensive good faith regulations and preventing program disruptions, legislators doubled down—gathering around the “good faith” streetlight where the light is better and life seems simpler.

All of which is an extremely roundabout way of getting to why I was pleased to see a moment of mental clarity last week amid all of this good faith harrumphing.  Within Chairman Wheeler’s blog post announcing the decision to conclude the FCC’s review was a rare acknowledgement of a truth that has gone unspoken in Washington for too long: “Though commenters complained about a variety of negotiating practices, none showed that those practices are the causes of the blackouts that occur.”  While he was referring specifically to the pointlessness of expandingfurther the list of good faith negotiating restrictions, the statement applies with equal force to most of the current good faith rules.  It’s not that anyone is particularly interested in engaging in bad faith negotiations; it’s just that when a major point of retrans negotiations becomes about posturing for the FCC rather than reaching a deal, program disruptions from failed negotiations will be more likely, not less likely, to happen.  As it turns out, standing next to the streetlight is better for reading than for getting good television reception.