FCC’s Exclusive Service Ban Will Void Existing Cable Agreements

Published on: January 20, 2008

Community associations will no longer be able to play favorites, at least when it comes to the selection of companies providing cable services. In a decision that has infuriated cable companies and unsettled common interest ownership communities , the Federal Communications Commission (FCC) has decided to prohibit contracts giving large cable companies the exclusive right to provide services to multi-unit properties. The order, published in November and approved unanimously by the five-member commission, applies to apartments, condominiums and cooperatives, as well as to “gated communities,” mobile home parks, garden apartments and “other centrally managed residential real estate developments.” In addition to prohibiting future exclusivity agreements, the order also nullifies the exclusivity provisions in existing contracts — a controversial exercise of the commission’s authority  encouraged by the telecommunications companies (primarily Verizon and AT&T) that sought the change in FCC policy, but almost certain to be challenged by the cable operators.

The FCC considered the exclusive contract question eight years ago, but concluded then that the agency lacked the authority to bar these agreements. W hen the issue came up again in 2003, the commission decided that while it had the authority to prohibit exclusive service agreements, it was unclear whether the benefits outweighed the disadvantages for consumers, or vice versa. This time, the commission concluded that the primary beneficiaries of exclusive service agreements are the cable companies themselves. According to the FCC order, the agreements “inhibit competition” and discourage the entry of new service providers, depriving consumers of “the benefits of increased competition, including lower prices and the availability of more channels with diverse content, as well as access to alternative providers of broadband facilities.”

The Community Associations Institute (CAI), along with other real estate industry trade associations (including the national Apartment Association, the Building Owners and Managers Association, and the Institute of Real Estate Management) had argued that exclusive contracts give building owners leverage they would not otherwise have to negotiate favorable terms with cable providers. Absent these agreements, the trade groups contended, providers would be less inclined to incur the cost of installing wiring and upgrading the installations, especially for smaller buildings and properties in rural communities.

That Was Then

The FCC disagreed. Those arguments may have been valid in the past, the commission notes, when cable operators were “the only game in town.” But since the FCC last considered the issue, many other providers have entered the video service business on a large scale. As a result, exclusive service agreements that once may have benefited consumers are now “denying [them] the recognized benefits generated by competition.” For that reason, the commission said, “we conclude that the harms significantly outweigh the benefits in ways they did not” several years ago.

The agreements harm building owners as well as residents, the FCC said, because they discourage the competition that would force providers to expand broadband capacity and otherwise upgrade systems in ways necessary to provide the multiple programming options that residents are increasingly demanding.

The FCC also specifically rejected CAI’s argument that community associations “are democratically governed organizations capable of making their own judgments about the benefits provided by exclusivity agreements.” In some cases, the commission noted, the existing agreements were signed by builders or managers “whose interests do not coincide with those of the residents, especially after [the passage] of several years.” Moreover, the commission noted in its order, “there is no evidence in the record, other than generalities and anecdotes,” that exclusivity agreements lead providers to make investments they would not make otherwise.

The most controversial aspect of the FCC order is its ban on existing exclusive service agreements as well as those that might be negotiated in the future. Aware of that concern, the commission considered but rejected suggestions to make the order prospective only, concluding, “A rule that left exclusivity clauses in effect would allow the vast majority of the harms caused by such clauses to continue for years.” Both existing and prospective agreements “have the same competition- and broadband-deterring effect that harms consumers,” the FCC said.

Litigation Guaranteed

Although the vote on the order was unanimous, at least one commissioner warned that banning existing contract provisions would guarantee a legal challenge. “To flash cut to a new regulatory regime without a sensible transition period only begs for an appeal that could result in a court throwing out all of our order, the good with the bad,” this commissioner warned.

That is clearly the outcome cable providers hope to achieve. A Comcast official has said the interference with existing agreements “will likely guarantee years of litigation.” The National Cable and Telecommunications Association (NCTA) has similarly termed the termination of existing exclusive service arrangements “unprecedented” and “legally suspect.” Signaling the arguments the industry’s attorneys will no doubt use in court and its lobbyists will use in Congress to challenge the order, the NCTA has warned that the exclusive service ban “”could harm consumers and jeopardize the delivery of advanced services to low-income neighborhoods, where other providers have chosen not to offer service.”

What Community Associations Should Know

While the legal battle lines are forming, the FCC’s order has taken effect. Community associations, therefore, should be aware of these key points:

  • The order applies only to larger cable companies operating under state or local government franchises granting them rights of way.
  • The order does not require community associations to grant access to all service providers who request it. Building owners (including the governing boards of common interest ownership communities) “still retain the rights [they have] under relevant state law to deny a particular provider the right to provide services to its property. We merely prohibit the enforcement of existing exclusivity clauses and the execution of new ones,” the FCC order says.
  • The order applies only to exclusive service agreements; it does not bar the bulk payment arrangements or the exclusive marketing agreements that many associations have negotiated with their cable providers. However, the FCCC is eyeing both areas. The commission has issued a “further notice of proposed rulemaking” seeking comment on whether the order should prohibit exclusive marketing and bulk billing arrangements, and on whether it should apply not just to large operators but also to “private” operators and to “other multi-channel video programming distributors.“

Because the order currently applies only to cable operators, it does not bar exclusive service agreements with providers of satellite or Internet services.  If cable programming is part of a combination package that includes other services, the exclusive service ban would apply only to the cable component.  The provider could enforce other provisions of the contract, but only if it contains a “severability clause.  Absent such a provision, termination of the exclusive service requirement could have the effect of terminating the contract as a whole.  Association boards should have their attorneys review their contracts with cable providers to determine what impact the FCC order will have on their communities.