In Search for Copyright Relief, Pandora Opens Box of Ownership Requirements

Alien ownership conditions imposed on Internet radio service when it tries to buy small-town radio station

This is the story of how Pandora, in an effort to cut its copyright royalty costs, managed to saddle itself with a complex array of ownership reporting requirements designed by the FCC to keep Box Elder, South Dakota safe from aliens. It’s a true story.

Pandora, of course, is the prominent Internet music streaming operator. Since its business consists of transmitting recorded music digitally, it’s on the hook for a lot of copyright royalties payable, through ASCAP, BMI and SESAC, to the composers of the music it transmits. The precise rates it pays are generally subject to direct negotiation between Pandora and the performance rights organizations (PROs).

In contrast to Pandora and other streaming services that are limited exclusively to Internet distribution, radio broadcasters do not have to negotiate individually with respect to royalties. Rather, broadcasters’ rates are set industry-wide through negotiations between, on the one hand, the Radio Music License Committee (RMLC) acting on behalf of broadcasters and, on the other, the various PROs. (The federal courts are also involved in the process to a degree.) Those negotiations have been good for traditional over-the-air broadcasters, who as a result pay lower royalties for their own digital transmissions than do Pandora and other Internet-only services. And those lower rates apply even if the broadcaster’s stream(s) carry content other than what the broadcaster is sending over-the-air.

Pandora has been involved in acrimonious negotiations, and even litigation, with ASCAP regarding its royalty rates. But then it had an idea: why not take advantage of the attractive over-the-air broadcaster rates by simply becoming a broadcaster?

And so it was that Pandora came to Box Elder (pop. 7,800), where the only local radio station in town was for sale.

After cutting a deal to buy the station, Pandora filed an application for approval of the acquisition. In that application it was upfront about its motivations for purchasing the station, i.e., it was looking, among other things, to lower its copyright royalty burden. Not surprisingly, the application drew opposition from ASCAP. 

In its Petition to Deny, ASCAP argued that Pandora’s proposed acquisition was essentially a sham to attempt to obtain better royalty rates. Perhaps recognizing that this argument by itself was unlikely to persuade the FCC, ASCAP also challenged Pandora’s compliance with the Commission’s ownership rules. Specifically, ASCAP alleged that Pandora had failed to properly disclose all of its ownership; more importantly, it alleged that Pandora had failed to show that it complies with the FCC’s limits on foreign ownership in broadcast licensees.

The Communications Act limits direct foreign investment in broadcast licensees to 20% and indirect ownership by foreign entities to 25%. While these limits are frequently waived for non-broadcast licensees, they have long been essentially hard and fast rules for broadcast licensees. Although the Commission has in recent years indicated a willingness to loosen the limits for broadcasters on a case-by-case basis, that willingness has not yet evolved into any actual loosening.  

The alien ownership charge posed considerable problems for Pandora – not necessarily because it was in violation, but because it couldn’t prove that it wasn’t in violation. That’s because it’s a publicly traded company whose stock is widely held by companies or individuals, some foreign, some not. For a number of reasons it was impossible for Pandora to determine with confidence the nationalities of all of its shareholders.

Nevertheless, it tried. Initially, Pandora submitted a NASDAQ survey of a sampling of its stockholders’ mailing addresses, which showed foreign ownership of around 16%. It argued that its Board of Directors was composed entirely of U.S. citizens, and that eight of ten of its executive officers were also U.S. citizens, greatly reducing the possibility of foreign influence or control over broadcast operations. That wasn’t enough for the FCC, primarily because mailing addresses aren’t necessarily a reliable indicator of nationality.

Pandora then tried a second approach based on an analysis of SEC filings by its shareholders. That study showed that around 18% of its voting interests might be held by foreign individuals or entities. The FCC still wasn’t satisfied because this alternate approach measured only voting interests, rather than equity interests. The Communications Act limits foreign ownership of both types of interests. 

Finally, Pandora gave up. It acknowledged that it couldn’t prove the level of its foreign ownership to the FCC’s satisfaction, in part because of SEC regulations designed to protect shareholders. Those regs prevent Pandora from requiring its shareholders to disclose their citizenship. (While the organizational documents of most publicly-traded broadcast companies include provisions requiring shareholders to waive this SEC protection, Pandora’s did not – because it had never been a broadcaster and thus hadn’t had to worry about this sort of thing.)

Still confident that its foreign ownership was well under the limit but unable to demonstrate compliance with the FCC’s rules, Pandora asked the FCC for a declaratory ruling. Specially, it asked the Commission to confirm either that: (a) foreign investors could hold up to an aggregate 49.99% voting interest and 100 percent equity interest in Pandora’s parent company without additional FCC approval; or (b) in processing Pandora’s application, the FCC would use the policy it routinely applies in the common carrier context. That latter option would permit 100% foreign equity and voting interests without prior Commission approval, subject to certain conditions.

After cogitating on all this for the better part of a year, the Commission finally agreed to cut Pandora some slack. In so doing, it blew past ASCAP’s arguments about how Pandora is just trying to get better copyright royalty rates. As far as the FCC is concerned, Pandora’s motivation has nothing to do with the foreign ownership rules, which were, after all, the sole focus of Pandora’s declaratory ruling request. And anyway, the Commission said, if ASCAP thinks that Pandora’s acquisition of a station will undermine the existing copyright licensing regime, ASCAP should take that up with some other agency, or maybe Congress, or maybe the courts – but not the FCC.

As far as Pandora’s alien ownership is concerned, the Commission concluded that the information submitted by Pandora had “not raise[d] immediate concerns regarding foreign influence or control”. That was the good news for Pandora.

The bad news was that, in order to make sure that aliens don’t sneak in and take over Pandora, the FCC imposed a long list of rigorous requirements on it. As a result, if Pandora wants to become a broadcast licensee, it will have to:

obtain prior Commission approval before any foreign citizen or entity obtains a greater than 5% equity or voting interest (10% for certain institutional investors). Prior approval will also be required before (a) Pandora’s aggregate foreign ownership (equity or voting) can exceed 49.99%, or (b) foreign citizens comprise a majority of the Board of Directors.  

amend its certificate of incorporation, bylaws or other corporate documents to ensure that it can determine its levels of foreign ownership and otherwise comply with the other terms of the Declaratory Ruling. Those amendments must provide Pandora not only the right to require disclosure of its shareholders’ citizenship, but also the right to “take any and all actions that the Board of Directors deems necessary to so comply or cure any noncompliance”, including (but not limited to) the right to compel the redemption of shares held by aliens.

monitor its foreign ownership percentages and, with every biennial ownership report, certify to its continued compliance with the conditions set out in the Declaratory Ruling. The Commission provides six suggested monitoring methods.

submit to the Commission, within 90 days, a list of steps it has taken, or plans to take, to ensure compliance with all of these condition. That submission must also include a detailed description of the methods Pandora plans to use to determine its foreign ownership percentages. If the Commission approves that submission, the terms described by Pandora in that submission will themselves become part of the conditions of the Declaratory Ruling.  

So Pandora has its work cut out for it. And get this: Pandora’s application still hasn’t been granted. In fact, processing of the application won’t even pick up again until Pandora has satisfied the various conditions described above. So while Pandora’s petition for a declaratory ruling may technically have been granted, Pandora still has a ways to go before it can become a broadcast licensee. 

And all of this effort is intended to prevent Box Elder’s only radio station from falling under the control of aliens. Really?

As Commissioners Pai and O’Rielly observed in separate concurring statements, this decision highlights flaws in the Commission’s treatment of foreign investment in broadcast licenses. Had Pandora been trying to acquire a license in some other regulated service – including, say, wireless licenses giving it access to the bazillions of smartphones in everyone’s hands – its foreign ownership levels could have been approved presumptively, without the need for exhaustive, and in Pandora’s case unavailable, documentation. The FCC’s insistence on such documentation here is especially bizarre in view of the fact that (as Pai points out) the available evidence indicates that Pandora already meets the existing alien ownership limits.

And let’s not forget that, whatever Pandora’s foreign ownership might be, Pandora already provides its Internet service to more than 79,000,000 Americans (according to Commissioner Pai). So if Pandora’s foreign interests do indeed have some insidious and malevolent plan afoot, it’s possible that Box Elder is the only place where Pandora could not, right now, this instant, implement its nefarious little plan.

So the extensive hoops that Pandora will have to jump through just to get its application processed seem a bit silly. But at least the FCC didn’t simply slam the door on Pandora. The Commission’s willingness, however heavy-handed and begrudging, to leave the door slightly ajar does suggest a continued openness to the relaxation of its approach to broadcast alien ownership, relaxation that the Commission promised a couple of years ago.

In the meantime, we can only hope that, if Pandora does eventually acquire its Box Elder station, the resulting savings in copyright royalties will make it all worthwhile.

Foreign Ownership Questions? Frank Montero, Don Evans May Have Some Answers

FHH foreign ownership gurus on the bill in upcoming webinar

If you’re interested in the FCC’s recent relaxation of its foreign ownership rules – and the impact that that relaxation might have on commerce nationally and globally – check this out. FHH mavens (and regular CommLawBlog contributors) Don Evans and Frank Montero will be sharing their expertise in a webinar on October 23, 2013. Titled “What the FCC’s Relaxed Foreign Ownership Regulations Mean for Global Commerce”, the gig is billed as a webinar for folks who advise communications and broadcasting companies, professionals involved in media ownership and regulation, and pretty much anybody dealing in international commerce. It may even qualify for continuing legal education in some jurisdictions. Such a deal! The 90-minute affair is sponsored by Bloomberg BNA.  Consult the registration page for information about admission fees (there are several options),CLE details, other webinar panelists and the like.

Foreign Ownership Rules Loosened For Common Carrier and Aeronautical Licensees

FCC relaxes alien ownership restrictions for some, but NOT all, services.

While Congress continues to debate fundamental issues of immigration policy, the FCC has taken steps to make it considerably easier for aliens to own controlling and non-controlling interests in common carrier and aeronautical stations. The odd result is that aliens can now own such licenses but may find it difficult to immigrate here to operate them.

As we reported when the FCC initially proposed changing its alien ownership rules, the impetus for the FCC’s Second Report and Order (Second R&O) was two-fold. First, the Commission recognized that its cumbersome alien-ownership approval process was impeding foreign investment in the United States at a time when capital investment is being strongly encouraged. Second, the process of trying to identify exactly who a company’s foreign owners are and where they are from can be difficult, if not impossible. The Commission and its regulatees found that they were spending inordinate amounts of time and money trying to ascertain where alien owners were from for purposes of the rules without any concomitant public benefit for the effort involved.  

While the new rules retain the basic structure of requiring prior FCC approval for aliens either to: (a) indirectly control a US common carrier licensee, or (b) own more than 20% of a licensee company, they greatly simplify the procedures and detailed ownership accounting that created so much wasted effort. We hasten to emphasize that the rules continue their very strong prohibition on alien ownership or control of broadcast licensees above the benchmark levels, even though those licenses are statutorily eligible for the same treatment as common carrier and aeronautical licenses. This disparate treatment is coming under increasing attack, most directly by Commissioner Pai. For the time being the disparity remains firmly in place, although the Commission has invited comment on a request for “clarification” of limitations on alien ownership of broadcast licensees.

Here are some of the highlights of the new rules:

  • The FCC is eliminating the distinction between aliens from World Trade Organization (WTO) countries and those who are not. It seems to have consumed considerable resources of the FCC and parties involved to try to determine which aliens in a company’s structure were from WTO countries and which were not. The FCC has dropped that distinction but has retained its requirement that all foreign investment be subject to an “open entry standard.” The Commission did not really discuss what this meant, but in the past the FCC has used this to refer whether the alien’s home country provided open entry to U.S. investment – absent such reciprocal investment opportunities, the U.S. would look unfavorably on the alien being allowed to invest here. The WTO membership standard was a shorthand means of reaching that conclusion because all WTO members were presumed to allow such reciprocal opportunities.   It is unclear how dropping the WTO criterion but retaining the underlying “open entry” requirement simplifies things, since the Commission would still need to determine whether, in the cases of non-WTO member aliens, their countries allow open entry.
  • The procedures now permit named alien entities to be approved for increasing ownership levels in the future without the need for new approval.
  • The requirement that ownership interests below 5% be identified and tracked has been eliminated. This feature alone eliminates a lot of paperwork for what were truly de minimis interests.
  • The rules permit other subsidiaries and affiliates of the approved alien-owned company to benefit by an approval of their parent or affiliate.

The FCC estimates that these reforms will reduce the number of required alien ownership filings by a whopping 40% to 70% and will simplify those filings that do need to be made. The Commission emphasizes, though, that government agencies charged with investigating foreign ownership will continue to have the opportunity to perform that function in the context of either application approvals or requests for declaratory rulings.

Significantly, the Commission reiterated its position that companies must obtain permission either via the forbearance approach for ownership by aliens of significant non-controlling interests or by other FCC approval for alien control of these entities, before the alien ownership reaches the pertinent 20% or 25% threshold.  It also stressed that different approvals are required under the forbearance approach (applicable to non-controlling interests) and the standard approach (for controlling interests). This leaves in question the peculiar situation of Verizon Wireless, which did not obtain the requisite approvals before Vodafone acquired a greater-than-20% non-controlling interest in it.

The new rules adopted in the Second R&O are currently set to take effect on August 9.

FCC Blesses SoftBank/Sprint Union

Celebrating the Fourth of July, the Commission approves alien take-over of U.S wireless carrier.

As was expected, the FCC has approved SoftBank Corp.’s acquisition of majority control of Sprint Nextel, as well as Sprint’s acquisition of 100% control of WiMAX broadband provider Clearwire.  As is also the FCC’s somewhat inconvenient custom, the Order was released at the end of the day on Friday of a holiday weekend, so that the common folk had to read it during the holiday, even if we were trying to relax on the nearest beach.

The decision contains nothing earth-shaking.  It’s apparent that the FCC has become increasingly uncomfortable with the growing monopoly strength of AT&T and Verizon in the wireless marketplace, so it’ll do anything it reasonably can to help Sprint and T-Mobile become stronger marketplace competitors.  SoftBank is going to dump big bucks into Sprint, and Sprint has agreed to decommission its equipment from Chinese suppliers that some people worry might have subversive back-door software, so to quote a legendary comic character, “What, me worry?”

Antitrust considerations didn't give the Commission heartburn because SoftBank does not operate in the U.S., so there will be no competition-reducing horizontal merger of competitors.

Of interest to our clients who hold Educational Broadband Service (EBS) licenses and lease their spectrum to Clearwire, several EBS entities complained that Clearwire’s EBS spectrum lessors might not be complying with the regulatory requirement that at least 5% of the capacity of an EBS system be reserved for educational uses.  The FCC said that the charges had not been adequately proven, the complaining parties who lease spectrum to Clearwire should hold perhaps their tongues because they had previously certified that they themselves were in compliance, and there was nothing to indicate that Clearwire would not continue to honor its leases.

The impact on Clearwire’s wholesale customers was not of concern to the FCC because Sprint is virtually Clearwire’s only wholesale user now, so Sprint’s owning 100% of Clearwire should not hurt any other significant wholesale customer.

Other parties threw everything but the kitchen sink against the deal, raising whatever beefs they might have with Sprint, Clearwire, or Softbank.  The FCC found these complaints both speculative and, more importantly, outside the scope of this proceeding.  They will be dealt with separately when and if raised in an appropriate context, ideally with more meat on their bones.

Finally, the issue of foreign ownership of a major U.S. carrier proved not to be a significant problem. As it has frequently in recent years, the FCC made the findings necessary to permit foreign control of any U.S. common carrier – such control is permitted as long as the foreigner owners are not from overtly hostile countries (unless, perhaps, the carrier’s facilities are used for critical national security operations).  These days, only broadcasters and aeronautical radio control networks are still up against a stonewall severely limiting foreign ownership.

Update: Comments Sought on Alien Ownership Proposal

Last September we reported on a request advanced by the Coalition for Broadcast Investment seeking "clarification" of the FCC's broadcast ownership limitations on alien ownership. You can find a copy of the Coalition’s letter request here. As summarized by the Commission, the proposal asks the Commission to “clarify that it will conduct a substantive, facts and circumstances evaluation of proposals for foreign investment in excess of 25 percent in the parent company of a broadcast licensee, consistent with and in furtherance of its authority under 47 U.S.C. § 310(b)(4)

The Commission has now solicited comments on the proposal. If you have any thoughts about the Coalition’s suggestion that you’d care to share with the Commission, you’ve got until April 15, 2013 to submit them; reply comments may be filed by April 30. You can file on paper, or electronically through ECFS (referencing MB Docket No. 13-50).

War of the Words: Coalition Urges Greater Alien Welcome

Broadcasters launch effort to promote greater alien ownership in broadcasting (while H.G. Wells rolls over in his grave).

Hot on the heels of the FCC’s recent liberalization of the restrictions on alien ownership of common carrier licensees, a group dubbed the Coalition for Broadcast Investment (the Coalition) has filed a petition seeking similar leeway for broadcast licensees.  The Coalition is an ad hoc group comprised of minority-oriented station owners as well as some of the largest multi-station group owners in the country.   The Coalition’s petition is styled as a “Request for Clarification” of the Commission’s policy with respect to alien ownership of broadcast stations, but it’s effectively a petition for a declaratory ruling on the issue presented.

Our regular readers will remember that in August the FCC released an order designed to clarify the power of the Commission to authorize significant indirect, non-controlling foreign interests in common carrier licensees. The August order addressed the fact that, as interpreted by the FCC, Section 310(b)(3) of the Communications Act bars aliens from indirectly owning 20% to 50% of a radio licensee but Section (b)(4) permits indirect alien ownership – with prior FCC approval – of controlling interests in radio licensees.   The FCC dealt with this odd anomaly by “forbearing” from enforcing the Section 310(b)(3) restriction on non-controlling alien interests. 

There were two catches to this solution.

First, the FCC’s authority (found in Section 10 of the Communications Act) to forbear applies only to common carrier licensees – not broadcasters. So even if it had wanted to, the FCC could not have ceased enforcement of the non-controlling interest prohibition as it applies to broadcasters. But there’s the rub: as far as we can tell, the FCC didn’t want to allow greater alien involvement in broadcast licensees. It has traditionally refused to countenance even non-controlling alien ownership interests of greater than 20% in broadcast licensees. This despite the fact that Section 310(b)(4) of the Act expressly grants the Commission the discretion to make a determination as to whether control of broadcast licensees by aliens is in the public interest or not. This broadcast-specific xenophobia seems to have been rooted in the classic sci-fi conceit that aliens, through their insidious control of broadcast stations, could take over American brains and, thereby, American society – with generally unpleasant consequences for all of us.

But now the Coalition, representing a broad sample of American broadcast entities, has decided that the time has come to revisit this policy.

The Coalition’s petition requests that the Commission declare that, rather than simply closing its ears to any petitions for alien control of broadcast licensees, it should now conduct a case by case review of whether such ownership is in the public interest – as the statute has always contemplated and allowed. In support of this change in policy, the Coalition points to a number of persuasive factors: the diversified and fragmented media market that now diminishes the potential dominance of broadcast stations; the significant benefits to the industry which would accrue from foreign investment in broadcast stations; and the current U.S. policy which in all other spheres of the economy encourages offshore investment in US assets.

Of course, even if the FCC were to agree with the Coalition here, aliens would still be left without the right or opportunity under any circumstances to own greater than 20% non-controlling interests in broadcast licensees, since, as noted above, the forbearance action taken by the Commission for such interests does not cover broadcast licensees. Still, the relief sought by the Coalition would be a solid step in the direction of rationalizing and regularizing the treatment of aliens under our communications laws.  

The Coalition petition was filed on August 31. As of September 5, the Commission had not yet requested public comment on it. Check back here for updates.

FCC Complicates, Simplifies Foreign Ownership Rules

The Communications Act imposes complex limits on alien ownership. The FCC’s historical interpretation of those limits has made them even more complex. The Commission has now revisited that interpretation – with mixed results.

We reported last year that the FCC initiated a rulemaking proceeding to consider how it might facilitate foreign ownership of licensed common carriers.   And we reported last spring that, in the initial rounds of that proceeding, the FCC received some industry feedback that its foreign ownership rules were limiting or hindering foreign investment unduly. As FCC veterans know, the Communications Act imposes certain restrictions on the ownership of broadcast and common carrier licenses by aliens. Specifically, Section 310(b)(3) of the Act forbids aliens from directly owning more than 20% in such licenses. Section 310(b)(4) precludes aliens from controlling a company that directly or indirectly owns more than 25% of such a license unless the FCC approves the ownership. 

Three score and 18 years after the Act came into being, the FCC has now taken a fresh look at those provisions.   It had previously decided that Section (b)(3) actually applies to indirect ownership interests even though, unlike Section (b)(4), Section (b)(3) doesn’t say that. The FCC has interpreted Section (b)(3) to apply when the alien entity does not control the licensee, while (b)(4) applies only when the alien does control. Non-controlling alien ownership interests between 20% and 50% were out of luck since an alien with an indirect 30% ownership interest would exceed the permissible level for non-controlling entities banned by (b)(3) but would not have the control necessary to permit the ownership to be approved. 

This interpretation presented a strange anomaly: an alien could indirectly own a controlling interest in a company so long as the FCC approved it, but an alien couldn’t own a non-controlling interest between 20 and 50% under any circumstances.  And indirect non-controlling  interests between 20% and 25% fell even deeper into the Twilight Zone – they seem to be fully permissible under (b)(4) without any FCC approval at all, but completely and irremediably banned under (b)(3). Commissioner Pai recognized this problem in his statement accompanying the Order – the Commission’s interpretation of the statute leads to “absurd” results.

The Commission could have easily dealt with this situation by simply declaring that (i) Section (b)(3) is limited to direct ownership interests, as it appears to be by its terms, and (ii) Section (b)(4) applies only when the indirect alien ownership is a controlling one, again, as the actual language of the statute indicates. This would have: (a) left (b)(3) to bar direct alien ownership interests above 20% entirely, as Congress seems to have intended; (b) permitted indirect but non-controlling alien interests of any level without the need for FCC approval at all; and (c) would have allowed the FCC to approve indirect controlling alien ownership interests where more than 25% of the stock is owned by aliens upon a proper showing. That would have been a simple and straightforward construction of the statute, reducing the need for FCC alien ownership rulings – and alien angst – significantly; it would also have applied both to broadcast and common carrier licensees.  

The Commission did not, however, take that approach.

Instead, apparently unwilling to abandon its historical interpretation, the FCC had to devise a complicated fix. Its solution was to “forbear” from enforcement of the statute as it had interpreted it. The Act permits the FCC to forbear upon certain findings from enforcing statutory mandates with respect to common carriers but not with respect to broadcasters.

The FCC made the necessary findings and concluded that it would forbear from enforcing the ban on indirect non-controlling alien ownership between 20% and 50% upon a showing by the alien similar to the public interest showing required under current procedures when an alien seeks approval under Section (b)(4).   This approach does have the salutary effect of treating all indirect non-controlling ownership interests above 20% in a consistent way. It also eliminates the confusing doughnut hole between 20% and 25% that had existed before. The only problem is that aliens now have to seek prior FCC approval before acquiring non-controlling indirect interests that the Act on its face seemed not to care about at all.

Wasting no time, the Commission published its report and order in the Federal Register less than a week after that report and order was adopted – meaning that the new approach became effective as of August 22, 2012.

The FCC declared that its newly-adopted approach “will clarify and simplify Commission regulation of foreign ownership of common carrier licensees, thereby facilitating investment from new sources of equity financing and enhancing opportunities for technological innovation, economic growth, and job creation.”   What do you think?

Update: Comment Deadlines Set in Alien Ownership Inquiry

A week or two ago we reported on a request for further comments in the alien ownership proceeding. The FCC’s notice asking for more comments has now made it into the Federal Register, which establishes the deadlines for anyone interested in chipping in his/her two cents’ worth. Comments in response to the notice are due by May 15, 2012; reply comments are due by May 25.

FCC Seeks Further Input on Foreign Ownership Rules

Commission contemplates forbearance approach to direct alien ownership limits.

Last fall we reported on an FCC Notice of Proposed Rulemaking in which the FCC is considering how to simplify the application of the foreign ownership restrictions that appear in the Communications Act.   After digesting the comments submitted in that proceeding, the FCC has asked for more input. It seems that a number of commenters were concerned about the interplay of Section 310(b)(3) of the Act with Section 310(b)(4).

Section 310(b)(3) strictly forbids ownership of a broadcast or common carrier licensee by a corporation which is more than 20% owned by aliens or their representatives or by foreign governments or foreign corporations.   In other words, no more 20% of the licensee entity itself may be owned by aliens or their representatives. Section 310(b)(4), however, permits licensee entities to be owned by companies that are themselves owned by aliens or their representatives, so long as the FCC OKs the ownership. In other words, indirect ownership of licensee entities by any quantum of aliens is permissible as long as the FCC approves it.   These provisions have long been thought to define two separate classes of ownership, direct and indirect, with distinct restrictions applicable to each.

Apparently Verizon – a company whose Cellco Partnership subsidiary has significant foreign ownership – pointed out that the FCC’s 2004 effort to provide guidance on these matters actually confused things. Those 2004 guidelines seemed to treat indirect interests in licensees as being subject to the strict 20% prohibition of 310(b)(3) rather than the more liberal 25% provision applicable to indirect interests under Section 310(b)(4). Verizon correctly noted that this makes no sense, and the FCC seems to have heard Verizon’s plea.

The FCC seeks comment on this specific issue. It also proposes a possible solution. Under the Communications Act, the FCC is allowed to forbear from applying any provision of the Act to a telecom carrier if the Commission finds such forbearance to be in the public interest, unnecessary to protect consumers, and unnecessary to ensure just, reasonable and non-discriminatory rates.   Accordingly, the FCC asks whether it should use that tool to get around the strict prohibition of Section 310(b)(3) if it applies to indirect interests. A company would simply have to make a showing similar to the one now needed to obtain Section 301(b)(4) approval and the Commission would then routinely forbear from applying the prohibition.

This seems to us to be a cumbersome and unnecessary procedure that could be handled much more directly. If the FCC simply interpreted 310(b)(3) straightforwardly to apply only to direct ownership interests in licensee – as Congress seems to have intended – the Commission would limit the application of that section to a very limited number of situations while handling the indirect ownership scenario through the now tried and tested Section 310(b)(4) approval process.

The forbearance process floated by the FCC in its recent notice can apply only to telecom licensees because the forbearance process is limited to that class of regulated entities. By contrast, the course we are suggesting would have the added benefit of applying to broadcast licensees since it would apply across the board to all licensees.  However, since to date the FCC has virtually never approved indirect foreign ownership of more than 25% of a broadcast entity, broadcasters under our approach would get only the marginal relief of being able to have up to 25% foreign ownership without running afoul of the statute.

There’s a short window to comment on this one – 21 days from publication in the Federal Register, plus ten more days for replies. We’ll let you know when that happens.

Update: Comment Deadlines in Alien Ownership Proceeding Set

In August we reported on an FCC proposal to liberalize its approach to alien ownership of common carrier and aeronautical radio station licenses. The Commission’s Notice of Proposed Rulemaking has now been published in the Federal Register. As usual, that means that the deadlines for comments and reply comments have been set. If you’re inclined to file comments on the proposal, you’ve got until December 5, 2011; reply comments may be filed by January 4, 2012.

Welcome Mat Out for Aliens?

NPRM proposes lower hurdles for alien ownership -- and alien investment.

With the issuance of an extensive Notice of Proposed Rulemaking (NPRM), the FCC is looking to liberalize its approach to permitting alien ownership of common carrier and aeronautical radio station licenses. While it’s not exactly a re-opening of Ellis Island, the plan should significantly expand opportunities for aliens to acquire or increase license ownership. The FCC correctly recognizes that its current policies and processes are burdensome to prospective foreign investors, unnecessarily impeding, delaying and obstructing the ability of aliens to buy, or buy into, FCC licensees – and thus also creating barriers to investment capital that could benefit U.S companies and U.S. consumers.

The starting point for any discussion of alien ownership of domestic U.S. communications interests is Section 310(b) of the Communications Act, a provision that dates back to the original 1934 version of the law.  Drafted in an era when foreign Fascists and Communists had to be prevented from acquiring control of our communications media, Section 310(b) strictly prohibited – and continues to prohibit – aliens from directly owning a broadcast, common carrier, or aeronautical radio license or even from owning more than 20% of a company that holds such a license. 

However, having erected a seemingly impenetrable fortress against evil foreign influences, Congress left the back door wide open.

Section 310(b)(4) permits an alien or alien-controlled company to own more than 25% of a company that owns some or all of a second company that in turn holds an FCC license – as long as the Commission does not find that the public interest would be served by denying the license. (Yes, the statute is drafted in that awkward double-negative way.)  In other words, direct ownership of a broadcast or common carrier license is unspeakably taboo, but indirect ownership is hunky-dory.   The statute makes little sense, but the FCC is stuck with administering it.

In 1997 the U.S. joined with 68 other countries to sign the World Trade Organization (WTO) Basic Telecommunications Agreement which committed all participants to “to open their markets to foreign competition for some or all basic telecommunications services.” (That Agreement has been incorporated in the General Agreement on Trade in Services (GATS).) To implement that commitment, the Commission adopted an “open entry standard” for WTO Member investment in the U.S. basic telecommunications services market, while continuing to apply an “effective competitive opportunities” (ECO) test to proposed investment from non-WTO Member countries. The Commission therefore routinely approves ownership of U.S. telecom interests by aliens from WTO countries. (The world being a happier place now than it was in the old days, WTO countries currently account for 94% of the world’s gross domestic product, which officially makes just about everyone our friend.)

The FCC also approves ownership by aliens from non-WTO countries as long as they can show that their country provides ECO to U.S. nationals.   This still leaves out a few large countries (notably Russia) and outlaw states like Iran, Libya and North Korea, but by and large aliens are nowadays welcome to indirectly own common carrier licenses, as long as they jump through the necessary hoops.

Notice that we said common carrier licenses. Even though the statute does not distinguish between (a) alien ownership of common carrier licenses and (b) alien ownership of broadcast licenses, the Commission has steadfastly refused to permit even indirect alien ownership of broadcast licenses to exceed 25%, no matter how friendly the foreign nation might be. The Commission appears to draw the line based on capacity for control of content: a broadcast licensee obviously controls the content of the information transmitted with its license(s); a common carrier, on the other hand, is prohibited from influencing the content of the transmissions on its system. Control of broadcast content is deemed so crucial to national security that aliens cannot be trusted with it. 

(The NPRM does not propose to change this bifurcated approach to the statute, but one could certainly argue that the media landscape has become so diversified and fragmented that aliens might now safely own broadcast stations without peril.)

Even with the somewhat liberalized approach adopted pursuant to the WTO Agreement, the FCC still has to carefully review requests for approval of alien ownership. Such requests are usually presented as requests for declaratory ruling that the proposed ownership is not contrary to the public interest.   If the alien is from a WTO country, the approval is a no-brainer: the Commission will permit identified friendly (i.e., WTO) aliens to indirectly own 100% of a common carrier licensee. It will also permit unidentified and unapproved aliens to indirectly own large chunks of the parent of the licensee, as long as no more than 25% of such unapproved alien ownership is non-WTO or a single person or entity. The hardest part in this process tends to be determining who owns what and where.

Often in today’s transnational business environment, companies are owned by other companies owned by other companies, some of which are foreign-owned and some of which may be publicly traded.   Sometimes the companies themselves do not know who their smaller owners are, much less what nationality they are, because the stock is held in street names or is registered to addresses that do not necessarily correspond to the nationality of their owners. Yet to satisfy the Commission, the would-be alien licensee owner is expected to precisely lay out the national origin of its direct and indirect owners, sometimes to the second decimal point, to ensure that the 25% threshold is not transgressed. And that goes for each different affiliate of the licensee, and is required each time the company enters a new FCC service category or expands into a different geographic area. 

Clearly, there is an enormous waste of time, money and energy here with virtually no concomitant pay-off in national security or anything else.

The FCC is proposing to simplify things and thus reduce the number of annual filings by an astounding 70%, according to the Commission’s own estimate.   While the basic regulatory framework will remain in place, the FCC plans to: (1) permit alien ownership approvals to apply to entire families of companies, as long as there is no substantive change to the original parent company; (2) permit approved aliens to increase their ownership up to 49.99% non-controlling interests without additional approval; and (3) not require approval of specific aliens unless they are to own more than 25% of the parent company. The company would still have to carefully monitor its alien ownership to determine when the 25% threshold is reached. A potential leg-up in that regard: a proposal that non-WTO alien interests of 5% or less be ignored.  That single reform would take much of the pain out of trying to identify and add up non-qualifying alien interests. The Commission also proposes to require disclosure of all persons holding 10% or greater interests in the entity for which approval is being sought.

The Commission hastens to remind everyone that none of these reforms would alter the normal requirement that all transfers of control of licenses be approved in advance. That requirement continues to apply regardless of whether the owners are alien or not.  And, of course, the Department of Homeland Security, the Department of Justice, and other federal agencies continue to have input into alien ownership issues from a national security perspective.

Comments on the NPRM will be due 45 days after Federal Register publication, with replies thirty days later. Check back here for updates on that front.