FCC Order Bans Certain Arrangements to Promote Competition in Multi-Tenant Buildings

Background

The FCC has long prohibited exclusive contracts between providers of certain communications services and MTE owners that explicitly prohibit entrance by competitors, but it has permitted other types of arrangements that competitors argued impeded competition in the MTE market. In 2017, the FCC released a Notice of Inquiry (2017 NOI) seeking comments on the current state of broadband competition in MTEs and asking how it could best support consumer choice and broadband deployment in those environments. It specifically asked about (1) revenue sharing agreements; (2) exclusive wiring arrangements; and (3) exclusive marketing arrangements. The 2017 NOI was followed by a 2019 Notice of Proposed Rulemaking and a 2021 Public Notice seeking comments and to refresh the record regarding the same issues.

After reviewing the record, the FCC released the Order adopting new rules prohibiting exclusive and graduated revenue sharing agreements between telecom carriers and Multiple Video Programming Distributors (MVPDs) and requiring providers to inform tenants about the existence of exclusive marketing arrangements. A Declaratory Ruling attached to the Order clarified that existing rules prohibit sale-and-leaseback arrangements between MVPDs and residential MTE owners because they essentially block competitive access to alternative providers. The rules adopted in the Order apply to communications services provided by telecom carriers in both commercial and residential MTEs, and to MVPDs subject to Section 628(b) of the Communications Act in residential MTEs. The Order does not apply to broadband-only providers.

Prohibition of Certain Revenue Sharing Agreements

Exclusive Revenue Sharing Agreements. The Order adopted rules that ban providers from entering into or enforcing two types of revenue sharing agreements with MTE owners: exclusive revenue sharing agreements and graduated revenue sharing agreements. In an exclusive revenue sharing agreement, a communications provider offers an MTE owner consideration in exchange for access to the building and tenants and the MTE owner agrees it will not accept similar payment from another provider. Because MTE owners would receive no compensation when tenants switch to a new provider, MTE owners are incentivized to block new providers from accessing the building, thus reducing or eliminating consumer choice. The FCC found that agreements which block other providers from sharing payments with the MTE owner are anti-competitive and are essentially exclusive access agreements.

Graduated Revenue Sharing Agreements. The Order also prohibits graduated revenue sharing agreements, sometimes referred to as “tiered” or “success-based” agreements, between providers and MTE owners. In a graduated revenue sharing agreement, a provider pays an MTE owner a percentage of revenue which increases as it serves more subscribers in the building. The larger portion of tenants a provider serves, the more money it pays the MTE owner. Like exclusive revenue sharing agreements, graduated revenue sharing agreements financially incentivize MTE owners to block competing providers from accessing the building and its tenants.

The ban on exclusive and graduated revenue sharing agreements does not differentiate between commercial and residential MTEs, and it will apply both to agreements that currently exist as well as new agreements entered into after the effective date of the Order. The ban on new agreements will go into effect 30 days after the Order is published in the Federal Register, while the ban on existing contracts goes into effect 180 days after publication of the Order.

Required Disclosure of Exclusive Marketing Arrangements

Though the Order does not go as far as to ban exclusive marketing arrangements, it requires service providers to disclose the existence of any current exclusive marketing arrangements they have with an MTE owner. The FCC found compelling evidence to suggest that when only one company may advertise in an MTE building, tenants are often unaware they have access to other providers, which also negatively impacts competition. The Order requires that disclosures must: (1) be included on all written marketing materials (electronic or print) from the provider directed to tenants or prospective tenants of the MTE; (2) identify the existence of the exclusive marketing arrangement and include a plain language description of the arrangement and what it means; and (3) be made in a manner that it is clear, conspicuous, and legible. The disclosure requirement does not apply to general-purpose marketing, such as online advertising or website promotions, that incidentally reaches tenants/prospective tenants.

The disclosure must also explain in “clear, conspicuous, legible, and visible language” that the provider has the right to exclusively market its services to tenants in the building, and must explain that such a right does not mean the provider is the only entity that can provide communications services to the tenants and that other providers may be available. While the requirement applies to both existing and future exclusive marketing arrangements, the requirement for existing arrangements will not be enforced until the later of (1) the Office of Management and Budget (OMB) completes its review of the requirement pursuant to the Paperwork Reduction Act, or (2) 180 days after the Order is published in the Federal Register. New arrangements must comply with the requirement as soon as OMB completes its review.

Prohibition of Sale-and-Leaseback Arrangements

The Order also clarifies that the FCC’s existing rules prohibit sale-and-leaseback arrangements that block competitive access to alternative providers. A sale-and-leaseback arrangement is an arrangement whereby an incumbent provider transfers ownership of its in-home wiring to a residential MTE owner who then leases it back to the provider on an exclusive basis. This practice removes the inside wiring from the hands of the incumbent provider while allowing it to still provide service to existing subscribers. However, the FCC points out that when an incumbent provider participates in a sale-and-leaseback arrangement, it violates its obligation to take reasonable steps to ensure that an alternative service provider has access to home wiring when a subscriber voluntarily terminates service with the incumbent provider. Providers are also prohibited from interfering with a subscriber’s right to use home wiring to receive alternative services following the subscriber’s voluntarily termination of service. However, sale-and-leaseback arrangements allow providers to do just that when they transfer ownership of the wiring to the MTE owner while the wiring is still under the incumbent provider’s control.

The FCC specifies that in order to avoid confusion caused by the passage of time, the prohibition of such sale-and-leaseback arrangements will not apply to arrangements made prior to the 2017 NOI.

Conclusion

Service providers and MTE owners should review existing agreements to determine whether they may run afoul of the new rules and determine how and whether severability or change of law clauses may be utilized to make any necessary changes and minimize disruption to commercial arrangements and the provision of service to tenants.