• FCC Bans Exclusive Contracts for Telecom Services in Residential Multi-Tenant Buildings
  • May 7, 2008 | Author: Barbara A. Trachtenberg
  • Law Firms: DLA Piper - Boston Office ; DLA Piper - Washington Office
  • The Federal Communications Commission (FCC) recently adopted a Report and Order (Order) prohibiting the enforcement of exclusive contracts for telecommunications (voice and data) services in residential multi-tenant environments (MTEs) such as rental apartments and condominiums. The Order also bans the execution of new exclusive contracts.

    The Order is the latest in a series of FCC decisions banning such “exclusive access” arrangements in residential and commercial settings.

    Evolving Policy Against Exclusivity in Commercial and Residential Settings

    In 2000, the FCC issued a ban prohibiting exclusive contracts for telecommunications services in commercial locations, such as office buildings. The agency did not prohibit exclusive contracts in residential MTEs at that time, due to a concern that residential buildings might not be able to attract competitive providers without the enhanced revenue streams inherent in exclusive contracts. Because telephone and cable operators now compete to provide bundled video, Internet, and voice packages to residential customers, the FCC’s view is that exclusive contracts are no longer necessary to promote competition in residential MTE buildings.

    In an action taken in October 2007, the Commission decided to ban exclusive contracts for video services provided to multiple dwelling units (MDUs) by cable operators subject to cable franchising regulation. The retroactive nature of the FCC ban on exclusive residential contracts for MDUs was challenged earlier this year in federal court by the National Multi-Housing Council and National Apartment Association, but the court did not stay the effectiveness of the residential video exclusivity ban, which became effective last month.

    In its October 2007 decision, the Commission also sought comment asking whether it should extend the residential MDU ban to include contracts with companies not subject to cable franchise regulation, such as satellite television and private cable providers. It has not yet decided whether it will extend the ban.

    The New Rule Affecting Telecom Agreements in Residential Settings

    The most recent FCC Order prevents any “common carrier” from entering into or enforcing existing contracts that “in any way restrict the right of any residential multiunit premises owner … to permit other common carriers to access and serve residential tenants on those premises.” (“Common carrier,” in this context, refers generally to telephone companies and other providers of basic local exchange services.)

    Several aspects of the FCC policy on contract exclusivity are worth noting:

    • With respect to residential buildings, the telecom services prohibition applies to existing as well as new contracts. The 2000 ban on exclusive contracts in commercial buildings was aimed only at prohibiting new contracts.
    • The Order applies only to service providers, not MTE owners; however, it indirectly affects such owners.
    • The prohibition only covers restrictions on giving access to the building to other carriers. It explicitly does not apply to “exclusive marketing agreements or other arrangements that give a preference to a particular carrier but do not effectively restrict the premises owner from permitting other providers access.”

    In adopting the new rule, the FCC found, as it had in its earlier decisions prohibiting exclusive residential video deals and exclusive commercial deals with telecom providers, that exclusivity harms competition and consumers without providing countervailing benefits. In particular, the Commission found that:

    1. exclusive agreements limit consumers’ choice, rates, and service quality and innovation;
    2. the new rule provides regulatory parity between telecom and video service providers, which is important in the increasingly competitive market for bundled services;
    3. the prohibition supports the 1996 Telecommunications Act’s mandate to encourage broadband deployment and the FCC’s goal of increased facilities-based competition; and
    4. growth in bundling of voice, data, and video services reduces the concern that the revenue stream for a sole service provider is insufficient to generate competition.

    The Order will take effect 60 days after it appears in the Federal Register, without any “phase-out” or expiration period for existing contracts. Although the Order could be appealed, challengers would have to separately persuade a court of appeals to grant a stay in order to prevent the rules from going into effect – which they were unable to do in the case of the October 2007 video exclusivity ban.
    Thus, the status of prohibitions on exclusive contracts in multi-tenant buildings is currently as follows:


    Service


    Type of building


    Type of Contract Banned


    Status of Ban


    Telecommunications


    Commercial


    New


    In effect


    Telecommunications


    Residential


    New and existing


    Pending Federal Register publication


    Video


    Residential


    New and existing


    In effect; rules under appeal

    How the Most Recent Rules Affect Real Estate Developments and Operations

    Many owners and developers of MTEs will be affected by the Order, once it takes effect, and by the October 2007 decision (together, the Residential Bans). However, the Residential Bans do not affect:

    • hotels, as expressly indicated in the Order;
    • properties served, or proposed to be served, by private cable operators (PCOs) or satellite providers (although the FCC is considering whether to extend the October 2007 video ban to such providers); and
    • the transmission of data and other broadband services.

    It is important to note that the Residential Bans, although they apply retroactively, do not terminate or entirely invalidate existing contracts that include exclusivity provisions. The exclusivity provisions of those agreements are simply unenforceable by the common carriers. Under common law and statutory law, the illegality of, or inability to enforce, one provision of a contract could invalidate the entire agreement. However, most agreements will usually override that legal premise by including a “severability” clause, which generally provides that the nullity of one portion of the contract will not render the remainder of the contract unenforceable.

    Some owners and developers may be concerned that the common carriers’ willingness to wire and equip a building with telecommunications and video equipment at the common carriers’ cost may diminish as a consequence of the Residential Bans. While the exclusivity ban will require common carriers to re-work their current contract forms, it is our experience that those common carriers who previously provided equipment at their expense will continue to do so under either preferred provider contracts (which will probably be used in planned communities, condominium projects, and apartment buildings) or bulk sales contracts (which will probably be used in nursing homes, assisted living facilities, and student housing).