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stood had enormous communications implications, which produced an unfortunate jurisdictional dispute between the Judiciary and Commerce Committees, which got onto the floor, as I am sure the chairman remembers very well.

The result was that, in a successful effort to save the rest of the legislation, the CATV section was deleted in its entirely, and the whole problem was sent over to the Senate. i '.

Meanwhile, after victories in lower courts, the copyright owners lost their big copyright case in cable in the Fortnightly case in June of 1968. In fact and I think this is sometimes forgotten there were two decisions a week apart in the Supreme Court, both very fundamental to cable television in this country. These were the Southwestern case and the Fortnightly case. They were certainly intended to interact, but they have not done so..

The Southwestern case, which was decided first, involved two questions—I am now on page 7-first, whether the Federal Communications Commission has authority, under the Communications Act of 1934, to regulate CATV systems at all; and second, wliether 1966 FCC regulations banning cable retransmission of distant signals into the 100 largest television markets under certain conditions were within the Commission's authority.

The Court's decisions supported the FCC's authority to regulate cable television under the 1934 act and without additional legislation, as long as the actions it takes are reasonably ancillary to the effective performance of the Commission's various responsibilities for the regulation of television broadcasting. This was an opinion by Justice Harlan, and it made clear there were limits to the Commission's authority, but it pointedly declined to define what those limits are, and it specifically upheld the administrative order involved in the case as coming within the regulatory authority of the FCC.

The FCC-and this is no secret—was certainly relying on the Court to uphold copyright liability as part of its master plan. It was definitely relying on copyright to assist it in regulating cable as part of its efforts to support local over-the-air broadcasting in the late 1960's. This was its policy, and it was seeking the help of the copyright law in carrying it out.

It was therefore quite disappointed that the Supreme Court 1 week later held against copyright liability in the Fortnightly case, but under circumstances that left the scope of the decision somewhat unclear. I am reading now from page 8.

The FCC in 1968 was committed to the active support of local broadcasting, particularly by independent stations on the ultra-high frequency bands, and it considered it a duty to maintain the inviolability of clearly defined geographic television markets by preventing cable from fragmenting local audiences and thereby causing loss of advertising revenue to the local stations. This is a flat statement, I think it is true. The FCC wanted cable to stand and bargain, and it really wanted to prevent what it called unfair competition as against local broadcasters.

The FCC was therefore as disappointed as anyone by the Fortnightly decision which held that, at least under the circumstances in the case, cable operators do not perform the programs they retrans

mit, and therefore do not come within the 1909 statute at all. Rejecting arguments based on the technical similarities between what broadcasters and CATV systems do, as well as arguments involving the quantitative impact of cable retransmissions, the Supreme Court adopted a functional test: a determination of the function that CATV plays in the total process of television broadcasting and reception.

In applying this test, the Court held that a CATV system operates more as a viewer than as a broadcaster in that it no more than enhances the viewer's capacity to receive the broadcaster's signals. The FCC was forced to reexamine its policies or its approaches to the problem by this decision, and it therefore tried two approaches, neither of which proved successful.

Late in 1968, in December, it adopted a new regulation which in general effect retained the 1966 freeze, abandoned the hearing procedure entirely, and prohibited importation of any new distant signals into the 100 largest television markets, unless the broadcasting station whose signals were being picked up-and this is quoting from the regulation has expressly authorized the system to retransmit the program or programs on the signal extended."

Despite many protestations to the contrary, the effect of this action was actually to harden the freeze. The precondition for carrying most distant signals was the obtaining of retransmission consents. This was identified as the retransmission consent regulation, and the Commission made clear that these had to constitute express retransmission authorization. Blanket authorizations were not sufficient.

This was virtually impossible. Cable could not get these as a practical matter. This, of course, was precisely what the Supreme Court had held was unnecessary in the Fortnightly decision, the necessity to get retransmission consent. What the FCC had done-I am expressing my own opinion, but I honestly believe that–in the guise of administrative regulation of what it called unfair competition was to impose copyright liability where the Supreme Court had held it did not exist and to create a de facto copyright protection in a situation where Congress has so far declined to act. It was hardly surprising this approach failed, so that you have the balance of the bargaining power zigging and zagging during this period. The Fortnightly decision looked like a victory for cable. Then the 1968 regulation actually deepened the freeze.

This has been the picture in this whole problem in the ensuing years up till now. In 1969 there was a significant staff agreement which brought into the picture for the first time the concept of adequate service, and I think it was mainly significant for that reason. The basic thought was that cable could carry distant signals in a market up to the point of giving the viewers in that market adequate service, which at that time was defined as three network stations and three independents.

The tradeoff in the staff agreement, or abortive staff agreement, as it came to be known, was that CATV systems receiving broadcast programs would be prohibited generally from interconnecting for the purpose of distributing entertainment type programs. In other words, this was an agreement cable would have the right to import distant signals up to a point in exchange for a promise not to network.

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This was pretty drastic stuff, even at that time. Interestingly, when this was presented to the boards of directors of the trade organizations, the proposal was accepted by the CATV operators, but was turned down by the broadcasters, who apparently felt that the proposal to outlaw CATV networking was not enough to offset the concessions to cable and the lifting of the freeze.

Now, we return to the legislative arena and particularly the Senate which had been confronting this problem. Finally, on December 10, 1969, the Senate Judiciary Subcommittee reported the bill with some very radical revisions in the old House cable provision which had been deleted on the floor. The amended bill provided compulsory licenses for the first time for the CATV carriage of purely aural signals and local signals and signals transmitted outside any U.S. television market.

It also adopted the concept of adequate television service, this deriving from the staff agreement, providing a compulsory license for the nearest available distant signals needed to supply cable subscribers in the top 50 markets with 3 networks, 1 educational and 3 independent stations, and so forth and so on, with many refinements with respect to markets below the top 50.

The bill contained a schedule of compulsory licensing fees based on a percentage of the CATV operator's gross receipts from subscribers and set forth detailed procedural provisions governing operation of the compulsory license. There was a provision for grandfathering, and in individual cases the Federal Communications Commission would be allowed to expand, but not to decrease the number of stations included under the bill's concept of adequate service.

The reaction to this was pretty outraged by many people, among them the FCC who felt that this infringed very deeply into their regulatory power and did not exactly coincide with their thinking on the subject. It complained particularly that it left it too inflexible. It had a plan of its own. Less than 6 months later, it adopted a second further notice of proposed rulemaking, which was the most controversial of all. It was adopted by a 4 to 3 vote. It was rather startling. It was never implemented, but it did mark a significant change in the direction of Commission policy away from the fencing in of local broadcasters against CATV competition and toward the recognition of cable television as a major communications medium.

Under the proposal, CATV operators in the largest 100 markets in the United States would be permitted to retransmit the distant signals of four independent commercial stations, plus any network signals not carried locally and an unlimited number of educational broadcast signals, on the rather startling condition that the CATV delete the commercial advertising from these signals and substitute commercials provided by local stations under a detailed scheme of priorities.

In addition, all cable systems would have been required to pay 5 percent of their gross subscription charges to the Public Broadcasting Corporation as a form of permanent subsidy for educational broadcasting. The rights of copyright owners under this scheme were somewhat obscure, but in general the proposal appeared to preclude exclusive rights and to favor the payment of compulsory licensing fees based on a fixed percentage of gross receipts multiplied by the number of distant signals imported.

57–786—76—pt. 3— 28

It attracted little support except from Public Broadcasting and a great deal of strong opposition, but it did provide the Commission with an opportunity to reexamine all of its basic policies concerning cable television.

Next, we come to the famous consensus agreement which was one of the important developments in 1971. The catalyst, as has been identified in the testimony before you in these hearings, was Clay J. Whitehead, then the Director of the Office of Telecommunications Policy in the White House. He did have the active collaboration and endorsement of Chairman Dean Burch of the FCC, and he sought to bring the factions into enough of an agreement to permit the Commission to go forward with the promulgation of the final regulations which, in turn, were supposed to provide the basis for copyright legislation.

There is some messy history to this, which I think I will skip over, I think I had better go into the FCC proposal that emerged about the same time. There was an initial Whitehead compromise proposal, which was followed, apparently without a lot of coordination, by a new FCC proposal-first, in the form of testimony before two Senate subcommittees, and later as a letter dated August 5, 1971, and identified as an official Commission recommendation.

This new proposal undercut the first Whitehead proposal since it completely sidestepped the copyright issue, stating that the FCC had concluded that copyright was a matter for Congress and the courts. Without any provision for copyright exclusivity or compulsory licensing, and leaving these chips to fall where they may, the Commission recommended a standard for the importation of distant signals based on three criteria; mandatory service, minimum service—that was what used to be called adequate service and additional service. I think I will spare you the details of these, except to say that it was based on market size and the number of signals that could be imported, and it did not deal with copyright at all.

None of the special interests was enthusiastic about either the Whitehead or the new FCC proposal. The cable operators were reluctant to accept the Whitehead plan with its copyright restrictions since it was less generous to them than the FCC package, and the broadcastercopyright interests opposed the FCC plan since it failed to protect them affirmatively. Some very hard bargaining ensued, as you might imagine behind closed doors, but with a good deal getting into the trade press.

On November 2, 1971–this was the gun-at-the-head day, as it was called by the cable operators—the Whitehead compromise was put forward with an endorsement by Burch and with the request that it would either be accepted or rejected by November 11. In its bare essentials, this new compromise proposed to accept the FCC formula with respect to distant signals, but with added provisions for limited exclusivity to be written into the FCC regulations, and with a commitment on the part of all parties to the compromise to support separate copyright legislation providing for compulsory licensing and exclusivity under varying circumstances.

The consensus agreement was accepted, but there was a noticeable lack of enthusiasm. There were dissenters, and there was a good deal said to the effect that this is a package and can only be accepted as a package. If anything goes, the whole thing goes.

I have included the full text of the consensus agreement on pages 19 and 20 of the chapter and also the exchange of letters between Dean Burch and Senator McClellan, which I think bear on this. As Professor Botein says, and I quote on page 22: "At the end of 1971, the Commission was thus in the rather anomalous position of having one suspended set of rules, two discredited sets of proposed rules, and one informally announced proposal.”

What came out of it was none of those. What came out of it was the definitive cable television report and order of February 2, 1972, which was 500 pages long and which consisted in very general terms of the August 1971 FCC plan drastically modified by the consensus agreement to provide for the protection of exclusive rights in programs carried by distant signals. The 3-year freeze on distant-signal importation had been lifted, but because of the rule's copyright provisions, the thaw was more theoretical than real in a number of important situations.

Again, as Botein has said: “What the Commission gave in terms of distant signals, it took away in the name of exclusivity.”

As to the right of cable systems to carry distant signals, the FCC retained unchanged its general scheme of mandatory service, minimum service, and additional service as already outlined. As to the issue of copyright exclusivity, there are two parts, and I do not think I have it in me to try to get into this now, unless you want to ask me questions about it. Essentially it is nonduplication of network programs and exclusivity of syndicated programs—that is, nonnetwork programs sold in more than one market—with a distinction between markets 1 to 50, markets 51 to 100, and other markets, where there is no exclusivity.

There is exclusivity of differing types for syndicated programs, depending on whether the market is a 1 to 50 or 51 to 100.

The February 1972 regulations are a far cry from the FCC's earlier conclusion, announced publicly less than 6 months before, that protection of exclusive right should be left to Congress and the courts. The reason for this change is found in the copyright exclusivity provisions of the consensus agreement. That is clear from the surrounding circumstances and from Chairman Burch's letter.

However, the full impact of the 1972 regulations is only now beginning to be felt because of their broad grandfathering provisions, which were also based on the 1971 consensus agreement. Some relatively minor changes have been made in the 1972 rules, but as time goes on, their practical imposition of copyright exclusivity on more and more CATV operations seems certain to be felt.

The response of Chairman McClellan to this was favorable but not an outright acceptance. He announced in June of 1972 that in view of the FCC's definitive action, he anticipated that the congressional action on the bill would get moving again, and he warned that the CATV provision in his 1971 bill, which was the old one that had all the communications stuff in it, would have to be modified because some of the regulatory provisions were now covered by the FCC rules. ·

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