The Communications Act and FCC rules generally require prior FCC consent for the transfer of control or assignment of FCC licenses or authorizations. This investigation began in February 2017, when Marriott voluntarily disclosed to the FCC that 65 licenses and authorizations that Starwood previously held or controlled had been transferred to Marriott during the acquisition without prior FCC approval. These licenses were used to support security operations at various hotels and resorts across the U.S. Starwood subsequently filed curative applications to secure the FCC’s approval of the transfers. To resolve the investigation, Marriott agreed to admit that the transfers violated the FCC’s rules and pay a civil penalty of $504,000. Marriott further agreed to a number of obligations commonly included in FCC settlements, including the appointment of a compliance officer, development of a compliance plan and training program, and a requirement to submit periodic compliance reports over the next three years to ensure that Marriott abides by the FCC’s license transfer rules going forward.

While generally following boilerplate language, the settlement contained one significant departure from normal practice. Specifically, the FCC agreed in a footnote that any further “isolated” instances of transfer of control violations that occurred prior to the settlement date subsequently discovered by Marriott will not be considered a separate violation of the Consent Decree. Usually, parties must disclose all relevant preexisting violations to the FCC before entering into a settlement. While this may be a one-off departure driven by the facts of the case, there may be an opportunity for companies to request similar provisions in future settlement negotiations.

The settlement illustrates that the FCC’s jurisdiction often stretches far beyond communications providers (indeed, Marriott previously paid a fine to end a FCC investigation into Wi-Fi blocking practices), and that companies that inadvertently fail to comply with FCC rules may be subject to an enforcement action that may involve a significant monetary penalty. Any time a transaction involves a change in the controlling ownership interest of a FCC licensee, a substantial transfer of control occurs requiring prior FCC approval. Consequently, any company engaged in or considering a corporate restructuring transaction should consult competent legal counsel to understand the full scope of its potential regulatory obligations that may arise as a result of such transaction.

The new releases highlight several items of interest: 1) the FCC’s continued focus on Wi-Fi management resulting in blocking activities and alleged malicious interference, 2) the debate among the Commissioners regarding the FCC’s ability to fine companies for such activities under current law and FCC regulations, and 3) the potential expansion of Bureau investigations into the activities of the subsidiaries, affiliates and possibly franchisees of the investigation’s initial target.

Protection of Wi-Fi Communications Against Willful Interference Remains an Enforcement Priority

Over the past year, the FCC entered into a pair of consent decrees with substantial fines addressing Wi-Fi management or blocking practices. In October 2014, the FCC reached a $600,000 settlement with Marriott Hotel Services and Marriott International, Inc. This was followed in August 2015 by a $750,000 settlement with Smart City Holdings, Inc. In various related enforcement advisories, the FCC has stated its firm belief that Wi-Fi blocking practices violate Section 333 of the Communications Act (the Act), which prohibits the willful or malicious interference with the radio communications of any station licensed or authorized under the Act.

The Dean NAL is the first of its kind. The FCC concluded that M.C. Dean provides Wi-Fi service for sale at the Baltimore Convention Center and was using wireless network equipment with an “auto-block feature” that automatically detects and deauthenticates unknown Wi-Fi hotspots. FCC field agents tested hotspots at the Convention Center in October, November, and December 2014 and found the company was blocking Wi-Fi operations. Based on these visits and apparent admissions from the company, the FCC found “it reasonable to conclude that a violation apparently took place every day there was an event”– a total of 10 events over 26 days during the one-year statute of limitations period. In proposing the fine, the Commission rejected M.C. Dean’s claims that its blocking practices are necessary network management practices. Further, citing its enforcement advisories against Wi-Fi blocking going back to 2011 and the Marriott consent decree, the Commission rejected the company’s claims that it did not have notice of the unlawfulness of its behavior.

FCC Commissioners Disagree over the Existence of the Basis for This Enforcement Authority

The Commissioners continue to debate whether the Act or the Commission’s current rules proscribe the activity of blocking unlicensed Wi-Fi communications. Commissioners Pai and O’Rielly – the two Republican Commissioners on the five-person Commission – dissented in the Dean NAL. Their statements question the FCC’s interpretation of Section 333 of the Act as an adequate basis to propose the fines. The majority concluded in the Dean NAL that Wi-Fi devices are “authorized stations”, that Wi-Fi communications are “radio communications”, and that M.C. Dean’s apparent activity was a case of willful and malicious interference to such radio communications. While recognizing that, as a policy matter, Wi-Fi blocking should not be permitted, both Commissioners argue that Section 333 does not apply to the interference of unlicensed Part 15 devices (such as Wi-Fi equipment, including smartphones when operating in Wi-Fi mode) and point out that the FCC has not, to date, promulgated rules to prohibit Wi-Fi blocking. They note that operators of Part 15 devices must, by rule, accept any interference received from any source, which raises the question whether any interference that is caused to an unlicensed device can be actionable interference. Commissioner O’Rielly also questions whether the activity in question even constitutes radio interference, since the devices did not operate as radio jammers of the Wi-Fi signal. Commissioner Pai contends that the FCC missed an opportunity to clarify the rules or enact new rules to proscribe these activities over a year ago when Marriott and the American Hotel & Lodging Association submitted a petition for declaratory ruling asking the FCC to clarify the limits of what network operators could do to mitigate supposed threats to their Wi-Fi networks by the operation of personal hotspots. That petition was later withdrawn. Commissioner Pai asserts the withdrawal occurred after the leadership of the FCC “made it abundantly clear that such guidance would not be forthcoming.”

M.C. Dean has thirty days to respond to the Dean NAL. The company has already indicated its intentions to fight the proposed forfeiture, which should bring the issues raised by the dissent to a head.

The Scope of Enforcement Bureau Investigations Can Be Expansive

The Bureau’s companion Hilton NAL also relates to an investigation of alleged Wi-Fi blocking. However, the Hilton NAL arises from Hilton Worldwide’s alleged obstruction of the Bureau’s investigation by refusing to respond or respond fully to an LOI. This investigation began with a consumer complaint of Wi-Fi blocking at a Hilton-branded hotel in Anaheim, California. The Bureau also noted it received complaints for other locations. In response to the complaints, the Bureau’s investigation sought information on Wi-Fi management practices at all Hilton properties in the United States, not just the one in question – including franchised hotels and properties of all Hilton brands. According to the Hilton NAL, Hilton responded to the LOI through a subsidiary and attempted to narrow the scope of the Bureau’s investigation to the Anaheim location, and a few others it states use the same Wi-Fi management technology. In addition to proposing to fine the company for its alleged inadequate responses, the Bureau also orders Hilton Worldwide to fully respond to the Bureau’s LOI within 30 days, at the risk of further penalties.

The Hilton NAL, which proposes a fine of $25,000 for failure to respond to the LOI, highlights not only the seriousness with which the Commission takes failures or refusals to respond to its LOIs, but underscores potentially important issues regarding the scope of investigations into entities with complicated corporate or franchising structures. While the investigation began because of a single complaint, the focus of its investigation is company-wide and nationwide, extending to entities that may have no more than a franchisee relationship to Hilton. This type of company-wide investigation is not at all uncommon. What is less clear, is how the scope of an investigation should play out with a corporate and operational model like that employed by Hilton. Although a corporate parent can be responsible for the actions of its subsidiaries and agents, the responsibility may be less defined with respect to franchisees or brand licensees. Any companies that are using or considering Wi-Fi management technologies or who have subsidiaries or franchises that may be considering such activities would do well to carefully consider the FCC’s recent NALs and monitor the further course of these two matters.