FCC Closes Book on Disney Record Flap

By TED HEARN -- Multichannel News, 2/5/2001

WASHINGTON -The Federal Communications Commission has closed its investigation into The Walt Disney Co.'s mishandling last fall of confidential records that America Online Inc. submitted in connection with its merger with Time Warner Inc.

While troubled by steps taken by Disney and its team of outside lawyers, the FCC concluded the events were unintentional and not designed to channel protected information to Disney's corporate decision-makers.

"Although the evidence before us establishes a significant violation of the protective order, it does not warrant further action looking toward imposing additional monetary or other sanctions," the agency said in a Jan. 26 order signed by Sherille Ismail, deputy chief of the Cable Services Bureau.

Disney executive vice president of government relations Preston Padden, who played a central role in the dispute, said AOL and Time Warner exaggerated the significance of the problem.

"It was a non-issue from day one, and it was exploited as a diversionary tactic by AOL and Time Warner. The commission's resolution is eminently reasonable," Padden said.

Padden led Disney's high-profile campaign urging the FCC and Federal Trade Commission to impose harsh conditions on the merger that created AOL Time Warner Inc., in order to prevent the new company from discriminating against competing Internet-service providers and would-be interactive TV competitors.

The controversy began Sept. 22 when Larry Duncan-an associate with Disney's outside counsel, Verner, Liipfert, Bernhard, McPherson and Hand-composed a short electronic-mail message that summarized confidential AOL documents he had just reviewed at the offices of the online provider's outside counsel, Wiley, Rein & Fielding.

Duncan, who had permission to review the AOL records, sent the e-mail to two Disney employees who did not: Padden and Marsha MacBride, vice president of government relations in Disney's Washington, D.C., office.

Padden reviewed and forwarded the e-mail to several high-ranking Disney executives who were also not entitled to examine AOL's information. MacBride-named FCC chief of staff by chairman Michael Powell the day before the agency's ruling was released-never opened Duncan's e-mail, according to Disney.

AOL was upset about the disclosure, particularly because Disney waited five days to confess its mistake to the FCC and AOL-despite an agency requirement that any breakdown in the confidentiality process be reported immediately.

During the five-day period, Disney lawyers from a second firm-Howrey, Simon, Arnold & White-continued to review AOL documents at Wiley, Rein. AOL said it could have blocked further review had it been immediately notified of the Sept. 22 breach.

In the order, the FCC said it was "most troubled" by the five-day delay, as it raised the suspicion that Howrey, Simon lawyers sought access to AOL records, probably with the knowledge that their access would be cut off had the FCC been promptly notified of the e-mail disclosure.

"The delay in reporting has raised troublesome questions about the conduct of Howrey, Simon that could have been avoided altogether if reporting has been more prompt," the commission said.

Disney and Verner, Liipfert said the delay occurred because Padden and Verner, Liipfert attorney Lawrence Sidman, for individual reasons, could not be reached to coordinate their response to the problem. Two of the five days covered one weekend, the company and firm added.

In putting the matter to rest, the FCC said there was no evidence Duncan tried to "leak" information; no evidence that Howrey, Simon acted knowing that further access would be denied; and no evidence that Padden served Disney executives with the e-mail for the purpose of conveying competitively sensitive information.

Nevertheless, the FCC said, Duncan failed to show "sufficient diligence" and Padden's actions "might have caused considerable competitive harm."

On Oct. 10, the FCC denied Disney further access to AOL records, but the agency lifted that ban Nov. 22. The commission said no additional punishment of Disney was needed because suspension of access represented "a substantial penalty."

The FCC needed 289 days to complete action on the AOL Time Warner merger. Disney lost access to the confidential records for 43 days, or 15 percent of the period in which the merger was under FCC review.