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FCC Closes Disclosure Dispute

The Federal Communications Commission has closed an investigation into The
Walt Disney Co.'s mishandling last fall of confidential records submitted by
America Online Inc. 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 that the events were unintentional and not designed to channel
protected information to corporate decision-makers within Disney.

'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
had a central role in the dispute, said AOL and Time Warner exaggerated the
significance of the problem 'It was a nonissue 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 the Federal
Trade Commission to impose harsh conditions on the AOL-Time Warner merger in
order to prevent the new entity from discriminating against competing
Internet-service providers and would-be interactive-TV competitors.

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

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 FCC'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 a FCC 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 notified immediately
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 knowing that their access would be cut off if the FCC had 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. They added that two of the
five days covered one weekend.

In putting the matter to rest, the FCC said there was no evidence that 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

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 the ban Nov. 22. The commission said no additional punishment of
Disney was needed because suspension of access represented 'a substantial

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 days during which the merger was under FCC review.