Santa Cruz County, Calif., was within its legal rights when it denied transfer of its cable franchise to Charter Communications Inc. based on fear the operator would boost rates to cover its high per-subscriber purchase price, a U.S. appeals court in California has ruled.
Under contract law, it was appropriate for the county to request information beyond the legal, technical and financial data required by federal cable policy, the 9th U.S. Circuit Court of Appeals in San Francisco ruled Sept. 20.
"Obviously, this is a great day for local governments," said Bill Marticorena of Rutan & Tucker, the law firm that represented the county.
Municipal regulators — who feel the franchise-transfer process has "broken down" — had kept a close eye on the case. Even when officials deny a transfer, operators close the sale, breach their contracts and hope for the best, regulators contend.
With the 9th Circuit decision, "we'll see what happens now," Marticorena said.
Santa Cruz County, located on the Northern California coast just south of San Francisco, is a classic cable market that was served by Sonic Communications until 1997.
At that point, Charter bought the 5,000-subscriber system, but was granted a transfer only after it agreed to upgrade the plant to 750-megahertz capacity, freeze rates and pay a lump sum to resolve alleged contract breaches by Sonic.
But when Vulcan Ventures Inc. — the investment vehicle controlled by Microsoft Corp. co-founder and billionaire Paul Allen — bought Charter, a second franchise transfer became necessary, and county officials demanded information beyond what's contained in the Form 394 disclosures required by the Federal Communications Commission.
County supervisors said they were concerned that Allen paid such a high price for Charter that consumer rates would rise exponentially to help recover the investment.
The MSO would not submit the requested information and the county refused the transfer. The operator requested reconsideration, but Santa Cruz demanded $500,000 and a due diligence study. Charter sued instead.
At the time, Charter senior vice president and general counsel Curt Shaw asserted that the county used invasive questions and the threat of denial in an attempt to get concessions to which it was not entitled under law.
Early round win
The cable company won the first round in March 2001, when U.S. District Court Judge William Alsup ruled that the county's denial was arbitrary. In a bench trial in the Northern District of California, the judge also concluded that Santa Cruz infringed on Charter's first-amendment rights.
But the appeals panel agreed with the county's actions and vacated the lower court ruling, including costs awarded to Charter.
The panel said the dispute "boils down to whether the county's request for financial and other information was reasonably related to the exercise of the county's approval authority."
The county's concern was well-placed because although Allen's personal balance sheet had been submitted to the county, his assets were not contractually pledged to support the system, the court noted. Thus, concerns about the viability of local operations were not unreasonable, the panel ruled.
The appeals court also faulted Alsup for going into the constitutional issues asserted by Charter.
Charter spokesman Dave Andersen said the company is disappointed in the ruling. The MSO is weighing its options, he added.
Observers said those options include a request for reconsideration, an en banc
rehearing or an appeal to the U.S. Supreme Court. Charter will have until Oct. 5 to make a decision on its next move.
Meanwhile, the county has scheduled an Oct. 8 meeting to decide whether Charter is in material breach of its franchise for taking over the operation without permission. Marticorena said the possible penalties for the breach range from revocation to liquidated damages.
As for the original concern — that of rising cable rates — the county's fears have been realized. Cable rates in Santa Cruz County saw a double-digit increase as the appeal was pending, Marticorena said.