Franchisers' Win Stands

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The U.S. Supreme Court won't review a court order cable attorneys fear could open the way to financial fishing expeditions by municipal authorities conducting franchise-transfer proceedings.

Without comment, the high court declined Charter Communications Inc.'s bid to overturn a ruling of the 9th U.S. Circuit Court of Appeals in its transfer dispute with Santa Cruz County, Calif.

Municipal attorneys said the appeals court's ruling expands the rights of a locality to broadly examine corporate financial data, and to extract operating concessions from a new cable franchisee.

"We're delighted with the results," said Bill Marticorena of Rutan & Tucker, consultant to Santa Cruz County. "We're pleased the Supreme Court decided not to disturb the Ninth's ruling."

The court's inaction affirms that public entities serve an important role in protecting consumers, he added.

The Supreme Court decision wasn't really surprising, because the court takes a limited number of appeals each session — and even declined to hear the cases of citizens challenging their arrests on terrorism grounds following the Sept. 11, 2001, terrorist attacks.

U.S. Solicitor General Theodore Olson, who submitted a brief in the case in November, opined that the standards set by the 9th Circuit provide "inadequate protection" for federal law, because they allow franchising authorities to violate national policy as long as they have one "plausible, legal" basis for their actions.

But Olson also said the Supreme Court should reserve action until a conflict appears among courts of appeal on application of the federal law.

"Obviously, we're disappointed," said Charter executive vice president, general counsel and secretary Curt Shaw. The St. Louis-based MSO believes the lower court opinion and Olson's brief demonstrated that regulators violated the federal Cable Act.

The National Cable & Telecommunications Association also filed a friend of the court brief in an attempt to overturn the 9th Circuit's ruling.

In a statement, National Cable & Telecommunications Association senior vice president of law and regulatory policy Dan Brenner also expressed disappointment.

The county's "behavior in the case was an anomaly in the traditional city-cable relationship, and we hope that the decision will not affect those ongoing, cooperative relationships with other communities," he said.

The dispute began in 1998, when Charter, which bought the Santa Cruz system from Sonic Communications Inc., was sold to billionaire Paul Allen. Allen's purchase trigged another transfer proceeding.

The county sought, and was given, a two-inch thick written response to questions about the new owner, according to court documents.

RATE IMPACT FEAR

County officials and consultant Marticorena were concerned that Allen had paid so much for Charter, he would be forced to raise cable rates.

They asked for a second round of information and proposed that Charter fund and conduct a due diligence study. Charter declined, and the county refused the transfer on Dec. 8, 1998.

When Charter officials asked what they could do to reverse the county's action, regulators adopted a new resolution, allowing the transfer if Charter extended an agreed-upon rate freeze and provided a "mitigation payment" of $500,000, among other conditions.

Charter sued, and won, in U.S. District Court for the Northern District of California.

The district court found that most of the county's requirements were unreasonable and unlawful. For example, the due-diligence study would have required Charter to locate third-party sources for information, then vet the findings against its own internal projections. The "bone-crushing" work the answer would have entailed made the demand unreasonable, the lower court ruled.

Also, the mitigation payment violated the federal cap on franchise fees, according to the ruling.

The 9th Circuit reversed Charter's victory. A panel of that court's judges decided the county had broad discretion, and the transfer denial was appropriate as long as there was "substantial evidence for any one sufficient reason for denial."

The appeals court said it was not unreasonable for the county to show concern about Allen's true net worth, and the relationship of that wealth to the cable enterprise.

'SHOT ACROSS BOW'

Though the issues in this case were not addressed by the U.S. Supreme Court, the solicitor general's brief on the case was a "shot across the bow" to franchising authorities, in the opinion of attorney Paul Glist from Cole, Raywid & Braverman, Charter's outside law firm.

Olson reaffirmed the cable stance that what Santa Cruz did was illegal, said Glist.

"He is inviting us to be alert for conflicts in other circuits, and we will," Glist added.

Observers noted that the 9th Circuit's decision is only the law of the land in the states included in the district: California, Arizona, Nevada, Oregon, Washington, Idaho and Montana.

Shaw said Charter has no other pending transfers in the 9th Circuit states. Charter's recent transactions are in states including Pennsylvania, Delaware, Maryland and West Virginia.

The Supreme Court's refusal to overturn the 9th Circuit was a "very significant win for local authorities," said Nick Miller of Miller & Van Eaton, a municipal adviser.

"In the 9th, at least, cable franchising remains subject to very broad discretion," said, Miller, noting the decision's significance in terms of efforts by localities to hold operators' feet to the fire.

He predicted the 9th Circuit ruling could influence similar cases, should they arise in other jurisdictions.

'RAISED RATES'

Santa Cruz County provided Charter with a notice of breach of franchise in 1998 based on the transfer dispute, Marticorena said. Even though its ownership of the franchise was under challenge in the proceeding, Charter continued to invest in the system and completed an upgrade by 2000, Marticorena noted.

The operator has introduced a number of new products, he added. But Charter has "also raised rates significantly, compared to Sonic."

The county's demand for cure lay dormant as the dispute worked its way through the courts.

Marticorena now expects the county Board of Supervisors to soon discuss options, ranging from liquidated damages up to revocation.

Shaw said it would not benefit the local citizens to lose cable service, adding Charter is willing to talk to any franchiser.

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