Charter Communications v. County of Santa Cruz

Decision Date07 March 2001
Docket NumberNo. C 99-01874 WHA.,C 99-01874 WHA.
Citation133 F.Supp.2d 1184
PartiesCHARTER COMMUNICATIONS, INC., a Delaware corporation; Charter Communications Properties, LLC, a Colorado limited liability corporation; and Paul G. Allen, an individual, Plaintiffs, v. COUNTY OF SANTA CRUZ, Defendant.
CourtU.S. District Court — Northern District of California

Ann E. Johnston, Richard R. Patch, A. Marisa Chun, Coblentz Patch Duffy & Bass, LLP, San Francisco, CA, for plaintiffs.

Dwight L. Herr, County Counsel, Samuel Torres, Jr., County Counsel of Santa Cruz, Santa Cruz, CA, William M. Marticorena, M. Katherine Jenson, Jeffrey Melching, Robert S. Bower, Rutan & Tucker, Costa Mesa, CA, for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER BENCH TRIAL

ALSUP, District Judge.

INTRODUCTION

In this case of first impression concerning the application of the 120-day rule under Section 617 of the Cable Television Consumer Protection & Competition Act of 1992, 47 U.S.C. 537, the issue is whether the County of Santa Cruz, California, unlawfully and unreasonably refused to consent to a change in ownership for a local cable franchise. Also presented is the question whether its refusals violated the First Amendment.

PROCEDURAL HISTORY

This action commenced in early 1999. On November 12, 1999, the Court granted in part and denied in part the County's Rule 12 motion, dismissing plaintiffs' takings claim as unripe and their direct claims under Section 617 of the 1992 Cable Act, 47 U.S.C. 537, for lack of a private right of action. Plaintiffs were allowed to proceed on their claim for infringement of their constitutional free-speech rights under 42 U.S.C.1983 and their contract claim to enforce a franchise agreement promise not to "unreasonably refuse" to approve such transactions, a claim that indirectly takes into account any violations of the 120-day rule. Charter Communications, Inc. v. County of Santa Cruz, 74 F.Supp.2d 937 (N.D.Cal.1999). On January 11, 2001, the Court denied cross-motions for summary judgment. A bench trial began in late January. The trial concluded on February 15, 2001. The Court now makes the following findings of fact and conclusions of law.

FINDINGS OF FACT

The parties have submitted voluminous proposed findings, and the Court has considered all of them. In the interest of clarity, however, this order focuses on the essentials. A number of proposed points, while arguably relevant and accurate, have been omitted as too distracting. That a finding has not been incorporated into this order does not mean that the Court rejected its accuracy. This order will cite the record as the exception and not the rule. For some exhibits, page cites are to the original page numbers and for others to Bates numbers, as convenient.

The Parties

1. Formed in 1992, Charter Communications, Inc. ("CCI"), has been at all relevant times in the cable-television business, providing service through one or more operating subsidiaries, including Charter Communications Properties, LLC ("Charter"). The latter acquired a group of cable businesses in California in 1997-98, one of which operated in Santa Cruz County, namely, the so-called "south county franchise," covering unincorporated areas surrounding the cities of Capitola and Watsonville. By 1998, CCI was a nationally-ranked cable operator and had acquired 22 cable systems in the United States. In 1998, Paul G. Allen purchased CCI, including its subsidiaries, in a $4.5 billion nationwide transaction. Mr. Allen was the cofounder of Microsoft Corporation and is wealthy. He paid cash for the Charter stock. Mr. Allen, CCI and Charter are the plaintiffs herein. They sued Santa Cruz County when it refused to approve the change in control for the local franchise in question. Whether that refusal was reasonable and lawful is the question presented. The County is the sole defendant.

The History of Cable in Santa Cruz County

2. Topography has long made cable important in Santa Cruz County. The area is surrounded by mountains that block reception of over-the-air signals from major metropolitan areas such as San Jose and the Bay Area. Until recently, the quality of service of cable providers in the area has lagged behind other parts of the country.

3. To operate a cable business in Santa Cruz County, it was (and remains) necessary to obtain a franchise from the local franchising authority, as elsewhere in the United States. Here, that franchising authority was the county government. From time to time, the county government had been frustrated over the cable service in the area. In dealing with cable operators, the County had even been threatened with termination of cable services. At least one operator told local officials that it could not continue providing services due to financial stress.

4. One troublesome prior operator was Sonic Cable Television. Prior to May 19, 1998, it had the south county area. Its franchise had actually expired in or about 1982, but thereafter Sonic had continued to operate as a holdover tenant. Under its franchise, the County's consent was required for a transfer of ownership (TX 3).

The Charter/Sonic Transaction

5. In 1997, an opportunity arose to improve conditions for the franchise. On August 19 of that year, Charter purchased Sonic's cable assets, including the south county operation. The Charter/Sonic transaction involved over forty cable television franchises located in two states, serving over 100,000 subscribers. Although the Charter/Sonic transaction is not at issue herein, it serves as important foundation, both sides assert, for the events that followed a few months later in the transaction that is at issue. By way of prelude, consequently, the following findings have relevance.

6. In September 1997, Charter and Sonic requested the County's consent to the transfer of the franchise. Federal law recognizes the power of local franchising authorities to approve or disapprove transfers but imposes certain restrictions discussed hereinafter. The FCC has promulgated a specific form to be used to seek approvals from local franchising authorities called Form 394. 47 C.F.R. 76.502. In the Charter/Sonic transaction, the parties submitted a Form 394 plus attachments to the County, which then requested and received additional voluminous supplemental information.

7. In the consent process, two individuals were the main actors for the County. One was Mr. Pat Busch, the assistant county administrative officer. He was schooled in cable issues. The County also retained Attorney William Marticorena, a private lawyer in Costa Mesa, California, to act as its special counsel. Mr. Marticorena was a graduate of Harvard Law School and specialized in cable law. For Charter, the individual primarily involved was Ms. Trudi Foushee, a vice president and senior counsel of the parent company CCI. All three were later leading actors in the CCI/Allen transaction. All three testified at trial.

8. The County was advised that CCI, the parent company, would manage the south county franchise area and was provided with information concerning CCI's technical qualifications to do so. The County did not ask for copies of employment contracts for CCI personnel or other evidence that CCI senior management would remain in place. The County did not ask any questions regarding the technical or financial qualifications of individual shareholders of CCI, or for a guaranty by individual shareholders, or for individual employment contracts. These omissions arguably stand in contrast to affirmative inquiries made by the County in the later CCI/Allen transaction.

9. Two of the items provided to the County were a five-year projected income statement for Charter nationwide and a ten-year projected income statement for Charter allocated specifically for Santa Cruz County (TX 58 and TX 60). These projected income statements contained projected capital expenditures, including rebuild costs, and a footnote explaining how revenue, expense and capital items were allocated. The County did not ask any questions regarding the revenue-growth assumptions used therein.

10. Through Mr. Marticorena, the County served Charter with extensive information requests. After the County served on Charter its second information request (TX 30), the discussions shifted to what concessions the County wanted. Messrs. Busch and Marticorena made clear that any grant of a cable franchise to Charter would have to include, at a minimum, the following: (a) a commitment by Charter to construct or rebuild a state-of-the-art cable system (750 MHZ, two-way system), which would ensure a minimum of 61 channels; (b) an immediate reduction of existing subscriber rate levels plus a rate freeze until the system rebuild was completed, plus significant restrictions on Charter's ability to increase rates in the future; and (c) cash payments for what the County believed had been franchise violations by Sonic. The proposed rate order would have limited Charter's ability to increase rates as might otherwise be permitted under the applicable FCC rate regulations. Charter demurred.

11. Mr. Busch then sent Ms. Foushee a "draft staff report" and draft county board resolution recommending denial of the transfer (TX 20). Among other things, they stated that Charter had failed to provide critical information regarding its ability to receive an acceptable rate of return and that Charter did not have the qualifications to own or operate the cable system. Viewed in the overall context of the negations, it seems clear that the County utilized the threat of a denial as a way to get Charter to accept its demands.

12. In the face of this threat, Charter acquiesced. An agreement resulted. On or about May 19, 1998, the County's board of supervisors adopted a resolution approving the transfer to Charter (TX 3). The parties entered into the following, which reflected various conditions imposed by the County for its consent: (a) a...

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