Charter Communications v. County of Santa Cruz, 99CV1874.

Decision Date11 January 2001
Docket NumberNo. 99CV1874.,99CV1874.
Citation203 F.Supp.2d 1102
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.


ALSUP, District Judge.


In this action for infringement of plaintiffs' First and Fourteenth Amendment rights of free speech under 42 U.S.C. 1983, and affiliated state-law contract claims, this order denies plaintiffs' motion for summary judgment and denies defendant's motion for summary judgment.


This case arises out of defendant County of Santa Cruz's denial without prejudice of consent to plaintiff Paul G. Allen's 1998 purchase of the outstanding shares of a cable operator, plaintiff Charter Communications, Inc. ("CCT"). At the time of the purchase, CCI owned plaintiff Charter Communications Properties, Inc. ("Charter"), which pursuant to a written franchise agreement, ran and operated a cable system in the County of Santa Cruz. Under the franchise agreement, the County's consent was required for the transfer but could not be "unreasonably withheld." The meaning of that phrase is the crux of this dispute.

On May 19, 1998, the County entered into cable television franchise agreement with Charter, which had obtained the Santa Cruz "South County Franchise" from a company called Sonic Cable. As part of that agreement, the County and Charter negotiated and agreed to: (1) a new franchise agreement (Joint Exh. 4.b); (2) a rate order limiting Charter's ability to raise cable rates in the county over the next ten years (Joint Exh. 4.c); and (3) a transfer agreement in which CCI, as Charter's corporate parent, guaranteed Charter's obligations under the franchise agreement and rate order. The franchise agreement incorporated the terms of the County's cable ordinance, as will be discussed further below, requiring Charter to obtain the County's prior consent to any change in control of Charter, but prohibiting the County from withholding such consent "unreasonably."

Just over two months later, on July 29, 1998, Paul G. Allen contracted with CCI and certain of its affiliates to purchase approximately 95% of the outstanding shares of CCI as part of a more than $4 billion acquisition that would result in a common ownership of all of the cable properties then managed by CCI under a single umbrella company. On July 30, 1998, Charter and CCI notified the County of the transaction. The letter to the County includes an assurance that CCI's existing management group would remain in place after the transaction (Joint Exh. 8). On August 18, 1998, plaintiffs submitted a fully-completed FCC Form 394 to the County, requesting County's consent to the transaction (Joint Exh. 9). Form 394 is a document designed by the Federal Communications Commission to provide franchising authorities with information necessary to establish the legal, technical and financial qualifications of a proposed transferee.

On or about August 26, 1998, representatives of CCI met with the County's special counsel, William Marticorena, to discuss the transaction. CCI notes that it advised the County that it needed to close the transaction by the end of the year (Foushee Decl. ¶¶ 17). Apparently at that same meeting, Marticorena requested that Charter and Allen agree to pre-fund a due diligence financial study by an independent consultant, and proposed that William Morgan perform the study (Marticorena Decl. ¶ 3). Marticorena's declaration states that Charter did not object and seemed agreeable to the concept as eliminating any possibility of bias (ibid.). In early September, Marticorena faxed Charter a proposal regarding the due diligence financial study (id. ¶ 5). At a follow-up meeting on September 15, 1998, Marticorena reminded Charter of the immediate need for due diligence financial study, and provided Charter with an additional copy of the proposal by Morgan (id. ¶ 6). Charter, apparently, indicated it would review the proposal and respond promptly (ibid.). Also at some point after August 26, Charter expressed hesitation about Morgan's impartiality and suggested that another expert be chosen. It did not reject the idea of an independent consultant altogether, however, in any of several conversations with Marticorena before October 5, 1998 (id. ¶ 7).

Meanwhile, on September 1, 1998, the County sent plaintiffs a request for further information "regarding the potential economic impact of said Transfer upon the rates which will be, or may be, charged for the provision of regulated and unregulated services within the Franchising Authorities. More specifically, and without limitation, the Franchising Authorities is [sic] concerned whether the Transfer, considering its totality of its economic impacts, will preclude or impede Charter from realizing a reasonable return..." (Joint Exh. 10).

On September 17, 1998, plaintiffs submitted a response to the September 1 information request (Foushee Decl. ¶ 25, Exh. 14). Although the response contained detailed financial statements, ten-year projected income statements, assurance that no new debt would be incurred to finance the Transaction, information on the cable systems in which Allen owned a controlling interest, explanation of Allen's role in the company, and information regarding the calculation of the sales price (Foushee Decl. ¶ 25), it did not mention the due diligence study. On October 5, 1998, Marticorena wrote to Charter warning that delay regarding the independent due diligence financial study could result in a delayed or adverse decision regarding the transfer application (Joint.Exh. 15).

On November 2, 1998, the County sent plaintiffs two more information requests. One was focused on the due diligence financial study request. The other asked for further information justifying the income projections provided in plaintiffs' last submission. (Joint Exhs. 16-17). On November 3, 1998, Charter wrote the County expressing uneasiness with proposed expert Morgan's impartiality and noting that County had not responded to the resume of alternate consultant that Charter stated it had faxed to the County on October 1, 1998 (Joint Exh. 18 at SC 002455-56).

On November 12, 1998, the County wrote a letter to plaintiffs. The letter stated:

After consultation with Staff of each of the Franchising Authorities, it is becoming increasingly clear that the Staffs will not be in a position to make a positive recommendation of approval to the legislative bodies of each of the Franchising Authorities prior to the conclusion of the 120-day review period. There are numerous issues relating to the technical and financial qualifications of the Buyer as well as various compliance issues which may well preclude an approval within the 120-day timeframe. As opposed to a recommendation of denial without prejudice so that these issues can be further pursued, Staffs are willing to recommend a thirty to sixty day extension of the review period so that the parties can utilize this time to address the various issues which have been identified to you in my prior correspondence, as well as future issues which may come out of continuing compliance audits, toward the goal of crafting a mutually-acceptable transfer agreement. If Charter and the Buyer are willing to entertain such an extension, please contact me as soon as possible since agenda deadlines are quickly approaching for the meetings at which the legislative bodies for each of the Franchising Authorities will take action.

(Foushee Exh. D at SC 002450-51) (emphasis added).

In a telephone call shortly thereafter, Charter advised the County of plaintiffs' objections to the County's further demands, stating Charter's position that the County already had more than sufficient information to make their decision and that no further responses would be provided and no extension of time could or would be given for the County to act on plaintiffs' consent request (Joint Stmt. 5 ¶ 26; Foushee Decl. ¶ 29). The general substance of this conversation was confirmed by Charter in two letters dated December 1, 1998, which also made clear that plaintiffs would not fund the due diligence study and further explained why they were taking that position (Joint Stmt. 5-6 ¶ 27, Exhs. 19 and 20).

On December 8, 1998, the County adopted a resolution denying without prejudice plaintiffs' consent request (Joint Exh. 21). No representatives of plaintiffs attended the December 8 meeting of the County's Board of Supervisors (Joint Stmt. 6 ¶ 30). The resolution was adopted without discussion as part of the "consent calendar" (Joint Stmt. 6 ¶ 31). This was 112 days after Charter formally requested the County's consent and 82 days after Charter responded to the County's September 1, 1998, information demand.

On or about December 15, 1998, the County issued another board resolution advising plaintiffs that the County would re-open the issue and consent to the transaction prior to the closing date. Two conditions were attached to such approval: (1) that Charter agree to a further rate freeze, and (2) that Charter make a "mitigation payment" of "approximately 5% of the difference between the per subscriber purchase price of Sonic and the sale price to Paul Allen multiplied times the number of subscribers," or approximately $500,000 (Exh. 23). Charter did not accept these conditions (Vossmeyer Decl. ¶ 5).

The parties' accounts of how...

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