I. County Violates First Amendment by Stalling Cable Transfer

     The refusal of a California county to give its consent to a transfer of control of ownership for a local cable franchise has led a U.S. district court to hold that the county violated the First Amendment.  Egregious reporting requirements that forced the purchaser to provide mountains of paperwork regarding its company led, in large part, to the decision in Charter Communications, Inc. v. County of Santa Cruz, 133 F. Supp. 2d 1184 (N.D. Cal. 2001).

     Charter Communications was formed in 1992; it has been in the cable business since that time.  Through one of its subsidiaries, Charter acquired a group of cable businesses in Santa Cruz County, Calif.  By 1998, the parent corporation operated cable franchises throughout the United States.  That same year, Microsoft co-founder Paul Allen purchased Charter and its subsidiaries for $4.5 billion.  The deal ran into trouble when Santa Cruz County refused to approve the transaction.

     To operate a cable business in Santa Cruz County, it is necessary to obtain a franchise from the local franchising authority, which happens to be the county government.  In 1998, multiple cable franchises were operating in the county.  Charter purchased its cable franchises from Sonic Cable Television in 1997 after filing the required FCC Form 394 and submitting voluminous supplemental information, including the company’s technical qualifications.  The county did not ask for any other information, such as personnel records, financial qualifications, or individual employment contracts, which might have demonstrated Charter’s ability to run a cable franchise.  Charter did provide a five-year projected income statement for its company nationwide and a 10-year projected income statement in Santa Cruz County. 

     The county then requested extensive further information.  It completed a “draft staff report” in which it stated that Charter had failed to provide critical information regarding its ability to achieve an acceptable rate of return, and that Charter did not have the qualifications to own or operate the cable system.  Rather than answer what it perceived to be an unreasonably onerous request for information, Charter acquiesced and signed a new franchise agreement with terms favorable to the county.  Included in this agreement was a rate order that restricted Charter’s ability to increase rates that might otherwise be permitted under the FCC’s rate regulations.

     On July 29, 1998, Paul Allen contracted with Charter and others to purchase approximately 94 percent of the company and its affiliates.  The purchase would result in a common ownership of all cable properties with Mr. Allen retaining ultimate corporate control.  The county was notified of this transaction the next day, and its consent to the change in control was requested.  This consent was required under the local cable ordinance but could not be “unreasonably withheld.”

     The county’s response, to say the least, was overwhelming.  It launched a wide-ranging investigation into what Mr. Allen might or might not make as a return on his stock investment and whether he might have reason to increase rates and/or cut services.  The county insisted that its concern arose from its impression that Mr. Allen paid a high price for the parent company.  The plaintiffs, in return, said these concerns were unfounded and served as a pretext for the manufacture of certain false or exaggerated concerns designed to negotiate a favorable franchise agreement.

     Out of the 497 franchising authorities nationwide with which an FCC Form 394 was filed as part of this transaction, less than 10 percent requested more information.  Among this small percentage was Santa Cruz County, and no request for more information was as extensive. 

     The first information request by the county was nine pages long and sought 70 items.  These ranged from information regarding future cable rates, to the company’s creditors, to submission of any and all agreements or documents regarding the system of transfer.  Charter responded with a two-inch-thick written response with backup documents.

     On Nov. 8, 1998, the county followed up with two lengthy demands for further information.  These centered on the company’s business plans and the ability of Mr. Allen to secure a reasonable return on his investment.  These demands sought numerous internal reports, analyses, memoranda, financial projections, and other documents. 

     Later that month, counsel for Charter called the county and explained the company’s belief that these requests were unreasonable.  Counsel also stated that the company would not be providing further information because it believed the county had enough information to make an adequate decision.  This was followed by written correspondence to the same effect. 

     The county recommended that the request for approval of change in control be denied.  When the matter came before the county board of supervisors on Dec. 8, 1998, this was, in fact, the final result.  Charter then filed suit.

     The main issue before the district court was whether the denial was reasonable and lawful.  The district court was charged as well with deciding whether the denial was in violation of the First Amendment.  As to the first question, the district court decided that the county was most certainly unreasonable in its demands.  Charter Communications, Inc. v. County of Santa Cruz, 133 F. Supp. 2d at 1212. 

     The district court’s analysis, albeit brief, found that the county violated the First Amendment.  It noted that the operation of a cable television franchise plainly implicates the First Amendment.  Id. at 1215 (citing City of Los Angeles v. Preferred Communications, Inc., 476 U.S. 488 (1986)).  However, this is a content-neutral regulation that will be upheld if it results in an incidental burden on the First Amendment; is within the constitutional power of the government; furthers an important or substantial governmental interest; and is no greater than necessary to the furtherance of that interest.  

     The plaintiffs suggested that the only possible important or substantial governmental interests would be protection of public safety or maintenance of public thoroughfares.  The district court disagreed.  It noted that the U.S. Supreme Court has listed other important interests such as “protecting noncable households from loss of regular television broadcasting service due to competition from cable systems, assuring that the public has access to a multiplicity of information sources, and eliminating restraints on fair competition.”  Id. 

     Lower federal courts have also found the following interests to be valid: the regulation of physical scarcity; ensuring an equal and uniform cable service; fostering local community participation, choice, expression, and communication; fostering employment opportunities for local residents; protecting consumers from monopoly pricing; and allowing municipalities to regulate cable operators without fear of potentially overwhelming damages awards.  Id.  The U.S. District Court for the Northern District of California did not, however, endorse all of these interests as substantial or important. 

     The district court noted that the asserted interest in this case was to ensure the continuity and quality of cable service, which the court held to be a valid interest.  However, it was plainly obvious that the county’s actions did not support this goal.  When given evidence of Charter’s continued financial stability, the county still asked for more information from the company. 

     This problem, the district court said, was exacerbated “by the fact that the Santa Cruz cable ordinance contained no standards whatever, either substantively or procedurally, other than to say consent might not be ‘unreasonably withheld.’  The County gave its agents unfettered discretion to scour transactions for concerns.  No notice was given as to what might constitute grounds for denial or subjects for investigation.  Instead the County made up the rules as it went.  Such ‘regulation’ lends itself to the suppression of speech.”  Id.