9th Circuit Court of Appeals Rules That Local Government Denial of Consent to Cable Deal Is Entitled to Deference, and Reverses District Court in Charter Communications v. County of Santa Cruz

On Friday, Sept. 20, 2002, the U.S. Court of Appeals for the 9th Circuit reversed the trial court’s decision in Charter Communications, Inc. v. County of Santa Cruz, D.C. No. CV-99-01874-WHA(BZ) (9th Cir. Sept. 20, 2002), and held that the decision of Santa Cruz County to deny consent to a change in control of a cable franchise must be upheld “as long as there is substantial evidence for any one sufficient reason for denial.” Because the court found that the County’s decision satisfied this highly deferential standard, it reasoned that it did not need to consider whether federal law otherwise limited the County’s behavior.

According to the 9th Circuit, the lower court was wrong to assess the County’s behavior under federal law governing the cable franchise transfer process, and was likewise wrong in applying the “preponderance of the evidence” standard. In the Ninth Circuit, at least, courts must now accord considerable deference to a local franchising authority (“LFA”) when reviewing that LFA’s decision to deny consent to a change in control of a cable franchise.

Background

In order to facilitate the transfers of cable franchises incident to clustering, swaps, and other ownership changes in the cable industry, Congress adopted provisions in 1992 that require LFAs to grant or deny applications for franchise transfers within 120 days, or the transfers are otherwise deemed granted. The implementing rules of the Federal Communications Commission (“FCC”) establish FCC Form 394, under which transfer applicants submit demonstrations of their legal, financial, and technical qualifications for LFA evaluation. The rules also require cable operators to respond promptly to reasonable questions, and provide for prompt processing of their applications.

The County of Santa Cruz case arose from the filing by Charter Communications of a Form 394 incident to Paul Allen’s acquisition of controlling equity in Charter. The County retained an outside consultant and commenced an aggressive transfer review process. At various times thereafter, the County sought: (1) detailed financial information concerning the transaction; (2) extrinsic verification of the assumptions in Charter financials, such as those governing revenue growth and penetration; (3) funding for an outside analyst to create his own 10 year pro forma testing the Charter assumptions; (4) $500,000 as “mitigation” to lessen supposed concerns over the financial qualifications of Mr. Allen and the “economic viability” of the deal; and (5) a rate freeze. The only provision in the franchise that governed transfer requests required county permission, which could not be “unreasonably” refused. Most of the information requests were consultant boilerplate having nothing to do with the particular transaction. The County denied the application for Charter’s failure to respond to some of these detailed questions and for its failure to fund the outside consultant’s activities.

The district court held that local franchising authorities: (1) are precluded from exploring concerns about legal, financial, and technical qualifications of transfer applicants if they do not clearly raise them within 30 days of receiving Form 394; (2) must limit the scope of their inquiries to specific concerns; (3) may not commingle “reasonable” follow-up questions with broad boilerplate interrogatories; (4) must proceed with an expeditious process or violate an implied “rule of reason” governing the prompt processing of transfer applications; (5) may not insist that transfer applicants pay consulting or legal fees, or incur outside consulting costs, over and above the 5 percent franchise fee; and (6) may not use their transfer authority to regulate rates or impose illegal fees. The court further held that failure to narrowly focus government transfer procedures and requests on substantial government interests violates the First Amendment, and that the processing of transfer applications in an ad hoc manner, with unbridled discretion left to LFA staff or consultants, exacerbates the constitutional violation.

The 9th Circuit’s Opinion

The 9th Circuit ruled that the County’s denial of consent to the transfer request was a “legislative action,” and therefore the franchise provision that prevented “unreasonable” denial was inapplicable. Instead, the court found that the County’s “discretion is not limited by an agreement that contemplates future discretionary approvals.” Because the district court scrutinized the County’s actions as part of the federal transfer process and rules, and did not give the County the kind of deference that the 9th Circuit panel believed was appropriate for review of legislation, its decision was reversed.

The 9th Circuit concluded that at least two of the reasons offered by the County as the basis for its denial were rational and based on substantial evidence. First, the court found that it was not unreasonable to deny consent based on stated concerns about “Allen’s true net worth and about the relationship of that wealth to the viability of the enterprise.” Second, the court found that the county had reasonable concerns about the price paid for the system and its possible effect on subscriber rates and the “long-term viability of the Allen purchase.” In reaching these conclusions, the 9th Circuit ran roughshod over the district court’s careful application of the relevant federal statute and rules to the facts proved at trial.

Although the court stated that it did “not endorse every drib and drab of the County actions during its negotiations with Charter,” it did not reveal any practical concern for the County’s gaming of the process and sharp tactics as detailed by the district court. Indeed, the court noted that it would give deference to the County’s action even if it believed the County had acted unreasonably, in light of law governing review of legislative actions, and because “methods exist to promote self-correction in the future: citizens can vote out their local representatives and cable operators can refuse to enter into franchise agreements with notoriously difficult LFAs.” The court provided no indication as to what LFA demands or actions might fail its deferential review.

Finally, the court dismissed Charter’s claim that the County’s denial abridged its First Amendment rights because it found that Charter had “voluntarily” entered into an agreement under which the County had to approve a transfer of ownership, and in doing so Charter had effectively waived its right to raise such a First Amendment claim. The court did not suggest that it was aware of LFA bargaining power in reaching such “voluntary” agreements, and indeed, its assumption that an operator could refuse to enter into franchise agreements with notoriously difficulty LFAs suggests the court did not appreciate the reality of cable franchising.

Conclusion

The court’s conclusion that an LFA denial of consent to a cable transaction should be “upheld as long as there is substantial evidence for any one sufficient reason for denial” creates a very high hurdle in the 9th Circuit for a cable operator harmed by an arbitrary or unreasonable decision by an LFA to disapprove a transfer. The court’s decision invites LFAs to make burdensome “boilerplate” information requests, and to base a denial upon a laundry list of issues, since any single reason for denial that is supported by substantial evidence appears to effectively end the judicial inquiry. Finally, the decision places no real limits upon LFA abuses during negotiations, and offers no guidance to reviewing courts as to what actions are unreasonable – virtually ensuring future LFA abuses.

The decision is binding only in the states that comprise the 9th Circuit: Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, and Washington. However, unless reversed, the decision may become persuasive authority for courts outside of the 9th Circuit because it is the first federal Court of Appeals decision to address franchise transfers.

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