Franchise Sales and Transfers
Cable systems are often transferred or sold, or the cable company itself is sold. When this happens, municipalities can often obtain significant benefits for themselves and their residents by making sure that prior to the sale current problems are corrected and that there are adequate assurances that the municipality and its residents will be no worse off after the sale than before. Usually this can be done at no cost to the municipality because the cable companies reimburse all costs. There is a significant risk of lost rights if municipalities fail to take action on proposed transfers.
Many cable franchises are transferred as part of a long-term consolidation of cable companies in the U.S., combined with the larger companies selling off systems (often in smaller communities) that are not a “good fit” with their operations.
Other transfers occur as cable companies “swap” systems so that only one cable company will serve an entire metropolitan area. This provides some efficiencies, but it also removes the ability to compare one cable company in an area against another that is literally across the street.
Some of the transfers are sales of the franchise – an asset sale where the company legally franchised to serve an area changes. Others are changes in control – the local cable company does not change, but through sales of stock or otherwise the entity controlling it changes. In either case, for practical purposes the cable company changes hands, and often personnel and operations may change, too.
A municipality has the right to review, approve, condition or reject a transfer if its cable franchise so provides. Typically a municipality can request a wide variety of information and impose a broad range of conditions to assure, for example, that it and its residents are no worse off after the transfer than before. Cable company claims that federal law limits municipal rights to obtain these protections are simply incorrect and have been rejected by the courts.
We have represented approximately 100 municipalities in connection with transfers or changes in control of their cable systems, including when a cable system is sold to a different company. Among the items we have addressed in the transfer process are:
- Getting assurances that the municipality and its residents will be no worse off after the transfer than before
- Resolving outstanding disputes
- Ensuring adequate customer service after the transfer
- Protecting against undue increases in rates
Risk of Loss of Rights
There is a significant risk for municipalities in transfers. Cable companies contend that under the 1984 Cable Act in a transfer the “slate is wiped clean” as to any defaults by the prior cable company. Unless this contention is specifically negated as a part of a transfer, the municipality may find that it has lost significant rights and claims, such as claims for damages or underpayment of franchise fees. The risk is increased because under federal law the transfer is automatically deemed approved if a municipality does not act on a complete Form 394 within 120 days of receiving it,
The combination of “approval by lapse of time” and the cable company contention creates a risk that municipalities can easily lose rights in a transfer.
Franchising and Renewals
Cable franchises are the agreement or ordinance setting forth the terms on which a cable company is given permission to provide cable service in a municipality. By state and federal law, a cable company must have such a franchise to use the public rights of way for its lines and to provide service.
Franchise issues include:
- What services are to be provided
- Which company is authorized to provide cable service (and what happens if the company changes)
- Where the cable company has to provide service
- Fees and other compensation the company provides the municipality and the public
- Protections for use of the rights of way
- Extensive customer service protections (such as answering the phone on time)
- Channels for use by the municipality, schools, the public and financial support for such channels
We represented national municipal groups, the Michigan Municipal League and municipal leagues from three other states before the Sixth Circuit federal Court of Appeals in obtaining the most important court decision to date on cable franchise renewals. It held that a municipality’s decision about what should be in a cable franchise to meet the municipality’s future cable-related needs must stand if there is any evidence in the record to support it. This case has helped many municipalities achieve their goals in cable franchise renewals.
Extensive Franchise and Renewal Experience
We have represented well over 100 municipalities on cable franchise renewals and franchise transfers. All were resolved successfully through negotiations. Results from recent franchise transfer and renewal negotiations include:
- Franchise fees effectively in the 5.25-5.5 percent range by having the “five percent” federal franchise fee applied to as broad a definition of revenues as is legally possible
- Prepayment of franchise fees, which can significantly increase franchise fee revenues during the first year of the franchise
- Improvements for municipal, school and public access channels by having fiber optic feeds from them to the cable company (improving quality of signal) and adding the ability to broadcast live from remote locations
- Increases in funding from the cable company for municipal, school and public access channels of from 10 cents to 30 cents per customer per month
- Cable company providing at no charge an “I-NET,” a fiber optic network connecting municipal buildings for video, voice, data and other applications
- Strict customer service provisions with significant liquidated damages, e.g., if the cable company does not answer the phone on time
- State of the art alert systems where the municipality can use the cable system to instantly notify its residents of emergencies
- Comprehensive indemnity and insurance provisions minimizing the municipality’s financial exposure should accidents occur