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MDU Litigation Strategies

MDU LITIGATION STRATEGIES

 

As outlined in a memorandum called “Legal Update,” several state and federal court decisions decided since 2002 have interpreted the FCC’s inside wiring rules in ways that ought to provide tangible benefits for MDUs seeking to dislodge incumbent franchised cable operators from their buildings in the name of video competition. These cases prove that MDUs and their PCO allies are capable of winning decisive battles with recalcitrant MSOs if they are determined and armed with well-informed legal strategies.

IMCC anticipated some of these legal victories by advancing the regulatory interpretations that were later adopted by the courts. We take this opportunity to suggest more winning strategies on issues not explicitly decided in the litigation to date. We seek to identify legal issues relating to inside wiring that, in our opinion, the courts can and should decide in favor of our industry, given the right factual circumstances.

1. Perpetual ROE Agreements

It is a well-established principle of contract law that a contract having no termination date is against public policy and therefore terminable at the will of either party after performance for a “reasonable time.” A perpetual contract in effect calls for indentured servitude on the part of the burdened party. There are hundreds of published judicial decisions from virtually all jurisdictions confirming this principle.

An ROE agreement that contains an “auto-renewal” clause, such that it lasts for the duration of the incumbent MSO’s franchise “and any extensions thereof,” is an example of a contract having no definite termination date. Such a perpetual ROE agreement is therefore against public policy and may be unilaterally terminated by the MDU owner after a “reasonable time.”

As stated, we are aware of many court decisions holding that perpetual contracts are unenforceable, no published decision (to our knowledge) deals with this issue in the context of an ROE agreement between a franchised cable company and an MDU owner. Because many MDUs are locked in by perpetual ROE agreements, it would be highly beneficial for the industry if a judicial precedent were established holding such an agreement to be unenforceable.

Accordingly, we urge MDU owners and PCOs to educate themselves regarding the law, in the hope that at some point, an enterprising MDU owner will undertake to challenge a perpetual ROE agreement in court. Given the right factual circumstance, we believe that such a challenge would likely succeed. With regard to the “right factual circumstance,” the crucial facts would involve the absence of a definite termination date for the contract, exclusivity, and the length of time it has been in effect. We sketch these three factors in order.

First, the language of the ROE agreement should specify that it is, in practical effect, interminable, meaning that it has no definite termination date. As stated above, an ROE agreement that last for the duration of the MSO’s franchise “and any extensions thereof” is, in practical effect, perpetual, and therefore fits the bill as a contract ripe for legal challenge.

Second, the ROE should provide the franchised cable operator with an exclusive right to provide service in the building. While exclusivity per se has nothing to do with the duration of a contract, exclusivity tends to be anti-competitive over a long term, and therefore against public policy. A court is more likely to hold an exclusive perpetual contract unenforceable than a non-exclusive contract.

Third, the ROE must have been in existence for more than a “reasonable time,” and there is no definable rule as to how long such a “reasonable time” must be. One hypothesis would be that once the MSO has provided service for a sufficient time to recover the costs of its initial investment and a reasonable profit, the MSO’s reasonable expectations based on the ROE cannot justify the continued enforcement of a contract that suppresses competition. On its face, an exclusive ROE agreement that has been in effect for twenty years has probably outlived its reasonable duration; an ROE signed less than ten years ago probably hasn’t.

Our analysis is bolstered by the 3rd Circuit Court of Appeals’ recent holding that an ROE agreement negotiated at a time when there was little or no video competition in the MDU market is a “contract of adhesion” and any ambiguities in the contract must be resolved in favor of the MDU owner and against the incumbent MSO.

An MDU owner subject to an apparently perpetual ROE agreement over an extended time period should consult with his local counsel (or with IMCC) to determine whether such a contract is likely to be upheld under that State’s law. If local law appears to be favorable (for example, if there is at least one published decision in that jurisdiction holding that an interminable contract is not enforceable), the MDU owner should write a letter to the incumbent MSO informing it that the owner is terminating the ROE agreement and invoking the FCC’s inside wiring rules.

2. Inside Wiring as a Fixture to the Real Estate

The FCC’s inside wiring rules allow an MDU owner, in certain circumstances, to force the incumbent MSO to remove, sell or abandon the existing home run wiring, thereby making it available for use by a competing video provider. The inside wiring rules apply only when the incumbent MSO owns the home run wiring; if the MDU owner owns that wiring, the owner need not invoke the FCC rules at all, and may take control over the home run wiring immediately.

Courts in several jurisdictions have held that home run wiring installed in an MDU building by a franchised cable operator are not the property of the MSO but rather “fixtures” to the real estate and therefore property of the real estate owner. These court decisions have to date involved ownership questions in the context of tax disputes; the issue has been whether the wiring is personal property belonging to the cable company or real property belonging to the building owner. The same analysis should apply when the issue is whether the MSO can use its ownership rights to suppress video competition in MDU buildings.

In general, most jurisdictions agree that an object affixed to real estate is part of that real estate (i.e., a fixture) when three conditions are satisfied: (1) the object is physically attached to the property; (2) the object is adapted to the use of that part of the property to which it is connected; and (3) the intention of the person making the annexation is to make the object a part of the property.[1] A majority of courts to have considered the question of whether cable inside wiring (both home run and home wiring) is a “fixture” belonging to the property owner, have answered the question in the affirmative. Conditions (1) and (2) are generally satisfied when cable wiring is installed in conduits designed for such purposes and located within or behind walls. With regard to condition (3), the case law indicates that the decisive indicator of the annexing party’s intention is whether the MSO routinely removes the wiring when the subscriber’s service is terminated.  A failure to remove wiring when it is no longer being used (such as cable home wiring in a subscriber’s unit, or the cable home run wiring leading to that unit) strongly indicates an intention to allow the wiring to become a fixture, that is, part of the building.

As with perpetual ROE agreements, we urge MDU owners to educate themselves regarding the law of fixtures; given the right factual circumstances, we believe that a determined MDU owner could challenge the incumbent MSO’s ownership claims and assert direct control over the home run wiring without resort to the FCC’s inside wiring rules. The “right factual circumstances” would involve an ROE agreement that does not specify that the home run wiring is the property of the MSO, and the MSO has not routinely removed home run wires leading to subscribers who have terminated the MSO’s service.

3. Conclusion

Recent state and federal court decisions demonstrate that a determined MDU owner, armed with an aggressive and well-informed legal strategy, can challenge an incumbent cable company’s heavy-handed attempts to suppress video competition in the MDU market, and win. Our industry will realize tangible and important benefits if this trend continues and capitalizes on the momentum already established. In this Memo, we suggest two additional issues on which favorable legal precedent can and should be established.


[1] Some courts also consider a fourth factor, namely, the degree of difficulty and the extent of any economic loss involved in removing the object from the real estate.

 

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