Two weeks ago, New York State’s telecommunications regulator gave Charter Communications 14 days to fully and unconditionally agree to the terms and condition of the 2016 Merger Order that granted the cable company permission to acquire Time Warner Cable. On the last day, hours before the deadline expired, Charter agreed, sort of.

“This replacement letter hereby clarifies that Charter ‘unconditionally accept[s] and agree[s] to comply with the commitments set forth in the body of [the Merger Order] and Appendix A’ as set forth in Ordering Clause 1 of the Merger Order,” wrote Adam E. Falk, senior vice president for state government affairs at Charter Communications.

Unwilling to stop there, Falk decided to make the unconditional acceptance… conditional.

“While Charter’s acceptance of these commitments is unconditional, this acceptance remains subject to applicable law,” Falk wrote. “Charter does not waive its positions as to the meaning or proper interpretation of its commitments (including Charter’s position that the negotiating history of Appendix A must guide such interpretation), or any of its legal rights including its right to seek review of the Commission’s June 14, 2018 Orders and the Commission’s interpretation and application of the January 8, 2016 Order.”

That final paragraph signals the Public Service Commission/Department of Public Service that Charter intends to continue insisting that the language in Appendix A governs, defines, and characterizes the entire Merger Order — an argument the Commission had refused to accept because it gave a foundation for Charter officials to claim they were in full compliance with their commitment to roll out service to an additional 145,000 unserved New York residents. Appendix A omits the purpose and intent of the expansion commitment, explained elsewhere in the Merger Order as providing broadband service in New York’s unserved rural areas. Charter had attempted to count as “new passings” any new expansion of its cable lines, including those in wealthy gated communities and upscale condos, refurbished apartments in New York City, and new housing developments — all likely to receive service without the Merger Order.

New York’s top telecommunications regulator has called Charter Communications a purveyor of fake ads, deception, and broken promises and has again called into question how much longer the company should be allowed to do business in New York State.

The New York State Department of Public Service/Public Service Commission today sent a letter to Charter Communications CEO Thomas Rutledge condemning Spectrum’s false and misleading advertising campaigns and the ongoing deception of New York consumers about its expansion efforts. The letter warned Rutledge Charter must immediately cease and desist airing fake ads about the company’s efforts to expand critical broadband service across the state. The letter also warns that if the misrepresentations and unacceptable way Spectrum conducts its business in New York does not stop, the company could find itself out of business in New York State.

“The situation regarding Charter/Spectrum is getting more serious with each passing day,” Department CEO John B. Rhodes said. “Not only has the company failed to meet its obligations to build out its cable system as required, it is now making patently false and misleading claims to consumers that it has met those obligations without in any way acknowledging the findings of the Public Service Commission to the contrary. Access to broadband is essential for economic development and social equity. Charter/Spectrum’s intentional deception of New Yorkers must end now.”

So far, Charter has ignored the Public Service Commission’s June 14 order demanding Charter indicate full and unconditional acceptance of the 2016 merger agreement and the terms it contained. The deadline for Charter or its attorneys to respond is this Thursday, June 28, 2018. If the deadline passes with no response, the Commission warned it may rescind, modify, or amend the approval order granting the merger, file a lawsuit in the Supreme Court of New York to potentially cancel the merger, and fine Charter for being out of compliance with state law.

Letter from New York regulators to Charter Communications (click image to download or view complete letter).

Charter’s Fake Ads

Rhodes

The letter accuses Rutledge of knowingly misleading New York customers in its advertising and printed materials that claim Charter has fully complied with — and exceeded — its commitments to New York under a merger agreement with the state allowing Charter to acquire Time Warner Cable systems. The letter emphatically states these representations are demonstrably and materially false.

State regulators pointed to Charter’s historic and systematic pattern of false advertising, noting a 2017 lawsuit filed by New York’s Attorney General over the company’s inability to provide advertised speeds has survived several company challenges in court and is moving forward.

The Merger Itself is in Peril

Charter will face the possibility of additional legal troubles as the PSC refers Spectrum’s latest conduct to the Attorney General’s office for possible further legal action. State regulators also suggested Charter was materially deceiving investors in violation of federal securities laws by not disclosing the company’s failure to honor its commitments to New York and warning investors the merger itself was now in significant peril if it is revoked in New York.

Regulators have also put Charter executives on notice that in advance of a possible penalty action by the Commission against the company directly, it further demanded that Spectrum produce records regarding its false representations and preserve all documents, including email, text messages, voice mail, recordings, and other documentation relating to its advertising claims.

A Record of Failure in New York

According to a PSC investigation and a Public Service Commission order, Spectrum missed its required December 16, 2017 build-out commitment to extend its network to pass additional residences and businesses by 12,245 passings. Spectrum also failed to cure, as required, its earlier failure by March 16, 2018. For these two failures, Spectrum was ordered by the Public Service Commission to forfeit $2 million. These failures came on top of earlier failures by Spectrum to meet its commitments. The PSC argues Spectrum has not met a single build-out deadline since the approval of its acquisition of Time Warner Cable in 2016.

The PSC stated that, instead of working to meet its commitments to New York, Charter executives have ignored state regulators as Spectrum knowingly continued to advertise and publish false claims that the company is exceeding its mid-December 2017 commitment made to New York by more than 6,000 locations and is on track to extend the reach of advanced broadband network to 145,000 unserved or underserved locations by May 2020. Both claims are patently false, claims the PSC.

“Spectrum’s failure to meet its build-out commitments hurts unserved and underserved New Yorkers, leaving them without a key public utility service crucial to their future success and well-being,” the regulator wrote.

“Spectrum’s publication of claims that it knows are false harm all consumers who rely on honest and accurate information in choosing suppliers from among competitors,” the PSC wrote. “And when Spectrum continues to advertise and publish false claims even after being directed not to by its governmental regulator, it demonstrates deliberate disregard and lack of respect for the Public Service  Commission, the rule of law, and regulation in New York State. Accordingly, in the name of customers and potential customers, the Department called on Spectrum to set the record straight by advertising and publishing the truth that the company has been found by the Public Service Commission to have failed to keep its buildout commitment to New York State.”

Charter Communications produced this video incorporating similar elements used in its advertising targeting New York consumers. Charter does not mention its investment in rural broadband in New York is not altruistic. It was a core condition the company agreed to as part of a settlement with the New York Public Service Commission to approve the acquisition of Time Warner Cable in 2016. (1:36)

Keep in mind the state sales tax rate in some states does not include local sales and use taxes, which can often double the sales tax in some states. In New York, for example, the 4% state sales tax is joined by an average 4% local sales tax, which effectively means buyers pay an average 8% sales tax, varying with the jurisdiction.

The U.S. Supreme Court has given states a green light to begin imposing state and local sales taxes on all online purchases, regardless of where an internet retailer is located, ending a long-standing competitive advantage for online retailers.

In a 5-4 decision, the court sided with state tax authorities and brick and mortar retailers who argued it was unfair to collect sales tax from businesses with a physical presence while allowing shoppers to effectively bypass those taxes by shopping online. The decision decisively overturned a 1992 landmark ruling that allowed most internet purchases to avoid the automatic collection of sales tax, as long as a company did not maintain any offices or stores in a state where the buyer was located. Despite the earlier ruling, many states including New York never surrendered their right to collect sales tax on all online purchases, but were forced to rely on the honesty of state taxpayers to voluntarily disclose those purchases on tax forms — something few taxpayers did.

The decision is perceived as a significant blow to Overstock.com, Newegg.com, and Wayfair.com — three online retailers that went far beyond other online retailers to avoid charging sales taxes on most purchases. When states threatened to sue to impose sales taxes when retailers maintained commission and referral programs that paid in-state, third-party businesses to refer internet traffic to those retailers, many terminated affiliate relationships in certain states just to continue avoiding the collection of sales taxes.

Amazon.com, among the largest of all online retailers, was an early target of state taxing authorities. After years of fighting, Amazon conceded and gradually began collecting sales taxes for all 45 states that impose them. Amazon Marketplace purchases, sold by third-party vendors, were not charged sales tax. After today’s decision, most expect that will change soon.

The ruling will likely be a boon to state coffers, bringing each state an estimated $8-33 billion annually in new tax revenue and growing, according to one federal report. Research by Barclays found that states that rely the most on sales tax revenue to fund their budgets will benefit the most from the decision. Those states are Louisiana, Tennessee, South Dakota, Oklahoma and Alabama. Because states like New York, Illinois, and California already aggressively collect state sales taxes on many online purchases, the benefits to those states will likely be more modest.

The competitive advantage to online retailers who do not charge sales tax has gradually declined in many instances over the years because of dramatically higher shipping costs. Those shipping costs are not borne by brick and mortar stores, but they have always collected sales tax and face more expenses that online retailers do. Despite that, shortly after the decision was announced, investors punished exposed e-tailers including Overstock, Wayfair, and eBay with lower stock prices.

Some small businesses were relieved the Supreme Court decided to upheld the South Dakota law that exempted retailers with less than $100,000 in sales or 200 transactions annually from collecting that state’s 4.5 percent tax on purchases. Many are hoping state tax authorities will maintain similar exemptions for small internet businesses that would otherwise be faced with dramatic new costs collecting the correct state and local taxes and paying them to the appropriate tax authorities.

The decision was an unusual liberal-conservative split among the justices. Joining Justice Kennedy in the majority were three of his conservative colleagues, Justices Clarence Thomas, Samuel Alito and Neil Gorsuch, as well as liberal Justice Ruth Bader Ginsburg. Chief Justice John Roberts wrote for the dissenters, joined by liberal Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan.

The New York Public Service Commission has notified Charter Communications it won’t be the victim of an offer that promises one thing and delivers something less, giving the company 14 days to fully accept the terms of its Time Warner Cable/Charter merger approval or face the possibility of having the merger canceled, potentially throwing Charter’s business plans into chaos.

In a move any aggrieved cable customer would appreciate, Charter’s lawyers gave the PSC a deal that looked good on the surface, only to be eroded away in the fine print. In a May 2018 response to the Commission’s “show cause” order, threatening to severely fine the cable company for breaking its commitments to New York State, the cable company effectively responded it wasn’t their fault if the Commission missed the fact the company did not actually agree to everything the state thought it did, and was in full compliance of what it unilaterally agreed to do.

The hubris of the state’s largest cable operator did not go down well in Albany, to say the least. But first some background:

Charter is coming under fire in New York State for failing to meet its obligations to extend service in a timely way to 145,000 New York homes and businesses not part of Spectrum’s service area and also lack access to broadband service. Today the Commission, in a separate action, fined Charter $2 million, to be drawn from a line of credit previously set aside by the cable company, for failing to meet its original broadband buildout targets and failing to remedy its past poor performance.

Charter’s lawyers last month protested their innocence, claiming the company was not out of compliance with its agreement — in fact it was ahead of schedule.

Both things cannot be true, so who is being honest and who is trading in “alternative facts?”

To find out, one has to turn back the clock to 2016. On January 19, Charter’s attorneys sent an acceptance letter to the Commission in response to the regulator’s offer to approve the acquisition of Time Warner Cable if Charter agreed to a series of pro-consumer benefits designed to allow New York customers to share in the lucrative deal.

Charter agreed to dramatically increase Standard internet speeds for its New York customers, first to 100 Mbps by the end of 2018 and again to 300 Mbps by the end of 2019. Charter met its first commitment ahead of schedule and is on track to again increase speeds for New York residents before the end of next year.

The company also agreed to temporarily retain Time Warner Cable’s $14.99 Everyday Low Price Internet program. Although that option has since expired for new customers, existing customers can keep the package until at least next year. But regulators note Charter has frequently made it difficult for New York customers to sign up for the program. Stop the Cap! has documented multiple instances of customers being told the plan was unavailable, or representatives have confused it with Spectrum Internet Assist, a similar budget-priced internet package for those that meet certain income and benefits qualifications.

But Charter’s agreement to expand its service to unserved areas of New York is where most of the current conflict arises. Stop the Cap! strongly recommended in our testimony to the PSC that rural broadband expansion be a part of a series of deal commitments that should be imposed on Charter if the Commission saw fit to approve the merger. The Commission agreed with our recommendation. That allows us to speak authoritatively that the Commission, in concert with the New York State government, framed that expansion commitment as an adjunct to the state’s Broadband 4 All program, Gov. Andrew Cuomo’s rural broadband expansion effort.

Charter would serve an integral role in the effort by extending service to homes and businesses just outside of its current service area. That would save the state millions in costs trying to subsidize other providers to expand into these typically unprofitable areas of the state. The design and intention of the expansion program was clear from the outset, and the Commission specifically requested Charter provide detailed lists of planned expansion areas, so the state could avoid duplicating its efforts and re-target funding to other areas of the state. The goal was to achieve near-universal broadband availability in every corner of New York.

The Commission’s 2016 letter to Charter seemed clear enough:

The conditions adopted in this Order and listed in Appendix A shall be binding and enforceable by the Commission upon unconditional acceptance by New Charter within seven (7) business days of the issuance of this Order. If the Petitioners’ unconditional acceptance is not received within seven (7) business days of the issuance of this Order, the Petitioners will have failed to satisfy their burden under the Public Service Law as described herein, and this Order shall constitute a denial of the Joint Petition.

But in Charter’s response on January 19, 2016, their lawyers got too cute by half (emphasis ours):

In accordance with the Commission’s Order Granting Joint Petition by Time Warner Cable Inc. (“Time Warner Cable”) and Charter Communications, Inc. (“Charter”) dated January 8, 2016, Charter hereby accepts the Order Conditions for Approval contained in Appendix A, subject to applicable law and without waiver of any legal rights.

On May 9, 2018 the state discovered what that language discrepancy meant. Charter’s lawyers responded to the state’s charges that the company was not complying with the terms of the merger approval agreement with a classic “gotcha” letter, claiming Charter’s agreement provided only a “qualified” acceptance of language contained exclusively in Appendix A, and its obligations started and stopped there.

That is a distinction worth millions of dollars. Appendix A basically summarizes Charter’s commitment to expand to 145,000 new passings in New York, but does not explain the expansion program or its purpose. If only Appendix A did apply, it would allow Charter to count any new cable hookup, whether in a rural hamlet or more likely in a condo in Manhattan as a “new passing,” bringing it one customer closer to meeting its expansion commitment. Charter could count new wealthy gated communities, apartment buildings, offices, and converted lofts, despite the fact it would almost certainly wire those customers for service with or without its agreement with the state government. More importantly, Charter would successfully avoid spending tens of thousands of dollars to extend the cable line down a road just to reach one or two rural customers.

Charter’s lawyers seem to think that their clever loophole will win the company significant savings and avoid fines — too bad, so sad if the state’s lawyers failed to appreciate what Charter was actually willing to agree to in 2016 and what the state accepted by default by not catching the discrepancy sooner.

“Contrary to [Charter’s] assertions, however, the Approval Order accorded Charter only two explicit choices: (1) to accept unconditionally the commitments set forth in the body of the Approval Order and Appendix A; or (2) have the Joint Petition rejected, subject to Charter’s right to judicial review,” the Commission rebutted.

In short, the state is calling Charter’s possible bluff. If it truly intends not to agree to the original terms of the agreement, the state has the right to toss out the merger agreement, in part or in full, canceling the merger. Of course, Charter can always take the matter to court and hope it can find a judge that will accept Charter’s ‘partial agreement’ argument.

To say the PSC was displeased with Charter’s novel legal maneuver would be an understatement. In today’s ruling, the PSC severely admonished Charter for its bad behavior:

Charter was not free to pick and choose the conditions it would accept or the portions of the Approval Order with which it would comply, nor was Charter free to accept only some of the conditions in the Approval Order and Appendix A yet still obtain Commission approval of the merger transaction. Charter is likewise not free to rewrite the Commission’s conditions.

In effect, Charter is ripping off the people of New York, and the state’s regulators are having none of it.

“The Commission is troubled by Charter’s position that the Commission’s Approval Order means something other than what it actually states,” the PSC wrote. “Given that many of the obligations in that Order are continuing and will need to be fulfilled in the future, the Commission believes it is critical that Charter acknowledge the obligations it agreed to undertake in exchange for the benefits it received by the Commission’s conditional approval. Anything short of an unconditional full acceptance of the Approval Order and Appendix A would deprive New York state of its fair share of the incremental benefits.”

It is likely we will know where this is headed by mid-July, because the PSC has given Charter 14 days to recommit itself to the PSC’s original merger terms, not just those in infamous Appendix A. It signaled it will no longer debate the matter, either, telling Charter “the Commission will not countenance that conduct” and wants action:

Charter is directed to cure its defective acceptance and file with the Secretary to the Commission a new letter indicating its full unconditional acceptance of the Approval Order and Appendix A thereof within 14 days.

Should Charter, however, fail to provide a new letter indicating full unconditional acceptance, the Commission may pursue other remedies at its disposal, including but not necessarily limited to the following.

First, beginning proceedings pursuant to PSL §216 to rescind, modify or amend the Approval Order, specifically, the Commission’s approval of the transfer of the Time Warner’s cable franchises and associated facilities, networks, works and systems to Charter, in whole or in part.

Second, initiate an enforcement action pursuant to PSL §26 for failing to comply with the Approval Order’s Ordering Clause 1 including an action in Supreme Court to adjudicate the dispute and/or declare the Commission’s conditional approval null and void for lack of an unconditional acceptance.

And, third, initiate a penalty action for being out of compliance with the Approval Order’s unconditional acceptance requirement under PSL §25.

It’s a teachable moment for regulators, one that cable customers have come to learn over decades of bad experiences. It’s never a good idea to trust a cable company.

The New York State Public Service Commission today fined Charter/Spectrum $2 million after the company failed to meet its obligations to expand its cable network to more than ten thousand homes and businesses the company committed to serve in the time allotted. In addition, the PSC warned the company, which claimed in a response to the state’s “show cause” order that it was not obligated to meet the terms of its 2016 merger agreement, faces the threat of having its merger with Time Warner Cable revoked, which could end Spectrum’s ability to operate in New York State.

“As a condition of our approval of Charter’s merger two years ago, we required Charter to make significant investments in its network,” said Commission chair John B. Rhodes. “Our investigation shows that Charter failed to meet its obligations to expand the reach of its network to unserved and underserved customers at the required pace and that it failed to justify why it wasn’t able to meet its obligations. Furthermore, since the company has taken the unfortunate position of refusing to adhere to all conditions set forth in our initial decision two years ago, we now demand the company unconditionally accept all of the conditions as the Commission unambiguously required in 2016, or run the risk of more severe consequences.”

In its order regarding Charter’s failure to meet its buildout obligations, the Commission rejected 18,363 addresses — including 12,467 in New York City and 4,096 in the cities of Buffalo, Rochester, Syracuse, Schenectady, Albany, and Mt. Vernon — to which Charter claimed it expanded network as part of its required buildout requirement. The Commission found that these addresses were already passed by Charter or another company providing high speed broadband, or that Charter was separately required to pass the addresses pursuant to state regulations and/or franchise agreements.

As a result, Charter must revise its overall 145,000 addresses-buildout plan to remove the rejected addresses and file a revised buildout plan for going forward within 21 days. In its initial 2016 order approving Charter’s acquisition of Time Warner Cable, the Commission required that Charter extend its network to pass within its statewide service territory, an additional 145,000 unserved and underserved residential housing units and/or businesses within four years.

About a year later, it became evident that Charter had failed to meet its May 2017 target. To get the company back on track, the Commission approved a settlement under which Charter was required to pass 36,771 eligible premises by December 2017, and meet regular six-month milestones or else pay up to $1 million for each miss, and up to $1 million should the company fail to correct any miss within three months.

Rhodes

Earlier this year, Commission staff, audited Charter’s compliance filing of proposed passings to be counted toward its December 2017 target, and determined that 14,522 passings should be
disqualified, which meant that the company failed to meet its required target. In its May response to the Commission, Charter argued that not all of the Commission’s 2016 merger order applies to the company as part of its rationale for including ineligible addresses. Given the company’s continued intransigence, the Commission today ordered that the company unconditionally accept all of the conditions and requirements spelled out in its 2016 order or face subsequent Commission action.

With today’s decision, the Commission ordered Charter to pay $1 million in accordance with the settlement agreement for failing to satisfy the December 2017 target and failing to demonstrate that it missed the target due to circumstances beyond its control. The Commission similarly  found that Charter did not “cure” this miss by March 16, 2018, nor did it demonstrate that it had good cause for its failure to do so, requiring an additional $1 million payment to the state.