Charter must pay $19 million for tricking customers into switching ISPs

A Pinocchio doll with a long nose.
Enlarge / Pinocchio.

A judge has ordered Charter Communications to pay $19.2 million to Windstream for lying to customers in order to trick them into switching from Windstream to Charter’s Spectrum Internet service. Charter also faces a $5,279 penalty for shutting off service to hundreds of Windstream’s resale customers.

When Windstream filed for bankruptcy in early 2019, Charter began a “literally false and intentionally misleading advertising campaign intended to create the impression, using mailings designed to seem as if they were coming from the Debtors [Windstream], that the Debtors were going out of business,” said an order issued Thursday by Judge Robert Drain of US Bankruptcy Court for the Southern District of New York.

Charter’s goal with the mailings “was to induce the Debtors’ customers to terminate their contracts and switch to Charter by sending them literally false and intentionally misleading information about the Debtors’ bankruptcy cases and financial wherewithal,” the ruling said. Charter premised its ad campaign “on false assertions regarding the Debtors’ bankruptcy cases,” the ruling said.

“We are gratified that Judge Drain’s ruling means Charter will have to pay a significant price for its egregious false advertising,” Windstream General Counsel Kristi Moody said, according to a FierceTelecom article. “Charter knew full well what it was doing when it embarked on a dishonest scare-tactic campaign to lure away our customers. At Windstream, we will always aggressively defend ourselves and our customers against predatory schemes and meritless allegations.”

Charter declined to comment on the ruling when contacted by Ars today.

Charter mailings

A Charter mailing to Internet users came in envelopes “with Windstream’s mark and distinct color pattern to make Windstream’s customers believe that the letters came from Windstream,” according to Windstream. The envelope was labeled, “Important Information Enclosed for Windstream Customers.” Inside the envelopes were advertisements that said:

Windstream Customers,

Don’t Risk Losing Your Internet and TV Services.

Windstream has filed for Chapter 11 bankruptcy, which means uncertainty. Will they be able to provide the Internet and TV services you rely on in the future? To ensure you are not left without vital Internet and TV services, switch to Spectrum. With a network built for the future, Spectrum is here for the long haul.

The ads also said, “Windstream’s future is unknown, but Spectrum is here to stay.”

In May 2019, the bankruptcy court issued a preliminary injunction against Charter and authorized Windstream to send letters to customers notifying them that “a federal court has now ruled that the advertisement sent to you by a competitor was untrue and improper.” Charter was ordered to pay for Windstream’s costs in mailing the letter to all customers who had received Charter’s false advertisements.

Windstream has about 1.1 million Internet customers and offers residential service in 18 states. Windstream estimated that 1,386 customers “canceled their Windstream subscription services as a result of Charter’s false advertising,” it said in a court filing.

Charter claimed “First Amendment” right

Charter claimed that punishment for its “literally false and intentionally misleading advertising campaign would violate their First Amendment right to free speech,” the judge wrote. But First Amendment rights are not absolute and do not protect Charter’s false statements about Windstream’s bankruptcy proceedings and financial wherewithal, he wrote. “Such commercial speech is properly curtailed by precluding such wrongful conduct,” he wrote.

Charter also claimed “that if anyone violated the stay, it was their advertising agency and their consultant, One Touch Intelligence in developing the campaign,” Drain wrote. The judge dismissed this claim briefly, writing that Charter’s argument “ignores the Defendants’ authorization of the campaign to be modeled on a prior campaign relating to a competitor that was ‘shutting down service’ to create doubt whether the Debtors would remain in business… Moreover, the acts of the Defendants’ agents in violation of the stay would be imputed to them.”

Charter itself filed for bankruptcy in 2009 and then sued DirecTV “for ‘false’ advertising that it said could give customers the impression Charter is liquidating and that its cable TV services will soon end,” as Reuters reported at the time.

Calculating damages

While the preliminary injunction was issued shortly after Windstream sued Charter, further proceedings were held to determine how much Charter has to pay Windstream in compensatory damages. Ultimately, Charter was ordered to pay $19,179,329.45 to Windstream “for the losses caused by their violation of the automatic stay by intentionally and wrongfully interfering with the Debtors’ customer contracts and good will.”

An automatic stay is an important mechanism in US bankruptcy law “that temporarily prevents creditors, collections agencies, government entities, and individuals from pursuing debtors for amounts owed,” as Investopedia notes.

Charter claimed the automatic stay law “is ambiguous or impermissibly broad in regulating their conduct,” the judge wrote. However, “improper advertising such as the Defendants’ clearly and objectively interfered with the Debtors’ customer contracts and goodwill and thus clearly was precluded by section 362(a)(3)’s plain terms and the caselaw applying them,” he wrote.

Windstream showed that it “suffered $5.1 million of lost profits” because of Charter’s false ad campaign, and Charter did not challenge Windstream’s “assertion of damages of $862,775 comprising the cost of corrective advertising in response to the ad campaign,” the ruling said.

The court ruled Windstream should be reimbursed for $4,033,425 that it spent on “a promotional campaign comprising customer upgrades, discounts, and other pricing promotions undertaken from September through December 2019,” which Windstream undertook “because of and in response to Defendants’ ad campaign.”

The $19.2 million judgment includes $9.2 million for litigation fees and expenses.

Charter disconnected Windstream customers

The ruling also said that Charter breached the automatic stay order by disconnecting Windstream customers who were being served over the Charter network under a reseller agreement. Charter disconnected those users despite having received notice of the bankruptcy proceedings and the automatic stay.

Charter’s penalty for the service disconnection is $5,278.85 to cover credits Windstream provided to customers who were disconnected.

Charter disconnected about 350 Windstream customers on or around March 14, 2019, Windstream told the court in an April 2019 filing after suing Charter. “When Windstream customers contacted Charter to have their services reinstated, they were told by Charter that service was not being repaired because of Windstream’s failure to pay certain amounts due to Charter,” the filing said. “Windstream, however, is not currently authorized to make any payments to Charter on account of prepetition debt as a result of the Chapter 11 filing.”

Charter continued with “smaller number of additional shutoffs in April and May 2019,” last week’s ruling said. It took Charter until May 9, 2019 to complete the “restoration of the Debtors’ accounts that should not have been automatically terminated in violation of the automatic stay,” last week’s ruling said.

Charter offered weak defense

Windstream alleged that Charter’s improper disconnections of those customers “was a deliberate attempt to manufacture a problem with Windstream’s services.”

Charter’s only response to the allegation “is a variation on the ‘inability’ defense to a finding of contempt, that is, that the termination of service was wholly mechanical, arising from ‘automatic nonpayment protocols’ programmed into its computerized billing system, or, possibly, that Charter reasonably attempted to comply,” the ruling said.

The judge rejected this argument, writing:

First, it is not really a defense for a large and sophisticated entity like Charter that provides services to many customers, some of whom inevitably will file for relief under the Bankruptcy Code, to argue that its systems do not have an effective fail‐safe to prevent it from violating the automatic stay. Charter has not contended that it lacked the capacity to adopt systems to override such automated collection activity. Turning a blind eye to the automatic stay by choosing systems that are incapable of complying with it is not tantamount to an inability to comply nor with making diligent efforts to comply in a reasonable manner.

Moreover, when Charter terminated service to the Windstream customers, “they did not even comply with the VAR [value-added reseller] Agreement itself, which provides at page 2 for 30‐days’ notice before service cancellation,” the judge wrote.

Disclosure: The Advance/Newhouse Partnership, which owns 13 percent of Charter, is part of Advance Publications. Advance Publications owns Condé Nast, which owns Ars Technica.