Legal Alert

Opinion Suggests Competition is King and a Debtor's Customers May Be Targeted Without Violating the Automatic Stay

by Michael L. Schuster
October 14, 2022

Summary

The Southern District of New York on October 6, 2022, reversed an award of over $19 million in favor of debtor Windstream Holdings against Charter Communications, Windstream’s competitor in the telecommunications business. The opinion suggests wide latitude for competitors to target and convert a debtor’s customers through advertising without violating the automatic stay.

The Upshot

  • Windstream filed for Chapter 11 reorganization in February 2019. The next month, Charter launched a direct mail campaign directed to Windstream customers that leveraged Windstream’s bankruptcy case to claim those subscribers were at risk of losing their Internet and TV services.
  • The bankruptcy court held Charter’s mailings violated the automatic stay because the campaign sought to obtain or control Windstream’s customers and wrest away Windstream’s corporate good will.
  • On appeal, the District Court reversed. In so doing, the District Court noted all advertising can be manipulative regardless of its veracity and held that customers themselves are not property of the estate and even an intentionally misleading advertising campaign does not take property from the estate. The District Court also emphasized the “thin” evidence about the nature of contracts between Windstream and its customers.

The Bottom Line

The District Court expressly declined to consider whether Charter’s actions violated other, non-bankruptcy law, such as the Lanham Act or state equivalents. In this sense, the District Court’s opinion is certainly not an authorization for companies to engage in false and misleading advertising or activity that might constitute tortious interference under state law. Nevertheless, at least according to the District Court, the automatic stay does not protect debtors from their competitors aggressively targeting their customers with advertising, even advertising that is false and misleading.

To compete or not to compete: that is the question. According to the Southern District of New York, competition is king and a debtor’s customers are fair targets for advertising, even advertising based on uncertainty caused by a debtor’s bankruptcy filing. In Windstream Holdings, Inc. v. Charter Communications Inc. (In re Windstream Holdings, Inc.), No. 21-cv-cv-4552, 2020 U.S. Dist. LEXIS 183574 (S.D. N.Y. Oct. 6, 2022), the District Court reversed the bankruptcy court’s award of over $19 million in favor of bankruptcy debtor Windstream Holdings against Charter Communications, Windstream’s competitor in the telecommunications business. The opinion suggests wide latitude for competitors to target a debtor’s customers through advertising without violating the automatic stay.

After Windstream filed bankruptcy, Charter launched a direct-mail advertising campaign to 800,000 Windstream customers. The mailing warned these customers they were at risk of losing their Windstream internet and TV services due to Windstream’s bankruptcy filing. Charter presented itself as the only safe alternative, graciously offering their services to save customers from the uncertainty of Windstream’s bankruptcy. According to the court, these statements were false and misleading because Windstream’s services would continue despite its bankruptcy. In a scathing decision, the bankruptcy court held Charter’s mailings violated the automatic stay because the campaign sought to obtain or control Windstream’s customers and wrest away Windstream’s corporate goodwill.

On appeal, the District Court focused primarily on whether Charter’s mailings were acts to “obtain” or “control” Windstream’s customers and goodwill (e.g., to take property from the estate). Charter did not contest that its advertisements were attempts to influence customer behavior, but Windstream argued Charter’s misleading ads “subvert[] the customer’s decision-making, allowing the liar to exercise control by manipulating the consumer.” The District Court responded by noting that all advertising can be manipulative regardless of its veracity. The District Court then held that customers themselves are not property of the estate, so that manipulating a customer to opt for a competitor’s service, falsely or otherwise, is not an act to control estate property. Similarly, the District Court held Windstream’s corporate goodwill could not be controlled merely by advertising. Instead, a stay violation for controlling goodwill requires evidence that the competitor sought to continue the debtor’s business, or hold itself out as related to the debtor’s business, thereby using the debtor’s goodwill as if it belonged to the competitor. The “thin” evidence on the existence and nature of contracts between Windstream and its customers was an important part of the District Court’s analysis.

The District Court expressly declined to consider whether Charter’s actions violated other, non-bankruptcy law, such as the Lanham Act or state equivalents. In this sense, the District Court’s opinion is certainly not an authorization for companies to mislead consumers or engage in tortious conduct. In fact, the millions in legal fees spent by Windstream and Charter and the bankruptcy court’s opinion finding a stay violation show there is great risk in targeting a debtor’s customers. Nevertheless, at least the District Court concluded aggressive or misleading advertising against a debtor does not violate the automatic stay (although it may very well violate other applicable law).

It is unclear whether the District Court’s decision is the last word or whether Windstream will appeal to the Second Circuit.

The Bankruptcy and Restructuring Group at Ballard Spahr advises on all facets of financial distress, including restructurings, workouts, the refinancing of debt, creditor-debtor litigation, asset dispositions and recapitalizations, reorganizations, and liquidations, both in and outside of formal proceedings. Please contact us for more information.

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