Federal, state courts hinder local streaming franchise fees

A wave of recent rulings by various federal appeals courts and state high courts has hindered local government efforts to require streaming service companies including Netflix and Hulu to register and pay local franchise fees traditionally paid by cable television companies. Most recently, four separate courts disagreed with localities in Nevada, Arkansas, Tennessee and Ohio arguing that the streaming companies are video service providers (VSPs) under state law and thus subject to local franchise fees measured by gross receipts.¹ Alternatively, the courts determined that the state laws at issue do not create an express private right of action for localities to seek franchise fees from such companies.

Background

As Netflix, Hulu and other streaming service companies have gained a foothold in the video entertainment market, local governments have argued that these companies are considered “video service providers” under existing state video service laws. Such laws historically imposed registration requirements and franchise fees on cable service providers in exchange for the use of a locality’s public rights of way to deliver content to customers using company-owned wireline facilities and equipment. Although such laws traditionally vested enforcement power in various state agencies, localities have nonetheless brought legal action against Netflix and Hulu to recover franchise fees. These cases generally have decided on the issue of whether the streaming companies provided video services to customers as specifically defined under state law, in contrast to strictly internet-based services.

City of Reno v. Netflix, Inc. & Hulu, LLC

In October 2022, the U.S. Court of Appeals for the Ninth Circuit affirmed a Nevada federal court ruling that Netflix and Hulu are not subject to franchise fees imposed by the city of Reno, Nevada under the state’s Video Service Law (VSL).² Enacted in 2007 to increase market competition for video services, the VSL requires that each VSP obtain a certificate of authority to provide video services through public rights of way. The law also allows local governments to impose a franchise fee measured by up to 5% of a VSP’s gross revenue earned within the locality. In September 2020, Reno filed a lawsuit in a Nevada U.S. district court, arguing that the streaming companies are required to pay franchise fees as VSPs. The district court disagreed, finding that neither company provides “video services” as defined under the VSL, and that Reno lacked a private right of action under the VSL.³

On appeal, the Ninth Circuit addressed only the private right of action argument, finding that the VSL does not create an express right of action for Reno to sue for unpaid franchise fees. The court noted that the VSL expressly grants enforcement authority to the state attorney general’s office, suggesting that the law does not include other rights of action. In vesting enforcement of the law in state agencies, the court reasoned, “the legislature seems to have deprived local government of enforcement powers intentionally.” Accordingly, the court affirmed the district court’s dismissal of the case.

City of Ashdown v. Netflix, Inc. & Hulu, LLC

In November 2022, the U.S. Court of Appeals for the Eighth Circuit affirmed an Arkansas federal court ruling that the city of Ashdown, Arkansas may not impose franchise fees on Netflix and Hulu under the state’s Video Services Act (VSA), also finding that the law does not provide the city the right to bring a class action lawsuit against the streaming companies. First enacted in 2013, the VSA establishes a franchising scheme authorizing VSPs to provide services throughout Arkansas localities.⁴ In 2020, Ashdown filed a class action lawsuit in an Arkansas U.S. district court, arguing that Netflix and Hulu are VSPs as defined under the VSA and were thus required to obtain certificates of authority from the state and pay local franchise fees. In September 2021, the district court dismissed the lawsuit, finding that the streaming companies provide video programming that allows users to access content over the public internet, which is expressly excluded from the VSA.⁵ The lower court also found that the VSA does not give the city a right of action to bring the suit.

Agreeing with the district court on appeal, the Eighth Circuit ruled that Ashdown misinterpreted the language of the VSA to create a right for localities to bring claims against companies deemed to be out of compliance with the law. In the court’s view, the statutory language is meant to preserve existing rights of action, and not confer a right. In fact, the court noted, “the legislature knew how to explicitly confer a right of action onto municipalities, as the VSA clearly conferred a right of action onto the [Arkansas] Public Service Commission.” Based on its reading of the law, the court concluded that Ashdown itself lacked a right of action to sue under the VSA and affirmed the district court’s dismissal of the lawsuit.

City of Knoxville v. Netflix, Inc. et al.

Later in November 2022, in a case certified by a Tennessee federal court, the Tennessee Supreme Court determined that Netflix and Hulu are not VSPs subject to local franchise fees asserted by Knoxville, Tennessee under the state’s Competitive Cable and Video Services Act (CCVSA).⁶ Similar to other state video service laws, the CCSVA was enacted in 2008 to streamline the franchising process and facilitate entry into the local cable market. The law requires state-issued franchise holders to pay a franchise fee based on 5% of gross revenues from cable or video service provided within a locality in exchange for use of a locality’s public rights of way. Under the law, a “video service” is defined as “the provision of video programming through wireline facilities located . . . in public rights-of-way without regard to delivery technology,” but excluding video programming provided as part of a service allowing users to access content over the public internet.⁷

The city of Knoxville first brought a class action against Netflix and Hulu in Tennessee federal court, arguing that the streaming companies owed franchise fees to local governments where they used wireline facilities owned by various internet service providers (ISPs) to deliver content to customers. After the companies filed a motion to dismiss, the court certified the case to the Tennessee Supreme Court to decide the question of whether the companies should be considered VSPs under Tennessee law. In answering this question, the court determined that the companies do not meet the CCSVA’s definition of a VSP because they do not own or operate the wireline facilities through which their content is delivered to customers. In the court’s view, the law does not apply to entities that do not own or build a network of equipment. For these reasons, the court concluded that the companies do not provide video services within the meaning of the CCSVA and therefore do not qualify as VSPs. Based on the state high court’s ruling, the Tennessee U.S. district court dismissed the lawsuit.⁸

City of Maple Heights v. Netflix Inc. & Hulu LLC

In answering a certified question from an Ohio federal court, the Ohio Supreme Court ruled that Netflix and Hulu are not VSPs under Ohio law and that the city of Maple Heights, Ohio had neither an express nor implied right to bring a lawsuit under the state’s video service law. Since 2007, the Ohio Fair Competition in Cable Operations Act⁹ has required that companies seeking to provide video services in Ohio obtain a video services authorization (VSA) from the Ohio commerce director. Under the law, video services include the provision of video programming over wires or cables located in public rights-of-way, but exclude programming provided as part of a service allowing users to access content over the public internet.¹⁰ In 2020, Maple Heights filed a class action lawsuit against Netflix and Hulu in an Ohio U.S. district court, arguing that the companies are VSPs subject to a local franchise fee based on 5% of subscription revenues.¹¹ Similar to the Tennessee litigation, the district court certified two questions of law to the Ohio Supreme Court for review: (i) whether the streaming companies are VSPs as defined under Ohio law; and (ii) whether Maple Heights may sue to enforce Ohio’s VSP provisions.

In answering “no” to both questions, the Ohio Supreme Court first concluded that online streaming service providers are not VSPs. The court determined that the companies offer services that are streamed over the internet, rather than via wires or equipment in public rights of way. The court reasoned that the companies are not required to obtain VSAs from the state because they do not place their own wires or equipment in the public rights of way to provide content to their subscribers. The court next concluded that Maple Heights did not have the authority to bring an action to enforce the video service requirements under the Ohio law, which established the state commerce director as the sole authority on that question. In the court’s view, Maple Heights was asking the court to “infer an unwritten right to bring its suit.” With these two questions answered by the Ohio Supreme Court, the Ohio U.S. district court is currently considering Netflix and Hulu’s motion to dismiss the case.

Commentary

The four cases discussed above represent a consistent line of conclusions in which courts soundly rejected arguments by localities to subject Netflix and Hulu to local video service provider fees. As characterized by the Tennessee Supreme Court, the cases are about “fitting new technology into a not-so-new statutory scheme.” Indeed, states began amending their existing video service laws with the objective of streamlining the franchise process for providing video services and facilitating entry into the local cable market. Using similar statutory language, the laws were intended to apply to cable companies using physical cable equipment in public rights-of-way, as opposed to online video services, which require no such physical equipment. Additionally, most laws were structured to limit local government power to regulate video service franchise agreements by vesting enforcement power in a state agency. As a result, the courts have determined that local governments lack the right to bring an action against streaming companies to recover franchise fees.

With several courts ruling in favor of Netflix and Hulu in the past few months that their online streaming services do not constitute video services as envisioned under the state laws, the decisions are indicative of the challenges local governments face in stretching the meaning of existing statutory language to account for technological advances. In the wake of these rulings, it remains to be seen whether state legislatures will begin to expand or update existing video service laws to encompass internet service providers in addition to VSPs. Nonetheless, the debate over the applicability of video franchise fees to streaming services continues to evolve, with pending litigation in the Third Circuit U.S. Court of Appeals,¹² and another case sent from the Eighth Circuit to state court for procedural reasons.¹³

1 City of Maple Heights, Ohio v. Netflix Inc. & Hulu Inc., No. 2021-0864, Ohio Supreme Court, Nov. 30, 2022; City of Knoxville, Tenn. v. Netflix, Inc. et al., No. M2021-07701-SC-R23-CV, Tennessee Supreme Court, Nov. 22, 2022; City of Ashdown, Ark. et al. v Netflix Inc. & Hulu LLC, No. 21-3435, U.S. Court of Appeals for the Eighth Circuit, Nov. 8, 2022; City of Reno, Nev. v. Netflix, Inc. & Hulu, LLC, 52 F.4th 874 (9th Cir. 2022).
2 Nev. Rev. Stat. § 711.020 et seq.
3 City of Reno, Nevada v. Netflix, Inc. & Hulu, LLC, No. 3:20-cv-4499, U.S. District Court for the District of Nevada, Nov. 10, 2020.
4 Ark. Code Ann. § 23-19-203(a), (c).
5 City of Ashdown, Ark. v. Netflix, Inc. & Hulu, LLC, No. 4:20-cv-4113, U.S. District Court for the Western District of Arkansas, Texarkana Division, Sept. 30, 2021.
6 Tenn. Code Ann. § 7-59-301 et seq.
7 Tenn. Code Ann. § 7-59-303(19), (20).
8 City of Knoxville, Tennessee v. Netflix, Inc. & Hulu, LLC, No. 3:20-CV-00544, U.S. District Court for the Eastern District of Tennessee, Knoxville Division, Dec. 5, 2022.
9 Ohio Rev. Code Ann. § 1332.21.
10 Ohio Rev. Code Ann. § 1332.21(J). 
11 City of Maple Heights v. Netflix, Inc., et al., No. 1:20-CV-01872, U.S. District Court for the Northern District of Ohio, filed Aug. 2020. 
12 See Borough of Longport, N.J. v. Netflix Inc., No. 22-2139, U.S. Court of Appeals for the Third Circuit, appeal filed June 23, 2022.                                              13 See City of Creve Coeur et al. v. DIRECTV & Dish Network Corp. et al., No. 21-3090, U.S. Court of Appeals for the Eighth Circuit, Jan. 26, 2023.