2022 Seen Bringing More Localities Opposing Streaming Services

A growing number of localities are suing video streaming platforms seeking franchise fees, and more lawsuits are expected in 2022. Tax experts think such suits face legal difficulties. Netflix and Hulu, typically the defendants of such suits, didn't comment.

This year suits against Netflix and Hulu were brought by Lancaster, California; Kenner, Louisiana; Fort Scott, Kansas; and in New Jersey, Longport and Irvington. Shiloh, Illinois, sued the two plus Disney, DirecTV and Dish Network. In 2020, Maple Heights, Ohio, and Knoxville sued Netflix and Hulu. Reno’s 2020 suit against Netflix and Hulu is pending before the 9th U.S. Circuit Court of Appeals after summary judgment for the defendants in September by a lower court. Pending before the 8th Circuit is an appeal by Ashdown, Arkansas, of a lower court’s dismissal in September of a 2020 Netflix/Hulu suit. U.S. District Judge Robert Schroeder of Texarkana dismissed a 2020 New Boston, Texas, suit against the two services in September.

Jurisdictional issues are a repeated front in the streaming legal fights. Pending before the 11th Circuit is an appeal by defendants Netflix, Hulu, Disney, DirecTV and Dish Network of a lower court’s August order granting a motion by Georgia plaintiffs Gwinnett County, Brookhaven, and the Unified Government of Athens-Clark County to remand their 2020 suit to Georgia state court. The 7th Circuit in July affirmed a lower court's remanding a 2020 suit brought by Indianapolis, Evansville, Valparaiso and Fishers, Indiana, against Netflix and Hulu to state court. Creve Coeur, Missouri's 2018 suit against Netflix and Hulu was remanded to state court in 2019 by a U.S. district judge in St. Louis.

Dallas could soon file a suit against Netflix, Hulu and Disney+ for failing to apply for a state-issued certificate of franchise authority under Texas Utility Code Chapter 66 and to pay the 5% franchise fee to the city. Texas Attorney General Ken Paxton’s (R) office approved a “contingent fee contract” Nov. 16 between the city and law firms McKool Smith, Korein Tillery and Ashcroft Sutton, a Dallas spokesperson emailed us Dec. 17. “The lawsuit has not yet been filed.” Other cities are expected to join.

More local governments would like to capture tax revenue generated by streaming services, and the politics are good because it looks like the local governments are taxing out-of-state corporations, emailed David Brunori, George Washington University School of Public Policy and Public Administration research professor.

“Consumer habits are shifting dramatically,” and cable companies are starting to get most of their revenue from their internet services, said Best Best attorney Cheryl Leanza in an interview. Some communities are probably having reductions in franchise fee revenue, or if they haven’t, they may have concerns they will, she said. Companies are using communities’ public assets and need to contribute to maintain that infrastructure, Leanza said: “If the current set of laws don’t fit, then you have a time of … ambiguity.”

Expect more opinions in these types of cases in 2022, said Leanza: Possibly more communities will file fresh suits, but “certainly many might be inclined to see how those rulings come out.” Most cases so far are based on state laws, which vary, and decisions will mainly come from state courts, she noted. Leanza is closely watching the Creve Coeur lawsuit against Netflix, because there the court denied a motion to dismiss, allowing it to move ahead.

“The primary driving factor behind these kinds of lawsuits is cord-cutting,” emailed Spiegel McDiarmid’s Tim Lay. “Unless court or legislative action is taken, this shift will reduce municipal franchise fee revenue receipts from traditional cable services, even though” revenue from right of way use, both from over-the-top and cable broadband "continues to grow.” So far, these local suits “have not fared very well, but it’s still early.”

Almost all the current suits are in states that adopted video franchise laws in the 2000s and where AT&T is the ILEC, noted Lay. “Those states’ video franchising laws share some attributes that attract OTT-based claims.” They each franchise cable service at the state level and have a video service provider definition that includes IP-based programming but excludes service over the public internet, he said: “The tension between those provisions is where some ... of the argument takes place.”

The cases are “worth watching” for local governments, said Rick Ellrod, Fairfax County, Virginia, Communications Policy and Regulation Division director. But he told us it looks like an “uphill fight” for localities to sue streaming companies for fees as if they were cable franchisees. “That’s kind of a tough case to make since they don’t own facilities in the rights of way,” he said, and they have no contractual relationships with localities.

Localities could instead assess fees to cable ISPs based on revenue the companies make from their users streaming video, said Ellrod: “What’s coming over from the streaming service fits the definition of cable service” in the Cable Act. Cable TV cord cutting in favor of over-the-top streaming could be a problem for local governments, said Ellrod: “We’re already seeing a diminishing of revenues for traditional cable service [and] that trend might continue.”

GWU's Brunori said local governments face a problem that almost all of them need some kind of state authorization to impose taxes, and states generally don't impose taxes -- either sales or excise -- on streaming services. States, however, do authorize taxes on cable TV services, so some local governments tried to tax streaming services like cable, he said. But without cable or other public infrastructure being involved, local governments haven't been very successful in that taxing strategy. "That being said, more will try in the coming years because frankly there is a lot of money at stake," he said.

U.S. District Judge Miranda Du of Reno said in the Reno summary judgment order the streamers don't provide video services as defined under state law, so Reno can't seek franchise fees under that law. In dismissing the New Boston suit, Schroeder agreed with the streamers' argument that they don't owe franchise fees because they aren't holders of a state-issued certificate of franchise authority and that it's up to the state to determine if they should be.

Tulane University associate law professor Jeremy Bock said it wouldn't be surprising if many suits fail. Some franchise fee statutes were likely written when the cable operator provided the data pipe into the house and was the sole purveyor of video content through that pipe, he said: Now content is decoupled from any particular route into a house and can be accessed through cable modems, DSL, fiber, satellite or cellular connections. "If a franchise fee statute is written in a way that assumes that a video content provider is also the operator of the data pipe through which the content is conveyed (like a traditional cable operator), then the streaming services are not going to be covered," he said.