Ohio Justices Question City's Path Seeking Netflix Franchise Fees

Ohio justices asked why a city went to court rather than the legislature to collect franchise fees from over-the-top streaming video services. The Ohio Supreme Court held oral argument Wednesday on litigation between Maple Heights, Ohio, and Netflix and Hulu (case 2021-0864). Some justices appeared skeptical that Netflix and Hulu are video service providers that must pay franchise fees under Ohio’s 2007 law.

Maple Heights in summer 2020 sued Netflix and Hulu in U.S. District Court in Cleveland, alleging the services needed to obtain state video service authorizations and pay franchise fees to all Ohio municipalities that collect them (see 2008220001). The federal court submitted two certified questions of law to the Ohio Supreme Court: if the companies are video service providers under Ohio law and if Maple Heights can sue to enforce the requirement that such providers get state authorization.

As more people cut the cord with cable TV providers in favor of streaming services like Netflix and Hulu, “the fees that go to the municipalities and townships to invest in this infrastructure are being pulled away from cities because there’s not as many subscribers to the cable companies,” said Maple Heights attorney Justin Hawal of DiCello Levitt at the livestreamed argument. Netflix and Google use “the exact same infrastructure but aren’t being required to pay any fee.”

“Wouldn’t you need to really have a change in the statute, going back to the 2007 act, and redefine what this is, rather than have a court do it?” asked Justice Jennifer Brunner.

“Shouldn't you be up at the state house a block and half away, instead of a courthouse trying to get the law changed?” Justice Patrick Fischer later asked. Hawal said the city isn’t trying to change the law but rather apply current law to a new technology. Fischer responded, “Isn’t that a policy decision?” Chief Justice Maureen O’Connor commented, “You would admit that there’s been tremendous advancement in entertainment and what can be brought into the home by various means since 2007?”

Netflix and Hulu don’t place any cables or other facilities in the public right of way (ROW), so they’re not video service providers who must pay fees, argued Netflix attorney Gregory Garre of Latham Watkins. "Holding that Netflix and Hulu are video service providers would result in an absurd result, or at least an extreme conclusion.” It could mean anyone who streams video, including the state court streaming the current argument live, would have to pay franchise fees, he said.

Ohio Deputy Solicitor General Mathura Sridharan said the city lacked standing to bring the complaint. Only the Commerce director may “call the shots” and compel entities to get the required authorization for video service providers, she said. Hulu and Netflix, who don’t put physical infrastructure into public ROW and are agnostic about how their content is delivered, “are not the ones tagged under the statute,” she said. "If they don't dig, then they don't pay."

Hawal said Netflix and Hulu are video service providers because they provide services over facilities in the ROW; they don’t have to operate physical cables for the law to apply. But Justice Melody Stewart asked several questions about whether the city’s reading would cover many more entities than Netflix and Hulu, including anyone who posted videos online. Hawal said Netflix and Hulu content is more comparable to broadcast services than the court streaming a case, but Stewart asked if that isn’t a “subjective standard.” Brunner asked why Hawal didn’t include other companies, including Apple and Roku.

Maple Heights isn’t saying Netflix and Hulu are the only video service providers that stream content, said Hawal. “The FCC has determined in its interpretation of the federal Communications Act that streaming services can reach the threshold when they reach the level of quality that goes along with broadcasting television.” Hawal told us afterward he was referring to an FCC 2014 NPRM that said the commission “previously held that video distributed over the Internet qualifies as ‘video programming.’” The NPRM referenced a line in the FCC’s 2010 open internet order saying improvements in streaming technology and broadband availability let such programming be comparable to broadcast TV. The NPRM "identifies Netflix, Hulu, and Amazon Prime as examples of Subscription On-Demand 'Internet-based distributors of video programming' that meet the statutory definition of an MVPD," Hawal emailed.

O’Connor asked if any streaming services “reached that threshold according to the FCC?” The commission hasn’t made a specific finding about any one company, Hawal said at first, though later he said he believes the FCC determined Netflix reached the threshold. O’Connor asked, “Wouldn’t you have to wait for that before you go down the path that you’re going?” Hawal said the FCC “hasn’t delineated each and every service [but] that’s actually a question for interpretation by the courts.”

The law defines a video service provider as an entity that was granted authorization, said Hulu attorney Victor Jih of Wilson Sonsini: If there’s a question about if an entity should have received authorization, the Commerce director should act. Justice Michael Donelly asked if the court must address the video service provider question if it agrees on the standing issue.

Justice Patrick DeWine asked if it’s true most watch Hulu “through an ISP that’s hardwired to someone’s house through the right of way.” The law focuses on who provides facilities and says “the person providing over the wires and cables is the ISP,” answered Jih. Justice Sharon Kennedy asked no questions.