Streaming Service Franchise Fee Fights Seen Centering on State Courts

Localities' lawsuits seeking franchise fees from streaming services have faced challenges in federal court, but experts said they expect the legal fight to increasingly focus on state courts. In a Texas court, Dallas, Houston and other cities sued Disney, Hulu and Netflix last week, claiming the streamers ignored their video service provider obligations to get their state certificates of franchise authority and pay required franchise fees. The streamers didn't comment Thursday.

More such suits by localities are likely, said communications regulatory and licensing lawyer Alan Poole of Troutman Pepper. He said local government losses in court have often been due to unique state law issues, and there's likely a lot of variation from state to state. He said key issues largely haven't been addressed by the courts, such as whether streaming service programming is sufficiently similar to cable, and if the streamers are using public rights of way as contemplated by the franchise fee statutes.

The Texas cities, in their complaint, said streamers not paying their franchise fees is "depriving Texas municipalities of the required compensation for their use of the right-of-way." Sharae Reed, city attorney for Beaumont, one of the plaintiffs, emailed the city "is confident that the relief sought for unpaid annual franchise fees pursuant to the Texas Public Utility Regulatory Act will be successful."

The argument in the Texas cities’ case “isn’t complicated, and unlike federal law, doesn’t require an ownership interest in the system by which the service is delivered,” emailed Ewell Brown’s David Brown, a Texas attorney for local governments. Such cases’ success might depend on the state law in question, said Brown.

Texas law imposes franchise fees on holders of state-issued certificates of franchise authority (SIFCA) under Texas Utility Code Section 66, said Brown. “The issues are many, such as whether state law would reach non-holders of SICFAs,” like Netflix, or “if they somehow were required to hold such certificates under state law.” Brown said it’s “reasonably clear that Netflix, et al., are not covered by the Cable Act.” However, state law requires entities seeking to provide cable or video service to apply for a SIFCA, he said. “The definitions in Chapter 66 are broad and could be read to reach the over-the-top providers.” Another question is “whether the relief could be damages or just prospective obligations to get SICFAs,” he said.

“This complaint has more factual allegations and exhibits trying to strengthen the argument that these video streaming services are indeed providing ‘video service’ under Texas” public utilities law “in an effort to counter the video streamers’ previous argument to the contrary,” said Best Best local government attorney Tim Lay. It adds claims for trespass and unjust enrichment that may be to get around streamers’ argument that the fee applies only to entities that received the state video franchise, which streamers don’t have and the Texas PUC hasn’t issued, said Lay. Cities filed their complaint in a different state court that isn’t “bound by another Texas state court’s earlier decision,” he added.

Communities' suits have not fared well in U.S. district courts. Longport and Irvington, New Jersey, appealed a lower court's dismissal of their franchise fee suit to the 3rd U.S. District Court of Appeals (see 2206170061). The 9th U.S. Circuit Court of Appeals is scheduled to hear oral argument next month in Reno's appeal of a lower court dismissing its franchise fees suit against Hulu and Netflix (see 2207110020). Oral argument hasn't been scheduled before the 8th U.S. Circuit Court of Appeals in the appeal by Ashdown, Arkansas, of a U.S. district court rejecting its franchise fees suit against Hulu and Netflix. A U.S. district court in September suit dismissed a New Boston, Texas, suit (see 2112230003). The U.S. District Court in East St. Louis is waiting to hear from the Illinois attorney general on constitutional questions about Illinois' Cable and Video Competition Law before it rules on streamer defendants' motions to dismiss a motion by the city of East St. Louis (see 2205170038).

The Ohio Supreme Court heard oral argument in April on a U.S. district court's state law questions about Maple Heights, Ohio's complaint (see 2204140026).

Many suits filed in federal courts were remanded to state courts, including complaints brought by Kenner, Louisiana (see 2203310052), Creve Coeur, Missouri, and some Indiana cities. Streaming service appellants dropped their fight in March before the 11th Circuit seeking to reverse a lower court's remand of a suit brought by various Georgia communities to state court.

The New Boston, Texas, litigation isn't binding as the various Texas cities give the argument another shot in state court, said Troutman Pepper's Poole. He said streaming companies will likely argue the issue has been decided, and it will be put to the state court to decide if the court needs to take a separate look at the franchise fee fight under state law.

States are taking more of a wait-and-see approach before crafting state laws in response to the suits, Poole said. He said given the sizable federal money heading to states for broadband deployment, state could see more pressure over how they regulate innovative online services.

A Louisiana law enacted earlier this year prevents cities from collecting franchise fees from streaming services. “‘Cable service’ shall not include any video programming provided by a commercial mobile service provider or video programming accessed via a service that enables users to access content, information, e-mail, or other services offered over the internet, including streaming content,” said the law. The bill passed the House and Senate in nearly unanimous votes.

The law doesn’t stop local governments from collecting fees that accrued before the law took effect May 26, said Louisiana Municipal Association (LMA) Executive Counsel Karen White, noting a pending Kenner, Louisiana, class action. “The LMA opposed this legislation at every stage,” said White. “Unfortunately, there appeared to be no legislative will to support our position. Indeed, the narrative that the costs of streaming services would increase if this exception were not enacted was very persuasive.”

Louisiana’s law shouldn’t be surprising, said Lay: “If some of these city lawsuits seeking video franchise fees under state video franchising laws start resulting in wins for the cities, you can bet that industry will run” to other state legislatures with similar bills. States may define cable service for purposes of state -- but not federal -- law, he noted.