7th Circuit Judge Voices Doubts About Court's Jurisdiction in Netflix Case

A big question about subject-matter jurisdiction will require more briefs in a case on whether cities are entitled to franchise fees from streaming TV providers, said 7th U.S. Circuit Court of Appeals Judge Frank Easterbrook. At oral argument Tuesday in City of East St. Louis v. Netflix (case 22-2905), judges also voiced skepticism about the merits of the Illinois city’s arguments.

“Before we get into the merits, we need to discuss subject-matter jurisdiction -- and I wonder why there is any,” said Easterbrook, cutting off East St. Louis’ attorney Melissa Sims less than a minute into her testimony. The federal court might not have diversity jurisdiction under the Class Action Fairness Act (CAFA), the judge said at the livestreamed Chicago argument. The city’s brief claimed complete diversity, meaning that no party is from the same state, but AT&T Capital Services, “seventh-level owner of Warner Media Direct … appears to have its principal place of business in Illinois,” said the judge.

East St. Louis wasn’t aware of that when it complained to the courts -- but it appears to be true, answered Sims of Milberg Coleman. Easterbrook asked, “Then why are we here? If you believe that indeed you have sued someone from Illinois, then there is no diversity jurisdiction and your ethical obligation is to dismiss this suit.” There was no ownership change since the complaint was filed, though “there may be an increase in knowledge,” as it appears the city’s research failed to find that CAFA Section 1332(d)(4) doesn’t provide jurisdiction, he said. The section says the court must dismiss cases where more than two-thirds of the class is from the same state, Easterbrook said.

“There is subject-matter jurisdiction,” Netflix attorney Gregory Garre of Latham & Watkins argued later. CAFA Section 1132(d)(10) puts focus on the defendant Warner Media itself and wouldn’t require the court to “drill down to the level of AT&T,” he said. The lawyer offered to provide a supplemental brief and the judge replied that the court clearly needs such submissions. Later, Easterbrook said he might see a path to jurisdiction by using Section 1132(d)(4)(A)(i)(II)(cc) in conjunction with Section 1132(d)(10), which parties should address in briefs.

Turning to the merits, Judge David Hamilton appeared skeptical that a law would require streaming providers to open separate brick-and-mortar storefronts in the state’s more than 1,000 localities. Illinois law requires video providers to maintain a customer service facility in each local area, which would mean that “anybody that you think is a video service provider has to open up a storefront in East St. Louis,” he said to Sims. “Doesn’t that strike you as kind of an odd result?”

“Not when they have equipment in the rights of way,” replied Sims. If streaming companies have servers in the ROW, “then they should be responsible and have somebody local” to address any problems, she said.

But Judge Doris Pryor asked what suggests “there are any type of physical facilities intruding upon the public right of ways from those streaming companies?” She questioned whether streaming companies use any infrastructure in the ROW. Sims replied, “Well, they are accessing it.” Pressed by Pryor if there’s any intrusion, Sims answered, “We don’t know the terms of the interconnection agreements.”

Easterbrook raised doubts that streaming companies have facilities in the ROW. The judge compared the situation to electricity, where an electric company needs a permit from the city to build and maintain poles, but the third parties that supply the energy don’t need the city’s permission. “I just gave you an example with wires on the public way that transmit electrons,” he said. “That’s what Netflix is doing.” Sims insisted that streaming companies have servers connected to the wire lines. Easterbrook interjected, “I don’t think you understand either how Netflix works or how electricity is wheeled across networks.”

"All the streaming defendants are doing is making content available for individuals to access through their own devices and through their own ISPs over the internet,” said Garre. “This has nothing to do with the defendants actually constructing, installing and maintaining anything on the wire lines in the public rights of way."

Hamilton asked about the impact of an Illinois law (HB-3808) enacted this year, which exempted streaming TV from the state franchise law (see 2305190048). That law isn’t effective until January, said Sims: Whether it applies retroactively is unclear.