Local governments will need to look elsewhere for a cut of video streaming dollars after two decisions holding that video streaming services have no obligation to pay state franchise fees. In two different cases, state courts ruled that Netflix, Inc. and Hulu, L.L.C. are not “video services” providers obligated to pay the state franchise fees that cable companies pay. ABA leaders applaud the decisions because requiring streaming services to pay franchise fees, on top of the franchise fees cable companies pay, would give state and local governments a “double dip.”
Both decisions started out in federal court. In City of Maple Heights v. Netflix, Inc. (Ohio Action), the plaintiff brought a federal class action on behalf of the local governments of Ohio, alleging that the defendants were providing “video services” without authority, in violation of the Ohio Fair Competition in Cable Operations Act.
The defendants moved to dismiss, arguing that their business activities do not come within the definition of “video services.” The U.S. District Court for the Northern District of Ohio certified to the Ohio Supreme Court the question of whether the defendants’ business operations come within the definition of “video services” under the Ohio Act.
Similarly, in City of Knoxville v. Netflix, Inc. (Tennessee Action), decided a few days before City of Maple Heights, the plaintiff brought a federal class action against the same defendants, alleging that they were violating the Tennessee Competitive Cable and Video Services Act. The plaintiff alleged that the defendants were offering “video service” within Tennessee without authorization to do so.
The defendants moved to dismiss on the same grounds as the Ohio Action, and the U.S. District Court for the Eastern District of Tennessee also certified the question of whether they are operating “video services” to the Tennessee Supreme Court.
Both cases were decided as a matter of statutory construction. The Ohio Act defines “video service” as “the provision of video programming over wires or cables located at least in part in public rights-of-way,” and excludes “video programming provided solely as part of and via a service that enables users to access content … over the public internet.” The Tennessee Act is nearly identical. It defines “video service” as “the provision of video programming through wireline facilities located, at least in part, in the public rights-of-way” and excludes “video programming provided as part of, and via, a service that enables end users to access content … offered over the public Internet.”
The defendants in both cases argued that they do not provide video services because they provide video programming over the public internet, and they do not have equipment located on public rights-of-way. Both of the plaintiffs argued that the Ohio Act and Tennessee Act do not require video service providers to own the wires on public rights-of-way, only that wires on public rights-of-way be used in the provision of video programming.
In both cases the state supreme courts held for the defendants. It found that they were not “video service” providers under the respective state laws because neither defendant employed equipment located in public rights-of-way. The Ohio Act and Tennessee Act both state that franchises authorize the construction and operation of a video service network across public rights-of-way (i.e., on utility poles), so the laws imply that the wires are owned by the video service provider. Since neither defendant imposes a burden upon the public rights-of-way, they are not subject to franchise fees and the local governments are not entitled to remuneration.
The Ohio Action and the Tennessee Action are but two of a several similar cases making their way through courts, as local governments seek new revenue streams. ABA leadership views this as overreach because local governments are already paid for uses of public rights-of-way that deliver the streaming services. For example, households that receive internet service from their cable or telephone company already pay a portion of the franchise fee in their monthly bills. Imposing a franchise fee on top of streaming services would cause the consumer to pay twice for the same use of public rights-of-way.
“I agree with both results,” advises Andrew C. Emerson, Columbus, OH, chair of the ABA’s Infrastructure and Regulated Industries Section. “Both courts’ decisions are consistent with the general rule that occupiers of the public rights-of-way should pay for the proportional burden they impose on those public rights-of-way.”
ABA leaders do not believe states are likely to impose franchise fees on streaming services for fear of being left out. “I do not think most states have an appetite for imposing taxes on streaming services,” explains Christian F. Binnig, Chicago, IL, vice-chair of the Communications Law Committee of the Infrastructure and Regulated Industries Section. “They recognize that if they impose taxes on service providers, the providers can just choose not to deploy in their states.”
The nature of streaming services creates another barrier to taxing them. “If courts adopted the municipalities’ theory, there would be no limit on the number of times municipalities could recover,” warns Binnig. “If I record a video and send it to you, that is video streaming,” he adds.
