A handful of law firms, some of whom are also deeply involved in opioid litigation, are convincing local government officials to sue Netflix, Hulu and other video streaming services over taxes they claim the companies should pay under laws originally aimed at cable television operators.
If successful, the lawsuits would result in consumers paying a new 5% tax on video they buy over the Internet. Plaintiff lawyers must first prove the new taxes aren’t precluded by federal laws including the Internet Tax Freedom Act, which prohibits state and local taxes on Internet access.
Private lawyers are seeking municipal clients for such litigation as more consumers “cut the cord” and drop traditional cable TV service in favor of online entertainment. Cities generally can charge franchise fees to cable operators for their use of public rights of way but those fees have been falling along with traditional cable revenue, even as revenue from Internet access rises.
One municipal plaintiff, the City of Valparaiso, Ind., reportedly saw a 7% decline in fees to $446,000 from $476,000 two years before.
“Franchise fees are dropping, and they can’t collect for Internet access, so now what they’re trying to do is say video really fits the definition of cable services,” said Harold Feld, senior vice president at Public Knowledge, which advocates for universal Internet access. “My bet is a court looking at this is going to say 'no, this does not fit the definition.'”
The lawsuits represent a potentially lucrative new business for plaintiff law firms that already are poised to earn hundreds of millions of dollars from opioid litigation. Those firms include DiCello Levitt, which represents the city of Maple Heights, Ohio, in a proposed class action on behalf of every city in the state and also represents cities and counties suing the opioid industry. Nix Patterson is also on the complaint; the Texas firm represented Oklahoma in its opioid lawsuit against Johnson & Johnson that yielded a $465 million verdict now on appeal.
The lawsuits seek to exploit ambiguities in the laws governing various forms of telecommunications that have become hopelessly blurred as every form of information has been transformed into digital bits traveling over the Internet.
Telephone services have generally been taxed at the state level, but when cable television companies began stringing wires in the 1960s, local governments sought franchise fees for using their public rights-of-way. As the industry matured, it convinced Congress to pass the Cable Communications Policy Act of 1984, capping those franchise fees at 5% of revenue. The law covered “cable operators,” which at the time was a clear definition meaning companies that operated one-way local networks to distribute video entertainment.
As the Internet grew in prominence, Congress passed the Internet Tax Freedom Act, a temporary ban on local taxes on Internet access as well as “multiple or discriminatory taxes on electronic commerce.” President Obama signed a permanent extension of the law in 2016.
The question now for courts is whether streaming services like Netflix, Hulu or the Disney Channel are covered by the Cable Act, the Internet Tax Freedom Act, or something else. The Ohio law that Maple Heights cites in its lawsuit seeking a 5% tax from streaming video services exempts “video programming provided solely as part of and via a service that enables users to access content, information, electronic mail, or other services offered over the public internet.” That language is copied exactly from the Internet Tax Freedom Act.
None of the plaintiffs or their lawyers would comment. But they will no doubt argue Netflix, Hulu and the other defendants aren’t covered because they only offer video, not other services such as email access. The defendants will argue they are covered under the broad exemption for Internet services.
The city of Creve Coeur, Missouri, won a significant victory last year when a federal judge remanded its case against streaming services and satellite television providers to state court in St. Louis County. The judge rejected arguments the case belonged in federal court under the Class Action Fairness Act, even though it appeared to meet the law’s criteria with hundreds of millions of dollars in potential damages and some 640 municipalities as proposed class members. That case is now pending in state court.
Creve Coeur is represented by private lawyers including Korein Tillery; Howard Paperner; Curtis, Heine Garrett & O’Keefe; and Bick & Kistner. Korein Tillery also represents Valpraiso, Indianapolis and other Indiana cities in a proposed class action making largely identical allegations.
Korein Tillery is a significant contributor to regional Democratic Party causes, according to Followthemoney.org, giving more than $61,000 to Illinois House Speaker Michael Madigan, since implicated in a bribery scheme to which the Chicago utility ComEd has pleaded guilty. The firm also contributed $11,100 to the losing campaign of Kevin Hoerner for an Illinois appellate court seat.
None of the cities would provide their contracts with outside attorneys, which are public records. Those firms typically charge contingency fees of 20% or more.
Some of the cities are also seeking to tax satellite video services. They may have gotten a boost in 2018 when the U.S. Supreme Court refused to hear the appeal of a Florida Supreme Court ruling upholding a 10.8% tax on satellite TV, compared with a 6.8% tax on cable service. Dish Network and DirecTV argued, unsuccessfully, that local cable operators convinced Florida legislators to pass the higher tax on satellite to protect their own business from competition. The satellite companies said they lost 200,000 customers because of the higher tax.