Netflix and Hulu have filed lengthy motions to dismiss a lawsuit by an Ohio city and its hired guns that seeks to impose a 5% franchise fee on streaming video, saying federal law prohibits local taxes on internet services and the fee would violate the First Amendment by discriminating against only certain providers of video content.
The City of Maple Heights sued Netflix and Hulu in September, claiming the online entertainment providers failed to register with the state and pay franchise fees as required of conventional cable television operators, which use public rights-of-way for their wires and equipment. The lawsuit seeks class action status on behalf of every municipality in Ohio. It was drafted by private lawyers who would take a third of anything they recover.
Netflix and Hulu say the lawsuit is an unjustified money grab that would raise prices for video consumers.
“Imposing a five percent fee on Netflix’s revenues—when Plaintiff does not even allege Netflix owns any facilities in the public rights-of-way—would chill demand for broadband Internet access services and in turn obstruct the federal policy of promoting broadband deployment,” Netflix says in its motion to dismiss.
Streaming-video litigation represents a new front for private lawyers who have allied with government officials to launch lawsuits over opioids, the commonly used chemical PFAS and other products they deem a “public nuisance.” In addition to the proposed class action in Ohio, private lawyers have recruited Indianapolis and several smaller cities in Indiana as clients for streaming video tax suits, as well as the city of Reno, Nev.
A contract with the city dated Aug. 14 shows DiCello Levitt, also active in PFAS litigation, negotiated a 33% fee for itself and co-counsel. Nix Patterson, also part of the team representing Maple Heights, collected part of a $60 million fee award in Oklahoma’s lawsuit against Purdue Pharma.
By suing streaming video providers, the lawyers seek to extend cable-television franchise fees to companies like Netflix and Hulu that have no physical presence in the city but collect subscription fees from consumers there. Cities and counties have long been concerned about the erosion in franchise fees as more consumers “cut the cord” on traditional cable and stream content over broadband internet connections or mobile devices.
Both sides seem engaged in a battle of semantics over the meaning of “video service,” which was written into state and federal law long before high-speed internet service made it possible for virtually anyone to stream video to anyone else. Maple Heights claims the companies must obtain a video service authorization from the Ohio Director of Commerce, who oversees franchise fees statewide, before selling content within the city.
Ohio law defines “video service” as any video programming “over wires or cables located at least in part in public rights-of-way, regardless of the technology used.” But the law carves out an exception for video programming provided solely as part of a service allowing users to access content over the “public internet.”
“Under Plaintiff’s approach, every provider of Internet video content throughout the world would be required to apply for a video service authorization before it could supply video content to Ohio consumers, and would be subject to franchise fee taxation,” Netflix argues in its motion to dismiss.
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, 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. Netflix argues the Ohio suit would violate that law.
Municipal plaintiffs have won some battles in the fight to collect taxes from streaming video providers. The city of Creve Coeur, Mo., 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 Oregon Supreme Court also upheld a 7% state “telecommunications license fee” on broadband services in 2016. After that decision, the FCC issued an order asserting federal preemption over most non-broadcast activities over cable networks, including internet service. The National League of Cities and other municipal groups opposed the rule and have appealed it in several courts.
Cable operators initially negotiated franchise agreements with individual towns but in Ohio, but in 2007 state legislators put the process under the control of the Director of Commerce. Netflix argues that if the lawsuit against it isn’t dismissed outright, it should be referred to the Director of Commerce to determine if franchise fees apply to streaming video.