CHICAGO (Legal Newsline) - Netflix, Hulu and other video streaming services have asked a federal appeals court to reverse a judge’s order sending a dispute over franchise fees back to state court in Indiana, saying the case belongs in federal court because it is a class action, not an attempt to collect state taxes.
The difference matters, the streaming services say, because the Class Action Fairness Act requires class actions seeking more than $5 million to be heard in federal court. Indianapolis and several other cities, represented by private lawyers working on contingency, sued to collect franchise fees from the video services and structured the case as a class action on behalf of every other Indiana municipality.
The streaming services removed the case to federal court, citing CAFA, but U.S. District Judge Jane Magnus-Stinson remanded it to state court in November, citing the so-called “comity doctrine” prohibiting federal courts from interfering in the collection of state taxes. The judge technically abstained from hearing the case, exercising an exception to the general rule that federal courts must hear every case for which Congress has given them jurisdiction.
The problem with the judge’s order is there was no underlying state tax case once the franchise-fee lawsuit was removed to federal court, the streaming services argued in a Jan. 27 filing with the U.S. Court of Appeals for the Seventh Circuit. The cities never initiated an action before the Indiana Utility Regulatory Commission, which has exclusive authority over cable-television franchise fees.
“The cities must point to some type of ongoing state regulatory or administrative process involving the franchise fees to support abstention,” the streaming services argued. “Because the cities opted to bypass any such administrative process and proceed directly to litigation against the providers, they cannot identify any pending state proceeding to support abstention.”
Indianapolis, Valparaiso and two other cities agreed to join litigation largely engineered by private lawyers seeking to earn tens of millions of dollars in fees from a judgment or settlement that could be worth hundreds of millions of dollars. In the lawsuit, the cities argue streaming services are identical to traditional cable TV and must seek a state license and pay the same franchise fees.
The streaming services say state law explicitly limits franchise fees to cable TV operators with equipment located in public rights-of-way. The lawsuits, they say, are an illegal attempt to make up for declining revenue as customers drop traditional cable packages, reducing the gross revenue upon which franchise fees are based.
Franchise fees aren’t considered taxes under Indiana law, the streaming services argue, although they might be “taxes” under the federal Internet Tax Freedom Act, which limits the ability of states to impose charges on Internet services.
Private lawyers, some of them also representing municipalities in multibillion-dollar opioid lawsuits, have recruited cities around the country to press similar franchise-fee cases. The suits, if successful, would mean consumers pay a new 5% tax on streaming video content – with some of the money going to the private lawyers, many of whom are heavy contributors to Democratic candidates and party causes.