NASHVILLE, Tenn. (Legal Newsline) - The Tennessee Supreme Court rejected the City of Knoxville’s attempt to collect a 5% tax on streaming video services, delivering a death blow to attempts by private lawyers to tap a new fee stream by recruiting municipalities in the state to sue Netflix, Hulu and other video providers.
Knoxville, like cities and counties around the country, sued the streaming services in federal court to extend state franchise fees and make up for declining revenue from traditional cable services. Netflix and the other defendants argued they delivered their signals over lines owned and operated by internet service providers and are immune to the tax. The Tennessee Supreme Court, ruling on a question of state law referred to it by a federal court, agreed.
Streaming services “do not construct or operate the facilities through which their content passes and rely instead on third-party ISPs to transmit it to the end-user,” the court ruled in a unanimous opinion. “Thus, they do not provide `video service’ under” the state cable franchise law.
Knoxville was represented by private lawyers including James Gerard Stranch of Nashville and Nix Patterson of Austin, Texas. The ruling by Tennessee’s highest court could have powerful implications for lawsuits elsewhere around the country as many states have cable-franchise laws similar to Tennessee.
The loss joins a string of failures as state and federal courts decide that franchise fees can be collected only from companies that actually string cables in public rights-of-way. Those fees are legally considered a type of rent but are based upon the gross revenue of cable companies from providing “video services” and are largely passed through to consumers as a tax. Private lawyers who recruited municipalities as clients hoped to collect 20% or more of those increased payments as legal fees.
Earlier this month, the Eighth Circuit Court of Appeals upheld the dismissal of a lawsuit by Ashdown, Arkansas, also represented by Nix Patterson. And in October, the Ninth Circuit Court of Appeals upheld the dismissal of a similar lawsuit by the City of Reno.
In September, a magistrate judge dismissed East St. Louis’s lawsuit against Netflix, Disney, Apple, Hulu, Warner Media, Amazon, CBS, You Tube, Curiosity Stream, Peacock, DirecTV, and Dish Network. As with the Eighth Circuit, the judge ruled “it does not make sense” for the legislature to leave enforcement of Illinois cable franchise law to “a thousand municipalities.”
Despite these failures, plaintiff lawyers convinced 25 Texas cities to sue the streaming services in a proposed class action that has been removed to federal court.