8th Circuit Judge Unsure City Can Sue Netflix, Hulu for Franchise Fees
An Arkansas law doesn't clearly give municipalities the right to sue for franchise fees from Netflix and Hulu, a federal appeals judge suggested Tuesday. At oral argument teleconferenced Tuesday from St. Louis, 8th U.S. Circuit Court of Appeals Judge David Stras suggested Ashdown and other Arkansas localities might have to ask the legislature to update the Arkansas Video Service Act (VSA) to address their concerns that streaming video companies don’t pay franchise fees.
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Ashdown says streaming providers violate the VSA, a 2013 state franchise law that displaced local franchise authorities, by not paying franchise fees. The U.S. District Court in Texarkana, Arkansas, rejected the complaint Sept. 30, 2021, agreeing with Hulu and Netflix that the municipalities have no private cause of action under the VSA and that streaming companies don’t need to have franchises or pay fees because they have no facilities in the public right of way and the law contains an exception for video content offered over the public internet. Municipalities appealed Oct. 27 to the 8th Circuit (case 21-3435).
The 9th Circuit challenged cities’ right-of-action arguments at a Monday hearing in an appeal by Reno on a similar dismissed franchise fee suit against Netflix and Hulu (see 2209190055). Other cities also are pursuing claims against streaming companies (see 2208120004). Over-the-top streaming is a rising concern for local governments that could lose cable franchise revenue as customers cut the cord for the OTT services that don’t pay local fees (see 2208310065).
At the 8th Circuit argument, Stras directed many more questions to Ashdown’s attorney than to Netflix or Hulu lawyers. Judges Steven Colloton and Roger Wollman asked nothing during the 30-minute argument. “The court will file an opinion in due course,” Colloton closed.
A VSA provision that municipalities say lets them sue sounds more like a “savings clause” than an “independent cause of action,” said Stras. The language in question says the law shouldn’t be interpreted to prevent political subdivisions from seeking clarification of their rights or obligations under state or federal law. Ashdown sued to clarify its rights under state law, responded Ashdown lawyer Justin Hawal of DiCello Levitt: the legislature at least implied cities could sue.
But the law expressly gives the Arkansas Public Service Commission a cause of action, while cities’ power to sue “is not as clear,” said Stras. “The legislature set up a cause of action for someone in the statute and it just doesn’t happen to be a municipality.” Hawal replied that the law doesn’t say the PSC has exclusive power, and streaming companies’ interpretation would mean local governments have no remedy for past-due fees.
Traditional video providers are moving toward internet-based TV, Hawal said. “If you interpret the public internet exception in the way that Netflix and Hulu urge,” even facilities-based companies like AT&T wouldn’t be subject to the state franchise law. Interpreting the exception “in a way that just simply exempts all television over the internet is going to render the Act obsolete, which couldn’t have been the intention of the Arkansas legislature.”
“Let’s suppose you’re right that it renders it obsolete,” returned Stras. “Should we … manipulate the statute or is it the responsibility of the legislature to fix that problem -- the fact that technology has changed over the last decade or two?”
“Arming hundreds of municipalities across the state with the ad hoc authority to bring enforcement actions against streaming services … would directly disrupt the legislature’s intent to establish a uniform regulation scheme,” Netflix attorney Gregory Garre of Latham Watkins told the court. “The legislature did not contemplate either expressly or in any inferred sense that municipalities would have the right to bring enforcement actions.” Municipalities’ lack of a private right of action is “a sufficient basis to dispose of this appeal,” he said.
All Netflix and Hulu do is make video content available for streaming over the public internet, so they “fall squarely within the public internet exception,” said Garre. Ruling otherwise would create a “fundamentally different taxation scheme” that would result in higher fees for end users, said the lawyer: It’s “exclusively an issue for the state legislature.”
Stras asked what would happen if Hulu got a third party to build in the ROW so the streaming company could provide video. “And so it’s not like a cable service provider,” which “has the right of way and also provides video content. Would it just not be covered by the statute at that point?” If the network operator were acting on Hulu’s behalf, “under normal agency doctrine, I think it would be considered the video service provider’s network,” said Hulu attorney Victor Jih of Wilson Sonsini. But here, “it’s not someone acting on our behalf that’s providing the delivery,” he said. “It’s the subscribers’ choice of ISP that actually connects them to any content that we make available on the public internet.”
It’s “hyperbole” to say Ashdown seeks to upend the state franchising system, said Hawal in rebuttal. “We’re not asking that every municipality be granted the right to issue its own separate franchise to these entities.”