Netflix and Hulu have notched another win in an escalating push by local governments to have streamers pay taxes for using public infrastructure, this time in California.
In a ruling likely ending the case, a Los Angeles judge on Wednesday found that the city of Lancaster doesn’t have the right to sue Netflix and Hulu to assess fees on them. Even if they could, the judge held that the steamers don’t use any public wires, cables or facilities anyway.
Lancaster is one of numerous cities and towns across the country suing Netflix and Hulu for taxes. These municipalities argue that streaming services must pay fees — typically 5 percent of gross income derived from providing local video programming — that were once traditionally reserved for cable companies needing to use public rights-of-way to lay their lines.
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Streamers have largely prevailed on this legal front in cases across the country.
L.A. Superior Court Judge Yvette M. Palazuelos kept in line with a spate of rulings siding with streamers that they aren’t subject to state laws regulating video service providers. She found that municipalities are limited to suing franchise holders, which Netflix and Hulu aren’t.
There’s “no language” in the statute that “authorizes a local entity to bring an action compelling a non-franchise holder to apply for a state franchise under [the Digital Infrastructure and Video Competition Act] or to comply with its requirements,” Palazuelos wrote in a ruling sustaining defendants’ demurrer without leave to amend.
The power to force a non-franchise holder to pay fees through a lawsuit, the judge concluded, belongs to the California Public Utilities Commission. She said the statute “clearly grants only the PUC — and not local entities — a right of action against non-franchise holding video service providers subjects to DIVCA’s requirements. In other words, under a plain reading of the relevant statutory provisions, only the PUC can bring an action to compel non-franchise holders such as Netflix and Hulu to comply with the DIVCA.”
Courts in other jurisdictions have reached identical conclusions even though state laws slightly vary. An Arkansas federal judge held that the “Legislature has not expressed any intent that individual municipalities are the ones who should ensure compliance” but has rather “intended for the Arkansas Public Service Commission to ensure compliance.” A Nevada federal judge similarly held that “in recognizing the public policy reasons for uniformity, the Nevada Legislature intended the State via the Office of the Attorney General to enforce actions, remedies, and penalties for violation of the provisions of the [statute],” meaning that “local governments…do not have a private right of action.”
But even if the local entities could sue, Palazuelos concluded that DIVCA doesn’t apply to Netflix and Hulu because they don’t own or operate infrastructure in any public rights-of-way.
“If Defendants were required to obtain a DIVCA franchise to deliver their services, then Plaintiff could presumably seek to require Disney Plus, Peacock, HBO Max, and Amazon Prime Video to also obtain DIVCA franchises,” the order reads. “Under plaintiff’s reading of DIVCA, numerous franchise holders could ‘use’ a single public right-of-way, and local entities would be allowed to collect a 5% franchise fee from each franchise holder. Such an interpretation would result in a financial windfall for local entities that the Legislature did not intend.”
In an identical case, the Ohio Supreme Court on Wednesday considered whether Netflix and Hulu are video service providers and should pay franchise fees under state law. Among the questions in that case is if a municipality can sue to enforce the law rather than the state. Notably, the Ohio Attorney General filed a friend-of-the-court brief in support of the streamers.
Netflix and Hulu have maintained that they don’t own or operate any wires, cables or facilities and that they aren’t a traditional video service provider as defined by state law because there’s no scheduled programming and they make their content available on demand.
Taking local governments’ claims to their logical conclusion, they argued that adopting the position would make anyone who streams content over the Internet a video service provider and thus subject to franchising fee requirements.
There has been at least one adverse ruling in Missouri, the first jurisdiction where a franchise fee suit was brought. In that case, a judge rejected arguments that Netflix and Hulu aren’t really video service providers at the dismissal stage. She found that the streamers could be covered by Missouri’s Video Services Providers Act.
There have been suits filed in Texas, Nevada, Tennessee, Indiana, Georgia and Arkansas, among other states.
The proposed class action sought to represent California cities and counties where Netflix and Hulu operate.
Netflix and Hulu didn’t respond to requests for comment.
