Why Cash-Strapped Towns Are Suing Streaming Giants

Why Cash-Strapped Towns Are Suing Streaming Giants
Illustration by Tim Peacock

Until COVID-19 struck, Mayor Annette Blackwell felt like her city of Maple Heights, Ohio, had finally gotten on its feet again. The 2008 home mortgage crisis had delivered a financial wallop to this suburb that’s 15 miles outside of Cleveland. A town that was once mainly Italian and Polish and became predominately African American after World War 2, it witnessed thousands of bank foreclosures on the bungalows that line the streets. In turn, that meant numerous property tax delinquencies among Maples Heights' citizenry, many of whom work in the service sector. Ohio’s state auditor declared a fiscal emergency. Maple Heights was finally set to escape the clutches of state officials by achieving the goals of a mandated recovery plan when the budget-busting pandemic came along. Blackwell knew she needed to do something bold. “I began looking for every opportunity to bring in revenue,” says Blackwell, whose epiphany resulted from a local business owner sharing a news story about TV streamers. “I read up. Then I called our law director. I wanted in.” On Aug. 21, Maple Heights filed a lawsuit against Netflix and Hulu.

Blackwell’s city isn’t the only one. Throughout the nation, one American town after another is struggling to figure out how to pay overtime for the city workers who disinfect public transit plus come up with funds so that schools can buy laptops for children learning remotely. Many officials have concluded that streamers should be contributing more for local government services and are shirking legal obligations by not doing so. In the past month alone, lawsuits against streamers, including Disney+, have come from Reno, Nevada; New Boston, Texas; and Fishers, Indiana. Each of these suits is guided by Chicago plaintiff lawyers and stylized as a class action over the issue of whether streamers must pay utility fees. If the lawsuits are successful, thousands of other municipalities will benefit too. But what are the prospects for victory? “It’s going to be an uphill battle [for cities],” says Covington & Burling partner Mitch Kamin. “The law just wasn’t structured with streaming in mind.”

The revolution decades ago to bring cable television into American homes didn’t happen without the assent of local governments. Back then, cable operators needed “right of way” to dig up the ground and lay their lines. To get access, these cable companies agreed to give up a portion of their revenue. In the early 1980s, to ensure that no local municipality was going to hinder progress by imposing unduly high fees, Congress amended the Communications Act to set a cap of 5 percent of revenue on what any local franchising authority could charge.

Flash forward to today as greater and greater numbers of consumers are canceling their pricey cable TV service amid increasing digital options. Cordcutting has been meaningful in many ways, including how it’s been impacting the coffers of local governments. A 5 percent cut of a cable operator’s revenue isn’t nearly as lucrative as it once was. Insiders say that cities could be losing tens of millions of dollars each year because of changing entertainment habits. As such, local officials are beginning to respond.

In 2015, Chicago famously enacted an “amusement tax” that included a 9 percent assessment on the subscription cost of streaming services such as Netflix and Spotify. So far, the city has successfully defended this tax in court, though the legal fight is hardly over, and perhaps more importantly, other localities haven’t shown the same appetite for imposing such a direct tax on their citizens. Instead, cities like Maple Heights, Reno and New Boston are following the lead of Creve Coeur, Missouri, which for the past two years has been in court seeking to make the streamers pay the same franchise fees that cable operators have traditionally rendered. That said, streaming subscribers might ultimately pay for this, too. Scott Houston, general counsel at the Texas Municipal League, believes that if the lawsuits are successful, Netflix would likely “pass through the cost” to customers in a line item on the bill.

The streamers, of course, are resisting. The nature of this legal battle has cities and streamers discussing in court the operations of digital video delivery in detail — for instance, how a company like Netflix moves data and where it maintains its local servers. It also has the parties attempting to square these operations with what's specifically in the statutes.

For instance, in the Missouri case, Netflix claims it isn’t a "video service provider" and therefore isn’t subject to rules meant for cable operators. Netflix turns to the relevant law, which defines video programming as what a television broadcast station does. "Netflix does not provide programming comparable to that provided by a television broadcast station," argue attorneys for Netflix, adding that city ordinances specifically exclude services that enable users to access content from public networks. Like streaming. At least that's how Netflix sees it.

Creve Coeur, of course, has a different take. It emphasizes how Netflix maintains privately owned local facilities and pushes a different interpretation of Missouri law. The city's lawyers argue that in 2007, the state legislature took another look at franchise fees with new technology in mind. "The legislature purposely gave the VSP Act a broad scope because it knew that new companies using new technologies that were not in existence in 2007 would likely someday provide TV content to Missourians through the public right-of-way and would similarly need to pay municipalities a VSP fee for that use," states a memorandum.

The streamers have a second big argument — and it's the type of issue that could eventually be tackled by the U.S. Supreme Court. They say that the fees would violate the Internet Tax Freedom Act as a discriminatory tax on electronic commerce. As Hulu puts it, “Creve Coeur seeks to collect a fee from Hulu because Hulu allegedly provides services ‘comparable’ to television broadcast stations — but Creve Coeur does not collect a fee from those same television broadcast stations.”

Creve Coeur argues that the streamers have it wrong: They are the privileged ones.

"In the end, Netflix and Hulu allow subscribers to watch TV with a push of a button just like other TV-content providers, and they have been siphoning subscribers from other TV-content providers without paying any VSP fees—putting them at an unfair competitive advantage," states Creve Coeur in a bid to stave off dismissal.

The city asserts there's no discriminatory tax because what the lawsuit seeks to collect isn't a "tax." It's a "fee" for pushing content through the public right-of-way.

A Missouri state judge recently held a hearing on the streamers' motion to dismiss, and the first big ruling on the subject will come sometime in the next few months.

Although neither Netflix nor Hulu would speak on the record about these cases, the companies see the presence of outside class action lawyers as being the real instigators. Indeed, two law firms — first, Korein Tillery, and second, DiCello Levitt Gutzler — have hands in all the lawsuits brought so far on this subject. The fact that competing private lawyers have a stake is probably a sign that similar litigation could come soon in other states.

But Blackwell says there’s a larger point at stake. “It’s about respect,” the Maple Heights mayor says. “In many ways, we’re doing business together. If there’s a natural disaster, we are there providing maintenance on infrastructure so that the end product can be delivered. And if people are in a place of crisis, if they don’t have jobs, they don’t have time to do Netflix. We help them [our citizens, their customers] so they can sit back and enjoy these services. Why would we not be part of the revenue?”

A version of this story first appeared in the Sept. 16 issue of The Hollywood Reporter magazine. Click here to subscribe.