Four cities in Indiana are suing Netflix and other video companies, arguing that online video providers and satellite TV operators should pay the same franchise fees that cable companies pay for using local rights of way.
The lawsuit was filed against Netflix, Disney, Hulu, DirecTV, and Dish Network on August 4 in Indiana Commercial Court in Marion County. The cities of Indianapolis, Evansville, Valparaiso, and Fishers want companies to pay the cable franchise costs, enshrined in the Video Service Franchises Act (VSF), which requires payments of 5 percent of gross revenue in each city.
The lawsuit is based on an unusual legal argument and seems unlikely to succeed. In essence, the cities claim that Netflix and similar providers are using the public rights of way simply by offering video streaming services over the Internet:
Defendants send video programming to Indiana subscribers using Internet protocol and other technologies. In doing so, defenders direct their programming through facilities that are at least in part in public law of way within the geographic boundaries of Indiana Units, including public rights of way located within the geographical boundaries of the plaintiffs. Defendants are therefore required by the VSF Act to pay the Plaintiff – and all other Indiana units on which defenders transmit video programs through facilities that are at least partially part of a public right-of-way franchise fee.
“Netflix is clearly not a cable operator”
But streaming companies do not have to build physical infrastructure in every city to offer online video, so they do not deploy their own wires on public rights of way.
“I find it highly unlikely that this lawsuit will occur,” Harold Feld, a longtime telecom lawyer and senior VP of consumer advocacy group Public Knowledge, told Ars. “The [federal] Communications law defines terms such as ‘cable system’ and ‘cable operator’ in physical terms. “
As Feld noted, U.S. law defines a cable system as “a facility, consisting of a set of closed transmission paths and associated signal generation, reception, and control equipment designed to provide cable service.” Local franchise rules and fees are based on the power of cities to manage their local rights of way.
“Netflix is clearly not a cable operator” and is therefore not subject to local franchise rules, Feld said. “Furthermore, because broadband is not considered a cable service, Netflix does not offer a video program ‘over a cable system’ that would be required to make it a cable operator.”
Netflix, Hulu, and Disney + are single internet services. Dish and DirecTV are primarily satellite operators but also offer online access. The city court case never mentions the word “satellite” and does not fully explain how DirecTV and Dish use public rights of way. Defendants DirecTV and Dish have transformed their businesses and delivery methods in recent decades to meet the demands of the market, and subscribers now have access to their services through facilities that are at least partly in a public right of way, ”said the lawsuit, apparently referring to the newer, online components of the services.
Some backstory
Historically, satellite services did not have to pay the franchise fees to cable companies. “For years, cable companies have called franchise fees unfair because competitors who do not need the right of way – such as satellite TV services or online video services – do not have to pay cities a penny,” The Colorado Sun wrote in a 2019 article.
When contacted by Ars today, a spokesman for DirecTV owner AT&T said that “DirecTV does not use public rights of way and is not covered by the Indiana Video Services Franchise Act.” Dish has called for efforts to set up franchise fees to satellite providers, saying on the Fair TV Tax website that “Requiring satellite providers to pay a franchise fee, as an equivalent tax, is like asking cable and telecom companies to pay for the launch of satellites into orbit. “
Dish declined to comment today. We’ve also contacted Netflix, Disney, and Hulu, and will update this story with all the answers.
City franchise revenues are in decline
Even if the Indiana state court system agrees with the cities, the companies could appeal in federal court and claim that U.S. law advances local franchise fees on streaming companies. The Federal Communications Commission could also participate in the legal battle, as it has done in cases that have federal preempt of local rules. We contacted the FCC today and will update this article when we receive a response.
The lawsuit may be encouraged in part by cities that receive less franchise revenue when TV customers switch to online video. “Records maintained by the Valparaiso official treasurer show that the city of Porter County received $ 446,000 in video franchise costs last year, $ 457,000 in 2018, and $ 476,000 in 2017,” The Times of Northwest Indiana wrote last week .
City Attorney Valparaiso Patrick Lyp told the Times, “Our case helps ensure a competitive market where everyone who is under the fee pays it. The current situation is unfair to cable suppliers who have complied with Indiana law.”
The lawsuit of the cities points to the broad definition of “video game” contained in the Video Service Franchises Act, which defines video service as “(1) the transfer to subscribers of video programming and other programming services: (A) through facilities located at least in part in a public law of way; and (B) without regard to the technology used to provide the video programming as another programming service. “Netflix and the other suspects would be forced to “obtain the necessary franchises, pay the required fees in the future, and compensate Earder and all other units of government for unpaid fees for service in the past,” the lawsuit said.
A similar lawsuit was filed by the city of Creve Coeur, Missouri, in 2018. Netflix sought dismissal of Creve Coeur’s case in federal court, saying the video program “distributes exclusively over the public Internet.” The case was adjourned to the Twenty-First Judicial Circuit of the state of Missouri, where it is still pending.
