Four cities in Indiana are suing Netflix and other video companies, claiming that online video providers and satellite television operators are paying the same franchise fees that cable companies pay for using local rights of way.
The lawsuit was filed in the Indiana Commercial Court in Marion County on August 4 against Netflix, Disney, Hulu, DirecTV and Dish Network. The cities of Indianapolis, Evansville, Valparaiso, and Fishers want companies to pay the cable franchise fees set out in the Indiana Video Service Franchises (VSF) law, which requires payments of 5 percent of gross sales in each city.
The lawsuit is based on an unusual legal argument and does not appear to be successful. In essence, cities claim that Netflix and similar providers are taking advantage of public rights of way by simply offering video streaming services over the Internet:
The defendants broadcast video programming to subscribers in Indiana using the Internet Protocol and other technologies. Defendants are submitting their programs through entities that are at least partially in public rights of way within the geographic boundaries of the Indiana Units, including public rights of way within plaintiffs' geographic boundaries. For this reason, the VSF Act requires Defendants to pay franchise fees to Plaintiffs – and any other entity in Indiana where Defendants broadcast video through facilities that are at least partially in public right of way.
"Netflix is clearly not a cable operator"
Streaming companies don't have to set up a physical infrastructure in every city in order to be able to offer online videos. Therefore, they do not use their own cables for public rights of way.
"I think it is extremely unlikely that this lawsuit will prevail," said Harold Feld, long-time telecommunications lawyer and senior vice president of the consumer protection group Public Knowledge, to Ars. "The (federal) communications law defines terms such as" cable system "and" cable operator " in physical terms. "
As Feld noted, US law defines a cable system as "a device that consists of a set of closed transmission paths and associated signal generation, receiving, and control equipment designed to provide cable service." Local franchise rules and fees are based on the authority of cities to manage their local rights of way.
"Netflix is clearly not a cable operator," and therefore not subject to local franchise rules, Feld said. "Since broadband is not viewed as a cable service, Netflix does not offer video programming" over a cable system "which would be required to make it a cable operator."
Netflix, Hulu and Disney + are internet-only services. Dish and DirecTV are primarily satellite operators, but they also offer online access. The cities lawsuit never mentions the word "satellite" and does not fully explain how DirecTV and Dish use public rights of way. "Defendants DirecTV and Dish have changed their business and delivery methods over the past decade to meet market demands, and subscribers are now accessing their services through facilities that are at least partially public," it says the lawsuit apparently referring to the newer online components of the services.
In the past, satellite services did not have to pay the franchise fees charged to cable companies. "For years, cable companies have labeled franchise fees unfair because rivals who don't need right of way – like satellite TV services or online video services – don't have to pay a dime to cities," wrote The Colorado Sun. in a 2019 article.
When Ars was contacted today by Ars, a spokesman for DirecTV owner AT&T said, "DirecTV does not have public rights of way and is not covered by the Indiana Video Services Franchise Act." Dish has made efforts to impose franchise fees on satellite operators and states on its Fair TV Tax website that “requiring satellite operators to pay a franchise fee or equivalent tax is equivalent to asking cable and telecommunications companies to launch satellites to pay orbit. "
Dish declined to comment today. We have also contacted Netflix, Disney, and Hulu and will update this story with any responses.
Franchise sales in the city are on the decline
Even if Indiana’s state court system is in line with the cities, companies could appeal in federal court arguing that US law provides for local franchise fees for streaming companies. The Federal Communications Commission could also intervene in the lawsuit, as it did in cases where the federal government overrode local regulations. We contacted the FCC today and will update this article if we get a response.
The lawsuit may have been triggered, in part, by cities generating less franchise revenue as TV customers switched to online video. "Valparaiso Treasurer records show the city of Porter County received $ 446,000 in video franchise fees last year, $ 457,000 in 2018, and $ 476,000 in 2017," The Times of wrote Northwest Indiana last week.
Valparaiso City Attorney Patrick Lyp told The Times: "Our case helps ensure a competitive market where anyone who is subject to the fee pays it. The current situation is unfair to cable operators who violate the law of Indiana have followed. "
The cities lawsuit recalls the broad definition of "video service" in the Indiana Video Service Franchises Act, which defines video service as "(1) the transmission of video programming and other programming services to subscribers: (A) through facilities in at least part of it in the context of a public right of way and (B) regardless of the technology used to provide the video programming or other programming service. "Netflix and the other defendants should be forced to" acquire the necessary franchises, pay the required fees in Future pay and indemnify plaintiffs and all other government entities for unpaid fees for past services, "the lawsuit states.
A similar lawsuit was filed in 2018 by the City of Creve Coeur, Missouri. Netflix moved the Creve Coeur case to be dismissed in federal court, stating that video programs would be broadcast "only over the public Internet." The case has been referred back to the Twenty-first Missouri State Judicial District, where it is pending.