A state appeals panel says the city of Lancaster and other local governments in California can't use a class action lawsuit to force streaming entertainment services Netflix and Hulu to pay the same kinds of franchise fees that the state requires cable TV providers to pay to local governments.
The city of Lancaster, a southern California community about 70 miles northeast of Los Angeles, filed a class action lawsuit against the streaming services in Los Angeles County Superior Court in 2021.
The lawsuit claimed Netflix and Hulu were violating California's state Digital Infrastructure and Video Competition Act of 2006.
That law was enacted to require all "video service providers to obtain a franchise through the state's Public Utilities Commission, and then pay franchise fees to local governments to use public infrastructure to construct and operate their television and entertainment networks.
The law at the time was targeted at cable TV providers and home internet service providers.
However, in the lawsuit, the city contended streaming service providers like Netflix and Hulu should be treated the same as those cable networks, and be forced to obtain state franchises through the state and then pay cities, like Lancaster, and other local governments the franchise fees they believe are required by state law.
The city claimed the streaming providers should be considered the same as the other video services providers because the companies "provide video service in numerous California jurisdictions using broadband wireline facilities located at least in part in public rights-of-way."
The lawsuit carried the risk of tremendously large recurring paydays from streaming providers to California local governments, if it were allowed to go forward.
The lawsuit asserted the streaming providers should be forced to pay a fee to local governments "based on the gross revenue generated from the provision of video service in each local government's jurisdiction." According to industry sources, such fees typically amount to 5% of gross revenue.
Lancaster was represented by attorneys with the class action firm of Schneider Wallace Cottrell Konecky, of Los Angeles, and, on appeal, by the firm of Messing & Spector, of New York.
In response, Netflix and Hulu argued the state law doesn't apply to them, because they aren't required to hold state franchises and don't actually operate "any 'networks' or 'systems'," like cable TV or internet service providers.
Netflix further argued the lawsuit should be dismissed, because federal law doesn't allow the state and local governments to essentially seek to tax them in that way.
Los Angeles County Judge Yvette M. Palazuelos sided with Netflix, finding nothing in the state law required streaming providers to obtain a state franchise.
And the judge found that the state law doesn't allow a class action lawsuit, such as that filed by Lancaster.
On appeal, a three-justice panel of the California Second District Appellate Court agreed to dismiss the case.
The justices, notably, declined to rule on the merits of the underlying question of whether streaming providers should be treated similarly to cable TV providers under the state law.
But the appellate justices agreed with Judge Palazuelos that the state law gives sole authority to enforce such video network franchise disputes to the Public Utilities Commission.
They said the city's arguments too narrowly interpret the law, zeroing in on certain pieces, while ignoring the larger context in which those passages are set.
"While we agree with the City that the Legislature intended for video service providers to pay franchise fees in any jurisdication where they provide video programming services, it does not follow that the Legislature also intended for a local government to bring a legal action in state court against any company it believes should, but does not, hold a franchise," the justices wrote.
They noted the Commission and California Attorney General are "generally empowered ... to bring an action in the name of the People of the State of California against a video service provider that fails to obtain a state-issued franchise."
And they noted the law specifically grants certain limited enforcement powers to local governments in specific circumstances.
This, they said, "also suggests (lawmakers) did not intend, impliedly or otherwise, to create private rights of action in other areas."
The justices said they also would not grant the city's request to essentially order the Commission to force the streaming providers to obtain a video services franchise and begin paying the required fees.
Netflix was represented by attorneys Jean A. Pawlow, Mary Rose Alexander, Peter E. Davis, Ward A. Penfold, Robert C. Collins III and Michael A. Hale, of the firm of Latham & Watkins, of Los Angeles.
An attorney representing Netflix did not immediately respond to a request for comment on the ruling.
Hulu was represented by attorneys Victor Jih, Conor Tucker, Eric Kohan and Christopher Hurley, of Wilson Sonsini Goodrich & Rosati, of Los Angeles and Boston.
Lancaster was represented by attorneys Todd M. Schneider, Jason H. Kim, Andrus Anderson and Jennie Lee Anderson, of Schneider Wallace Cottrell Konecky; and Noah A. Messing and Phillip M. Spector, of Messing & Spector.
The case also drew amicus briefs, or friend of the court briefs, from other cities and counties from Missouri and Georgia, filed by attorneys with the plaintiffs' law firm of Korein Tillery, of St. Louis and San Diego, in support of Lancaster;
And briefs from other streaming TV service providers, including DirecTV, Dish Network and Sling TV, in support of Netflix and Hulu. They were represented by attorneys with the firms of Steptoe & Johnson, of Washington, D.C.; and Kilpatrick Townsend & Stockton, of Atlanta.