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On The Case

Why Netflix and Hulu really, really want this Texas class action to be dismissed

(Reuters) - A couple of months ago, when I saw the names of the plaintiffs’ firms that signed a class action complaint (2020 WL 4669712) by Texas municipalities that claim they’re owed 5% of the revenue that Netflix and Hulu receive from streaming video to their residents, I had a feeling this case had implications beyond the Texarkana federal courthouse where it was filed. The class action plaintiffs’ firms Nix Patterson and DiCello Levitt Gutzler have nationwide footprints. The Texas case, I suspected, was the start of a broader attempt to squeeze fees from Netflix and Hulu.

Sure enough, two additional suits followed the Aug. 11 Texas complaint: an Aug. 21 class action filed in Cleveland federal court on behalf of Ohio municipalities and a Sept. 2 complaint in Reno for Nevada cities and towns.

And now Netflix and Hulu have confirmed the consequences of the Texas case in dismissal motions filed last week. Netflix’s lawyers at Latham & Watkins decried the “radical implications” of the class action’s “drastic” interpretation of the Texas law imposing fees on cable companies and telecoms for the use of public right-of-ways. Hulu, represented by Wilson Sonsini Goodrich & Rosati, argued that the Texas plaintiffs’ theory “represents a dramatic expansion of internet taxation” that would force every video content provider, from CBS and HBO to TikTok, to pass fees onto their users.

Netflix and Hulu really, really want to shut this litigation down.

The plaintiffs’ theory is so simple that their complaints in Texas, Ohio and Nevada are less than 20 pages long. Those states (and others) require cable operators and “video service providers” to register with the state and pay a franchise fee in return for their use of public land for wires and cables. Those laws typically apply to cable companies and telecoms that provide internet services. But the new class actions allege that Netflix and Hulu also fall within the laws’ ambit because, as plaintiffs wrote in the Texas complaint, the video-streaming companies “operate and provide their video service to (their) subscribers through wireline facilities located at least in part in the public right-of-way.” So, according to the class actions, Netflix and Hulu owe cities and towns across Texas, Nevada and Ohio a portion of their revenue.

The complaints do not allege a specific dollar amount owed by Netflix and Hulu. Neither company breaks down reported revenue by state. Netflix’s total reported revenue in 2019 was about $20 billion. Hulu, which is part of Disney, reportedly earned about $1.3 billion in revenue from subscribers.

The Netflix and Hulu dismissal motions in Texas contend that plaintiffs’ theory is a fundamental misreading of state regulations because they use existing cable and ISP infrastructure to deliver their content. The class reading of Texas law, Hulu said, “transforms a ‘franchise fee’ authorizing the construction and operation of network infrastructure into a quickly compounding internet use tax.” Netflix elaborated on that point, arguing that because its content is delivered via internet service providers, it receives no more benefit from public right-of-ways than anyone else maintaining a public website.

Texas never intended its law to impose a tax on every company that uses cable and telecom infrastructure to provide video content to consumers, Netflix said – and if the state did intend that result, its law would violate the federal 1984 Cable Act and the 1998 Internet Tax Freedom Act. The Texas law, in the application advocated by the plaintiffs, would even run afoul of the First and Fifth Amendments, Netflix said, by selectively taxing speech in an unconstitutionally vague, arbitrary and discriminatory fashion.

The Texas Public Utility Commission has not opined on the plaintiffs’ theory, Netflix said, but binding authority from the Federal Communications Commission holds that state authority to impose franchise fees is restricted to “the provision of cable services over cable systems,” and is otherwise preempted by federal law. And in the only judicial opinion to consider whether video-streaming companies are subject to cable and ISP franchise taxes, Netflix said, a state court judge in Kentucky found it would be “unreasonable” to apply a tax on cable and broadcast television services to Netflix because their products “could not be more different.”

Netflix and Hulu, in other words, have offered U.S. District Judge Robert Schroeder a vast menu of options for tossing the class action.

Plaintiffs’ counsel Adam Levitt of DiCello Levitt did not provide a statement responding to the defense motions. I also didn’t hear back from Netflix counsel at Latham or Hulu counsel from Wilson Sonsini.

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