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Court News Ohio
Court News Ohio

Cities Cannot Impose Franchise Fee on Streaming Services

Image of a bunch of different colored vertical lines next to a hand holding a television remote pointed at a flat screen tv

The Court ruled streaming services do not have to pay the same franchise fees to local governments paid by wired TV and phone companies.

Image of a bunch of different colored vertical lines next to a hand holding a television remote pointed at a flat screen tv

The Court ruled streaming services do not have to pay the same franchise fees to local governments paid by wired TV and phone companies.

Internet streaming services Netflix and Hulu are not “video service providers” under Ohio law and do not have to pay local franchise fees that wired cable and telecommunications companies pay, the Supreme Court of Ohio ruled today.

In a unanimous decision, the Supreme Court rejected claims by the city of Maple Heights that the two streaming services need authorization from the director of the Ohio Department of Commerce to operate and that they owe local government franchise fees. The Court was divided 4-3 on the legal reasoning used to determine whether state law allowed Maple Heights to bring a lawsuit to enforce payment of the franchise fees.

Maple Heights sued Netflix and Hulu in federal court. The U.S. District Court for the Northern District of Ohio asked the state Supreme Court to clarify the state’s cable franchising law before moving forward with the case.

Writing for the Court, Justice Michael P. Donnelly stated the state’s scheme for regulating video service applies to those who install wires in public rights-of-way to broadcast to subscribers. Because Netflix and Hulu are accessed through the public internet and do not install wires, they are exempt from the requirement that they be authorized by the state to provide service.

Not only are the streaming services exempt from the law, but the Court also said that only the commerce director, not any municipalities, can take legal action against a video service provider that is not complying with the cable franchise law.

Chief Justice Maureen O’Connor and Justices Melody Stewart and Jennifer Brunner joined Justice Donnelly’s opinion.

In a concurring opinion, Justice Sharon L. Kennedy disagreed with the majority’s willingness to consider Maple Heights’ claim that a cause of action for fees not paid by video service providers could be inferred from the statutory language that the General Assembly enacted. She wrote that the Court should reject outright the theory of an implied right of action, explaining that to recognize an implied cause “is to judicially amend” a statute. Reading an implied cause of action into a statute “is the work of judges who are guided by their own public-policy choices, not text. It is the very definition of judicial activism,” she concluded.

Justices Patrick F. Fischer and R. Patrick DeWine joined Justice Kennedy’s opinion.

Municipalities Seek Franchise Fees From Steaming Services
Maple Heights filed a class action lawsuit in 2020 against Netflix and Hulu, claiming the services are operating in violation of R.C. 1332.21, which is part of the Ohio Fair Competition in Cable Operations Act. The Fair Competition Act was created in 2007 to bring statewide uniformity to the process of authorizing cable and telecommunications companies to provide an array of services to Ohioans. Prior to the law’s enactment, businesses that wanted to provide cable service to customers would enter into franchise agreements with local governments and pay them a franchise fee to install wires in the public rights-of-way.

The 2007 law abolished the authority of local governments to impose franchise agreements. Instead, businesses would seek authorization from the state commerce director to be video service providers, and the director would grant the authority to operate in the state. The law required a video service provider to pay a franchise fee to each municipal corporation and each township in which it offered video services.

The law also allowed the municipalities and townships to conduct an annual audit to determine if the video service providers were paying the correct fees based on the number of subscribers in the local government’s boundaries. If a local government believed the provider was underpaying, it could file a lawsuit to recoup the unpaid fees.

Maple Heights argued in federal court that Netflix and Hulu qualified as video service providers but have been illegally operating without state authorization and were not paying the required franchise fees. Because Maple Heights asserted that the services were underpaying the fees, the city claimed that state law “implies” that local governments have the right to sue the companies for payment.

Netflix and Hulu stated that they are online steaming services connected to the public internet. Because they do not maintain wires, cables, or other infrastructure in Ohio public rights-of-way, they maintain they are not video service providers under Ohio law.

Hulu additionally told the federal court that state law empowers only the commerce director, not the local governments, to take any legal action against a business operating without video service provider authorization.

Supreme Court Analyzed History of Broadcast Regulation Law
The opinion explained that under R.C. 1332.21(J), a video service provider must provide “video service.” The law defines “video service” as the provisions of video programming over wires and cables located at least in part in public rights-of-way, regardless of the technology used to deliver the programming.

The term “video service” excludes “video programming provided solely as part of and via service that enables users to access content, information, electronic mail, or other services offered over the public internet.”

Netflix and Hulu provide online services over the internet and are not video service providers, the Court ruled.

“They do not need to place their own wires or equipment in the rights-of-way in order to provide their members with programming,” the Court stated. “Therefore, neither Netflix nor Hulu has to obtain video service authorization.”

Local Governments Not Empowered to Enforce Law
Maple Heights has argued that since it has the right to sue a service provider for underpaying a fee, it can infer from state law that it can sue providers that are paying no fees.

The Court stated nothing in the Fair Competition Act indicates the General Assembly intended to create a right for local governments to enforce the law. Rather, the language of the act indicates the legislature intended to “foreclose the rights of remedy for local governments” and leaves the commerce director sole authority to regulate and sanction those providing video service without authorization, the Court concluded.

2021-0864. Maple Hts. v. Netflix, Inc., Slip Opinion No. 2022-Ohio-4174.

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