No Hulu, Netflix franchise fees for city, judge rules

Siding with Netflix and Hulu, a Los Angeles County judge said the city of Lancaster can't collect franchise fees under the Digital Infrastructure and Video Competition Act simply because the streaming giants use broadband wirelines in the public right of way.

In the lawsuit brought under Public Utility Code sections within the act -- mostly used to charge cable companies for constructing and using power lines on public lands -- the city in northern LA County sought to charge Netflix Inc. and Hulu LLC 5% of their gross income derived from providing video services in the city.

Sustaining the demurrers of Netflix and Hulu on Monday, Superior Court Judge Yvette M. Palazuelos said while the act allows government entities to pursue private rights of action to collect franchise fees from cable companies and franchise holders, Hulu and Netflix don't actually own the power lines providing broadband internet and are thus not franchise holders.

"Netflix and Hulu contend that DIVCA does not apply because they do not own or operate infrastructure in any public rights of way. The court agrees," Palazuelos wrote in a tentative ruling, later adopting it as a final order.

In motion supporting Hulu's demurrer, Victor Jih of Wilson Sonsini Goodrich & Rosati said while its subscribers do, as the city argued, "typically use a broadband Internet connection," to access its services, "it is equally true for any website a resident may access."

"Hulu no more uses the city's public rights of way than CNN, The Weather Channel, or any resident when they use Snapchat, Instagram or TikTok," Jih wrote.

The city, represented by San Francisco attorney Jennie Lee Anderson of Andrus Anderson LLP, also sought to compel Hulu to comply with the act by applying for and obtaining a franchise.

While the Public Utility Code segment the city pointed to in the complaint, Section 5860 (i), can be used to collect unpaid fees, it does not authorize an entity to bring an action "compelling a non-franchise holder to apply for a state franchise under DIVCA," Palazuelos wrote.

Netflix and Hulu have been targeted in lawsuits throughout the U.S. arguing that while they do not own or operate any facilities in the public rights of way, their subscribers obtain content through the network of their internet service provider (ISP), which is in the public rights of way. City of Lancaster v. Netflix, 21STCV01881 (L.A. Sup. Ct., filed Jan. 15, 2020).

"These broadband internet connections rely upon wireline facilities located in whole or in part in the public right(s)-of-way to deliver internet service to subscribers," the city's complaint reads. "Defendants provide video service to their subscribers to view television shows, movies, documentaries and other programming. They compete with other video service providers, offering video programming that is comparable to that provided by cable companies and television broadcast stations."

However Palazuelos agreed with Netflix that their on-demand services are not "video service providers" that provide "video programming" under the act. Citing a Kentucky circuit court, Palazuelos said Netflix's content is not comparable to broadcast television or cable service. Finance and Administration Cabinet, Commonwealth of Kentucky Department of Revenue v. Netflix, Inc. (Ky. Cir. Ct., Aug. 23, 2016).

"'Netflix's streaming service does not provide content in a multichannel format; Netflix's streaming service does not include the concept of channels," the Kentucky court found. "This is a vast departure from the linear programming model of traditional cable or broadcast television services.'"

Attorneys for Netflix and the city of Lancaster did not respond to requests for comment.