Streaming Services Cite Judicial Precedents in Support of Motion to Dismiss

The 29 Texas cities suing Disney, Hulu and Netflix for franchise fees “cannot and do not explain away” similar franchise fee lawsuits that were rejected in other jurisdictions, said Netflix’s reply in support of its motion to dismiss Wednesday in the 14th District Court of Dallas County (docket DC-22-09128).

The Texas cities, including Austin, Dallas and Houston, cited in a Monday memorandum in opposition to the defendants’ motion to dismiss (see [Ref:2304120051) chapter 66 of the Texas Public Utility Regulatory Act (PURA), saying anyone who seeks to provide video programming through wireline facilities located “at least in part” in the public right-of-way (ROW) in Texas must obtain a franchise and pay Texas cities a franchise fee.

Some 14 courts, including a Texas federal court construing the Texas Act, have rejected similar lawsuits and 30 state and federal judges “have agreed that -- even at the pleading stage -- these lawsuits fail as a matter of law,” Netflix said in its reply. It cited City of New Boston, Texas v. Netflix, in which a Texas district court held that municipalities “have no claim against Netflix and Hulu under the Texas Act.”

The court should reject plaintiffs’ effort to “rewrite the Texas Act to divorce the franchise fee from the physical occupation of city land” and to impose a 5% tax on streamed video services, “and by extension Texas consumers,” Netflix said, “regardless of whether the streaming service operates or constructs any facilities in the public rights-of-way.”

Hulu and Disney+ don't hold a state-issued certificate of franchise authority or operate their own facilities in the public ROW, they said Wednesday in their reply in support of their motion to dismiss, asserting plaintiffs’ claims “fail as a matter of law.” Plaintiffs “cannot enforce franchise obligations against non-franchise holders,” they said. PURA, which “creates a facilities-based franchise regime, does not apply to streaming companies who neither construct nor operate any facilities in the public rights-of-way.”

Plaintiffs’ “overly expansive” reading of PURA -- that all distributors of video content over the internet are subject to Texas’ video franchise laws because viewers may choose to connect to the public internet using a third-party internet service provider with facilities in the public ROW -- is “unprecedented,” said Disney. The interpretation “circumvents” the franchise authority of the Public Utilities Commission “by attempting to enforce franchise obligations against those the PUC has not conferred upon (or required from) a state franchise."

The parties’ disagreements center around (1) whether municipalities have the right to enforce franchise obligations under PURA against non-franchise holders and (2) whether PURA applies to internet streaming companies that neither construct nor operate wireline facilities in the public ROW, said Disney: Both “require a negative answer."

In plaintiffs’ view, franchise obligations are triggered when users choose to access content using ISPs “that may implicate ISP facilities in the rights-of-way,” said the Disney reply. Plaintiffs argue streaming services can make predictions about where their subscribers will be, but “even if that is true, the need for guesswork” is inconsistent with PURA provisions that assume a provider “can know with certainty which geographic areas are implicated before commencing video service."

Plaintiffs noted a proposed amendment pending in the Texas Legislature that “purportedly ‘proves … Plaintiffs’ interpretation of PURA is legally correct,'” but “not so,” said Disney and Hulu, citing a suit in Louisiana, in which a municipality claimed a similar statute applied to Hulu and Netflix. The district court in Kenner City v. Netflix said the statute didn't apply because the streaming services didn’t provide “video service” as defined “pre-amendment,” they said.