Texas Appeals Court Grants Streamers Mandamus Relief in Franchise Fees Fight

A three-judge panel of the Court of Appeals for the 5th District of Texas in Dallas conditionally granted a request from relators Disney, Hulu and Netflix for mandamus relief following the Dallas County district court’s denial of their Rule 91a motion to dismiss, said the panel's opinion Thursday (docket 05-23-00485-cv). The panel also denied as moot a motion for vacating its order staying proceedings the real parties in interest filed.

In the lawsuit, 31 Texas cities argue that streaming services should pay franchise fees for video programming they provide through wireline facilities in the public rights-of-way (see [Ref:2304120051). Plaintiffs cited chapter 66 of the Texas Public Utility Regulatory Act (PURA), saying anyone who provides video programming through wireline facilities located “at least in part” in the public right-of-way (ROW) must obtain a franchise and pay Texas cities a franchise fee. The streaming services provide such video programming in Texas but haven't obtained the franchise or paid the required fee, according to the lawsuit.

The municipalities seek declaratory relief, asking that the court declare the streamers have violated PURA by not obtaining a state-issued certificate of franchise authority or paying municipalities a 5% franchise fee. In addition, they seek injunctive relief, asking that the court enjoin the streaming providers from using public ROW unless they comply with PURA.

The municipalities also request an account of franchise fees owed and a trespass claim against the streaming providers for wrongfully entering and using the public ROW as they deliver video programming to Texas customers without: 1) obtaining the proper state-issued certificate of franchise authority from the commission, 2) obtaining authorization from municipalities and 3) without paying franchise fees. They also assert unjust enrichment, claiming streaming providers were unjustly enriched by avoiding payment of franchise fees; additionally, they seek attorneys’ fees.

The trial court denied streaming providers’ motion to dismiss, the mandamus proceeding followed, and the panel granted a stay of proceedings on May 31. To obtain mandamus relief, relators must show the trial court “has clearly abused its discretion and that they have no adequate appellate remedy,” said the opinion. Previously, the Texas Supreme Court said mandamus relief is appropriate when the trial court “abuses its discretion in denying a Rule 91a motion to dismiss,” it said.

Under Rule 91a, a party can move for dismissal on the ground that a cause of action has no basis in law, said the opinion. A cause for action “has no basis in law if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought,” it said.

PURA provides a cause of action for municipalities, but it is limited to disputes about compensation from franchise fees, said the opinion. The statute “makes clear that only holders of a ‘state-issued certificate of franchise authority’ are required to pay franchise fees,” so “we conclude the statute does not provide municipalities with an express cause of action against non-franchise holders,” it said. The municipalities have not alleged the streaming providers are franchise holders and don’t dispute they are non-franchise holders, it said.

The opinion cited a similar case in the district court, City of New Boston v. Netflix, Inc., in which the court granted Netflix and Hulu’s motions to dismiss for failure to state a claim. There was no dispute that neither Hulu nor Netflix was a holder of a state-issued certificate of franchise authority and therefore “not entitled to franchise fees from them,” the opinion said.

Other courts addressing “holder” language in parallel state statutes “have similarly held that municipalities have no express cause of action to sue 'non-holders’ such as relators, said the opinion, citing City of E. St. Louis v. Netflix, which held that “statutory scheme did not permit municipalities to sue non-franchise holders.” The 5th Circuit also concludes “PURA contains no clearly implied cause of action for municipalities to sue non-franchise holders,” it said.

The municipalities insist that a right of action can be implied because PURA was intended to benefit them by establishing a franchise fee, but the supreme court “has outright rejected a ‘rule of necessary implication,’ said the opinion. Under that rule, when a legislative enforcement scheme fails to protect intended beneficiaries, courts must imply a private cause of action to effect the statutory purposes, said the opinion. Because the supreme court “has repudiated this rule, it is not sufficient here that the municipalities are an intended beneficiary of the statute,” it said.

The trial court “abused its discretion by denying the Rule 91a motion,” said the opinion that Justice Bill Pederson (D) wrote. The 5th Court of Appeals justices “conditionally issue a writ of mandamus compelling the trial to vacate its denial order and grant the Rule 91a motion to dismiss,” it said.