Legal Update

LEGAL UPDATE

By: Regina Koho

Attorney, Tennessee Valley Authority Office of the General Counsel

A PROBLEM FOR THE GENERAL ASSEMBLY TO SOLVE—

TENNESSEE SUPREME COURT RULES THAT NETFLIX AND HULU ARE NOT “VIDEO SERVICE PROVIDERS” SUBJECT TO FRANCHISE FEES UNDER THE COMPETITIVE CABLE AND VIDEO SERVICES ACT

Background

It’s difficult to have a conversation these days without being asked whether you’ve seen the latest series, documentary, or film that has been released on Netflix, Hulu, or a similar streaming service. Yet given their recent vintage, streaming services don’t fit comfortably within existing regulatory schemes for content providers, which often generate fees for the localities they serve. In contrast, traditional cable and internet providers must often obtain authorization to operate in a particular locality and then pay relevant fees to do so. For example, cable and internet companies serving the Knoxville area must obtain a franchise pursuant to the Tennessee Competitive Cable and Services Act (“the Act”),1 which was enacted in 2008. They must then pay a franchise fee based largely on gross revenues,2 which is “intended as a form of compensation for the provider’s occupancy of the public rights-of-way.”3 As more and more subscribers switch from traditional cable to streaming services, local governments have naturally looked for ways to obtain revenue from these emerging content providers.

The City of Knoxville (“the City”) made such an attempt by filing suit in the U.S. District Court for the Eastern District of Tennessee “on behalf of a putative class of all Tennessee municipalities and counties in which Netflix or Hulu has subscribers,” arguing that these streaming services should be classified as “video service providers” under the Act and thus be subject to local franchise fees.4 Netflix and Hulu moved to dismiss, arguing, in pertinent part, that they did not provide “video services” under the Act.5 Because the outcome of these motions turned on an unanswered question of state law, the district court certified the question to the Tennessee Supreme Court,6 which accepted it.7

Despite their ubiquity, modern streaming services are not “video service providers” covered by the Act

Under the Act, an entity provides “video service” if it engages in the “provision of video programming through wireline facilities located, at least in part, in the public rights-of-way.”8 Although the parties did not dispute that the content provided by Netflix and Hulu “travels over wireline facilities located in the public rights-of-way,” they did dispute whether these streaming services’ “use of wireline facilities owned and operated by third-party [internet service providers] counts as the ‘provision of video programming through wireline facilities’” under the Act.9

Finding that this definition did not answer the question in isolation, the Court looked to the broader statutory scheme for guidance. It found that several of the Act’s provisions “link[ed] franchise holding with construction or operation of facilities in the public rights-of-way.”10 For example, the Act defined “franchise” as “‘authorization to construct and operate a cable or video service provider’s facility within the public rights-of-way used to provide cable or video service.’”11 Additionally, the certificate obtained under a franchise authorized a provider “to construct, maintain and operate facilities through . . . any public rights-of-way.”12 And the franchise fee paid by a video service provider was meant to be “compensation for its facilities’ presence in a particular locality’s public rights-of-way.”13 Thus, given the Act’s focus “on granting video service providers permission to physically occupy the public rights-of-way and ensuring that those providers adequately compensate localities for that privilege,” the Court concluded that it made “little sense to interpret it to apply to entities like Netflix and Hulu that do not construct or operate the wireline facilities that are used to transmit their content.”14

The City persuasively countered that, as a matter of policy, Netflix and Hulu should be subject to the Act’s franchise requirements—due to these streaming services’ popularity, third-party internet service providers had been forced “to build additional capacity in public rightsof-way,” and the City contended that these entities “ought to compensate municipalities for benefitting from these improvements.”15 But the Court also rejected this argument, concluding that it was “not well situated to weigh competing policy arguments involving rapidly changing technologies in a complex economic sector subject to substantial federal and state regulation.”16 Because Netflix and Hulu did “not construct or operate the facilities through which their content passes,” instead relying on third-party internet service providers “to transmit it to the end-user,” they were not providing “video service” as contemplated by the text of the Act.17 As a result of this ruling, the ball is in the Tennessee General Assembly’s court. And until it intervenes, streaming services, like Netflix and Hulu, will continue to benefit from the regulatory gap that has resulted from technology outgrowing arguably applicable legislation.

1 Tenn. Code Ann. § 7-59-306(a). 2 Id. 3 Tenn. Code Ann. § 7-59-306(i). 4 City of Knoxville v. Netflix, Inc., No. M202101107SCR23CV, 2022 WL 17099921, at *2 (Tenn. Nov. 22, 2022) [hereinafter City of Knoxville v. Netflix]. 5 Id. 6 Tennessee Supreme Court Rule 23, § 1, allows the Court, “at its discretion, [to] answer questions of law certified to it by the Supreme Court of the United States, a Court of Appeals of the United States, a District Court of the United States in Tennessee, or a United States Bankruptcy Court in Tennessee.” Certification turns on whether there are questions of state law that “will be determinative of the cause and as to which it appears to the certifying court there is no controlling precedent in the decisions of the Supreme Court of Tennessee.” Id. 7 City of Knoxville v. Netflix, 2022 WL 17099921, at *2. 8 Tenn. Code Ann. § 7-59-303(19). 9 City of Knoxville v. Netflix, 2022 WL 17099921, at *3. 10 Id. at *4. 11 Id. (quoting Tenn. Code Ann. § 7-59-303(8)). 12 Tenn. Code Ann. § 7-59-305(e)(1)–(2). 13 City of Knoxville v. Netflix, 2022 WL 17099921, at *5. 14 Id. 15 Id. at *7. 16 Id. 17 Id.