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Panel hears Arkansas city’s demand for 5% of revenue from streaming services

The Eighth Circuit heard oral arguments in a case brought by the city of Ashdown, Arkansas, which interprets a state law to treat video streaming services like cable providers.

(CN) — Do video streaming services such as Netflix and Hulu have to pay municipalities in Arkansas a franchise fee for beaming their signals along fiber optic cables placed in public rights of way? The small city of Ashdown near the Texas and Oklahoma borders believes so, according to its interpretation of the state’s 2013 Video Service Act.

In a class action complaint filed against the two streaming platforms in late 2020, Ashdown claims that because the defendants are defined as “video service providers” under the statute — just like cable TV providers — they owe the city 5% of gross quarterly revenue derived from the community.

The law requires providers to file an application with the secretary of state for a “certificate of franchise authority,” unless providers negotiate alternative franchise agreements with local political subdivisions. Providers who possess a certificate may install or construct video facilities – namely cables – in public rights of way, provided they pay a fee of not more than 5% of their gross revenue to local municipalities. 

The statute does not distinguish between providers who install infrastructure themselves and those that use existing infrastructure, but the defendants didn’t comply regardless, according to the complaint. 

“Defendants have failed to comply with the Arkansas Video Service Act, because they have failed to pay plaintiff and the other class members the required franchise fee of 5% of gross revenues,” the lawsuit said. “Defendants cannot escape liability by arguing that they simply were not SICFA holders; they were required to apply for and obtain a SICFA, then pay the franchise fee of 5% of gross revenues derived from providing video service in Ashdown in the manner in which they did.”

But crucially, according to an order granting the defendants’ motion to dismiss in September 2021, the state law “specifically exempts from the statutory scheme video programming . . . [p]rovided as part of and via a service that enables end users to access content, information, electronic mail, or other services offered over the public internet.”

The city argued the exemption should not apply because video streaming represents the entirety of Netflix and Hulu's "service," and because the service is only accessible to subscribers, it is not offered over the “public” internet.

But Chief U.S. District Judge Susan O. Hickey, a Barack Obama appointee, determined “this interpretation reads too much into the statute."

“A plain and sensible reading of the statute reveals that the exclusion applies to any video programming provided as part of a service,” Hickey wrote. “Video programming is a part of a service that both defendants provide, regardless of whether defendants provide multiple services or just one service.”

Similarly, Hickey accepted an analogy by Hulu that their subscription-based service, offered over public internet, is no different than driving a private vehicle on a public road. 

“Whether a driver locks the car doors while driving does not affect whether the road taken is a public road," the judge wrote.

Ashdown appealed the ruling and met the streaming giants again in St. Louis on Tuesday for oral arguments before the Eighth Circuit Court of Appeals. 

Representing the city, attorney Justin J. Hawal said the district court erred with respect to standing and in its so-called plain language reading of the public internet exception. Hawal said the city has a right under the Video Service Act to clarify its rights and obligations with video service providers, including conducting financial audits and inspections.

With respect to a suggestion from Netflix and Hulu that the remedy was the exclusive jurisdiction of the Arkansas Public Service Commission, Hawal said under that construct, municipalities would have no remedy at all.

“What would happen is it would incentivize video service providers to simply not comply with the act because there is no penalty for past noncompliance,” he told the three-judge panel.

According to Hawal, the law specifically targets streaming services and not internet service providers because the latter, which typically installs and maintains internet infrastructure, do not create or benefit from the sale of the video content Netflix and Hulu provide. 

“Netflix and Hulu do not provide access to email as a part of their service, they don’t provide access to information or other services other than video programming … it’s the entirety of their service,” he said.

The judges inquired whether other services provided by Netflix — show production and film curation, title suggestions, marketing emails — make the company more than a simple video service provider. Hawal said they “directly compete” with traditional television providers, including broadcast networks. 

On behalf of Netflix, attorney Gregory G. Garre said Ashdown's interpretation of the law would result in “arming hundreds of municipalities across the state with ad hoc enforcement” powers, “directly disrupting the legislature’s intent.” As written, the law ensures uniform enforcement by the Public Service Commission, and municipalities retain the right to audit those providers whose facilities are in the public right of way. Both Garre and Victor Jih, representing Hulu, argued their clients possess no facilities in the right of way

“The notion that the city of Ashdown is trying to completely upend the franchising system in the state of Arkansas is a bit of a hyperbole,” Hawal said in rebuttal.

He added, “Ashdown is not attempting to create a system where every single municipality has a right to bring their own action against providers, rather, require a declaration to require Netflix and Hulu to receive authorization from the secretary of state … so they have to pay required fees and give cities the right to audit and take other actions the statute gives them to ensure they are receiving those fees.”

The argument was heard by U.S. Circuit Judges Steven M. Colloton, Roger L. Wollman and David R. Stras, appointed by George W. Bush, Ronald Reagan and Donald Trump, respectively.

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