Skeptical Seventh Circuit questions jurisdiction in class action against Netflix, other streaming giants

(CN) — An attorney for an Illinois town was met by a skeptical Seventh Circuit on Tuesday morning as she sought revive a federal class action against the country’s TV streaming giants.

Judges wasted no time hammering Melissa Sims, who represented the town of East St. Louis, about jurisdiction, kicking off the line of questioning just seconds into a 40-minute hearing.

“You have defendants which are extraordinarily complex entities that have many layers of organization,” said U.S. Circuit Judge Frank Easterbrook, a Ronald Reagan appointee. “And there's one in particular that I'm worried about, which is AT&T Capital Services, which … appears to have its principal place of business in Illinois. And then there's no diversity jurisdiction.”

Sims, of the firm Milberg Coleman Bryson Phillips Grossman in Knoxville, Tenn., said that appeared to be correct.

“Then why are we here?” Easterbrook replied. “If you believe that, indeed, you have sued somebody from Illinois, then there is no diversity jurisdiction, and your ethical obligation is to dismiss this suit.”

At issue is a 2021 lawsuit filed by East St. Louis in the U.S. District Court for Southern Illinois against Netflix, Disney Platform Distribution, Apple, Hulu, WarnerMedia Direct, Amazon.com Services, CBS Interactive, YouTube, CuriosityStream, Peacock TV, DirecTV and DISH Network.

East St. Louis claimed the defendants violated Illinois’ Cable and Video Competition Law by providing video service to Illinois residents through the public rights of ways without first getting authorization from the Illinois Commerce Commission and without paying the required fees to municipalities.

The three-judge panel also questioned Gregory G. Garre, of the Washington-based L Latham & Watkins, who represented the streaming companies on jurisdiction, specifically on whether AT&T Capital Services is based in Illinois or Texas.

“We would love the opportunity to provide a supplemental brief on this,” Garre said.

The panel made clear that it would need supplemental briefs from both sides regarding jurisdiction.

East St. Louis claims the defendants, instead of complying with the state law, entered into confidential interconnection agreements with authorized holders to circumvent the nature and purpose of the statute, all to avoid paying cities a 5% fee.

U.S. District Judge Mark A. Beatty tossed the lawsuit on Sept. 23, 2022, granting the defendants’ motions to dismiss for failure to state a claim.

Beatty found neither East St. Louis nor the state of Illinois had the right to seek statutory compensation against a non-holder under the Cable and Video Competition Law. He also dismissed East St. Louis’ common law counts of trespass and unjust enrichment and the city’s ordinance count for the unlawful resale of cable communication.

“To avoid compensating municipalities for the use of their infrastructure, the streaming companies have leveraged private interconnection agreements with cable providers to house their video content on servers located within the [local internet service providers],” Sims argued Tuesday.

The panel pressed Sims on language in the statute requiring cable or video providers maintain a customer service facility staffed with customer representatives within the boundaries of a local holding unit, noting Illinois has 2,000 different municipalities.

“As you read the statute, then every one of them has to open up a separate customer service facility, a brick-and-mortar facility, in every one of those municipalities they serve," U.S. Circuit Judge David Hamilton, a Barack Obama appointee, pointed out. "Doesn’t that strike you as an odd result?”

“When they have equipment in the rights of ways, such as servers, then they should be responsible and have somebody local to talk if something were to happen to that equipment,” Sims answered. “They should have a local person to address those issues with the city.”

Garre said the servers Sims mentioned are not physically connected to any hardware within city boundaries.

“All the streaming defendants are doing is making content available for individuals to access through their own devices, and through their own [internet service providers] over the internet,” Garre said. “This has nothing to do with the defendants actually constructing, installing, or maintaining anything on wire lines in the public rights of way, which is the prerequisite for imposing this franchise fee on anyone.”

Garre cited precedent in similar claims.

“Courts across the country, while they're not binding on this court, have reached the same conclusion in almost identical circumstances,” Garre told the court. “And there's no reason for this court to break from that pack and find any implied basis for the city to maintain this action under the Illinois statute.”

Judge Doris Pryor, a Joseph Biden appointee, rounded out the panel, which took the case under advisement.

The rise of streaming television options has followed the “cord cutting” trend by viewers seeking cheaper alternatives, and traditional cable companies have struggled to keep popular stations on the air, leaving viewers in the dark during contract disputes.

Spectrum on Monday announced a deal with Disney after its 15 million customers lost access to popular sports television stations such as ESPN just as football season began. DirecTV customers have been without access to Fox and other stations since July due to an ongoing contract dispute.

East St. Louis claims “cord cutting” has caused substantial losses to local and state governments.

“Indeed this ‘cord cutting’ is expected to strip nearly $33.6 billion in annual revenue from traditional U.S. cable television services in the five-year outlook,” the city stated in its brief.

East St. Louis, located directly across the Mississippi River from St. Louis, has a population of 18,195, according to city-data.com. The town’s population, which has dropped 42% since 2002, is 86.2% Black and its median household income in 2021 was $27,874, almost $45,000 below Illinois’ average.

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