State Video Franchising Laws and the Legal Actions Taking Place in New Jersey
by Dave Garb, Legislative Committee Chair
Last month we talked about legal action that has begun here in New Jersey against over-the-top service providers and their franchise fee obligations.
The following is from the law firm Kessler, Topaz, Meltzer & Check, LLP, who are leading this action. It is a brief summary of the factual allegations and procedural history of Borough of Longport and Township of Irvington v. Netflix, Inc. and Hulu, LLC, No. 2:21-cv-15303-SRC-MAH (D.N.J.) (the “Netflix/Hulu Litigation”).
*On August 13, 2021, Plaintiffs Borough of Longport and Township of Irvington (“Plaintiffs”) filed a class action complaint in the District of New Jersey, individually and on behalf of all other similarly situated municipalities against Defendants Netflix, Inc. and Hulu, LLC (“Defendants”) alleging violations of New Jersey’s Cable Television Act, N.J. Rev. Stat. § 48:5A-1, et seq. (the “CTA”). As set forth in the Complaint, Defendants have been providing online streaming services, using wireline facilities (i.e. broadband wireline facilities) located at least in part in the public rights-of-way, without paying Plaintiffs and other New Jersey municipalities franchise fees required under the CTA. The CTA requires entities, like Defendants, that provide “video programming” and “cable television service” to pay franchise fees to municipalities in exchange for their use of the public rights-of-way. Because Netflix and Hulu qualify as providers of “video programming” and “cable television service,” they are obligated under the CTA to pay Plaintiffs, and other New Jersey municipalities, franchise fees equivalent to a percentage of their gross revenue. Plaintiffs have sued Defendants to recover these fees on behalf of themselves and the putative Class.
By way of background, to fall under CTA’s franchise fee requirement, an entity must provide a “cable service over a cable system” and, either directly or through an affiliate, own a significant interest in that “cable system.” N.J.S.A § 48:5A-3(g). An entity can also be covered by the CTA if, “through any arrangement,” it controls or has responsibility for the management and operation of a “cable system.” Id. Plaintiffs have alleged that Netflix falls under the CTA because, inter alia, it (1) provides video programming comparable to traditional programming and thus provides cable services and (2) owns a significant interest in its billion-dollar infrastructure program which it controls and operates through contractual arrangements with local Internet Service Providers (“ISPs”). As for Hulu, it falls under the CTA because, inter alia, it (1) provides cable services through live broadcasts similar to traditional cable services and (2) owns a significant interest in a cable system through its affiliation with ISPs and, in addition, its ownership by Comcast. Plaintiffs allege that despite being covered by the CTA, Netflix and Hulu have failed to pay the required franchise fees.
On October 29, 2021, nearly two months after Plaintiffs filed their complaint, Netflix and Hulu filed Motions to Dismiss. In their Motions to Dismiss, Defendants asserted that Netflix and Hulu do not fall under the CTA, Plaintiffs do not have a right to enforce the franchise fee requirements of the CTA, and that the statute’s provisions do not apply to streaming services. Thereafter, on December 23, 2021, Plaintiffs opposed Defendants’ Motions to Dismiss, disputing Netflix and Hulu’s assertions. For example, Plaintiffs pointed to provisions in the N.J. Constitution as well as the CTA’s legislative history, which showed that Plaintiffs have a right to enforce the statute’s franchise fee requirements. Moreover, Plaintiffs highlighted the numerous ways in which the CTA applies to Netflix and Hulu’s streaming services.
Following Plaintiffs’ Opposition, Defendants filed reply briefs on January 26, 2022. The Motions to Dismiss are fully briefed and pending. While the Motions to Dismiss are pending, the parties continue to negotiate the protective order and ESI protocol and Plaintiffs plan to serve an initial round of discovery. (ESI-Electronically Stored Information) Should this action win in court, it could potentially mean more income via franchise fees and therefore more support for our PEG channels. While this is going on in New Jersey, other states like Connecticut are actually attempting to pass a bill that would require OTT providers to pay a yearly fee per subscriber. The bill is SB278 and it has come out of their Energy and Technology Committee. We are currently waiting on the next steps as to where this bill is heading.