Indiana Cities Prevail on Threshold Issue in Franchise Fee Appeal Against Netflix, Hulu, and Others

On Wednesday, a panel of Seventh Circuit judges sided with the City of Fishers, Indiana in its case against four streaming platforms for their alleged failure to pay franchise fees to local governments. The court ruled that under Supreme Court precedent, comity applies to the dispute and the trial court did not abuse its discretion by remanding the case to state court.  

The cities filed suit in August 2020 seeking a declaration that defendants Netflix, Disney, Hulu, DIRECTV, and DISH Network, as offerors of “video service,” owe them past and future fees. The plaintiffs assert that Indiana law applies to the defendants and mandates that they enter into franchise agreements with the Indiana Utility Regulatory Commission in exchange for use of a public right-of-way. The defendants removed to federal court on the bases of both traditional diversity jurisdiction and under the Class Action Fairness Act of 2005.

The cities sought remand to state court, contending that under the 2010 case Levin v. Commerce Energy Inc. and its progeny, “federal courts have long declined to exercise jurisdiction over cases involving local revenue collection and taxation.” The trial court agreed and returned the case to state court. The defendants appealed.

In this week’s opinion, the panel concluded that the doctrine both applies and was analyzed correctly. At the outset of its discussion, the court explained that the comity doctrine reflects respect for state functions and “‘a continuance of the belief that the National Government will fare best if the States and their institutions are left free to perform their separate functions in separate ways.’”

In this instance, the panel held that the lower court correctly concluded that the Levin factors weighed in favor of abstention. One factor considered whether the defendants seek federal aid to improve their competitive position, in this case over traditional cable providers who pay the fees. In another part of its analysis, the court agreed that “Indiana courts are well positioned to interpret (for the first time) the state’s Video Service Franchises Act and, in turn, to resolve any federal defenses raised by the streaming platforms along the way.”

The opinion culminated by noting that “[t]he Supreme Court is sure to say more about the limits of comity abstention in years to come.” With regard to Wednesday’s decision however, the panel was satisfied that the district court did not abuse its discretion by granting the cities’ motion for remand.

The plaintiffs are represented by Korein Tillery LLC and Hoover Hull Turner LLP.

The defendants are represented by Kilpatrick Townsend & Stockton LLP, Wilson Sonsini Goodrich & Rosati, Latham & Watkins, Steptoe & Johnson LLP, Plews Shadley Racher & Braun LLP, and Delk Mcnally LLP.

The case is one of several leveled against streaming platforms for their alleged failure to pay local government fees as set forth by various states’ laws. Plaintiffs are proceeding in Illinois, and in California state court, defendants Netflix and Hulu recently sought dismissal of the claims.