Netflix and Hulu Seek Demurrer in Calif. City’s Service Provider Fee Class Action

Video streaming platform defendants Netflix Inc. and Hulu LLC reiterated dismissal arguments late last week in a case brought by the City of Lancaster, California against them for allegedly failing to pay fees associated with their use of wireline facilities located in public rights-of-way. Netflix’s reply brief contends that the suit, filed in a Los Angeles County state court earlier this year, is flawed for myriad reasons, including for impermissibly restricting free speech.

According to Lancaster’s January-filed complaint, the defendants provide video service in California municipalities using broadband wireline facilities, located at least in part in public rights-of-way. The city further contends that a provision of the California Public Utility Code, the Digital Infrastructure and Video Competition Act of 2006, requires the defendants “to pay each of those cities, counties, cities and counties, or joint powers authorities a video service provider fee of up to 5% percent of their gross revenue” generated in that locale. The city, on behalf of itself and all other uncompensated California municipalities, requested declaratory relief and the unpaid fees in damages.

In this week’s filing, Netflix asserted that the DIVCA does not confer a private right of action because it applies only to state franchise holders, and as the plaintiff purportedly concedes, Netflix does not hold a franchise. In addition, the defendants argue that they are not subject to DIVCA scrutiny because their “use” of rights-of-way are not the type conceived of by the statute, which they contend applies rather to internet service providers.

In its brief, Hulu made similar arguments. asserting that the city’s interpretation of the DIVCA is out of sync with its limiting language and is “inconsistent with the stated legislative purpose.”

The defendants also make constitutional arguments, with Netflix contending that Lancaster’s lawsuit attempts to circumvent the state rule that new taxes may not be imposed without voter consent. Both streaming platforms said that the city’s asserted cause of action violates the First and Fourteenth Amendments of the U.S. Constitution by restricting free speech.

Among other arguments, Netflix contends that even if the DIVCA applies to it, the state law would be preempted “by federal law limits on the ability of local franchise authorities to impose fees on companies like Netflix.” The brief, along with Hulu’s, also states that the city’s attempt to collect franchise fees violates the federal Internet Tax Freedom Act.

The demurrer hearing is scheduled for Aug. 27 before Judge Yvette M. Palazuelos.

The plaintiff and putative class are represented by Andrus Anderson LLP, Nix Patterson LLP, DiCello Levitt Gutzler LLC, and Schneider Wallace Cottrell Konecky LLP.

Hulu is represented by Wilson Sonsini Goodrich & Rosati, and Netflix by Latham & Watkins.

Notably, a similar case was filed by an Illinois city in June alleging that Netflix, Hulu, and a host of other television service providers failed to pay a fee mandated by an analogue state law. In that federal court class action, the defendants must file responsive pleadings by Aug 23.