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  • Writer's pictureDerek K. Heyman, PhD, JD, CPA - Attorney

Latest Programming on Hulu and Netflix: Legal Drama over Video Service Provider Fees

Latest Programming on Hulu and Netflix:  Legal Drama over Video Service Provider Fees

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In the latest instance of a courtroom drama playing in courts across the United States, the Ohio Supreme Court heard oral arguments in relation to City of Maple Heights, Ohio v. Netflix, Inc. and Hulu, LLC. The city’s complaint was filed in the U.S. District Court for the Northern District of Ohio, but that federal court certified two questions to the Ohio Supreme Court:

  1. Whether Netflix and Hulu are video service providers under Ohio law.

  2. Whether Maple Heights can sue Netflix and Hulu to enforce Ohio’s video service provider provisions.

As argued by the attorney for Hulu, the answer to the second question, regarding standing, is largely dependent on the first, because Revised Code (“R.C.”) 1332.33 gives municipalities the right to annually audit video service providers and to bring an action against video service providers whom such audit has determined have underpaid their franchise fees. But for this provision to apply, defendants Netflix and Hulu must be properly classified as “video service providers.”

This brings us to the action-adventure portion of the program: if the defendants are found to be video service providers, then municipalities such as Maple Heights may impose a video service provider fee, as provided in R.C. 1332.32, and may bring legal actions such as this one if the provider doesn’t pay.

But what is a “video service provider” and why would, or wouldn’t, a company such as Hulu or Netflix be one?

The program turns out to be a mystery as well. As is often the case in the law, the term is defined by reference to other provisions. As defined in R.C. 1332.21, “video service provider” means a person granted a video service authorization under a set of related provisions called the Video Service Authorization Law. Although this act, dating from 2007, updated the law governing cable television operations to include other technologies such as fiber optic networks, it predated contemporary streaming services. In an effort to encourage investment in infrastructure, the granting of a video service authorization gives the authorized provider the right to provide video service in its video service area, but also to “construct and operate a video service network in, along, across, or on public rights-of-way for the provision of video service.” R.C. 1332.24(A)(1). Ohio’s Director of Commerce is charged with issuing these authorizations.

The Ohio attorney general, siding with the defendants, argued that the physical infrastructure – installing a physical network in public rights-of-way – was the crucial point. As expressed in court, “the core principle that animates the video service authorization law” is “delivery of video programming through wires and cables.” The authorization law applies to “those entities that are physically intruding in Maple Heights’ public rights of way, those who are digging up their roads.” In this view, the payment relates to the intrusion into municipal rights-of-way to place the infrastructure they will use to deliver video services. Since present-day streamers are “agnostic” as to the form of delivery of their service, the law does not apply to them. Without authorization, they do not meet the definition of “video service provider,” and cannot be assessed the video service provider fee.

On the other side, the attorney for Maple Heights argued that the law was meant to keep up with the changing technological landscape. The city’s position relied heavily on the definition of “video service,” defined, in part, as “the provision of video programming over wires or cables located at least in part in public rights-of-way, regardless of the technology used to deliver that programming, including internet protocol technology or other technology.” “Video programming,” in turn, is defined by reference to the federal “Cable Communications Policy Act of 1984.” That Act defines the term as “programming provided by, or generally considered comparable to programming provided by a television broadcast station.” 47 U.S.C. 522(20).

This definition, used by Maple Heights to show that streaming services Netflix and Hulu are providing video services, also led into the comedy portion of the program. Multiple justices asked the attorney to distinguish streaming content providers such as the defendants from other streaming services, including the Ohio Channel, which was streaming the court’s oral arguments even as they took place, and maintains their availability for free viewing. The attorney was at pains to explain why such services were not comparable to broadcast programming, revealing the vaguely defined borders of the federal definition incorporated in Ohio law. Were the Supreme Court’s broadcasts too short to qualify? Were they insufficiently entertaining? Hulu’s attorney expressed his own opinion that they were at least as entertaining as the programming on C-SPAN, receiving a “thank you” from one of the justices.

In our obligatory nod to the documentary genre, it should be noted that this same issue has been brought to court by cities in more than a dozen states, each state with its own statutory framework. The “cutting the cord” phenomenon of viewers leaving cable for streaming services has left cities lacking revenue from fees based on a percentage of the cable companies’ revenue. It is understandable that such cities would seek to recover that revenue. But as some of the Ohio justices asked in their questioning of Maple Heights, isn’t it up to the state legislature to update the law, if the law as written doesn’t apply to new technologies?

Returning to our courtroom drama, the justices, from both sides of the political divide, appeared skeptical of Maple Heights’ position, with their toughest questions going to the city’s attorney. He did have answers and, as is standard practice, the decision will not be issued for some time. Not surprisingly, we are left with a cliff-hanger ending. Stay tuned.

If you have any questions about municipal fees or any other tax matters, please contact Derek Heyman or any of our other professionals.

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