Skeptical Tennessee Supreme Court hears Knoxville streaming case

The city of Knoxville faced a skeptical Tennessee Supreme Court in its bid to use the judicial system to try to force video streaming providers Netflix and Hulu to pony up cable television franchise fees.

"Why did it take so long?" Justice Holly Kirby asked attorney Justin Hawal on why the city waited more than a decade to sue the firms. "Suddenly, municipalities are waking up and going, 'Wait a minute, Netflix and Hulu, all these streaming services, are killing [cable],' but this [cable television franchise] statute's been [on the books] since 2008.

"Knoxville is just now waking up?" Kirby pressed. "It's been a long time since [Netflix and Hulu] came into existence."

The city is asking the state's high court to declare that video streaming services, which rely on the internet, are equivalent to cable television providers, which rely on infrastructure on public rights-of-way.

It's a first-of-its-kind lawsuit in Tennessee but is one of many being filed and litigated across the nation by state and local governments seeking to force Netflix and Hulu to pay franchise fees.

The sides made their arguments before the state's high court Tuesday.

The growing popularity of video streaming versus traditional cable television – dubbed "cord cutting" in pop culture vernacular – is driving these legal battles as local governments face the loss of revenue from cable franchise fees if the trend continues.

Pushed by Kirby on Tuesday, Hawal conceded money as a motive and cord cutting as a cause for the city's decision to sue.

"It's only recently the programming [Netflix and Hulu have] to offer has reached a quality of programming where they are now directly competing with digital cable companies," Hawal told Kirby. "[Netflix and Hulu] are the ones competing with [cable] They are the ones who are taking revenue from the municipalities in Tennessee."

Chief Justice Roger Page replied, "Isn't that a great argument to take to the legislature and have them amend [the state's franchise fee law]?"

Justice Sarah Campbell added, "I'm having a hard time understanding how your interpretation of [the state franchise law] does not lead to an absurd result, where you've got an entity that does not own or operate any wireless facilities [on public rights-of-way] having to obtain a franchise."

Pandora's box

Local governments in Tennessee began complaining of lost revenue from cord cutting as early as 2016. The Tennessee Advisory Commission on Governmental Relations studied the issue but in 2019 declined to recommend the state legislature make changes to the state's cable franchise fee system to include video streaming services.

The city of Knoxville filed suit a year later. The municipality purports in its lawsuit to represent the interests of 430 municipalities in Tennessee. If the city's litigation is successful, it could impact both the pricing and availability of streaming services in the state.

The key issue in the city's federal lawsuit is whether state law would allow municipalities to recoup franchise fees from video streaming services without legislative approval or action.

The Tennessee Supreme Court has never addressed that legal question, so U.S. District Judge Clifton Corker put the city's federal litigation on hold and asked the high court to render a decision first.

At Tuesday's hearing, Netflix attorney Gregory Garre argued the high court would be opening Pandora's box if justices rule that online video streaming is equivalent to cable television under Tennessee's franchise fee law.

"That would include a high school that streams its football games over the internet or a church that streams its services over the internet or this court itself, which is streaming these arguments over the internet," Garre said.

Hulu attorney Victor Jih added, "No one has ever suggested the [Tennessee franchise fee law] should be applied to us simply because we provide speech, expression, content over the [internet]."

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Franchise fees, Jih argued, are specifically designed to pay state and local governments for the right to use public rights-of-way for the construction or operation of infrastructure and not for the right to broadcast or stream content.

"If you dig or occupy the public rights-of-way, you must pay," Garre said.

Losing battle?

But Hawal argued Hulu and Netflix make use of that cable television infrastructure to provide their content to subscribers and, therefore, should pay fees, too.

"[Hulu and Netflix] provide their programming through the wireline facilities [located] in the public rights-of-way," Hawal said.

The town of Creve Coeur, Missouri, was the first in the nation to turn to the courts to try to force Netflix and Hulu to pay cable franchise fees, filing suit in 2018.

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An attorney for Hulu argued that franchise fees have been limited to cable companies as the fees are designed to pay governments for the right to use public rights-of-way for construction or operation of infrastructure, not for content.

It's not clear why the two firms – ranked first and fifth, respectively, in the number of paid streaming service subscribers in the U.S. – are being targeted while others, such as Amazon Prime, are not.

The Knoxville litigation is a carbon copy of the Missouri case and lawsuits filed in a dozen other states, including Ohio, Kansas, Texas, Illinois and California.

"Would you agree the majority of courts have ruled in favor of [Netflix and Hulu]?" Page asked Hawal.

Hawal acknowledged the defeats but pressed his case anyway, arguing there are some differences between Tennessee's law and those at play in other states.

"Significant differences?" Justice Jeff Bivins asked.

Hawal answered, "We believe the plain language of [Tennessee's law] is clear."

It could be months before the justices issue a ruling. If the high court sides with the city, the federal class-action lawsuit can then move forward. If the high court sides with Netflix and Hulu, the city's federal lawsuit is likely doomed.