City of Knoxville v. Netflix, Inc., M2021-01107-SC-R23-CV

CourtSupreme Court of Tennessee
Writing for the CourtSARAH K. CAMPBELL, JUSTICE
PartiesCITY OF KNOXVILLE, TENNESSEE v. NETFLIX, INC. et al.
Docket NumberM2021-01107-SC-R23-CV
Decision Date22 November 2022

CITY OF KNOXVILLE, TENNESSEE
v.

NETFLIX, INC. et al.

No. M2021-01107-SC-R23-CV

Supreme Court of Tennessee, Nashville

November 22, 2022


Session May 3, 2022

Certified Question of Law from the United States District Court for the Eastern District of Tennessee No. 3-20-CV-00544-DCLC-DCP Clifton L. Corker, Judge

This is a case about fitting new technology into a not-so-new statutory scheme. Exercising our power to answer questions certified to us by federal courts, we consider whether two video streaming services-Netflix, Inc. and Hulu, LLC-provide "video service" within the meaning of a Tennessee law that requires such providers to obtain a franchise and pay franchise fees to localities. Netflix and Hulu say they do not provide "video service" and therefore do not owe franchise fees; the City of Knoxville says they do. We agree with Netflix and Hulu.

Tenn. Sup. Ct. R. 23 Certified Question of Law

Victor Jih, Los Angeles, California, and John L. Farringer and Hunter Branstetter, Nashville, Tennessee, for the petitioner, Hulu, LLC.

Mary Rose Alexander and Robert C. Collins III, Chicago, Illinois, Jean A. Pawlow and Gregory G. Garre, Washington, D.C., and W. Tyler Chastain, Knoxville, Tennessee, for the petitioner, Netflix, Inc.

James Gerard Stranch, IV and Benjamin A. Gastel, Nashville, Tennessee, Austin Tighe, Michael Angelovich, and Chad E. Ihrig, Austin, Texas, and Justin J. Hawal, Mentor, Ohio, for the respondent, City of Knoxville, Tennessee.

John Bergmayer, Washington, D.C., and Buck Lewis and Charles C. McLaurin, Nashville, Tennessee, for the amicus curiae, Public Knowledge.

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Buck Lewis and Charles C. McLaurin, Nashville, Tennessee, and Pantelis Michalopoulos, Matthew R. Friedman, and Jared R. Butcher, Washington, D.C., for the amici curiae, DISH Network Corp. and DISH Network L.L.C.

Mandy Strickland Floyd, Nashville, Tennessee, and Adam H. Charnes, Dallas, Texas, for the amicus curiae, DIRECTV, LLC.

SARAH K. CAMPBELL, J., delivered the opinion of the court, in which ROGER A. PAGE, C.J., and SHARON G. LEE, JEFFREY S. BIVINS, and HOLLY KIRBY, JJ., joined.

OPINION

SARAH K. CAMPBELL, JUSTICE

I.

In the cable industry, a "franchise" is authorization from a government entity to construct or operate a cable system in the public rights-of-way. See 47 U.S.C. § 522(9)(10). Federal law allows state and local governments to issue franchises within their jurisdictions. See id. § 541(a); see also id. § 521(3). This allocation of authority reflects the principal justification for cable franchising-localities' "need to regulate and receive compensation for the use of public rights-of-way." In re Implementation of Section 621(a)(1) of the Cable Communications Policy Act of 1984 as amended by the Cable Television Consumer Protection and Competition Act of 1992, 22 FCC Rcd. 5101, 5135 (Mar. 5, 2007) (hereinafter FCC Order). Before reforming its franchise system in 2008, Tennessee, like many States, allowed counties and municipalities to exercise this authority by granting franchises at the local level. Tenn. Code Ann. § 7-59-102 (2005) (amended 2008). And traditional cable companies, which provide cable television through cable facilities-e.g., equipment such as transmission lines-located in the public rights-of-way, were the primary franchise recipients. FCC Order, 22 FCC Rcd. at 5103, 5135; see also U.S. Dep't of Justice, Voice, Video and Broadband: The Changing Competitive Landscape and Its Impact on Consumers 5, 9, A-2 (Nov. 2008), https://perma.cc/4JWA-65NF (hereinafter DOJ Report).

The entry of new competitors into the cable market led to changes in the local character of franchising, but not its facilities-based nature. In the mid-2000s, telephone companies like AT&T and Verizon began upgrading their existing networks to allow bundling of video, internet, and telephone services. FCC Order, 22 FCC Rcd. at 5103; DOJ Report, supra, at 6-9; see also Robert W. Crandall et al., Does Video Delivered over a Telephone Network Require a Cable Franchise?, 59 Fed. Comm. L.J. 251, 253 (2007). Many of these new entrants already had access to public rights-of-way but sought cable franchises to upgrade old facilities and build new ones. FCC Order, 22 FCC Rcd. at 5103, 5108, 5112. That process was cumbersome, because they often needed to obtain franchises from as many as thousands of localities. Id. at 5108-09, 5112 &n.72, 5120; see also Crandall et al., supra, at 253-54.

In response, several States passed legislation to streamline the franchising process. FCC Order, 22 FCC Rcd. at 5109. Tennessee was among them. In 2008, the Tennessee

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General Assembly enacted the Competitive Cable and Video Services Act (the "Act"). Act of May 15, 2008, ch. 932, 2008 Tenn. Pub. Acts 479, 480-525 (codified at Tenn. Code Ann. §§ 7-59-301 to -318 (2015 &Supp. 2022)). While the Act preserved the option of negotiating franchise agreements with individual localities, it offered cable and video service providers the alternative of obtaining a state-issued certificate of franchise authority that would apply in multiple jurisdictions across the State. Tenn. Code Ann. § 7-59-304(a)(2).

The Act has two essential features that are relevant here. First, the Act requires "[a]ny entity . . . seeking to provide cable or video service over a cable system or video service network facility" to obtain a franchise. Id. § 7-59-304(a)(1); see also id. § 7-59-305(a) (requiring "a cable or video service provider [to] file an application [for a state-issued franchise] with the [Tennessee Public Utility Commission]"). A "franchise" "authoriz[es]" a cable or video service provider "to construct and operate a cable or video service provider's facility within the public rights-of-way used to provide cable or video service." Id. § 7-59-303(8) (incorporating definition from 47 U.S.C. § 522(9)); see also id. § 7-59-305(e). The Act defines the term "video service" to mean "the provision of video programming through wireline facilities located, at least in part, in the public rights-of-way without regard to delivery technology, including Internet protocol technology or any other technology." Id. § 7-59-303(19); see also id. § 7-59-303(20) (defining a "video service provider" as "a provider of video service"). The Act, however, excludes from the definition of "video service" "any video programming . . . provided as part of, and via, a service that enables end users to access content, information, electronic mail or other services offered over the public Internet." Id. § 7-59-303(19).

Second, the Act provides that-in exchange for receiving authorization to use a locality's public rights-of-way-the holder of a state-issued franchise must pay a franchise fee. Id. § 7-59-306(a). The fee is based primarily on the holder's gross revenues from providing cable or video service within a specific city or county, id., and the holder pays this fee to the relevant locality, id. § 7-59-306(c)(1). The fee is "intended as a form of compensation for the provider's occupancy of the public rights-of-way" in the city or county, and a locality may not impose any other taxes or fees on providers for that purpose. Id. § 7-59-306(i). The Act thus ties the franchise-fee obligation to physical occupation of public rights-of-way in specific localities-consistent with the principal justification for cable franchising.

Since the Act's passage, facilities-based providers have obtained franchises to build and operate networks in Tennessee's public rights-of-way. See Tennessee Advisory Commission on Intergovernmental Relations, Local Government Revenue in Tennessee and the Evolving Market for Cable Television, Satellite Television, and Streaming Video Services 5-7 (Sept. 2019), https://perma.cc/9AUQ-J3GK (hereinafter TACIR Report). Such providers use these networks to carry television service to their subscribers. Id. at 14. And they remit franchise fees to the localities where they provide service. Id. at 7.

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In the last decade or so, video streaming services, like Petitioners Netflix and Hulu, have surged into competition with these facilities-based providers, attracting increasingly large numbers of subscribers, many of whom have "cut the cable cord." See id. at 1-2, 13. But unlike cable or telephone companies, Netflix and Hulu have not obtained franchises and instead have relied on third-party internet service providers ("ISPs")-including those same cable or phone companies-to transmit their video content to the end-user. See id. In layman's terms, Netflix and Hulu subscribers use an internet-connected device to send a request to view particular content to a Netflix or Hulu server, which then returns a response-the requested content. Both signals typically travel over broadband internet connections via wireline facilities that are located in public rights-of-way and operated by ISPs. Netflix and Hulu do not own or operate those wireline facilities; in Knoxville, as elsewhere, they depend on the facilities of third-party ISPs to connect subscribers to their content. Nor do Netflix and Hulu pay franchise fees to the localities where subscribers stream their content.

The City of Knoxville asserts that Netflix and Hulu ought to pay franchise fees because they use the public rights-of-way to provide video service. Knoxville sued Netflix and Hulu in the United States District Court for the Eastern District of Tennessee, seeking a declaratory judgment to that effect on behalf of a putative class of all Tennessee municipalities and counties in which Netflix or Hulu has subscribers. Knoxville contends that Netflix and Hulu are "video service providers" as defined in the Act. According to Knoxville, Netflix and Hulu were thus required to apply for a franchise and pay franchise fees to Knoxville and violated the Act by failing to do so.

Netflix and Hulu both filed motions to dismiss, arguing among other things that they do not provide...

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