Spotlight shines on Ohio Supreme Court, as Maple Heights wants Netflix, Hulu to pay fees

COLUMBUS, Ohio –A federal class-action lawsuit involving Maple Heights and 2,000 other U.S. communities against Netflix and Hulu took a detour through the Ohio Supreme Court Wednesday, with the Maple Heights officials city asking the state justices to define the streaming giants as “video service providers.”

If the Supreme Court agrees, the streaming services would be subject to the same video service provider fees paid by cable companies. Those fees in Ohio are 5% of the companies’ gross revenues they earn in the city and go directly into city coffers.

The streaming companies argued they are instead “specified digital products” under state law. Therefore, they pay state sales taxes, and Ohio would lose money if the court determines they owe the local franchise fees since they would be exempt from state sales tax under Ohio law.

The Ohio Supreme Court will determine whether Netflix and Hulu are video service providers, among other legal questions, in the coming months. After the Ohio Supreme Court issues an opinion, the case in federal court in Cleveland can resume.

That case involves around 2,000 cities, but U.S. District Judge James Gwin directed the Ohio Supreme Court to answer legal questions first.

2007 law

At the heart of Wednesday’s arguments by both sides is a law the Ohio General Assembly passed in 2007 that gave the Ohio Department of Commerce director sole franchising authority for video service providers.

With that authority, video service providers received the right to install lines through rights-of-way across the state.

Before the 2007 law, video service providers had to negotiate individual agreements with some 2,000 local governments in Ohio to access rights-of-way and lay cable. Each government could charge different fees until the 2007 law set it at 5% of gross revenue in a city.

Wires and cables

Gregory Garre, an attorney representing Netflix, told justices that Netflix and Hulu don’t own, operate or control any cables, and the Ohio Department of Commerce never required the companies to get a video service authorization.

It would be absurd to call Netflix and Hulu video service providers and could have extreme consequences, Garre said.

“It would mean that anyone who streams content over the internet – whether it’s a high school that streams educational programs or athletic events or a church that may stream programs or this court itself, which is streaming this argument live today – would be a video service provider under the act, potentially subject to the franchising fee requirements,” Garre said.

Ohio Attorney General Dave Yost filed a friend-of-court brief supporting Netflix and Hulu, and Ohio Deputy Solicitor General Mathura Sridharan addressed the court.

“The statute is very clear. This is about those who dig. They must pay,” she said. “If they don’t dig, they don’t pay. And I think that is the core principle that animates this entire case.”

Cutting the cord

However, Maple Heights attorney Justin Hawal noted that people are canceling cable services and subscribing to streaming services, which puts more demand on the existing system and requires laying more fiberoptic cable.

“Their content is virtually indistinguishable from broadcast television,” Hawal said. “They’re providing the same shows, the same movies. They’re competing with broadcast television. They produce their own content.”

“How are they competing with broadcast television?” asked Justice Melody Stewart.

“Your Honor, I don’t know if you’re familiar with the cord-cutting phenomenon, but there are differently subscribers or consumers in the state of Ohio and across the country that are ‘cutting the cord,’ moving away from traditional cable providers, and subscribing to one or more streaming services like Netflix and Hulu,” Hawal said.

The result is that cities are losing money fast from franchise fees.

“So what about Roku, Apple, YouTube?” asked Justice Jennifer Brunner, referring to other streaming services. “Did you include those?”

“We did not,” Hawal said.

“Why not?” Brunner asked.

“Roku is a device that facilitates the delivery of content,” he said. “It doesn’t actually have its own content. The same with Apple TV, Your Honor.”

“You pay a subscription to Apple to get particular movies and programming and television shows, just like you do for Hulu and Netflix,” Brunner said.

“We’re not taking the position that Hulu and Netflix are the only video service providers that stream content,” Hawal said.

Brunner and Justice Patrick Fischer each asked at different times whether it would be more prudent for the cities to ask the Ohio General Assembly to clarify in the law that streaming services are video service providers.

Hawal replied that it is already clear in the law, and the court can recognize it.

Hawal also noted that many traditional cable broadcast providers are also joining the streaming trend, such as AT&T, offering customers services over Wifi, and the court needs to consider this too in its decision.

Brunner also asked whether the companies that lay down fiber have agreements with Netflix and Hulu since they create so much demand on the system. Hawal replied that the federal case is not far enough along for “discovery,” or the submission of documents by parties in the case, for Maple Heights to understand any such agreements.