Netflix and Hulu came out unscathed in another state-level court case after the Ohio Supreme Court ruled this week that the streamers aren't "video service providers" under state law and therefore are exempt from paying the same franchise fees that local, facilities-based cable operators and telcos do.

In a ruling (PDF) handed down November 30, the Ohio court shot down claims lodged by the city of Maple Heights that Netflix and Hulu required authorization from the director of the Ohio Department of Commerce and owed franchise fees (usually 5%) to local governments.

Figure 1: (Source: Ivan Kmit/Alamy Stock Photo)

Maple Heights originally sued Netflix and Hulu in federal court in 2020, claiming they were violating R.C. 1332.21, a part of the Ohio Fair Competition in Cable Operations Act. The Ohio Supreme Court was then tasked to clarify the state's franchising law and review and certify two key questions:

The Ohio Supreme Court's answer was a unanimous "no" in both instances.

On the video service provider side, the court found that "video service" applies to video programming over wires or cables located at least in part of public rights-of-way.

"Because Netflix and Hulu provide online-streaming services over the public Internet, they are not video-service providers," the court explained. "They do not need to place their own wires or equipment in the public rights-of-way to provide their subscribers with their programming, and the equipment used to access their services belongs to their customers, not to them. Therefore, neither Netflix nor Hulu is required to obtain a video-service authorization."

The court also ruled that Maple Heights does not have the authority to bring action against Netflix and Hulu to enforce Ohio's video service provider provisions.

"[T]he director of commerce is the sole franchising authority," the court said, citing the provisions of a state Act focused on video service authorization that limits the authority of local governments and municipalities on the issue. In September 2007, the Act abolished the authority of local governments to require new franchise agreements from cable service providers. It instead directed the creation of a statewide regulatory scheme that made the director of commerce the sole franchising authority of certain video services in the state.

"Maple Heights has no right, either express or implied, to bring a cause of action against Netflix or Hulu under the Act," the Ohio Supreme Court concluded.

'Billion-dollar battle' being waged in multiple states

The Ohio court ruling means Netflix and Hulu – and presumably other Internet-delivered streaming services – won't need to pony up video franchise fees in the state. Several cases are resolved or being heard in various other states.

In February, J. Tyson Covey, a partner at Duane Morris LLP, noted in a blog post that similar suits were underway in at least 14 states. He characterized it as a "billion-dollar battle" that's pitting municipalities against Internet-delivered streaming services.

In addition to the recent case in Ohio, Netflix and Hulu have already come out on the winning end of some of those cases:

Other cases are underway. Examples include Texas (with cities such as Irving, Dallas, Houston, Austin and Arlington), and Georgia in a case involving a group of municipalities arguing that Netflix and Hulu are violating the state's Consumer Choice for Television Act.

Another case, filed in August 2020, is being argued by the Indiana Commercial Court.

— Jeff Baumgartner, Senior Editor, Light Reading