Twenty-five Texas cities, including Dallas, Fort Worth, Houston and Austin, are suing Disney, Hulu and Netflix for franchise fees the municipalities say Texas law allows them to collect.
The lawsuit was filed Thursday in Dallas County District Court, and other cities are expected to join. The filing asks for fees dating back to 2007 based on the Texas Public Utility Regulatory Act of 2005, which says municipalities can collect a franchise fee of 5% of gross receipts from a provider of video service if its programming is delivered over wireline facilities located even partially in the public right of way.
“Under Texas law, these companies are technically video service providers, and even if they say they aren’t, they’re using public property without paying for it, so they’re trespassing,” said Steve Wolens, McKool Smith principal and co-counsel on the case.
Last year, the Dallas City Council gave the city attorney’s office the go-ahead to pursue the lawsuit, and so did other cities. In addition to Dallas-based McKool Smith, co-counsels are Austin-based Ashcroft Sutton Reyes LLC and St. Louis-based Korein Tillery. The lawsuit is asking for fees dating back to 2007 from Netflix, 2011 from Hulu and 2019 from Disney.
The initial list is made up of cities across the state: Abilene, Allen, Amarillo, Arlington, Austin, Beaumont, Carrollton, Dallas, Denton, Frisco, Fort Worth, Garland, Grand Prairie, Houston, Irving, Lewisville, McKinney, Mesquite, Nacogdoches, Pearland, Plano, Sugar Land, Tyler and Waco.
The purpose of the lawsuit is similar to others filed against the major streaming services throughout the U.S. The amounts owed for past due franchise fees could range from hundreds of thousands of dollars to many millions, depending on the size of the city, Wolens said.
The timing of the lawsuits has a lot to do with consumer behavior. Better broadband service and other technology advancements are accelerating cord-cutting. By the end of 2020, the number of households not paying for traditional TV services in the U.S. was estimated to be more than 30 million, and that number is projected to hit 46.6 million in 2024, according to Statista.
When households cut the cable cord and ditch the satellite service to instead stream video over internet broadband, cities lose revenue, Wolens said. Service providers DirecTV, Dish Network, Comcast and Spectrum collect taxes. As streaming services raise the rates they charge subscribers, the franchise fees to cities would rise incrementally, too, Wolens said.
Disney+ has more than 137 million global subscribers. Hulu streaming service has more than 41 million subscribers, and Netflix has more than 73 million U.S. subscribers.
The services charge subscriber fees to access their video programming through wireless facilities that are entirely or at least in part through the public right of way, the lawsuit said.
So far the litigation has been incrementally successful “but has anyone gotten any money? The answer is no,” Wolens said. A Missouri case in July was the first to be certified as a class action by a judge.
The Texas lawsuit cites a 1995 Texas Supreme Court ruling that said existing law is in place “to prevent the application of public funds to private purposes” and “for private gain.”
While Disney, Hulu and Netflix are receiving revenue from Texas customers, the three companies haven’t obtained state-issued certificates of franchise authority from the Texas Public Utility Commission that the law requires, the lawsuit said.
The filing cites claims by the services that they are viable alternatives to cable and broadcast television, adding that they compete for the same industry programming awards. Hulu’s service includes both live and on-demand programming. The services also provide shows from broadcast networks such as ABC, NBC and CBS.
Federal and state funds are being allocated to expand broadband access. Texas has the fourth-highest number of broadband subscribers in the nation, according to the Texas Cable Association, so the state is one of the largest U.S. markets for any streaming service.