Lancaster, a small city in Northern Los Angeles County, has hosted location shoots for a number of movies and TV shows, but otherwise doesn’t get a lot of attention in Hollywood. That would have changed dramatically if the city had won a lawsuit targeting a key part of the entertainment industry.

Cities collect fees from cable TV systems that deliver video programming to their residents, and should also get paid by Netflix and Hulu, which provide similar content, Lancaster argued in a case recently decided by the California Court of Appeal (City of Lancaster v Netflix).

California’s Digital Infrastructure and Video Competition Act, enacted in 2006, requires all “video service providers” to obtain a franchise from the Public Utilities Commission and pay franchise fees to local governments.

In exchange for those fees, franchise holders get the right to construct and operate “video service networks,” such as the coaxial cable and fiber optic systems that bring television and internet signals into our homes.

Lancaster, reasoning that Netflix and Hulu provide video services and thus are covered by the 2006 law, sought to collect franchise fees from them. When the companies declined to pay, the city sued them in Los Angeles Superior Court, asking the court to order the companies to obtain state franchises and pay franchise fees to the city.

The lawsuit was filed as a class action, claiming to be on behalf of all California cities and counties. It aimed to make the companies pay fees to local governments based on their gross revenues from customers in each jurisdiction.

Netflix and Hulu asked the court to dismiss the complaint, arguing that they don’t operate any “networks” or “systems” on public rights-of-way and are not subject to the 2006 Act.

In addition, they said, the Act doesn’t authorize a city to bring an enforcement action against them; that is the responsibility of the Public Utilities Commission.

The Act gives cities specific powers, such as to set customer service standards and to collect franchise fees, they said, but it only authorizes cities to sue to collect unpaid fees from franchise holders. Since Netflix and Hulu don’t hold state-issued franchises, the city has no legal power to sue them.

The trial court agreed and dismissed the city’s complaint. Lancaster then appealed.

The appellate justices noted that the 2006 law was intended to untangle a rather messy set of circumstances. At that time, almost two-thirds of all California residents received their television programming via cable companies. More than a quarter used digital satellite networks, and only 10 percent relied on over-the-air broadcasting.

Prior to the passage of the Act, cable companies negotiated individual contracts with more than 400 cities and towns, paying fees for the right to run their wires on poles alongside public roads and rights-of-way.

Then telephone companies, which had long served these communities, began to transmit TV programming over fiber-optic cables.

The need for a uniform statewide regulatory system became clear, leading to the passage of the 2006 Act to regulate all “video service providers.”

As Lancaster pointed out, the goal of the Act was to “create a fair and level playing field for all market competitors,” and to “protect local government revenues.” To accomplish that, “the state franchise fee shall apply equally to all service providers in the local entity’s jurisdiction,” the law says.

Netflix and Hulu are “service providers,” Lancaster argued, and should pay franchise fees just as cable TV companies do.

The appellate court first looked at whether Lancaster had the right to sue for what it claimed were unpaid fees. It concluded that the legislature gave cities only the authority to sue franchise holders for unpaid franchise fees. Since Netflix and Hulu did not hold state-issued franchises, Lancaster was not empowered to sue them.

“While we agree with the City that the Legislature intended for video service providers to pay franchise fees in any jurisdiction where they provide video programming services,” the justices said, “it does not follow that the Legislature also intended for a local government to bring a legal action…against any company it believes should, but does not, hold a franchise.”

The wording of the Act, they said, makes it clear that legislators intended to give enforcement power to the Commission, not to local governments.

Similarly, the Act does not empower a court to order a company to obtain a franchise from the Commission, nor to order the Commission to issue a franchise to a company, they said.

The justices affirmed the ruling of the lower court, and awarded Netflix and Hulu their costs on appeal.

By Michael R. Morris