City of Lancaster v. Netflix, Inc.

318 Cal.Rptr.3d 423

CITY OF LANCASTER, Plaintiff and Appellant,

v.NETFLIX, INC., et al., Defendants and Respondents.

B321481

Court of Appeal, Second District, Division 3.

Filed February 22, 2024

APPEAL from a judgment of the Superior Court of Los Angeles County, Yvette M. Palazuelos, Judge. Affirmed. Los Angeles County Super. Ct. No. 21STCV01881

Schneider Wallace Cottrell Konecky, Todd M. Schneider, Jason H. Kim, Emeryville; Andrus Anderson, Jennie Lee Anderson, San Francisco; Messing & Spector, Noah A. Messing, and Phillip M. Spector for Plaintiff and Appellant.

Korein Tillery, Steven M. Berezney, and Garrett R. Broshuis for City of Creve Coeur, Missouri, Gwinnett County, Georgia, City of Brookhaven, Georgia, and Unified Government of Athens-Clarke County, Georgia as Amici Curiae on behalf of Plaintiff and Appellant.

Latham & Watkins, Jean A. Pawlow, Menlo Park, Mary Rose Alexander, Peter E. Davis, Ward A. Penfold, San Francisco, Robert C. Collins III, and Michael A. Hale, Los Angeles, for Defendant and Respondent Netflix, Inc.

Wilson Sonsini Goodrich & Rosati, Victor Jih, Conor Tucker, Los Angeles, Eric Kohan, Palo Alto, and Christopher Hurley, Los Angeles, for Defendant and Respondent Hulu, LLC.

Kilpatrick Townsend & Stockton, Adam H. Charnes, and Samuel Z. Hyams, San Francisco, for DIRECTV, LLC as Amicus Curiae on behalf of Defendants and Respondents.

Steptoe & Johnson, William Travis West, Robyn C. Crowther and Melanie A. Ayerh, Los Angeles, for DISH Network, L.L.C. and Sling TV LLC as Amici Curiae on behalf of Defendants and Respondents.

LAVIN, J.

INTRODUCTION

Plaintiff and appellant City of Lancaster (the City) challenges a judgment of dismissal entered after the trial court sustained demurrers to its first amended complaint without leave to amend. Defendants and respondents are Netflix, Inc. (Netflix) and Hulu, LLC (Hulu).

The City brings the present action against Netflix and Hulu under the Digital Infrastructure and Video Competition Act of 2006 (Pub. Util. Code, § 5810 et seq.)¹ (the Act), legislation that governs video service providers in this state. Among other things, the Act requires all video service providers to obtain a franchise from the Public Utilities Commission (the Commission) before operating in the state. In addition, all franchise holders must pay franchise fees to local governments in exchange for the use of public rights-of-way to construct and operate video service networks. The City contends Netflix and Hulu are video service providers within the meaning of the Act and that they have been providing video service within its boundaries without the benefit of a state franchise. The City seeks monetary damages (unpaid past franchise fees) and declaratory relief (an order compelling Netflix and Hulu to obtain state franchises and pay franchise fees going forward).

Netflix and Hulu demurred to the operative first amended complaint, asserting they are not video service providers and that, in any event, the Act does not authorize the City to bring a private enforcement action against them. The trial court sustained the demurrers on multiple grounds and without leave to amend and entered a judgment of dismissal.

We affirm the judgment. Although the Act expressly authorizes a local government to sue a franchise holder concerning unpaid or underpaid franchise fees, the Act does not authorize a local government to seek franchise fees from non-franchise holders. And because the City’s declaratory relief claim is wholly derivative of its claim for damages, it also fails.

REGULATION OF VIDEO SERVICE PROVIDERS

At the time the Legislature enacted the Act, a majority of California residents (63 percent) received their television programming through cable companies. Cable companies had previously negotiated individual contracts with local governments in approximately 400 jurisdictions to use public rights-of-way for their cable networks. Non-cable subscribers used digital satellite (27 percent) and over-the-air broadcast (10 percent). (Senate Energy, Utilities and Communications Committee, Analysis of Assembly Bill No. 2987 (2005–2006 Reg. Sess.) June 29, 2006 ["Committee Analysis of June 29, 2006"] p. 2.)

But as telephone companies upgraded their networks with fiber-optic cables, they gained the ability to transmit television programming—and compete directly with cable operators. The telephone companies, which were investing billions in infrastructure upgrades, favored a single, statewide system authorizing the construction and maintenance of their new networks. (Committee Analysis of June 29, 2006, p. 2.) The Legislature agreed.

The Legislature had the following concerns, among others, in mind when it adopted the Act:

• Creating a fair and level playing field for all market competitors that does not disadvantage or advantage one service provider or technology over another.

• Promoting widespread access to the most technologically advanced cable and video services to all California communities in a nondiscriminatory manner regardless of socioeconomic status.

• Protecting local government revenues and their control of public rights-of-way.

• Requiring market participants to comply with all applicable consumer protection laws.

• Complementing efforts to increase investment in broadband infrastructure and close the digital divide.

• Continuing access to and maintenance of the public, education, and government channels.

• Maintaining all existing authority of the Commission as established in state and federal statutes.

(§ 5810, subd. (a)(2).)

The Act regulates all "video service providers", i.e., cable operators and other providers of "video programming."² As pertinent here, the Legislature transferred responsibility for contracting with video service providers from local governments to the state. Specifically, the Act directs the Commission to issue state franchises authorizing the provision of video services in the state. (§ 5840.) The Act includes a requirement that video service providers pay local governments a franchise fee, i.e., a rent or toll for use of the public rights-of-way to construct and maintain their networks. (Id., subd. (q)(1).)

FACTS AND PROCEDURAL BACKGROUND

1. Original Complaint; Demurrers

The City initiated this putative class action suit against Netflix and Hulu (together, the Companies) in January 2021. The original complaint was purportedly filed on behalf of "[a]ll California cities, counties, and/or joint powers authorities" (collectively, local governments) in which Netflix, Hulu, or both, have provided video service.³ The complaint asserted two claims: violation on the Act and declaratory relief.

The complaint generally alleged that the Companies provide video service in numerous California jurisdictions using broadband wireline facilities located at least in part in public rights-of-way. As such, the Companies were obligated to pay a video service provider fee to local governments based on the gross revenue generated from the provision of video service in each local government’s jurisdiction. But, according to the City, the Companies have failed to pay the required video service provider fees to local governments.

The Companies demurred to the original complaint on a variety of grounds, including that the Act does not apply to the Companies because they do not operate any "networks" or "systems" in public rights-of-way, and that the Companies are not required to remit franchise fees to the local governments because they do not hold state franchises. The Companies also argued that the City did not have a private right of action under the Act.

The court sustained both demurrers with leave to amend.

2. First Amended Complaint

The City filed the operative first amended complaint in October 2021. Like the original complaint, the operative complaint states two claims: violation of the Act and declaratory relief.⁴

In the first cause of action for violation of the Act, the City alleges the Companies provide video service in California and are video service providers within the meaning of section 5830. As video service providers, the Companies are required under section 5840 to pay a franchise fee to local governments in each service area. The complaint alleges the Companies have not paid such fees to local governments and seeks monetary damages for unpaid fees as well as pre- and post-judgment interest.

The City’s declaratory relief claim seeks a judicial declaration that the Companies have violated the Act by failing to obtain state franchises from the Commission (§ 5840, subd. (c)) and by failing to pay franchise fees owed to local governments (Id., subd. (q)). The City seeks an order compelling the Companies to "cure their noncompliance with the California Public Utilities Code[.]"

3. Demurrers; Oppositions

3.1. Demurrers

Netflix demurred to the amended complaint, on several grounds, including that the City does not have a private right of action against Netflix and Hulu. Specifically, Netflix argued that the Act provides only limited rights of action for local governments under sections, 5870 (public access channels), 5890 (prohibition of redlining), and 5900 (customer service standards). And as to franchise fees in particular, the Act only authorizes a suit by a local government against a franchise holder concerning nonpayment or underpayment of franchise fees. (§ 5860, subd. (i).) However, because the Companies do not hold state franchises, only the Commission is authorized to bring an enforcement action against them. Netflix also asserted that it does not "use" public rights-of-way or provide "video services" within the meaning of the Act and that its services fall within the "public Internet exception" of the Act.⁵ Hulu demurred on the same grounds.

3.2. Opposition

The City opposed both demurrers. On the private right of action issue, the City asserted the Act is silent regarding both express and implied rights of action for nonpayment of franchise fees against video...