In its ruling, the court found that the Texas Public Utility Regulatory Act bars municipalities from bringing suit for non-payment of franchise fees against non-franchise holders.
Hulu, Disney and Netflix are not required to pay a 5 percent municipal fee because they are not statewide franchise holders, according to a new ruling by the Fifth District of Texas Court of Appeals.
In a ruling issued on January 31, the court found that the Texas Public Utility Regulatory Act, or PURA, bars municipalities from bringing suit for non-payment of franchise fees against non-franchise holders. The case was originally brought in Dallas County by 31 Texas cities against the streaming providers
“The municipalities have not alleged the streaming providers are franchise holders. Nor do they dispute that the streaming providers are non-franchise holders,” the court wrote in its opinion. “Drawing this distinction between franchise holders and non-franchise holders is consistent with the statute’s wording, which uses different language for a holder of a state-issued certificate of franchise authority and the separate concept of a service provider.”
Under a 2005 change to PURA, the Public Utility Commission of Texas was granted authority to issue a statewide franchise allowing for the construction and operation of cable or video networks in public rights-of-way. Under the law, the franchise holders are required to pay a 5 percent franchise fee to each municipality in which they operate. The appellate court has noted that the purpose of this statutory change was to eliminate the need for cable competitors to negotiate individual agreements with municipalities.
In August 2022, the municipalities sued in Dallas County, alleging that they were owed a 5 percent gross revenue fee from streaming providers that operated within their jurisdictions. The cities also claimed the streaming providers had failed to get a state-issued certificate of franchise authority from the PUC.
The district court denied the streaming providers’ motion to dismiss wherein they argued that they are not required to pay the 5 percent fee because they don’t construct or operate facilities in the public rights-of-way. The streaming providers appealed that motion to dismiss at the Fifth District of Texas at Dallas by filing a “Rule 91a” Motion to Dismiss. And now the appellate court has ruled that municipalities have “limited enforcement authority” under PURA.
“Before a certificate of franchise is issued, the PUC, through the attorney general, is the body which determines who should be a holder of such a certificate and to enforce compliance if a party improperly fails to file for a certificate,” the court wrote. “To allow a municipal plaintiff to bypass the PUC would undermine the regulatory scheme set forth in the statute and its overall purpose to centralize the issuance of franchises in one statewide body.” The court focused its decision on the terminology used in the relevant sections of PURA, which restricts municipalities’ cause of action to suits against “holders.” Thus, the court found, that since the streaming providers are not “holders” of the statewide franchise certificate, the municipalities are barred from bringing these claims.
The court also noted that other states have similar franchise statutes and that courts in those states have found that municipalities have limited enforcement rights.
The court also found that PURA does not provide an implied cause of action for municipalities. “Courts must exercise caution when they are asked to imply a cause of action where the legislature did not expressly provide for one,” the court wrote. “Here, we conclude the municipalities cannot meet the ‘high bar’ of implying a cause of action. … Nothing in the statute suggests that the legislature intended to establish a cause of action for municipalities against non-franchise holders.”
The case is In re Disney DTC LLC, now known as Disney Platform Distribution Inc. et al., case number 05-23-00485-CV, in the Court of Appeals for the Fifth Judicial District, Dallas.