Federal court properly abstained from franchise fees fight between Indiana cities, streaming platforms

The Southern Indiana District court is in the clear after it abstained from a lawsuit filed by several Indiana cities against popular streaming services like Netflix and Hulu. The 7th Circuit Court of Appeals in a Wednesday decision found the district court acted properly in removing itself from the fight.

In August 2020, Fishers, Indianapolis, Evansville, and Valparaiso sued video-streaming services Netflix, Disney, Hulu, DIRECTV, and DISH Network. The class-action lawsuit alleged that major video streaming services must pay a 5% franchise fee of gross revenue to the localities where their customers reside because of the use of internet equipment in the public right of way to transmit programming.

Specifically, the cities sought a declaration that the streaming platforms provide “video service” as defined by the Indiana Video Service Franchises Act of 2006 and therefore must pay past and future franchise fees.

After the streaming platforms responded by removing the case from state to federal court under 28 U.S.C. §§ 1441 and 1453, the cities filed a motion to remand to state court on abstention grounds. It pointed to Levin v. Commerce Energy, Inc., 560 U.S. 413 (2010), arguing that federal courts have long declined to exercise jurisdiction over cases involving local revenue collection and taxation.

The Indiana Southern District Court agreed with the cities and remanded, relying on the Levin comity abstention doctrine. Only answering one question – whether the district court properly abstained under the teachings of Levin and like cases – the 7th Circuit Court of Appeals affirmed in a Wednesday decision.

Circuit Judge Michael Scudder, writing for the 7th Circuit in City of Fishers, Indiana v. DIRECTTV, 20-3478, noted that Levin delivered a clear message that federal courts “should think twice before taking too couched a view of the comity abstention doctrine.”

“On balance, we conclude that the comity doctrine has something to say about the propriety of a federal court adjudicating this dispute, and the district court did not err by applying the Levin abstention factors,” Scudder wrote, agreeing with the district court that all signs point to the need for comity-based abstention.

None of the streaming platforms’ counterpoints opposing abstention were persuasive, Scudder wrote, adding that the companies failed to preserve their arguments in the district court.

As to the streaming platforms’ main argument on appeal, the 7th Circuit doubted their contention that the Class Action Fairness Act of 2005 provides an exhaustive list of exceptions under which a federal court may decline the exercise of jurisdiction.

“For starters, the Supreme Court has limited (its holding in Thermtron Products, Inc., v Hermansdorfer, 423 U.S. 336 (1976)) in more recent years. In Carnegie-Mellon University v. Cohill, the Court rejected the argument that because ‘the removal statute explicitly authorizes remands in two situations,’ Congress must have ‘intended to preclude district courts from remanding’ on any other ground. Such an interpretation, the Court reasoned, ‘is based not on the language of Congress, but on its silence.’ We think the same interpretive flaw undermines, if not defeats, the streaming platforms’ argument here. The fact that Congress considered federal-state comity in the CAFA exceptions does not mean that it swept decades of abstention doctrines off the table,” Scudder wrote.

“But we can stop short of reaching any definitive conclusion, for the streaming platforms’ CAFA-based argument faces an insurmountable and independent hurdle—waiver,” the 7th Circuit wrote. “The streaming platforms’ CAFA argument falls squarely within that rule and falls out of this appeal. The platforms failed to cite Thermtron in their district court filings. And they never argued that federal courts lack authority under CAFA to remand properly removed cases on non-statutory grounds. We will not reverse the district court’s determination on a ground not presented to it.”

The streaming platforms also waived their final argument invoking Quackenbush v. Allstate Insurance Co. arguing “federal courts have the power to dismiss or remand cases based on abstention principles only where the relief being sought is equitable or otherwise discretionary.”

“The Supreme Court is sure to say more about the limits of comity abstention in years to come,” the 7th Circuit concluded. “Today, though, informed in part by substantial issues of waiver, we are satisfied that the district court did not abuse its discretion by granting the cities’ motion to remand to Indiana state court.”

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