Seventh Circuit Affirms Remand of City’s Royalty Lawsuit Against Video Streaming Services Back to State Court, Based on “Comity Abstention”

In City of Fishers, Indiana v. DIRECTTV, No.20-3478 (7th Cir. July 21, 2021), the Seventh Circuit holds that a suit involving “state taxation of commercial activity” belonged in state court, and should not have been removed to federal court, under the seldom-invoked “comity abstention” doctrine.

This action was brought under Indiana’s Indiana Video Service Franchises (VSF) Act of 2006. The law requires anyone offering “video service” to “enter into a franchise agreement with the Indiana Utility Regulatory Commission in exchange for use of a public right-of-way.” The franchise fees find their way back to the localities.  

In August 2020, the cities of Fishers, Indianapolis, Evansville, and Valparaiso … [filed] a putative class action lawsuit in Marion Superior Court against Netflix, Disney, Hulu, DIRECTV, and DISH Network. The cities sought a declaration that the streaming platforms provide ‘video service’ as defined by the Act and therefore must pay past and future franchise fees.”

The defendants removed the action to federal court on diversity grounds. The plaintiffs conceded that the district court had subject-matter jurisdiction but moved for a remand to Indiana state court on abstention grounds. “Invoking the comity abstention doctrine articulated most recently in Levin v. Commerce Energy, Inc., 560 U.S. 413 (2010), the cities argued that federal courts have long declined to exercise jurisdiction over cases involving local revenue collection and taxation.” The district court agreed and remanded the case. The streaming services appealed.

The Seventh Circuit affirms.  After briefly determining that the Tax Injunction Act (TIA), 28 U.S.C. § 1341, did not apply (because the suit was by the city against the taxpayer, instead of visa versa), the panel reaches the issue of comity abstention. The doctrine privileges state over federal court jurisdiction for “challenges to ‘state taxation of commercial activity,’ on the understanding that revenue collection is a core function of state governments.”

The panel notes the rareness of comity abstention cases. “Because the comity abstention doctrine often overlaps with the limitations imposed by the TIA, the doctrine is seldom invoked. Leading treatises and casebooks on the law of federal jurisdiction devote little attention to the doctrine. Yet comity-based abstention enjoys deep roots in the Supreme Court’s jurisprudence,” noting cases going back to 1870 through the 2010 Levin decision.

In this case, as distinguished from past Supreme Court authority, the city’s were not seeking to impose a direct tax on the streaming services and the cities (rather than taxpayer) brought the suit. The panel holds that these distinctions were not material to whether comity abstention applied. The defendants conceded that the royalties were in effect a tax. And “[r]egardless of who brought the underlying suit, the district court’s resolution of the merits issues will risk or result in federal court interference with the fiscal affairs of local government—the principal concern of Levin.”

The panel also holds that the district court did not abuse its discretion in applying comity jurisdiction, finding that the judge properly weighed the relevant considerations. “First, the streaming companies ‘seek federal-court intervention over matters over which the State of Indiana and its municipalities have traditionally ‘enjoyed wide regulatory latitude’—specifically, utility regulation and state revenue.’ Second, the streaming companies ‘invoke the Court’s jurisdiction ‘to improve their competitive

position,’ namely over traditional cable television and landline telephone providers that pay franchise fees under the VSF Act.’ Third, ‘this matter involves interpretation of Indiana state law—specifically, certain provisions of the VSF Act—for which this Court could identify no precedent from any Indiana court.’”

The streaming services argued that comity abstention could not apply to class actions, because the Class Action Fairness Act of 2005 (CAFA) exclusively regulated such cases. While this argument has “some surface appeal,” it fails ultimately because “abstention doctrines reflect foundational features of our federal constitutional system, including respect for dual sovereignty and caution against interfering with traditional state functions, like taxation . . . . We are unwilling to say that CAFA eliminates a federal court’s ability, if not obligation, to consider the comity abstention principles at the heart of Levin and like cases.”