City of East St. Louis v. Netflix, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 22-2905
CITY OF EAST ST. LOUIS, ILLINOIS,
Plaintiff-Appellant,
v.
NETFLIX, INC., et al.,
Defendants-Appellees.
____________________
Appeal from the United States District Court
for the Southern District of Illinois.
No. 3:21-CV-561-MAB — Mark A. Beatty, Magistrate Judge.
____________________
ARGUED SEPTEMBER 12, 2023 — DECIDED OCTOBER 13, 2023
____________________
Before EASTERBROOK, HAMILTON, and PRYOR, Circuit
Judges.
EASTERBROOK, Circuit Judge. Illinois requires anyone who
wants to provide cable or video service to obtain permission
from state or local authorities, and pay a fee, as a condition of
using public rights of way. 220 ILCS 5/21-101 to 5/21-1601. In
recent years traditional cable services have been supple-
mented or replaced by over-the-top streaming services that
2 No. 22-2905
deliver their content through the Internet. The City of East St.
Louis, Illinois, contending that all streaming depends on ca-
bles buried under streets or strung over them, filed this suit
seeking to compel each streaming service to pay the City 5%
of all revenues it receives. The City named Netflix, Disney,
Apple, Hulu, Amazon, WarnerMedia, YouTube, Peacock TV,
DIRECTV, DISH Network, CuriosityStream, and CBS Interac-
tive as defendants in this suit. If the City is right, then The
New York Times, CNN, Major League Baseball, and any other
entity that transmits videos to paying customers likewise
must pay fees to every municipality in Illinois.
Illinois initially required cable TV operators to obtain fran-
chises from each city to be served, but after encountering ad-
ministrative problems Illinois enacted the Cable and Video
Competition Law (CVCL), which requires operators to obtain
statewide authorization. Someone who has received authori-
zation is called a “holder.” 220 ILCS 5/21-201(k). None of the
defendants has received permission from either the City or
the state’s Commerce Commission—which, from the City’s
perspective, is the nub of the problem, because paying a por-
tion of the service’s revenue to each municipality is a condi-
tion of receiving permission. The City asked the district court
for a declaratory judgment whose practical effect would be to
compel defendants to become “holders” and pay fees.
The parties agreed to decision by a magistrate judge. 28
U.S.C. §636(c). And the magistrate judge dismissed the com-
plaint after concluding that only the Agorney General of Illi-
nois is authorized to sue an entity that needs, but does not
possess, “holder” status. 630 F. Supp. 3d 1003 (S.D. Ill. 2022).
The magistrate judge observed that §21-1301 grants litigating
power to the Agorney General. A proviso in §21-1301(a) “that
No. 22-2905 3
nothing in this Article shall deprive local units of government
of the right to enforce applicable rights and obligations” refers
to the preservation of existing contracts and local ordinances
rather than a need for “holder” status, the judge thought.
Other parts of the statute, such as §21-901(a), which grant
some enforcement powers concerning audits to municipali-
ties, do not deal with “holder” magers, which confirms the
limits of §21-1301. Add to this the fact that not a single judge
in Illinois has ever held that municipalities can sue to force
anyone to become a “holder,” and the magistrate judge’s con-
clusion is hard to contest.
Before we can take up the merits, however, we must con-
sider subject-mager jurisdiction. The City asserts jurisdiction
under 28 U.S.C. §1332(a)(1) based on diversity of citizenship.
As a rule, that means “complete diversity” under the ap-
proach laid down in Strawbridge v. Curtiss, 3 Cranch (7 U.S.)
267 (1806). Complete diversity exists only if none of the de-
fendants has the same citizenship as any plaintiff. The City is
a citizen of Illinois, see Moor v. Alameda County, 411 U.S. 693,
717–21 (1973), and it asserted that none of the defendants has
Illinois citizenship. That assertion is mistaken. Several of the
defendants are limited liability companies, and the citizen-
ship of an LLC is the citizenship of each member—traced
through as many levels as necessary until reaching a natural
person or a corporation. See Mutual Assignment & Indemnifica-
tion Co. v. Lind-Waldock & Co., 364 F.3d 858, 861 (7th Cir. 2004).
If you trace through the complex ownership structure of
WarnerMedia Direct, LLC, on the date this suit began, you
eventually reach AT&T Capital Services, Inc., which has its
principal place of business in Illinois. Jurisdiction therefore
cannot be sustained under 28 U.S.C. §1332(a)(1). (While this
suit was pending, AT&T sold its stake in WarnerMedia Direct,
4 No. 22-2905
but jurisdiction depends on circumstances at a suit’s outset.
Freeport-McMoRan Inc. v. K N Energy, Inc., 498 U.S. 426, 428
(1991).)
Jurisdiction under §1332(d), a part of the Class Action Fair-
ness Act (CAFA), remains a possibility. East St. Louis pro-
posed to represent a class of all municipalities in Illinois,
which number more than 100. The amount in controversy for
all municipalities and all defendants comfortably exceeds $5
million. This led the City to rely on §1332(d)(2), which pro-
vides jurisdiction for such a class action if there is even mini-
mal diversity—and of all defendants only WarnerMedia is a
citizen of Illinois.
Neither the City, any of the defendants, nor the magistrate
judge explored the significance of §1332(d)(4), which pro-
vides that a district court “shall” decline to exercise jurisdic-
tion under §1332(d)(2) when more than two-thirds of the
plaintiff class’s members and at least one defendant are citi-
zens of the state in which the suit was filed, and in addition
the principal injuries occur there. Those conditions are met in
this suit, so at oral argument we asked counsel why the case
should not be dismissed. See Mullen v. GLV, Inc., 37 F.4th 1326,
1328 (7th Cir. 2022) (court of appeals may raise problems un-
der §1332(d)(4) on its own, even though (d)(4) does not negate
the grant of jurisdiction in (d)(2)). As the significance of
§1332(d)(4) had not been addressed in the briefs, we also in-
vited supplemental filings.
After considering these post-argument memoranda, we
conclude that §1332(d)(10) keeps this case in federal court. It
reads: “For purposes of this subsection … an unincorporated
association shall be deemed to be a citizen of the State where
it has its principal place of business and the State under whose
No. 22-2905 5
laws it is organized.” WarnerMedia Direct is unincorporated;
only a corporation (or its equivalent in other legal systems)
counts as incorporated, and every other kind of entity is
treated as a partnership for jurisdictional purposes. See
Carden v. Arkoma Associates, 494 U.S. 185 (1990); Indiana Gas Co.
v. Home Insurance Co., 141 F.3d 314 (7th Cir. 1998). As we ob-
served earlier, normally the citizenship of any entity other
than a corporation depends on the citizenship of its partners
and members. But §1332(d)(10) tells us that, for the purpose
of §1332(d), an unincorporated entity is treated like a corpo-
ration under §1332(c)(1): one citizenship for the state of its
principal place of business, another for the state of its organi-
zation, and the investors’ citizenship ignored. WarnerMedia
Direct is organized under Delaware law and has its principal
place of business in New York. This means that diversity is
“complete” under the special definition applicable to
§1332(d), and the condition for dismissal given in
§1332(d)(4)(A)(i)(II)(cc) is not satisfied.
Today is the first time this circuit has considered how
§1332(d)(10) works. As far as we can see, our understanding
comports with that of every other circuit that has addressed
the subject. See BRT Management LLC v. Malden Storage LLC,
68 F.4th 691, 696 n.7 (1st Cir. 2023); Erie Insurance Exchange v.
Erie Indemnity Co., 722 F.3d 154, 161 n.7 (3d Cir. 2013); Ferrell
v. Express Check Advance of SC LLC, 591 F.3d 698, 699–700 (4th
Cir. 2010); Abrego Abrego v. Dow Chemical Co., 443 F.3d 676, 684
(9th Cir. 2006); Siloam Springs Hotel, L.L.C. v. Century Surety
Co., 781 F.3d 1233, 1237 n.1 (10th Cir. 2015). We therefore
move to the merits.
Although the district court dismissed the City’s claims un-
der Illinois law because the statute does not provide it an
6 No. 22-2905
express right of action, we think it cleaner to reach the merits.
The absence of a statutory right of action does not affect juris-
diction, and a judgment may be affirmed on any ground pre-
served in the district court, as this was, without the need for a
cross-appeal. See MassachuseRs Mutual Life Insurance Co. v.
Ludwig, 426 U.S. 479 (1976). A decision on the merits will bring
the dispute to a close.
The statutory system applies to any “cable service or video
service”. 220 ILCS 5/21-301(a). Defendants do not offer “cable
service” (the City acknowledges this much), and “video ser-
vice” is a term defined by §21-201(v):
“Video service” means video programming and subscriber inter-
action, if any, that is required for the selection or use of such video
programming services, and that is provided through wireline fa-
cilities located at least in part in the public rights-of-way without
regard to delivery technology, including Internet protocol tech-
nology. This definition does not include any video programming
provided by a commercial mobile service provider defined in sub-
section (d) of 47 U.S.C. 332 or any video programming provided
solely as part of, and via, service that enables users to access con-
tent, information, electronic mail, or other services offered over
the public Internet.
This definition remains in force through the end of 2023. A
new definition replaces it on January 1, 2024:
“Video service” means video programming provided by a video
service provider and subscriber interaction, if any, that is required
for the selection or use of such video programming services, and
that is provided through wireline facilities located at least in part
in the public rights-of-way without regard to delivery technology,
including Internet protocol technology. This definition does not
include the following: (1) any video programming provided by a
commercial mobile service provider defined in subsection (d) of
47 U.S.C. 332; (2) direct-to-home satellite services defined in sub-
section (v) of 47 U.S.C. 303; or (3) any video programming
No. 22-2905 7
accessed via a service that enables users to access content, infor-
mation, electronic mail, or other services offered over the Internet,
including Internet streaming content.
Act of July 28, 2023, Pub. Act 103-0360. The City does not deny
that the new definition excludes the defendants’ streaming
services. But it insists that it is entitled to damages through
December 2023, while the original definition lasts.
It is hard to see a material difference between the two def-
initions. Exclusion (3) in the new definition just sharpens the
language of the original definition, which excluded “any
video programming provided solely as part of, and via, ser-
vice that enables users to access content, information, elec-
tronic mail, or other services offered over the public Internet.”
The addition of “including Internet streaming content” makes
pellucid what most readers of the older definition would have
understood: content streamed over the Internet is outside the
scope of this regulatory system. East St. Louis did not cite, and
we could not find, any decision of any state court in Illinois
holding that the original definition of “video service” in-
cludes over-the-top streaming services. No more need be said
to resolve the parties’ dispute about state statutory law.
The parties have debated what it means to “use” the pub-
lic way for communication. Defendants insist that sending
signals through wires owned and operated by other firms
(firms that are themselves subject to state regulation) does not
constitute a “use” of the public way. No one thinks, for exam-
ple, that a conversation over a landline phone exposes the
speaker and recipient to state regulation just because the
phone system’s wires cross public land. See Chicago v. FCC,
199 F.3d 424, 432–33 (7th Cir. 1999). We need not pursue this
issue, however, given the clarity of the statutory definition.
8 No. 22-2905
“Use” remains potentially relevant to the City’s assertion
that the transmission is a “trespass” on the City’s lands, in vi-
olation of the state’s common law of property. Still, if phone
calls over landline cables, electricity over wires, and gas
routed through pipes are not trespasses on the City’s land—
and they are not—neither are the electrons that carry movies
and other videos. Once again the City lacks any decision by
any state court supporting its approach.
The City has one additional argument. East St. Louis Mu-
nicipal Code §82-19 prohibits the “resale” of cable television
service, which §82-20 defines:
Cable television service means any and all services provided by
or through the facilities of any cable television or closed-circuit
coaxial cable communication system, or any microwave or similar
transmission service used in connection with any cable television
system or similar closed-circuit coaxial cable communication sys-
tem.
This ordinance does not help the City. First, over-the-top
streaming services do not “resell” cable TV service. An inter-
net service provider sells the transmission of data (band-
width) to and from arbitrary sources. Customers use that
bandwidth to receive streaming videos from Netflix and sim-
ilar providers. The internet service provider is paid for band-
width; Netflix is paid for content; nothing is “resold.” Second,
internet service is not “cable television service” under the or-
dinance’s definition. It is unrelated to “television.” Although
some internet service providers also offer cable TV service,
the two services are priced and sold separately. An internet
service provider may use coaxial cables or microwave relays
for some of its data but does not employ a “closed-circuit”
system. The Internet is as open as any circuit gets. It would
take an exceedingly creative reading of the ordinance’s
No. 22-2905 9
language to support the City’s claims. Yet the City does not
identify any helpful decision by any state court—and it is not
an appropriate function of a federal court in a diversity suit to
read a state or local statute in an unnatural way without the
support of the state judiciary.
AFFIRMED