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Does the CRTC Have the Legal Authority to Challenge Netflix?

09/23/2014 12:39 EDT | Updated 11/23/2014 05:59 EST
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FILE - This Jan. 29, 2010 file photo, shows the company logo and view of Netflix headquarters in Los Gatos, Calif. Netflix Inc. has reached a multiyear agreement Tuesday, Aug. 10, 2010, to stream movies from Paramount, Lionsgate and MGM online starting Sept. 1. It's a major move as Netflix looks to cater to people who want to watch movies instantly. (AP Photo/Marcio Jose Sanchez, file)

Last week's very public fight between the CRTC and Netflix escalated on Monday as Netflix refused to comply with Commission's order to supply certain confidential information including subscriber numbers and expenditures on Canadian children's content. While the disclosure concerns revolve around the confidentiality of the data, the far bigger issue is now whether the CRTC has the legal authority to order it to do anything at all. The response from Netflix states:

The Responses are filed voluntarily by Netflix to assist the Commission in this proceeding. The Responses are based solely on a review of the video archive of Netflix's appearance on the CPAC web site, in view of the fact that the transcript from the hearing was not available. The filing of the Responses is not an acknowledgment of or attornment to either the jurisdiction of the Commission by Netflix, or the substantive application of Canadian law (including the provisions of the Broadcasting Act) to Netflix. The Responses are filed strictly without prejudice to any future positions that Netflix may take.

A second letter emphasizes the same points of voluntary action and the limits of CRTC jurisdiction:

We voluntarily agreed to appear before the Commission in connection with the Commission's Let's Talk TV hearing to provide Netflix's views on the evolving nature of television. During our appearance at the public hearing on September 19, we undertook to provide further information to assist the Commission in its endeavors. This information is being provided to the Commission today in separate correspondence. As we stated during our appearance at the hearing, specific information requested by the Commission, which was ultimately the subject of various orders made by the Commission, remains confidential and competitively sensitive, the disclosure of which to third parties would be highly prejudicial to Netflix. Accordingly, Netflix is not in a position to produce this information. Moreover, the orders are not applicable to Netflix under Canadian broadcasting law.

While the media coverage has unsurprisingly focused on Netflix, unconfirmed sources indicate that Google has adopted a similar position by declining to provide all the information requested by the CRTC (Cartt.ca reports the same thing). The search giant did not face any direct orders, but there was also tension during its appearance, raising the possibility of more questioning of the Commission's legal authority to regulate online video services.

The standoff is not entirely unexpected. As I blogged on Friday immediately after the Netflix appearance:

Netflix appeared voluntarily before the Commission, but it could have refused. It could argue that it is not a broadcaster and not subject to the Broadcasting Act. In fact, it could challenge the CRTC's orders for information, arguing it does not fall within the Canadian legislation and does not maintain a physical presence in the country.

That appears to be precisely what is happening as the confidentiality issue places the spotlight on the bigger question of the CRTC's jurisdiction over Internet-based content providers.

How did it come to this?

To start, Netflix did not ask to appear at the hearing as it was initially content to submit only written comments. This suggests that the CRTC asked that it appear to answer questions. Once there, the Commission asked for specific confidential information, leading to the exchanges over whether there would be a guarantee of confidentiality. Mark Goldberg provides a good review of why Netflix had reason for concern since there have been disclosures of confidential information in the past and rules on public interest disclosures that make sense in a tightly regulated broadcast system would also be applied to foreign Internet-based services.

The issue clearly escalated with the following comment to Netflix from CRTC Chair Jean-Pierre Blais:

You operate under an exemption order that requires you to provide information. Failure to provide information puts at risk your exemption order. So the Commission is ordering you to provide the number of subscribers that you have currently in Canada by 5:00 p.m., Ottawa time, Monday.

The decision to implicitly threaten Netflix's ability to operate in Canada without a licence set off a reaction that could create significant uncertainty about the Canadian legal environment for online services and lead to protracted litigation. Within hours, the federal government issued a statement rejecting any new regulation of services such as Netflix. Yet Blais' warning about providing information in compliance with the new media exemption order dramatically altered the playing field for companies such as Netflix and Google.

The comments made it clear that they are already regulated (the new media exemption order with its reporting requirements constituting a form of regulation) and that failure to cooperate with the Commission raises the prospect of additional regulation or licensing. That could theoretically include requirements related to content, promotion, or financial contributions. Revocation of the new media exemption order would presumably require Netflix to obtain a licence (which it could not do given its foreign ownership status) or stop its Canadian operations.

While that represents a serious concern for the Internet companies, the regulatory threat also represented a major risk for the CRTC. There have long been doubts about whether the Broadcasting Act empowers the CRTC to regulate Internet-based services with questions about whether the services constitute broadcasting along with jurisdictional questions involving services with no physical presence in Canada. The 2012 Supreme Court of Canada decision on fee-for-carriage did not help the CRTC's case, with the court articulating clear limits on the Commission's powers.

The original 1999 new media exemption order provided a full exemption without conditions. In 2009, the CRTC changed the exemption by adding a reporting requirement. By making the new media exemption subject to conditions, the CRTC quietly began regulating Internet-based services and opened the door to a regulatory showdown that was likely inevitable. So long as the CRTC did not enforce the requirement (relying instead on voluntary participation), the Internet companies were presumably content to maintain the status quo. That changed on Friday, when Blais invoked the regulation and forced the Internet companies to either accept regulation or challenge the CRTC's authority on the matter.

With the government opposing new regulation and the CRTC's existing regulatory framework under challenge, the Commission finds itself in a bind with its entire television regulation initiative potentially side-swiped by the issue. Ironically, it seems likely that the Commission was simply trying to gather the necessary evidence to justify plans to reject any new Internet regulations. By escalating the issue with regulatory threats, however, the CRTC -- Netflix battle seems set to turn the TalkTV initiative into a legal battle over the CRTC's authority to regulate online video.

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