On Thursday, the Ninth Circuit issued its decision in Disney Enterprises v VidAngel, affirming the district court’s order enjoining VidAngel after it was sued by several studios alleging copyright infringement.1Unless otherwise specified, the quotes in this article come from the decision. VidAngel operated an unauthorized, on-demand video streaming service that allowed viewers to filter out objectionable content, such as swearing or nudity, and argued that doing so was permissible for a variety of reasons, most notably that it was exempt from liability pursuant to an exception created by the Family Movie Act of 2005 (FMA).2Codified in 17 USC §110(11). The Ninth Circuit disagreed.

VidAngel might be considered one of the latest companies to engage in legal parlor tricks, creating a service that was functionally the same as an infringing service but purportedly sticks to the letter of the law. Other examples include MP3.com,3UMG Recordings v MP3.Com, 92 F.Supp.2d 349 (SDNY 2000) (“although defendant seeks to portray its service as the ‘functional equivalent’ of storing its subscribers’ CDs, in actuality defendant is re-playing for the subscribers converted versions of the recordings it copied, without authorization, from plaintiffs’ copyrighted CDs.”). Zediva,4Warner Bros. Entertainment v WTV Systems, 824 F.Supp.2d 1003 (CD Cali 2011) (“Although Defendants are clearly transmitting performances of Plaintiffs’ Copyrighted Works, Defendants argue that their service offers “DVD rentals” rather than transmissions of performances.”). Aereo,5American Broadcasting Co. v Aereo, 134 S.Ct. 2498 (2014) (“In Aereo’s view, it does not perform. It does no more than supply equipment that ‘emulate[s] the operation of a home antenna and [digital video recorder (DVR) ]’…  having considered the details of Aereo’s practices, we find them highly similar to those of the CATV systems in Fortnightly and Teleprompter. And those are activities that the 1976 amendments sought to bring within the scope of the Copyright Act.”). and ReDigi.6Capitol Records v Redigi, 934 F.Supp.2d 640 (SDNY 2013) (“At base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome.”). But just as courts rejected those companies’ convoluted arguments, the Ninth Circuit here saw through VidAngel’s smoke and mirrors and found it infringing via a straightforward (and unfiltered) application of the copyright law.

VidAngel’s Service

As the Ninth Circuit explained, VidAngel offers over 2,500 film and television episodes to consumers. At the time of the lawsuit, VidAngel operated by first purchasing DVDs or Blu-ray discs of the titles, ripping them to a computer, creating intermediate files that breaks the works into segments that can be tagged for objectionable content, and storing these segments, which make up the entirety of the movie or television episode, on cloud servers.

Customers could then “purchase” a title for $20. That is, VidAngel assigned the specific disc of the title to the customer’s unique ID but retained physical possession of the disc. At this point, the customer, after selecting what types of objectionable content they wished to avoid, could stream the work online from the cloud servers. The customer then had the option of “selling” the disc back to VidAngel, minus $1 per night ($2 for high-definition videos). You can be forgiven if you think that this sounds more like an on-demand streaming service than a Blockbuster, and indeed, the record demonstrates that that is how VidAngel’s customers used the service—VidAngel only ever shipped out four physical discs to purchasers, with virtually all customers selling back their titles within five hours of purchasing them.

Studios sued VidAngel, alleging it infringed their rights of reproduction and public performance and also that it had circumvented technological measures controlling access to copyrighted works in violation of §1201(a)(1)(A). VidAngel denied both claims and raised the defense of fair use and legal authorization by the FMA. Studios sought a preliminary injunction. The district court granted the injunction, finding that VidAngel violated §1201(a)(1)(A) when it ripped the DVDs and Blu-ray discs, infringed the studios’ right of reproduction when it copied the works to its computers and third-party cloud servers and right of public performance when it streamed the works to customers. It also rejected VidAngel’s defenses. VidAngel appealed.

The Ninth Circuit provided a wholesale rejection of all of VidAngel’s arguments.

On the infringement claim, VidAngel argued that it was entitled to copy the works to its computers under the first sale doctrine because it had lawfully purchased them, but the court said that doctrine only applies to disposition of “a particular copy” of a work and doesn’t entitle an owner to reproduce the work. This issue is currently squarely in front of the Second Circuit, which recently heard oral arguments in Capitol Records v Redigi. (Indeed, within hours of the Ninth Circuit’s decision, attorneys for Capitol Records had informed the Second Circuit).

Having concluded that the studios were likely to succeed on their infringement claim, the court turned to VidAngel’s affirmative defenses.

Family Movie Act

The FMA was passed in the shadow of litigation over a tool that automatically muted or skipped over objectionable material on ordinary DVDs. The legislation created an exception from liability for such tools, codified in 17 USC § 110(11), which provides that

the making imperceptible, by or at the direction of a member of a private household, of limited portions of audio or video content of a motion picture, during a performance in or transmitted to that household for private home viewing, from an authorized copy of the motion picture, or the creation or provision of a computer program or other technology that enables such making imperceptible and that is designed and marketed to be used, at the direction of a member of a private household, for such making imperceptible, if no fixed copy of the altered version of the motion picture is created by such computer program or other technology

is not copyright infringement.

The exception specifically requires that the performance or transmission comes “from an authorized copy.” VidAngel argued that because it begins its process with an authorized copy, it meets this requirement. The Ninth Circuit disagreed, saying “from an authorized copy” is different from “beginning from” or “indirectly from” an indirect copy, which is how VidAngel interprets the statute. It goes on to say the statutory context and legislative history of the provision supports its interpretation. “More importantly,” said the Ninth Circuit, “VidAngel’s interpretation would create a giant loophole in copyright law, sanctioning infringement so long as it filters some content and a copy of the work was lawfully purchased at some point. But, virtually all piracy of movies originates in some way from a legitimate copy.”

Fair Use

The Ninth Circuit also rejected VidAngel’s fair use defense. The service argued that the district court abused its discretion with respect to the first factor—the “purpose and character of the use”—and the fourth factor—the “effect of the use upon the potential market for or value of the copyrighted work.”

On the first factor, the circuit court easily agreed with the district court that VidAngel’s service adds nothing new to Plaintiff’s works and merely “transmits them for the ‘same intrinsic entertainment value’ as the originals.” As the court said, “Star Wars is still Star Wars, even without Princess Leia’s bikini scene.”

Given that VidAngel’s use was both not transformative and commercial, the Ninth Circuit said it was “not error to presume likely market harm” under the fourth factor. But still, VidAngel tried to argue that “its service actually benefits the Studios because it purchases discs and expands the audience for copyrighted works to viewers who would not watch without filtering.” No dice, said the court. As a matter of law, alleged positive benefits do not excuse defendants from usurping markets directly derived from unauthorized reproduction. And factually, the record showed that, contrary to VidAngel’s argument, “49% of its customers would watch the movies without filters,” demonstrating that the service acted as an effective substitute for unfiltered works.

Of note, VidAngel also advanced two alternate fair use arguments, both of which were decisively rejected by the Ninth Circuit. First, it argued that its service is “a paradigmatic example of fair use: space-shifting.” But the court said, far from being paradigmatic, “The reported decisions unanimously reject the view that space-shifting is fair use under § 107.” And even if space-shifting could be fair use, the court says, “VidAngel’s service is not personal and non-commercial space-shifting: it makes illegal copies of pre-selected movies and then sells streams with altered content and in a different format than that in which they were bought.”

Second, VidAngel argued that the copies it made were “intermediate” copies, which it said are considered “classic fair use.” In a footnote, the Ninth Circuit responded that, “The cases it cites are inapposite, because VidAngel does not copy the Studios’ works to access unprotected functional elements it cannot otherwise access.”

Circumvention of access control measures under the DMCA

The Ninth Circuit also upheld the district court’s finding that the Studios are likely to succeed on their DMCA claim. Here, the question was whether, in ripping DVD and Blu-ray discs to digital files, VidAngel circumvented “a technological measure that effectively controls access to a work”, an act prohibited by 17 USC § 1201(a)(1)(A).

VidAngel conceded that it used software to decrypt encryption access controls on the discs it purchased. (The Ninth Circuit observed in a footnote that the software VidAngel employed for this purpose, “AnyDVD HD”, is sold by “a Belize-based company run by former employees of a company convicted overseas for trafficking in anti-circumvention technology and identified by the United States Trade Representative as selling software that facilitates copyright violations.” Interesting choice for a family-friendly service.) But the court rejected VidAngel’s argument that the Studios had authorized DVD buyers to circumvent encryption technology, saying “Rather, lawful purchasers have permission only to view their purchased discs with a DVD or Blu-ray player licensed to decrypt the TPMs.”

VidAngel also tried raising on appeal for the first time the argument that technological measures cannot serve as both “use controls” and “access controls”, which are each separately addressed under §1201. The statute prohibits trafficking in devices that circumvent both use and access controls, but it only prohibits the actual act of circumvention of access controls. VidAngel thus argued that the technological measures at issue were use controls and that it engaged only in their circumvention, not in trafficking tools to allow circumvention. The Ninth Circuit said even assuming this argument was not waived it fails, since “the statute does not provide that a TPM cannot serve as both an access control and a use control.”

The remaining preliminary injunction factors fell in the studios’ favor. On irreparable harm, the Ninth Circuit observed that “the district court had substantial evidence before it that VidAngel’s service undermines the value of the Studios’ copyrighted works, their ‘windowing’ business model, and their goodwill and negotiating leverage with licensees.” It rejected VidAngel’s argument that damages could be calculated based on licensing fees, noting that many of the harms it cited are non-monetary and “cannot readily be remedied with damages.” On the balance of equities, it noted that the only harm VidAngel alleged was “financial hardship from ceasing infringing activities”, which does not outweigh the harm to the studios absent an injunction. Finally, on the public interest, VidAngel had argued that its service was the only filtering service on the market available for streaming digital content, a fact that was contradicted by the record. On the other hand, said the Ninth Circuit, quoting the district court, “the public has a compelling interest in protecting copyright owners’ marketable rights to their work and the economic incentive to continue creating television programming.”

Conclusion

Though in hindsight, the Ninth Circuit decision seems unsurprising, the risk of a bad decision here was high, not just for studios but for many businesses in the media and publishing fields. Besides the legal holdings, the decision provides positive language about the value of copyright and ability of copyright owners to exercise their marketable rights. The unequivocal decision will likely be welcomed by many copyright owners, and should prove helpful in other fora.

But it remains to be seen whether this is the end of this particular litigation. VidAngel had retained a high-powered legal team and has been active on Capitol Hill. So its efforts in court should not be discounted, and one can likely expect the company to file for en banc review by the Ninth Circuit followed by a Supreme Court petition unless it reaches a settlement agreement with the Studios.

 

References   [ + ]

1. Unless otherwise specified, the quotes in this article come from the decision.
2. Codified in 17 USC §110(11).
3. UMG Recordings v MP3.Com, 92 F.Supp.2d 349 (SDNY 2000) (“although defendant seeks to portray its service as the ‘functional equivalent’ of storing its subscribers’ CDs, in actuality defendant is re-playing for the subscribers converted versions of the recordings it copied, without authorization, from plaintiffs’ copyrighted CDs.”).
4. Warner Bros. Entertainment v WTV Systems, 824 F.Supp.2d 1003 (CD Cali 2011) (“Although Defendants are clearly transmitting performances of Plaintiffs’ Copyrighted Works, Defendants argue that their service offers “DVD rentals” rather than transmissions of performances.”).
5. American Broadcasting Co. v Aereo, 134 S.Ct. 2498 (2014) (“In Aereo’s view, it does not perform. It does no more than supply equipment that ‘emulate[s] the operation of a home antenna and [digital video recorder (DVR) ]’…  having considered the details of Aereo’s practices, we find them highly similar to those of the CATV systems in Fortnightly and Teleprompter. And those are activities that the 1976 amendments sought to bring within the scope of the Copyright Act.”).
6. Capitol Records v Redigi, 934 F.Supp.2d 640 (SDNY 2013) (“At base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome.”).