IP/Entertainment Law Weekly Case Update for Motion Picture Studios and Television Networks
August 19, 2009
Table of Contents
RealNetworks, Inc., et al. v. DVD Copy Control Association, Inc., et al., USDC N.D. California, August 11, 2009
Click here for a copy of the full decision.
DVD Copy Control Association, Inc. (DVD CCA) is a not-for profit corporation made up of motion picture studios, consumer electronics companies, and computer companies. DVD CCA licenses Content Scramble System (CSS) to manufacturers of DVD devices and software.
- Court grants DVD CCA and studio defendants’ motion for a preliminary injunction barring RealNetworks, Inc. from manufacturing and distributing its RealDVD software, which allows users to copy, save and play DVD content onto a hard drive; court holds that DVD CCA and studios are likely to succeed on their counter-claims for breach of contract and violation of the anti-circumvention provisions of the DMCA and that the fair use defense is not available for these DMCA claims
CSS technology is an encryption-based system that, inter alia, scrambles the video content on DVDs and renders it unusable and unplayable to the user, unless and until the content is decrypted with CSS security “keys.” The content of a CSS-protected DVD is playable only after the DVD drive in which the DVD is inserted is locked and “authenticated”, akin to a secret handshake. Each company that wishes to license CSS technology from DVD CCA agrees to comply with the uniform set of rules set forth in the CSS license that are intended to prevent the copying of DVD content (CSS License). A CSS License is required to interact with CSS-protected DVDs and any company that implements CSS technology must obtain one. CSS licensees are prohibited from producing or selling devices that circumvent CSS technology.
In or about August, 2007, RealNetworks, Inc., which develops and sells platforms for delivering digital media, obtained a CSS License. In September, 2008, RealNetworks began selling software called RealDVD. When a user inserts a CSS-protected DVD into the DVD drive of a device running RealDVD software, the user can either (1) play the DVD, (2) play and save the DVD, which allows the users to view the content while RealDVD makes a copy of the content on the device’s hard drive, or (3) “save” the DVD so that it can be played later, without the DVD. Although RealDVD products are marketed for use with DVDs that a consumer owns, individuals are able to copy DVDs that are not owned by the licensed user of RealDVD, as there is no way for RealDVD to detect whether the DVDs are rented.
Once RealDVD copies the content of a DVD onto a hard drive, one does not need the physical DVD to view the content. A RealDVD copy does not include most of the CSS technologies, such as DVD-drive locking or authentication. RealDVD copies contain RealNetworks’s own propriety encryption protection called AES, and thus RealDVD copies can only be played through RealDVD software.
In addition to CSS technology, DVD content owners protect against unauthorized copying by employing copy protection systems, such as ARccOS and RipGuard, intended to interfere with the ability of certain DVD “ripping software.” ARccOS and RipGuard insert various “errors” onto DVDs that do not affect the content during playback but that severely impede copying of the DVD. In response to technologies like ARccOS and RipGuard, RealNetworks designed a program for RealDVD so that RealDVD users could freely copy the DVDs without encountering these inserted errors.
On September 30, 2008, RealNetworks filed an action in the Northern District of California against DVD CCA and several motion picture studios seeking a declaratory judgment that RealNetworks did not violate the Digital Millennium Copyright Act (DMCA) nor breach its CSS License by manufacturing and distributing its RealDVD product. A similar suit in the Central District of California was filed later the same day by several motion picture studios against RealNetworks, and the actions were consolidated into the present matter.
The studios and DVD CCA sought to preliminarily enjoin the further sale of RealDVD until the final disposition of the litigation. Pursuant to the Ninth Circuit standard, a preliminary injunction may issue if a party meets one of two tests: (1) a combination of probable success on the merits and the possibility of irreparable harm, or (2) if serious questions are raised and the balance of hardships tips in its favor.
The defendants alleged that RealNetworks violated two provisions of the DMCA: section 1201(a), which prohibits a person from trafficking in technology that “is primarily designed or produced for the purpose of circumventing a technological measure that effectively controls access to a work protected under this title” (referred to as the “access-control provision”) and section 1201(b), which prohibits a person from trafficking in technology that “is primarily designed or produced for the purpose of circumventing a technological measure that effectively protects a right of a copyright owner under this title in a work or a portion thereof” (referred to as the “copy-control provision”).
Regarding the access-control provision, the court rejected RealNetworks’s argument that CSS technology did not effectively control access. Although CSS security keys have been hacked and made available on the Internet, the court held that access control must be viewed from that of an average consumer. Applying the access control provision, the court found that, because RealDVD allowed consumers to access DVD content from a hard drive without going through CSS protection steps such as drive-locking and authentication, RealNetworks unlawfully circumvented the CSS technology. The fact that RealNetworks is a CSS licensee did not preclude the court from finding a DMCA violation because it ruled that RealNetworks was acting outside the scope of the license. Hence, DVD CCA could bring both a breach of contract and DMCA claim against RealNetworks. The court found that the DMCA provided broad statutory protection against circumvention of technology measures aimed at protecting content, and that any “unauthorized” use of CSS technology qualified as circumvention. The court emphasized that although RealNetworks initially accesses the DVD content via the licensed CSS technology, it is not shielded from the provisions of the DMCA when it engages in subsequent non-licensed functions such as copying DVD content. Accordingly, the court found that the defendants were likely to prevail on their section 1201(a) claim pursuant to the DMCA.
Turning to the copy-control provision, the court found the defendants would likely also prevail as to section 1201(b) of the DMCA. The court held that the RealDVD product engaged in unauthorized circumvention of CSS technology when it “removed” the layers of protection such as DVD drive-locking and authentication. The court found this removal thwarted the rights of copyright owners to decide who may gain access to their copyrighted works in digital form. Additionally, RealNetworks’s DVDWalk software, which circumvented the intentionally inserted errors by ARccOS and RipGuard, also likely violated the copy-control provision of the DMCA. The court rejected RealNetworks’s arguments that DVDWalk was designed to circumvent accidental errors caused by manufacturing defects in the physical DVD. The court did not find this claim credible given the amount of time and resources RealNetworks spent on addressing the errors. It further rejected RealNetworks’s claim that because ARccOS and Ripguard only slow down the copying process and do not prohibit it completely, these programs do not effectively protect the rights of the copyright owners.
Having found the defendants likely to prevail on their two DMCA claims, the court considered whether the fair use defense would preclude liability. As an initial matter, the court rejected RealNetworks’s claim that copying a DVD onto a hard drive was akin to “time-shifting” as set forth in Sony Corp. Of Am. v. Universal City Studios, 464 U.S. 417 (1984), because RealNetworks could not assert that RealDVD offered substantial non-infringing uses. The court continued by noting that fair use is not a defense to violations of 1201(a), but fair use might be available under 1201(b) for individual end-users who copy a work. While fair use might be applicable to individual end-users, the court held that the DMCA “fair use” exception does not apply to manufacturers or traffickers of the devices, like RealNetworks, that enable the individual end-users to copy.
Next, the court held that the defendants would likely prevail on their breach of contract claim. As a preliminary matter, the court found that the CSS License was comprised of three different documents, including a document detailing the technical specifications of CSS that was delivered after the execution of the central agreement. RealNetworks argued that it complied with the CSS License by protecting the RealDVD copy with RealNetworks’s own propriety encryption program called AES. The court found that RealNetworks’s added level of protection was inconsequential to the language of the contract, which related only to CSS technology. RealNetworks further proffered that the CSS License was a contract of adhesion. The court agreed with RealNetworks’s contention but held that even contracts of adhesion must be read in light of the reasonable expectations of the adhering parties and that a designation of adhesion does not in and of itself mean an agreement is unenforceable absent undue oppression or unconscionablility. Notably, the court found that RealNetworks never communicated its reasonable expectations at the time the parties contracted and, as such, the defendants’ interpretation, embodied in the general text of the agreement, controlled. Because RealDVD disregarded the CSS License requirements regarding authentication, RealNetworks violated the contract. Additionally, the court found that RealNetworks breached the covenant of good faith and fair dealing.
The court held that the defendants were entitled to a presumption of irreparable harm on their DMCA claims because, in a case involving the circumvention of copyright protection systems, demonstration of a reasonable likelihood of success on the merits likewise creates a presumption of irreparable harm (citing Universal City Studios, Inc. v. Reimerdes, 82 F. Supp.2d 211 (S.D.N.Y. 2000)). Furthermore, the court held that the defendants were entitled to a presumption of irreparable harm on their breach of contract claim because the CSS License contained a stipulated irreparable injury provision expressly entitling DVD CCA to preliminary or permanent injunctive relief for a breach of the agreement and providing that injury arising from a breach “will be irreparable.”
DVD Copy Control Association, Inc. v. Kaleidescape, Inc., California Court of Appeal, Sixth Appellate District, August 12, 2009
Click here for a copy of the full decision.
Plaintiff DVD Copy Control Association (DVD CCA) is a not-for-profit organization consisting of companies in the motion picture, consumer electronics and computer industries. It licenses encryption technology called Content Scramble System (CSS) which is used to prevent unauthorized copying of movies and other copyrighted content stored on DVDs.
- California Court of Appeal reverses trial court’s decision and holds that defendant, who licensed CSS technology from plaintiff DVD CCA and developed a home entertainment system that allows a user to play a movie without the physical DVD, was bound by the General Specifications provided by plaintiff, even though that document was not specifically referenced in the DVD CCA standard license agreement; appeal court instructs trial court to determine if defendant breached the license agreement and whether to issue a permanent injunction
Defendant Kaleidescape, Inc. licensed CSS from DVD CCA in order to develop a home entertainment system for viewing movies distributed on DVD. The system Kaleidescape developed (with a retail price of about $10,000) is capable of storing and organizing content from thousands of DVDs. Once stored in the Kaleidescape system, the DVD content may be played back at any time in any room, without the need to reinsert the physical DVD.
DVD CCA provides a standard License Agreement to every licensee that states “Licensee shall comply with the CSS Specifications” and CSS Specifications is defined as “the documentation relating to CSS entitled ‘CSS Specifications’ (including the Procedural Specifications and the Technical Specifications) that Licensor makes available to Licensee.” After executing the License Agreement and paying the administrative fee, Kaleidescape received a master key, specifications for Descramblers, specifications for Authenticators, and General Specifications (which requires that the physical DVD be present in the device when the movie is played).
When DVD CAA learned that Kalediscape’s system allows users to play a movie without inserting the physical DVD, it sued for breach of contract. Kaleidescape asserted that the document titled General Specifications was not part of the License Agreement because it was not referenced or incorporated by the License Agreement. The trial court agreed with Kaleidescape’s analysis and ruled in its favor. The trial court also stated that it was not offering any opinion about whether Kaleidescape actually breached the contract.
The trial court also ruled on the issue of specific performance. Prior to trial, DVD CCA abandoned any claim for damages and sought only specific performance or preliminary injunction. The trial court held that the terms of the License Agreement were not sufficiently definite to allow for specific performance, and injunctive relief was unavailable because DVD CCA had not shown it would suffer irreparable harm.
The California Court of Appeal reversed and remanded. Regarding the breach of contract claim, the court concluded that “the mutual intent of the parties at the time the License Agreement was signed was that DVD CCA would grant Kaleidescape permission to use CSS in exchange for the payment of an administrative fee and Kaleidescape’s promise to build its system according to specifications that DVD CCA would later provide. This promise is express and complete on the face of the License Agreement. The undisputed extrinsic evidence shows that General Specifications was one set of specifications that DVD CCA provided to Kaleidescape pursuant to this arrangement.”
The Court of Appeals began by stating that the incorporation-by-reference doctrine is inapplicable under the circumstances. According to the court, the general rule is that the terms of an extrinsic document may be incorporated by reference in a contract so long as (1) the reference is clear and unequivocal, (2) the reference is called to the attention of the other party and he consents thereto, and (3) the terms of the incorporated document are known or easily available to the contracting parties. However, the court explained that applying this doctrine would be “directly contrary to the unambiguous intent of the parties as expressed in the License Agreement, which was that the licensee would comply with the specifications that DVD CCA provided after the agreement was signed.”
The court acknowledged that DVD CCA had an interest in not disclosing the CSS technology until after a licensee signed a License Agreement. According to the court, “[t]he overarching and undisputed intent of the License Agreement was to allow Kaleidescape to produce a DVD device utilizing CSS to access DVD content while maintaining the confidentiality of the CSS technology. DVDCCA could not distribute confidential information pertaining to CSS absent Kaleidescape’s promise to maintain its confidentiality. Thus, the agreement was made under circumstances that required DVD CCA to withhold the confidential specifications until after Kaleidescape signed the confidentiality provisions contained in the License Agreement. Both parties understood that technical specifications would be provided after the License Agreement was executed. Kaleidescape knew that it was taking a risk that the undisclosed specifications might preclude the type of device it planned to make. All three sets of specifications, identically formatted, were delivered together, along with the master key, promptly after the agreement was executed, indicating that General Specifications was one set of CSS specifications that DVDCCA was providing pursuant to the License Agreement.”
The court also examined the extrinsic evidence to determine whether the agreement was reasonably susceptible to the meaning Kaleidescape asserted. The court noted that Kaleidescape’s compliance memo to DVD CCA after receiving the various specification documents showed that, before this litigation began, Kaleidescape understood that General Specifications was included among the undisclosed specifications to which the License Agreement referred.
The court concluded that “under the License Agreement, Kaleidescape promised to comply with the technical specifications pertaining to CSS that DVDCCA would provide. General Specifications falls within the scope of that promise and, therefore, Kaleidescape is obligated to comply with its requirements insofar as they are pertinent to its system.” The court also stated that it was not offering any opinion about whether Kaleidescape actually breached the contract and remanded that issue back to the trial court.
The Court of Appeal also reversed the trial court’s conclusion that it could not order specific performance because the terms of the contract were not sufficiently definite for the court to know what to enforce. The Court of Appeal held that a specific performance order cannot be crafted unless and until the trial court decides that Kaleidescape is in breach; “[r]esolution of that issue will clarify the meaning of the terms.”
The Court of Appeal also reversed the trial court’s conclusion that DVD CCA had suffered no irreparable harm, a necessary element for obtaining a permanent injunction. The License Agreement stated that “in the event that Licensee breaches its obligations . . . , money damages alone will not adequately compensate an injured party . . . [and DVD CCA] will be entitled to specific performance or other temporary, preliminary, or permanent injunctive relief.” DVD CAA urged the court to treat the stipulation as a liquidated damages clause or a consent decree. According to the court, there is no published California case holding that such stipulations are enforceable, and DVD CCA’s approach would be “the prudent approach.” The court concluded that the trial court must first determine if Kaleidescape breached the License Agreement, and the nature and extent of the harm, and whether DVD CCA can be remedied in damages. If not, the Court of Appeal said the trial court should enforce the stipulation stating that a breach would result in irreparable harm.
Siegel, et al. v. Warner Bros. Entertainment Inc., et al., USDC C.D. California, August 12, 2009
Click here for a copy of part one of the decision.
Click here for a copy of part two of the decision.
This 92-page decision is the latest ruling in an ongoing action brought by the widow and daughter of Jerome Siegel, one of the co-creators of the Superman character, to terminate Siegel’s grant of rights in various Superman works to Detective Comics and other publishers.
- District court holds that plaintiffs, heirs of one of the co-creators of the Superman character, successfully terminated certain prior grants in copyrights and recaptured the rights to several Superman-related works from the 1930s and 40s, including portions of Superman comic books and two weeks’ worth of daily newspaper strips; however, the court ruled that the remaining Superman material at issue in the litigation was created as a work made for hire under the Copyright Act of 1909, and that ownership of such material remains solely with defendants
The Copyright Act of 1976 does not allow an author (or his or her heirs) to terminate a prior grant of copyright in a work made for hire, and thus the primary issue in this ruling was whether four distinct groups of works created by Siegel, by himself or with others, constituted “works made for hire” under the Copyright Act of 1909, the law in effect at the time they were created. While the 1909 Act did not define the terms “work made for hire” or “employer,” courts have analyzed whether works created by independent contractors or employees were ones made for hire using what is known as the “interest and expense” test, which requires the evaluation of three factors: (1) at whose instance the work was prepared; (2) whether the hiring party had the power to accept, reject, modify, or otherwise control the creation of the work; and (3) at whose expense the work was created.
Applying the interest and expense test to the Superman material, the court first held that material created by Siegel prior to a March 1, 1938, grant of rights from Siegel and his co-creator to Detective Comics, which was later published by Detective Comics, was not a work made for hire. However, the court also held that a paragraph drafted by Siegel prior to March, 1938, which described future Superman exploits, merely set forth non-copyrightable “ideas,” and did not suggest that later fuller expressions of the concepts contained therein should be deemed to have been created prior to the March 1, 1938, grant. Based on its analysis, the court held that, in addition to works set forth in earlier orders, works that were created prior to March 1, 1938, and were subsequently published in Action Comics No. 4 and pages three through six of Superman No. 1 were not works made for hire, and were subject to termination.
The court next determined that works created after the March 1, 1938, grant of rights, but before Siegel and his co-creator entered into an employment agreement with Detective Comics dated September 30, 1938, were nevertheless works made for hire. Applying the “instance and expense” test, the court concluded that the creation of the material in question was solicited by and done at the instance of the defendants, finding that “Detective Comics, as the copyright holder of a pre-existing work, approached the artists and asked that they create works derived from that pre-existing material on a regular basis, and then paid the artists for that derivative work.” The court also determined that all comic book material produced by Siegel and his co-creator after they signed the September 30, 1938, employment agreement was clearly work made for hire, and thus was not subject to termination.
The court stated that the final category of works, newspaper strips published from 1939 to 1943, was the most difficult, largely because of the involvement of a third party, the McClure Publications newspaper syndicate, and because the newspaper strips were derivative works. The court applied the instance and expense test and determined that newspaper strips created following the execution of a September 22, 1938, syndication agreement were works made for hire and therefore not subject to termination, because “the artists did not independently decide to create the newspaper strips; rather, they did so because they were contractually obligated to do so and because they expected to receive compensation for their creations,” and because McClure retained editorial supervision rights of the material. The court held that whether the ultimate employer was McClure or Detective Comics was irrelevant, because the present inquiry concerned only whether the artists created the newspaper strips within the scope of their job duties.
However, the court also held that two weeks’ worth of newspaper strips, which were created before the parties signed the syndication agreement, were not works made for hire. The defendants argued that the plaintiffs were not entitled to terminate the grant of these two weeks’ worth of newspaper strips because the works had fallen into the public domain because of faulty copyright notices, but the court rejected this notion, finding that the artists had assigned the entire copyright in this material prior to the material’s publication. The court also rejected the defendants’ contention that plaintiffs’ failure to serve a copy of the termination notice on McClure rendered the termination notice invalid, because all of McClure’s rights in the material were assigned to Detective Comics in 1944, and Detective Comics’ successors were served with the termination notice. The court ruled that service of the termination notice need only be made upon the last grantee in the chain of title of which those serving the notice are reasonably aware.
Finally, the court concluded that the plaintiffs’ failure to list the initial two weeks’ worth of newspaper strips in the termination notice did not invalidate the notice as to those strips (which contained “potentially valuable copyright elements [including] material in which Superman’s home planet of Krypton is named, Superman’s Krypton name is revealed, and the circumstances surrounding Krypton’s destruction are revealed”) in light of the vast number of works plaintiffs sought to recover (thousands) and the existence of a catch-all phrase in their notice.
For more information, please contact Jonathan Zavin, W. Allan Edmiston, David Grossman, Jonathan Neil Strauss, Tal Dickstein or Meg Charendoff.
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