Tag Archives: internet

Copyright and Web-DVR Broadcasting: The Latest Aereo and FilmOn X Decisions

Two recent decisions have added more discord among federal courts as to the question of whether technology that allows users to record copies of over-the-air broadcasts on remote servers for later web viewing violates broadcasters’ exclusive public performance rights under the Copyright Act.  On October 8, 2013 the US District Court for the District of Massachusetts aligned itself with the Second Circuit, holding that such services do not violate broadcasters’ performance rights in Hearst Stations v. Aereo (Aereo).  Reaching the exact opposite conclusion back on September 5, 2013, was the US District Court for the District of Columbia in Fox Television v. FilmOn X (FilmOn X).

The split among District Courts on this issue will likely lead to further appeals and decisions by the respective Court of Appeals.  Ultimately, the issue could be heard by the Supreme Court in the coming years, depending on whether the Courts of Appeals continue to be similarly split.

Before going to the current state of the law, this post will describe the technology that is at the heart of these copyright disputes by using Aereo as the example platform.

What is Aereo?

According to Aereo’s website, “Aereo is a technology platform that you can use to watch live broadcast television at home or on the go.” A potential Aereo user purchases a subscription from Aereo, which, in exchange, provides the user with a remote, cloud-based DVR to set and watch recordings.  The benefit to users is that the service only requires a compatible internet-enabled device, without the need to purchase antennas, boxes, or cables.  The concept is extremely simple:


Once a potential user becomes an Aereo member, the user logs in and is assigned a miniaturized, private, remote antenna and DVR.  Aereo offers technology to give consumers access to their antenna and DVR via a web browser and supported internet-enabled devices.  Once the user has connected to his remote Aereo antenna, the user can then access the Aereo platform to view all major broadcast networks live in HD.  Alternatively, the user can enable their remote DVR to set recordings and watch the broadcasts later whenever the user wants.

How does Aereo Work?

When Aereo decides to enter a particular geographic region or market, it installs an array of mini antennas.  Each of these mini antennas are no larger than the size of a dime.  A large number of mini antennas are aggregated on a circuit board, which also contains other electronic components essential to Aereo’s Internet broadcast system.Antenna

While the antenna may be assigned to an individual user, they are generally available for dynamic allocation by the tuner server.  Essentially, this means that a specific antenna is assigned to one specific individual user only when that user is watching television via Aereo, but is then assigned to a different user when the first user is done.  Nevertheless, no single antenna is used by more than one user at a single time, and all dynamic antennas are shared. The antennas are networked to a tuner router and server, which in turn link to a video encoder. The encoder converts the signals from the antennas into a digital video format for viewing on computers and mobile devices.

When a user selects a channel to watch through Aereo’s web or mobile app, the user’s request is sent to Aereo’s web server. The server sends a command to the tuner router, which then identifies an available antenna and encoder slot.  Once the antenna begins receiving the signal, data for the requested channel flows from the antenna to the antenna router and then to the video encoder, where it is stored on an Aereo remote hard drive in a unique directory created for the specific user.  The data then goes through the distribution endpoint, over the Internet to the web or mobile app for the user’s consumption.

The Dispute

In the recent Aereo case, Hearst claimed that Aereo’s services violate its exclusive rights under Section 106 of the Copyright Act to: (1) publicly perform, (2) reproduce, (3) distribute, and (4) prepare derivative works based on its copyrighted programming.  The Court’s analysis focused on the first claim relating to public performance, which will be discussed below.

The Court quickly rejected Hearst’s claim that Aereo infringed its exclusive right to reproduce its works, stating that “holding a media company directly liable just because it provides technology that enables users to make copies of programming would be the rough equivalent of holding the owner of a copy machine liable because people use the machine to illegally reproduce copyrighted materials.”  Similarly, with respect to its distribution right, the Court sided with Aereo, relying heavily on the fact that Aereo’s technology does not allow users to download (only stream) the copyrighted content.  Likewise, with respect to Hearst’s exclusive right to make derivative works, the Court quickly disposed of Hearst’s argument that by reformatting intercepted programming Aereo violated the broadcaster’s right to prepare derivative works.  As the Court reasoned, “Hearst has presented no legal authority nor is the Court aware of any for the proposition that Aereo’s technology creates a derivative work merely by converting programs from their original digital format to a different digital format compatible with internet streaming.”

Public Performance Right

Quickly dismissing the above claims, the Court focused its discussion on Hearst’s first claim regarding its exclusive right to publicly perform its copyrighted works.  The Copyright Act gives copyright owners of audiovisual works the exclusive right, among others, to “perform the copyrighted work publicly.”  Section 101 of the Act provides that “to perform” an audiovisual work means “to show its images in any sequence or make the sounds accompanying it audible.”  To make matters more confusing, the statute distinguishes between public and private performances.  Having become known as the “Transmit Clause”, Section 101 provides that “to perform a work publicly” means to transmit a performance of the work to the public, “by means of any device or process, whether the members of the public capable of receiving the performance […] receive it in the same place or in separate places and at the same time or at different times.”  For additional insight – or perhaps more confusion – the House Committee on the Judiciary’s Report to the Copyright Act (revised 1976) provides a discussion on the intended meaning of “perform” and “public performance”:

“Concepts of public performance and public display cover not only the initial rendition or showing, but also any further act by which that rendition or showing is transmitted or communicated to the public. Thus, for example: a singer is performing when he or she sings a song; a broadcasting network is performing when it transmits his or her performance (whether simultaneously or from records); a local broadcaster is performing when it transmits the network broadcast; a cable television system is performing when it retransmits the broadcast to its subscribers; and any individual is performing whenever he or she … communicates the performance by turning on a receiving set.”

The Decision

The District Court for the District of Massachusetts in Aereo relied on the Second Circuit’s holding that similar DVR technology does not infringe a copyright holder’s exclusive right to perform its work publicly.  In the 2008, the Second Circuit decided the Cablevision case, which held RS–DVR technology non-infringing of the original broadcaster’s public performance right because the technology’s manner of transmitting a recorded program to the viewer who recorded it did not constitute a public performance.  The Cablevision opinion concluded:

“In sum, we find that the transmit clause directs us to identify the potential audience of a given transmission, i.e., the persons “capable of receiving” it, to determine whether that transmission is made “to the public.” Because each RS–DVR playback transmission is made to a single subscriber using a single unique copy produced by that subscriber, we conclude that such transmissions are not performances “to the public,” and therefore do not infringe any exclusive right of public performance.”

Likewise, earlier this year, the Second Circuit applied its reasoning from Cablevision in WNET, Thirteen v. Aereo (WNET) to the very Aereo service that was before the District of Massachusetts Court.  In WNET, the Second Circuit affirmed their Cablevision decision and found that Aereo’s transmissions to subscribers also did not infringe.  The court described Cablevision’s holding as resting on two essential facts:

1)      The RS–DVR system created unique copies of each program a customer wished to record; and

2)      A customer could only view the unique copy that was generated on his behalf.

Adopting the Second Circuit’s rationale, the Massachusetts court found that Aereo’s system is consistent with the two key factors above because it (1) employs individually-assigned antennas to create copies unique to each user and (2) only at the user’s request.

The Split: FilmOn X

Not persuaded by the Second Circuit’s Cablevision or WNET decisions, the District Court for the District of Columbia came out the other way in the FilmOn X case.  Quite simply, its decision rested on a different, and not unreasonable, statutory interpretation of the Transmit Clause.  The FilmOn X court reasoned that what makes a transmission public is not the intended audience of any given copy of the program, but the intended audience of the initial broadcast.

At the end of the day, this battle of statutory interpretations may need to be settled by the Supreme Court, or – don’t hold your breath – an Act of Congress.

Capitol Records v. ReDigi: Used Digital Music Not for Re-Sale

If you are (or should I say, were) a ReDigi user, you’re probably wondering why your marketplace is gone. On Saturday, the Federal District Court for the Southern District of New York determined that ReDigi’s entire business model infringes on copyright holders’ exclusive rights to reproduce and distribute their works, in Capitol Records v. ReDigi (No. 12 Civ. 95 (RJS) (March 30, 2013).

So, for those of us who buy our music “brand-new” from Amazon and iTunes, what exactly is this ReDigi? Essentially, ReDigi provides a marketplace where sellers can resell their “used” music to willing buyers. Here’s how ReDigi describes their service:

Not surprisingly, Capitol Records took issue with ReDigi’s practice and so brought suit not more than 4 months after ReDigi went live back in October 2011. Among other things, Capitol claimed violation of its copyrights on the basis of ReDigi’s unauthorized (1) reproduction and (2) distribution of the underlying protected works. ReDigi attempted to defend against these two claims, arguing (1) the digital reselling method that it employed did not involve reproducing (or “duplicating”) the music because only one music file existed before and after the transaction between users, and (2) its distribution of a music file from one user to another user is protected under the first sale defense.

Of course, there are other aspects of this case, such as fair use defense, liability (direct and secondary infringement), and claims of violation of rights to publically display and perform, but for the purposes of this post, I find the issues I’ve identified above as the most interesting; and, I’m anticipating that they are also the most likely to be closely scrutinized on appeal.

Since I spoiled all suspense as to who won this case in the first paragraph, I’ll turn to the Court’s opinion as penned by Judge Richard J. Sullivan for the rationale.

Right to Reproduce

As to the infringement of Capitol’s exclusive right to reproduce its protected music, the court states, “the plain text of the Copyright Act makes clear that reproduction occurs when a copyrighted work is fixed in a new material object.” The court relies heavily on London-Sire Records, Inc. (D. Mass. 2008) to define the “material object” requirement:

[w]hen a user on a [P2P] network downloads a song from another user, he receives into his computer a digital sequence representing the sound recording. That sequence is magnetically encoded on a segment of his hard disk (or likewise written on other media). With the right hardware and software, the downloader can use the magnetic sequence to reproduce the sound recording. The electronic file (or, perhaps more accurately, the appropriate segment of the hard disk) is therefore a “phonorecord” within the meaning of the statute. 

According to the Court, “this understanding is, of course, confirmed by the laws of physics, [as it] is simply impossible that the same ‘material object’ can be transferred over the Internet […] because the reproduction right is necessarily implicated when a copyrighted work is embodied in a new material object, and because digital music files must be embodied in a new material object following their transfer over the Internet, the Court determines that the embodiment of a digital music file on a new hard disk is a reproduction within the meaning of the Copyright Act.”

Essentially, this issue turns on what exactly is a reproduction under the Copyright Act. ReDigi’s argument, and entire business model for that matter, relied on the notion that a reproduction means duplication, as in where there existed one copy of a song there are now two (or more) copies of that song. The court is unmoved by ReDigi’s argument that its technology ensures that only one copy of the song exists at all times during the lifecyle of a ReDigi transaction. As the court states,

ReDigi stresses that it “migrates” a file from a user’s computer to its Cloud Locker, so that the same file is transferred to the ReDigi server and no copying occurs. However, even if that were the case, the fact that a file has moved from one material object – the user’s computer – to another – the ReDigi server – means that a reproduction has occurred. Similarly, when a ReDigi user downloads a new purchase from the ReDigi website to her computer, yet another reproduction is created. It is beside the point that the original phonorecord no longer exists. It matters only that a new phonorecord has been created.

This determination on the reproduction issue was the death knell for ReDigi. While they asserted a fair use defense, it was feeble and quickly dismissed by the court.

Right to Distribute

As to the distribution issue, ReDigi did not (nor could it) argue that distribution does not occur on its website. Instead it relied on the first sale defense (in addition to the unsuccessful fair use defense mentioned above). The first sale doctrine only applies to a defense against infringement of the right to distribute. The defense allows “the owner of a particular copy or phonorecord lawfully made under this title […] to sell […] that copy or phonorecord” without the permission of the copyright owner. This once common law principle is codified in the Copyright Act at 17 U.S.C. § 109. As the Court acknowledges, “under the first sale defense, once the copyright owner places a copyrighted item (here, a phonorecord) in the stream of commerce by selling it, he has exhausted his exclusive statutory right to control its distribution” citing to Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135, 152 (1998).

The Court discards ReDigi’s first sale defense for two reasons. First, since the Court already concluded that ReDigi violated Capitol’s right to reproduce above, the Court went on to reason that all digital music files sold on its website are not “lawfully made under this title.” Second, the Court reads Section 109 as limiting the first sale defense to “only distribution by the owner of a particular copy or phonorecord of that copy or phonorecord.” Interestingly, the Court applied this reasoning to the facts of this case as follows:

Here, a ReDigi user owns the phonorecord that was created when she purchased and downloaded a song from iTunes to her hard disk. But to sell that song on ReDigi, she must produce a new phonorecord on the ReDigi server. Because it is therefore impossible for the user to sell her “particular” phonorecord on ReDigi, the first sale statute cannot provide a defense. Put another way, the first sale defense is limited to material items, like records, that the copyright owner put into the stream of commerce. Here, ReDigi is not distributing such material items; rather, it is distributing reproductions of the copyrighted code embedded in new material objects, namely, the ReDigi server in Arizona and its users’ hard drives.

The Court’s statutory construction is certainly one logical interpretation of the statute governing the first sale defense. That said, the Court doesn’t cite an authority other than the statue itself in quickly dismissing ReDigi’s best defense to its infringement on the distribution claim.

Needless to say, I’m guessing this will be closely reexamined at what most certainly will be an appeal to the Second Circuit. Stay tuned, as this decision and its appeal will undoubtedly have impacts beyond ReDigi to other online marketplaces that either currently facilitate used digital sales or looking to do so in the future (think used e-books for your Kindle).

Sourcing from the Crowd: The Netflix Crowdsource License

To address the flip-side of my previous post, this post looks at “crowdsourcing.”  While eager entrepreneurs attempt to lure funding from accelerators and VC firms, established companies are making open calls to the public in search of the next big idea.  First coined by Jeff Howe nearly 7 years ago, crowdsourcing “represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call.”

With the growth of this relatively new form of outsourcing, this post attempts to inform the would-be participant (i.e., the member of the crowd) of the implications of her participation in such an event.  In particular, I will use the recent Netflix Cloud Prize Contest and its corresponding Terms & Conditions to highlight some of the crucial aspects related to the intellectual property license contained therein.

For starters, software developers should know their work is generally protected under U.S. Copyright Law.  When they develop original code they “own” the underlying work.  That code can then be lawfully used by others, but only to the extent the developer has granted a license to that user.  To put it simply, software licenses are copyright licenses. The key copyright license rights are:

  1. The right to reproduce
  2. The right to modify (also, the right to create derivative works)
  3. The right to distribute
  4. The right to publicly perform (also, the right to publicly display)
  5. The right to use (including install, download, etc.)
  6. The right to sublicense (i.e., the right to pass license rights on to third parties)

Looking now to crowdsourcing, and the Netflix Cloud Prize Official Rules in particular, here is how a software developer’s rights are affected by virtue of their submission to the contest.  The software developer (the “Participant”) grants the below license to Netflix, as the “Sponsor” of this crowdsourced project.  For ease of interpretation, I will address the license in discrete pieces, first, addressing the scope, and then addressing the specific rights licensed.

Participant (and all members of your team, if applicable) grant to Sponsor a non-exclusive, worldwide, royalty-free, perpetual, irrevocable, fully sublicensable (through multiple tiers) and transferable license, without additional consideration to you (or any members of your team, if applicable) or third parties, to […]

This licensing scope is very broad.  The software developer Participant is giving Netflix license rights that have no limitation in geography, volume (no royalty payment based on Netflix exercising its license rights), duration, or revocability.  More interesting, the license is “non-exclusive” and “sublicensable”.

Developers should interpret the non-exclusivity as a benefit to this otherwise one-sided transaction.  This means, that while Netflix has broad license rights, the developer still has the ability to license its software to other entities in the future.  Less appealing to the developer, however, should be the fact that they are agreeing to allow Netflix to sublicense the software.  This will allow Netflix to provide license rights to third parties without further consideration or negotiation with the developer.  Developers who participate in this contest that may wish to commercially exploit their software after participating in the crowdsourcing event, should consider whether a competitor would be able to license its software through Netflix where the developer herself would not enter into such an agreement with that competitor.

Continuing now to the actual rights licensed:

[…] to (a) reproduce, distribute, perform and display (publicly or otherwise), adapt, modify, edit, translate, make available to the public, make, sell, offer to sell, import and otherwise use and exploit (and have others exercise such rights on behalf of Sponsor, through multiple tiers) your Submission (the “Licensed Work”) and any ideas, trademarks, patents and other intellectual property accompanying, related to or embodied in the Licensed Work, and any materials embodying, incorporating or derived from the Licensed Work, in any format or media now known or hereafter developed; [and to] (b) create derivative works from and incorporate the Licensed Work into other works or into Sponsor’s or its designees’ products or services; […]

As subclauses “(a)-(b)” make clear, the software developer, as a condition of submitting her software in the contest, grants Netflix every license right under copyright law.  That is, the rights to use, reproduce, distribute, modify (create derivative works), and publicly display/perform.  Interestingly, albeit understandably, subclause “(a)” casts a wide net in order to remove all ambiguity by including within these rights all other IP rights (i.e., patent, trademark, and “ideas”) that are “related to” the participant’s software.

Like the scope of the license itself, these rights are expansive.  While developers would surely anticipate Netflix’s use and commercialization of their software, they may be less aware of Netflix’s right to create derivative software that leverages the developer’s submitted work.  This is true regardless of the developer’s initial intent for how the software would be used.  Software developers considering this contest must be prepared to relinquish full control over their design, code, and future manipulation of their product, regardless of whether or not they win the contest.

Finally, while somewhat beyond the scope of this post, it’s interesting to point out the final subclauses of this license, which include the following marketing rights and likeness rights:

[…] [to] (c) use the Licensed Work for Sponsor’s advertising and promotional purposes; and (d) except where prohibited by law, use the name, photograph, portrait, picture, voice, likeness, statements, and biographical information of you (and all members of your team, if applicable) for Sponsor’s advertising and promotional purposes, whether or not in connection with your Submission, in each case for the purpose of administering and promoting the Contest, any future Sponsor promotions, and/or Sponsor.

These rights, while not standard for general software licenses (other than distributor licenses), are a product of the crowdsourcing method.  This goes back to the original definition.  Crowdsourcing is a call to the public, a contest of sorts.  As such, the software developer participant grants Netflix the right to use the likeness of the developer to promote not only the software but the fact that the software was the product of a crowdsourcing event.  Most contests contain similar language in their rules of participation, so this should not be too surprising for participants; however, software developers should consider how comfortable they are with privacy matters and their inability to control how Netflix (should it choose to exercise this right) portrays the developer to the public.

Given the lack of restrictions on these rights or in the scope of the license, software developers should weigh the probability of winning the contest prize ($10,000) against the possibility that they could commercialize their software.  While participating in the contest will not preclude the developer from commercializing their software by licensing to other firms in need of SaaS widgets, their market is diminished by virtue of Netflix’s ability to exploit, in all manners, the developer’s software (and to sublicense that exploitation to others without the developer’s consent).  Of course, developers may perceive certain intangible benefits to the contest, such as those often associated with social networking, as tipping the scales in what might otherwise be an unattractive deal.  Certainly, that’s what the crowdsourcing movement has largely depended on.



Fund Me! Still Awaiting SEC to Act on Crowdfunding Law

If you are familiar with the Ostrich Pillow, then you’re definitely aware of the growing crowdfunding marketplace.  Today, companies such as Kickstarter are leading the way in providing platforms for connecting creative founders with the public.  According to the Crowdfunding Industry, as reported by techcrunch, crowdfunding platforms raised almost $1.5 billion and funded over one million projects in 2011.  So what is crowdfunding and what issues does it raise from a legal standpoint?

Crowdfunding is simply the process of obtaining funding for some project by appealing to the public.  Or, as a recent California Department of Corporations (DOC) bulletin put it:

Crowdfunding began as a way for the public to donate small amounts of money, often through social networking websites, to help musicians, filmmakers and other artists finance their projects. These types of crowdfunding are generally altruistic and contributors (who are not, strictly-speaking, investors) do not receive equity in the projects they are funding.

Sounds a lot like an IPO?  Well, not necessarily.  Currently, there are at least four types of crowdfunding platforms as identified by Suw Charman-Anderson of Forbes.com:

  1. Lending: Funders receive income from their loan and expect repayment of original principal investment
  2. Reward: Funders receive a non-financial benefit, with projects often following a pre-sales model
  3. Donation: Funders expect no return, motivations are philanthropic
  4. Equity: Funders receive equity in the projects they back, earn revenue or profit-share

For the purposes of this post, it is the equity platform that is of greatest interest as it alone is the the subject of the JOBS Act.  Over a year ago, Congress passed bipartisan legislation known as the Jumpstart Our Business Startups Act (the “JOBS Act” or “Act”).   The Act is intended to “increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies.”  The Act, in its entirety, can be found here.  When fully implemented, the Act will promote capital formation by enabling “emerging growth companies” to sell, through a portal registered with the SEC, up to $1 million in securities over a 12-month period to an unlimited number of investors, i.e. the crowd.  Furthermore, the Act lowers the burden of capital formation by exempting these crowdfund offerings from registration with state or federal authorities.  The Act attempts to balance these benefits that may encourage fraud by requiring the emerging growth companies to disclosure all material facts and risks associated with the investment.

Most importantly, the Act calls upon the Securities and Exchange Commission (SEC) to adopt rules and regulations implementing the Act.  And, until the SEC implements the Act through its rulemaking authority, this type of equity crowdfunding remains illegal.  To date, the SEC has yet to act, putting the agency nearly 4 months behind their deadline.

The entrepreneurs that I know are excited for this opportunity.  As are investors who want to be a part of something.  The appeal of the reward and donation type crowdfunding platforms seems to be largely one of community, similar to the underpinnings of social networking in general.  How else could a project like this ever get funding?

Certainly, there are legitimate reasons for the SEC to carefully craft rules to implement the Act.  Protecting the investing crowd from fraud is an important objective.  Similarly, ensuring the investing crowd have adequate and accurate information to make an informed investment decision is principle inherent to our public equity markets.  But these problems are by no means any reason for them to bury their heads in the sand.