Aereo: Car Dealership or Copy Shop?

July 16, 2014

(as published in Wired Innovation Insights)

In the Supreme Court’s recent Aereo decision, the majority opinion compares the company to a car dealership that sells products. The dissent likens Aereo to a copy shop that allows customers to make copies, thus creating products themselves. Whichever analogy is used, the Court’s overall message is clear: Fledgling businesses would do well to avoid a business model based on a perceived loophole in the law, especially when that loophole arguably flies in the face of Congressional intent and case law from other jurisdictions.

This article looks back at the history leading up to Aereo’s inception and its path to the Supreme Court, and forward to the impact this decision might have on new technologies such as cloud computing.

Back When Cable Was New

Soon after the growth of the early cable companies in the 1960s, the Supreme Court held that community antenna television (“CATV”) systems that captured live broadcasts and retransmitted those signals to viewers in areas not receiving the signals did not infringe the broadcasters’ copyrights because CATV systems were not “performing” the copyrighted work.

With the Copyright Act of 1976, Congress overruled the Supreme Court by amending the definitions of “perform” and “publicly” to encompass CATV secondary transmissions. Congress also established a compulsory licensing system, which permitted cable companies to publicly perform and retransmit signals of copyrighted television programming as long as they paid government-regulated royalties and complied with other requirements.

Aereo’s Launch: Lessons Learned From Cablevision and Ivi Cases

In developing its business model, Aereo took note of past court decisions. In 2008, Cablevision successfully argued in the U.S. Court of Appeals for the Second Circuit that its DVR system remotely stored television shows at the direction of a user and only for that user, and therefore did not involve transmissions of copyrighted material “to the public.” Then in 2012, ivi, Inc.—a company that captured and retransmitted copyrighted television programming live over the Internet to paying subscribers—was sued by a group of broadcasters, also in the Second Circuit. Ivi argued it was a cable system entitled to take advantage of the government’s compulsory licensing system, but was unsuccessful.

Incorporating the lessons from Cablevision’s success and ivi’s defeat, Aereo developed a novel system that assigned a single one of its dime-sized antenna to a single user who logged in to use the company’s services. By allowing one user to take control of a single antenna, Aereo argued that each transmission of broadcast material was not made “to the public” and so was not copyright infringement.

Here Comes the Judge

When a group of broadcasters sought a preliminary injunction from the Southern District of New York to prevent Aereo from retransmitting their signals online, the court denied the motion, holding that the broadcasters were unlikely to prevail in light of the Second Circuit’s Cablevision decision, and the Second Circuit affirmed. Notably, Judge Chin, who authored the opinion finding that ivi was not able to utilize the compulsory licensing scheme, filed a dissenting opinion.

In Judge Chin’s view, Aereo had created a “Rube Goldberg-like contrivance, over-engineered in an attempt to avoid the reach of the Copyright Act and to take advantage of a perceived loophole in the law.” He further wrote that “there is no technologically sound reason to use a multitude of tiny individual antennas rather than one central antenna . . . .”

Judge Chin also argued that Cablevision’s DVR system involved content for which the defendant had already paid a license, whereas Aereo does not pay any licensing fee. He pointed to the fact that Aereo does not offer its subscribers access to channels broadcast from New Jersey as proof that Aereo knew it was taking advantage of a perceived loophole created by Cablevision because Cablevision would not govern in New Jersey.

As a side note, FilmOn X, Aereo’s biggest competitor, is currently appealing two injunctions that have prevented it from operating. On September 5, 2013, the District Court for the District of Columbia issued a nationwide injunction barring FilmOn X from operating. The District Court for the Central District of California issued a similar injunction the year prior that was limited geographically to regions falling within the Ninth Circuit’s jurisdiction. FilmOn X has until July 29, 2014 to submit a brief describing how the Supreme Court’s ruling against Aereo will affect its position.

Aereo Not Simply an Equipment Provider

On June 25, 2014, the Supreme Court issued an opinion authored by Justice Breyer that ruled against Aereo, finding that its system of assigning a single antenna to a single user constituted a public performance for the purposes of copyright infringement. The majority focused primarily on the intent of Congress in passing the Copyright Act of 1976, which, in part, overturned two Supreme Court decisions that found traditional CATV cable systems did not infringe broadcasters’ copyrights.

Justice Breyer wrote that the history of the Congressional response to CATV cable systems “makes clear that Aereo is not simply an equipment provider [and that it] . . . ‘perform[s]’ (or ‘transmit[s]’).” The opinion further stated that “Aereo’s activities are substantially similar to those of the CATV companies that Congress amended the [Copyright] Act to reach.”

Parking Lots v. Copy Shops

To allay concerns that this opinion may affect new technologies, especially those involving cloud computing, the Court used the analogy of a parking lot and a car dealership: No one would say that a parking lot offered cars to the public, because users provide and park their own cars, whereas a car dealership does offer cars to the public. In the same sense, a cloud computing service that merely allows users to “park” content they already own would not be making a transmission to the public when users accessed their content.

Justice Scalia authored a dissenting opinion that focused heavily on the rationale of the Cablevision opinion. He compared Aereo’s business model to that of a copy shop that just allows users to make copies, stating “the customer chooses the content and activates the copying function; the photocopier does nothing except in response to the customer’s commands.” For this reason, the dissent argued that neither the copy shop owner nor Aereo could be held liable for direct infringement.

At the end of the day, however, Justice Scalia admitted that he shares “the Court’s evident feeling that what Aereo is doing . . . to the Networks’ copyrighted programming ought not to be allowed.” In his view, however, the Supreme Court should not take the role of plugging what he perceives as a loophole in the Copyright Act; rather, such action should be left to Congress.

Head in the Cloud

The Supreme Court’s decision is extremely narrow and likely limited to the specific context of online retransmission of broadcast signals. The Court went out of its way to limit its decision in an attempt to avoid any chilling effects on new technologies, especially those based on cloud computing.

In view of this opinion, fledgling businesses would do well to avoid a business model based on a perceived loophole in the law, especially when that loophole arguably flies in the face of Congressional intent and case law from other jurisdictions.

In the final analysis, however, Aereo may have proven its business model, and it has an infrastructure that other startups do not. It may find itself in a decent position to begin negotiating licenses from the broadcasters.

What’s Next?

FilmOn X has applied to the Copyright Office for a compulsory license, taking the position that it is a “cable system” under the meaning of the Copyright Act. Similarly, Aereo has written to the Southern District of New York, to which its case has been remanded, taking the same position.

Although the Supreme Court stated that Aereo’s services were substantially similar to cable companies targeted by the amendments to the Copyright Act of 1976, it did not specifically address whether Aereo would qualify as a cable system under the statute. In 2012, as noted above, the Second Circuit found ivi did not qualify as a cable system under the statute, and the Copyright Office has consistently concluded that service providers like Aereo are not cable systems.

It is unclear whether the Supreme Court’s opinion implicitly overrules the Second Circuit’s precedent, which would otherwise govern and prevent Aereo from obtaining a compulsory license. Even if Aereo does not qualify for a compulsory license, it may be able to negotiate a license with broadcasters privately.