USDC N.D. California, August 11, 2009

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  • 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

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.

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.”