A three-judge panel of the United States Court of Appeals for the Ninth Circuit has unanimously affirmed the decision of the District Court for the Central District of California denying Fox Broadcasting Co. a preliminary injunction against Dish Network’s advanced DVR service and its associated ad-skipping functionality.

Background. As reported in our Client Advisories dated May 31, 2012 and November 29, 2012, Dish is offering its subscribers an advanced DVR-enabled set-top box featuring (i) multi-room recording capability (the “Hopper”); (ii) automatic recording of the primetime schedule of the major broadcast networks (“PrimeTime Anytime” or “PTAT”); and (iii) ad-skipping (“AutoHop”). Fox responded to Dish’s deployment of this equipment and the associated services by filing copyright infringement and breach of contract actions against Dish in the United States District Court for the Central District of California. The lower court denied Fox’s motion for a preliminary injunction against Dish last fall, holding that Fox had failed to establish a likelihood of success on its claims relating to the Hopper’s PTAT and AutoHop functionality.

In part, the district court relied on the Supreme Court’s 1984 decision in the Sony Betamax case in finding that Dish could not be held liable for contributory or vicarious copyright infringement because Fox had failed to identify any theory under which individual consumers could be liable for infringement for using the Hopper. The district court also rejected Fox’s contention that its reproduction and distribution rights were infringed directly by Dish. The court, citing the Cablevision RS-DVR case, found that it was the individual consumer, not Dish, that caused the PTAT copies to be made, and that those copies were not “distributed” because they did not change hands. The district court similarly rejected breach of contract claims arising out of retransmission consent agreements between Dish and Fox that purported to (i) prohibit Dish from distributing copies of Fox programming on a time-shifted basis or (ii) bar Dish from copying or authorizing others to copy Fox broadcast programming for purposes other than private home use.

Finally, the district court concluded that certain copies of Fox broadcast programming that Dish itself created for “quality assurance purposes” were infringing and not fair use. However, the court concluded that the “harm” resulting from the creation of these copies was not irreparable and thus did not warrant the issuance of the requested injunction.

The Ninth Circuit’s Decision. The Ninth Circuit noted at the outset of its decision that it was required to apply a “deferential standard of review” when reviewing a district court’s denial of a request for a preliminary injunction. Under this standard of review, the Ninth Circuit stated that it was obligated to affirm the decision below unless it found that the district court had committed an “abuse of discretion.”

Direct Copyright Infringement Claim relating to PTAT. The court of appeals accepted the district court’s determination that Dish could not be held liable for violating Fox’s reproduction rights under the Copyright Act because proving such infringement requires “copying by the defendant.” According the court of appeals, Dish’s “participation” in the operation of the PTAT copying service (by enabling the device to automatically copy the entire Fox primetime schedule) did not mean that Dish made the copies itself since the service only creates copies in response to a user’s command.

Secondary Liability Relating to PTAT and AutoHop. The court of appeals also concluded that the district court did not abuse its discretion in concluding that Fox was unlikely to succeed in claiming that Dish was guilty of “secondary” (e.g., contributory, vicarious) copyright infringement with respect to the operation of the PTAT and AutoHop services. To establish secondary liability, Fox was required to prove that consumers were engaged in direct infringements when they copied programs and/or skipped commercials with the Hopper device.

Unlike the district court, which had dismissed this aspect of Fox’s case on the grounds that Fox had not put forward any theory on which direct infringement by consumers could be found, the court of appeals stated that “there is no dispute that Fox has established a prima facie case of direct infringement by Dish’s customers.” According to the appeals court, the burden thus was on Dish to demonstrate that it was likely to prevail in showing that the use of the PTAT and AutoHop functionality by consumers was “fair use.”

The portion of the court’s opinion that follows is somewhat perplexing. According to the court, Fox argued that the Sony Betamax case, in which it was held that recording television programming for private home use was fair use, was distinguishable because in Sony the main use of the recording capability was to “time-shift,” while the PTAT and AutoHop functions allowed consumers to build libraries of recorded content and to skip ads. The appeals court noted that the facts in the Sony case indicated that some consumers were using VCRs not just to time-shift but also to avoid advertising and to create libraries. However, the court of appeals did not expressly base its decision on the fact that Sony and the present case were not distinguishable. Instead, the appeals court wrote that the alleged distinction does not matter with respect to the AutoHop ad-skipping functionality because “as the district court held, commercial-skipping does not implicate Fox’s copyright interests because Fox owns the copyrights to the television programs, not to the ads aired in the commercial breaks.” The problem with this part of the court’s opinion is that the district court made no such finding regarding the AutoHop functionality. Moreover, it is simply untrue that Fox does not have an interest in the ads that air during its network programming. Fox either has a license to broadcast those ads or, in the case of advertisements promoting other Fox programming, owns the ads directly.

Having thus disposed of Fox’s claims regarding the AutoHop service, the appeals court next analyzed whether the use by Dish customers of the PTAT recording functionality was “fair use.” First, the court considered the purpose and character of such use and concluded that Dish customers’ viewing of copyrighted programming recorded using PTAT was “noncommercial.” The court next considered “the nature of the copyrighted work” and “the amount and substantiality of the portion used in relation to the copyrighted work as a whole.” Although the PTAT functionality records entire programs, the appeals court, citing Sony, ruled that because broadcast television programming is made available over-the-air free of charge, time-shifting an entire program does not have the ordinary effect of militating against a finding of fair use.

Finally, the court considered what it described as the “most important” element of a fair use analysis: “the effect of the use upon the potential market for or value of the copyrighted work.” According to the court, because consumers’ use of the PTAT functionality is for a “non-commercial purpose,” the burden was on Fox to demonstrate the likelihood of future market harm. The court acknowledged that unlike the situation at the time of the Sony decision, there now is a secondary market for copyrighted television programming, as evidenced by Fox’s licensing of programming to Hulu and Apple. Nevertheless, the appeals court agreed with the district court that the record establishes that the harm that Fox has alleged occurs not because of the recording of programs through PTAT, but from the AutoHop commercial skipping functionality. (The court noted specifically that Fox often charges no additional fees for providers to offer Fox’s programming “on-demand” so long as providers disable fast-forwarding). Because, as noted above, the court had concluded that ad-skipping does not implicate any copyright interest, it found in favor of Dish on this issue.

Breach of contract claims. The court of appeals described the question of whether Dish had breached its retransmission consent agreements with Fox as being “much closer” than the issue of whether Dish had committed copyright infringement. However, the court still ruled in favor of Dish. First, the court concluded that a contractual provision barring Dish from recording, copying or duplicating Fox programming was inapplicable because it was Dish’s customers, and not Dish itself, that caused the PTAT copies to be recorded.

Second, the court of appeals analyzed Fox’s claim that Dish had violated a contractual provision that generally barred Dish from distributing Fox programming on “an interactive, time-delayed video-on-demand or similar basis.” The court of appeals concluded that Fox had made a “good argument” that PTAT was “similar” to “interactive, time-delayed, [or] video-on-demand” programming. The court also described as “plausible” Fox’s argument that the contractual prohibition on “distribution” of its programming should be construed more broadly than the Copyright Act’s “distribution” right. Nevertheless, the court found that because Fox had failed to put forward extrinsic evidence in support of its interpretation of the contract, the district court did not err in relying on the narrower Copyright Act concept of distribution under which a copy of must change hands. The court left the door open for a different result after trial by “express[ing] no view on whether, after a fully developed record and arguments, the district court’s construction of ‘distribute’ will prove to be the correct one.”

Third, the court of appeals upheld the district court’s determination that Dish’s offering of PTAT service did not breach a later agreement under which Fox granted Dish permission to provide Fox’s licensed video-on-demand service so long as Dish disabled fast-forwarding during commercials. The court of appeals found that the district court’s conclusion that PTAT was “more akin” to a digital video recording (DVR) service than to video-on-demand was not “clearly erroneous” despite evidence that Dish had referred to PTAT as a “video-on-demand” service in a trademark application and had created promotional materials characterizing PTAT as providing “On Demand access.” The court pointed out that the district court’s ruling was supported by other evidence that the term “on demand” has sometimes been used in reference to DVR recordings and by the fact that, unlike video-on-demand service, PTAT must be enabled by a viewer in advance in order to watch a show at a later time.

Fourth, the court of appeals ruled that Fox had failed to demonstrate it was likely to succeed in arguing that Dish had violated a contractual provision under which Dish and Fox agreed not to “take any action whatsoever intended to frustrate or circumvent…the protections granted” by the agreement allowing Dish to deliver Fox video-on-demand content on a service that does not permit fast forwarding. The court noted that the record does not indicate that Dish launched PTAT because it was unwilling to comply with the limitations in that agreement, but rather indicated that Dish launched PTAT because it lacked the technological capability to comply with those limitations.

The “Quality Assurance” Copies. The district court found that Dish both directly infringed Fox’s copyrights and breached its contract with Fox by making “quality assurance” copies of the Fox programming that are used by Dish to test the functioning of the AutoHop service. However, the district court refused to issue an injunction against the AutoHop service because it concluded that the creation of the “quality assurance” copies did not pose a threat of irreparable harm to Fox. The court of appeals assumed without deciding that the district court’s infringement and breach of contract analysis was correct. The issue for the appeals court was whether or not the court correctly concluded that there was no irreparable harm associated with the quality assurance copies.

According to the appeals court, the ruling of the district court on the irreparable harm issue was correct because it was the AutoHop itself, not the quality assurance copies, that were the cause of Fox’s alleged harm. Noting that Dish temporarily stopped making the quality assurance copies pending the appeal, the court of appeals found that those copies were not integral to the functioning of the AutoHop service. Moreover, the appeals court held that the district court did not err in finding that Fox could be compensated through money damages even though Fox does not license copies of its programs to create ad-skipping software. The appeals court held that it would still be possible to calculate damages and suggested that Fox’s existing licensing agreement could constitute a starting point or an aid in calculating damages.

Next Steps. The Ninth Circuit’s decision represents a clear victory for Dish on the copyright issues raised with respect to the PTAT and AutoHop services However, in the longer term, the decision leaves open the possibility that, after trial, the district court could conclude that the PTAT service constitutes a breach of certain agreements between Fox and Dish. Furthermore, while Fox could seek Supreme Court review of the Ninth Circuit’s decision, the appeals court’s questionable findings regarding who “owns” the commercials aired on Fox programming and the relevance of that fact could form a basis for Fox to seek rehearing of the case by the Ninth Circuit. Finally, it is likely that as Dish’s carriage agreements with Fox and other broadcasters expire, the new agreements will seek to impose limitations on Dish’s deployment of the PTAT and AutoHop services and/or to demand higher fees to compensate the broadcasters for the revenues they allege they will lose due to ad-skipping.