The United States District Court for the Central District of California has denied a motion by Fox Broadcasting Company, Inc. for a preliminary injunction against Dish Network’s advanced DVR service and its associated ad-skipping functionality. The court found that Fox was not likely to succeed on the merits of its copyright infringement and breach of contract claims arising out of the operation of the advanced recording service. Moreover, while the court held that Fox had demonstrated a likelihood of success on the merits on its copyright and breach of contract challenges to Dish’s creation of “quality assurance” copies to ensure the reliability of the ad-skipping function, the court nevertheless denied the request for an injunction on the grounds that Fox had failed to demonstrate that it faced irreparable harm from the creation of those copies.

Background. As reported in our Client Advisory dated May 31, 2012, Dish (the nation’s second largest direct broadcast satellite service provider) 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”) functionality. In response, several broadcasters, including Fox, filed copyright infringement and breach of contract actions against DISH in the United States District Court for the Central District of California. DISH, anticipating the broadcast networks’ lawsuits, filed its own complaint against the major broadcast networks in the Southern District of New York, seeking a declaratory ruling that it is not directly or indirectly infringing the broadcasters’ copyrights and is in compliance with its contracts with the networks. After the New York court ruled that the case should be considered initially by the California court, the issues were briefed and argued by the parties.

The Court’s Decision. The court analyzed the PTAT and Auto-Hop services to determine whether Fox had demonstrated a likelihood of success on its direct and secondary copyright infringement claims and its breach of contract claims. The court also considered whether Fox had established that it was likely to suffer irreparable harm absent the grant of the requested preliminary injunction. A summary of the court’s findings and reasoning follows.

PTAT. The court first addressed and quickly disposed of Fox’s claim that Dish should be held liable for the acts of its subscribers in using the PTAT recording feature. The court pointed out that Dish can only be held liable for the acts of its subscribers if those acts themselves constitute direct infringement. And the court held it was well-settled under the Supreme Court’s 1984 Sony Betamax decision that recording television programming for the purpose of engaging in time-shifting for home viewing is fair use. Because Fox failed to offer any theory or evidence that would support a finding that PTAT users were engaging in direct infringement, the court held that there was no basis for imposing secondary copyright liability on Dish.

Fox also argued that Dish, by offering the PTAT service, was directly infringing Fox’s exclusive reproduction and distribution rights under the Copyright Act. Dish conceded that the operation of the PTAT service resulted in the creation of copies of Fox’s copyrighted programming; however, Dish argued, and the court agreed, that the threshold question is “who makes the copies.” Reviewing past cases where reproductions of copyrighted works were made by the operation of a technical system or device (including the Cablevision remote storage DVR case), the court held that in order to find direct infringement there must be some element of “volition or causation” on the part of the alleged infringer. While Dish exercises some measure of control over the PTAT service (such as deciding which networks can be recorded using the PTAT service, determining the length of time PTAT copies are available to be viewed, and defining other parameters of the service), the court concluded that the decision to activate the PTAT service is made by Dish’s customers, not by Dish. Thus, the court found that Fox was unlikely to succeed in a direct infringement claim against Dish based on the creation of the PTAT copies. Moreover, the court found that Dish did not publicly “distribute” copies of Fox’s copyrighted works since the PTAT copies are made on hard drives located on the subscriber’s premises and do not change hands.

The court next turned to the question of whether the PTAT service breached certain provisions in the “retransmission consent agreement” between Fox and Dish that (i) bar Dish from distributing copies of Fox broadcast programming on a time-shifted basis (but with an express carve-out allowing Dish to connect to consumers’ “video replay equipment”) and (ii) prohibit Dish from copying, or authorizing others to copy, programming broadcast by Fox stations other than for private home use. The court concluded that these contractual provisions were meant by the parties to permit in-home copying and playback of copies made by consumers for time-shifting purposes. Having already held that the PTAT copies are made by consumers, not Dish, the court had no problem finding that Dish was not making or distributing copies within the meaning of the prohibitions in the retransmission consent agreement.

Auto-Hop. Fox apparently did not argue that ad-skipping standing alone constitutes copyright infringement; however, it did claim that by offering the AutoHop service, Dish had breached its retransmission consent agreement with Fox. That agreement contains a provision that bars Dish from enabling ad-skipping on Fox programming made available by Dish as part of a “video-on-demand” (“VOD”) service. Fox claimed that this provision was applicable because Dish’s PTAT service was indistinguishable from a VOD service (citing among other things the fact that Dish itself had characterized the service as “VOD” in patent applications). The court rejected Fox’s argument, finding that PTAT was as a “hybrid” service that (i) was not contemplated by the parties’ retransmission consent agreement and (ii) was more akin to a DVR service than VOD. In reaching this conclusion, the court emphasized the following distinctions between a VOD service and PTAT: (i) Dish does not have control over the scheduling of the programming that the PTAT service is enabled to copy (i.e., Fox can decide to change what programs are broadcast on what days and times); (ii) the copies made by the PTAT service reside on a device located at the subscriber’s premises and is not transmitted from a remote server; and (iii) a Dish subscriber cannot make an after-the-fact decision to utilize the PTAT service to view a program aired on an earlier date – the recording only exists if the PTAT service was enabled when the program first aired. In light of its conclusion that the PTAT service was more like DVR service than VOD, the court ruled that Fox was not likely to succeed on the merits of its claim that Dish was breaching its contractual duty not to offer ad-skipping on VOD services

Unfortunately for Dish, the determination that ad-skipping functionality itself was neither infringing nor a breach of contract was not the end of the court’s analysis of the AutoHop service. The court also considered Dish’s admission that, in order ensure that the AutoHop ad-skipping functionality operates reliably, Dish itself makes “quality assurance” (“QA”) copies of every PTAT program on which ad-skipping is available. Dish argued that the QA copies did not infringe Fox’s reproduction right under copyright law because those copies were merely intended and used for the “intermediate” purpose of enabling the lawful ad-skipping service. The court, however, disagreed. In a somewhat confusing application of the traditional four-part “fair use” analysis, the court found that the QA copies likely were infringing even though Dish only used them for a limited non-infringing purpose and that the copies themselves were not distributed to consumers. The court emphasized that the QA copies served a commercial purpose (i.e., they were used to facilitate the reliable operation of the commercial ad-skipping service); were non-transformative (i.e., the copies were identical to the originals); were reproductions of works that were primarily creative rather than “fact-based” in nature; and, most importantly, adversely impacted Fox’s right to license copies of its works for distribution over other platforms, such as Hulu, Netflix, iTunes, etc.. The court also found that Fox was likely to succeed in establishing that the creation of the QA copies constituted a breach of the provision in the retransmission consent agreement that prohibits Dish from making unauthorized reproductions of Fox programming.

The final step in the court’s analysis was to determine whether Fox had established that it will suffer irreparable harm as a result of the Dish’s creation of the QA copies. The court reiterated its conclusion that the QA copies have an inherent value and that their creation would adversely impact the market for distributing copies of Fox programming via other platforms (notwithstanding the fact that the QA copies themselves merely are used to perfect the functioning of the non-infringing AutoHop functionality). However, the court held that the record failed to show that the harm to Fox resulting from the creation of the QA copies was irreparable. Rather, the court held that the economic harm caused by the QA copies was remediable by money damages. Moreover, to the extent that Fox had alleged non-monetary harms arising from the ad-skipping service, those harms were not attributable to the QA copies themselves. Thus, in the end, the court denied Fox’s request for a preliminary injunction.

Next Steps. While both sides claimed victory following the announcement of the district court ruling, most observers believe that Dish came out ahead since the major elements of the PTAT and AutoHop services were upheld. Furthermore, some observers have criticized the court’s treatment of the QA copies on the grounds that the QA copies themselves do not compete with services such as Hulu and iTunes and thus do not have any impact on that segment of the market. Fox has already filed an appeal of the court’s decision to the United States Court of Appeals for the Ninth Circuit. It is likely that Dish also will appeal. In addition, Disney (which had not previously brought a complaint against Dish) has filed a new request for injunction in federal district court in New York.