Kaleidescape leaves Hollywood blu in the face

Well, here we go again. With its five-year litigation with the DVD Copy Control Association over its original DVD jukebox still not resolved, Kaleidescape Systems on Tuesday announced plans to roll out a new disc player that will import high-def movies from Blu-ray Discs onto Kaleidescape home media servers, along with conventional DVDs and CDs. The new player, the M500, won’t actually ship until May 18, which gives the studios (or the Advanced Access Content System Licensing Administrator, the Blu-ray equivalent of DVD-CCA) a week to try to file a new suit and persuade a court to issue a temporary restraining order preventing the M500 from shipping.

Assuming they decide to sue, that is. On the face of it, Tuesday’s announcement by Kaleidescape would seem to invite a very similar lawsuit as the one DVD-CCA filed against the company back in 2004. As it did with its original DVD system, Kaleidescape secured all the necessary technology licenses needed to build a Blu-ray player, including a license for the AACS copy-protection system. Also as with the CSS copyright protection system for DVDs, Kaleidescape maintains the AACS license does not, as a legal matter, prohibit the copying of Blu-ray discs, at least not in the manner by which Kaleidescape creates a hard-drive copy of the movie.

In the case of DVDs, of course, the DVD-CCA, which oversees the CSS license, had a very different interpretation of what was and was not permitted under the license agreement, and sued Kaleidescape in California state court for breach of contract on grounds that the Kaleidescape player violated the provisions in the license agreement that prohibit copying.

In April 2007, however, the trial court found that the rules purporting to prohibit copying were not actually part of the CSS license because they were contained in a separate document that was not incorporated by reference into the main license agreement. That finding rendered the question of whether Kaleidescape had actually violated the rules moot — you can’t be in breach of what’s not in the contract — so the court never decided the question.

DVD-CCA appealed the decision and in August, the California Court of Appeal overruled the lower court, declaring that the rules regarding copying were, in fact, properly part of the contract. Since that was the only question before it, however, the appeals court also reached no decision on whether Kaleidescape had actually violated the rules. Instead, the case was sent back for a new trial to determine whether in fact the rules prohibit copying and whether in fact Kaleidescape is not in compliance with those rules.

And there the case sits. Kaleidescape’s new M500 Blu-ray player, meanwhile, would seem to raise very similar questions. Kaleidescape is an AACS licensee and its player enables copying. In a statement issued to the LA Times, a spokesman for AACS-LA insisted the AACS license prohibits copying, and implied, without quite saying so, that Kaleidescape’s system violated the terms of the license:

The AACS technology and licenses do not permit ripping of Blu-ray discs unless the copy has been authorized by the content owner, either by setting the Copy Control Information appropriately (and nearly all BD movies are set for “Copy Never”, just like DVDs), or by individual authorization through the Managed Copy process, which we anticipate rolling out at the end of this year or the beginning of 2011.

So, lawsuit? Maybe, but maybe not. Kaleidescape added a new wrinkle in the design of the M500 that could well give the studio lawyers in AACS-LA pause. While the player can be used to import Blu-ray discs to a Kaleidescape server, the movies cannot be played back from the server unless the original disc is in the tray of the M500.

That feature (or limitation, depending on how you look at it) was added ostensibly to address one of the studios’ key complaints with the original Kaleidescape system: rent, rip and return. Since the Kaleidescape player doesn’t know whether you actually own the DVD or Blu-ray being imported, as opposed to its having been rented, a user could, for the price of a Netflix subscription, conceivably fill their Kaleidescape server with movies without ever having purchased them (never mind that most people who spend $30,000 on a Kaleidescape system have them pre-loaded with movies they either already own or pay for as part of the installation process).

A so-called disc-in-tray requirement for playback, in fact, was one of the main changes the studios tried unsuccessfully to add retroactively to the CSS license following Kaleidescape’s initial court victory, the idea being that even if you managed to rip a rented DVD, you couldn’t play it back once you returned the disc.  What makes adding a disc-in-try requirement to the M500 so devilish, though, is that, while seeming to address one of the studios’ key concerns it actually puts the studios on the spot, by exposing the double game they’ve been playing with Kaleidescape all along.

For the studios, the DVD-CCA lawsuit against Kaleidescape was never really about preserving the integrity of the CSS license. It was about copying. The CSS license was mostly a stalking horse.

Though the studios have long feared copying, so, too, have they feared a showdown in court over whether consumers have a right to make backup copies of their own DVDs. The possibility that some federal judge might decide that consumers have a fair-use right under copyright law to format shift their DVDs is a threat to the entire edifice of studio control over the design of consumer electronics devices, so they’ve done everything possible legally to avoid that showdown. In the Kaleidescape case, that meant having DVD-CCA bring the suit, in state court, on breach-of-contract grounds, rather than charging the company in federal court with copyright infringement. (Even then, the risk wasn’t entirely mitigated, as the concurring opinion by Judge P.J. Rushing in the California Court of Appeal ruling made clear.)

Rent, rip and return serves a similar purpose. While consumers may or may not have a right to format-shift their own DVDs, almost no one seriously believes they have a right to copy rented discs. Yet forcing device makers to design that possibility out of their playback systems, such as by requiring that the disc be in the tray, has the added benefit of making those systems less useful — and thus less commercially viable — for format-shifting legitimately purchased discs.

By adding a disc-in-tray requirement to the M500, Kaleidescape has now effectively called the studios’ bluff on that point. While undoubtedly less convenient for users, Kaleidescape is going ahead and marketing the M500 anyway. The studios cannot challenge it on grounds that it facilitates rent, rip and return because it clearly does not. If they want to charge Kaleidescape with enabling copying the studios are going to have to confront head on the question of consumers’ right to format-shift their own Blu-ray discs and DVDs.

The studios could, of course, have AACS-LA bring the same sort of breach-of-contract claim against Kaleidescape as DVD-CCA did in 2004. That case has now dragged on for more than five years, however, with no end in sight. In the meantime, Kaleidescape has sold an awful lot of DVD jukeboxes, through dealers in more than 50 countries around the world, with, again, no end in sight. With that case still pending, it won’t be easy to get an injunction barring sales of the M500 based on a similar claim.

It’s not quite check mate for Kaleidescape. But it’s certainly check.