The Aereo Decision – Exploring the Implications

September 2014

By Lois F. Wasoff, Attorney-at-Law, Concord, Massachusetts, USA

This article is based on the webinar Copyright and the Aereo Decision presented as part of the Beyond the Book series of the Copyright Clearance Center (CCC) on July 10, 2014, with Christopher Kenneally of CCC and Lois F. Wasoff [podcast of the webinar].

The main antagonists in the case of American Broadcasting Companies, Inc. v. Aereo, Inc. (134 Sup.Ct. 2498 (June 25, 2014)) were, on one side, leading US television broadcasters and, on the other, a startup company delivering broadcast content to subscribers over the Internet. But interest in the outcome was not limited to the named parties.

Many saw the dispute over whether Aereo had infringed the broadcasters’ rights when it offered its service without permission or payment as the latest example of conflict between innovation and copyright. The US Supreme Court decision, announced in June, resolved the legal issue by finding that Aereo’s activities were infringing. Whether that decision has broader implications for technology and innovation is a matter of discussion and debate.

The Supreme Court held that Aereo’s business model: one antenna, one copy, one user, was a gimmick to avoid paying royalties for delivering content. (Photo: iStockphoto © megainarmy)

Aereo’s business model

Aereo’s service allowed subscribers paying a modest monthly fee to watch broadcast television programs virtually live on any Internet-connected device. The broadcast signal was captured and retransmitted using one of thousands of tiny antennae maintained by Aereo. When a subscriber signed on to watch a program, it was assigned a specific antenna for the duration of that session, and a separate copy of the program was made for that user.

This structure was not arbitrary. Nor was it a coincidence that Aereo’s service was first offered in New York, which falls within the jurisdiction of the US appeals court for the Second Circuit. In 2008, the Second Circuit had decided the case of Cartoon Network LP, LLLP v. CSC Holdings, Inc., (“Cablevision”) (536 F. 3d 121 (2008)) which involved a remote digital video recording (R-DVR) service offered by cable television provider Cablevision. After the Supreme Court’s seminal 1984 decision in Sony Corp. of America v. Universal City Studios, Inc., (464 US 417 (1984)), it was clear that Cablevision’s customers could have recorded television programs with set-top equipment in their homes without infringing copyright. The question was whether they could do essentially the same thing using remote equipment provided by Cablevision.

The Second Circuit said they could, reasoning that the user was initiating the copying, there was a separate copy for each user, and the user’s playback was not a public performance. Under US copyright law, the right to control public performance is a key exclusive right of the copyright holder (17 USC §106(4)). The private performance of a copyrighted work (e.g. a viewer watching a program in his or her own home) is not an infringement. Aereo wanted to put itself within the ambit of Cablevision and in the shoes of its subscribers to avoid making public performances that would implicate copyright. Hence the architecture of the system: one antenna, one copy, one user.

The reasoning of Cablevision, and in particular the court’s reliance on the fact that the R-DVR service maintained separate, user-specific copies, helped remove some of the legal uncertainty around cloud-based Internet offerings like storage services for music, media, and documents. That is one of the reasons the Aereo case has attracted so much attention. The possibility that the US Supreme Court, in deciding the Aereo case, might overrule Cablevision or render a decision that undercut its reasoning was a matter of great concern to many parties.

Aereo relies on legal precedent

Aereo’s reliance on Cablevision was, initially, well placed. Both the District Court in New York and the Second Circuit sided with Aereo, citing Cablevision. When the broadcasters appealed to the Supreme Court, Aereo joined in their request. Aereo had built its business around the legal theory that its retransmission of broadcast signals over the Internet did not implicate copyright, and it was willing to bet the company that the Supreme Court would agree with its position.

The Supreme Court does not agree

The majority of the Supreme Court did not agree with Aereo. Justice Stephen Breyer, writing for the six justices who voted to reverse the Second Circuit, put it this way: “We must decide whether respondent Aereo, Inc., infringes this exclusive [public performance] right by selling its subscribers a technologically complex service that allows them to watch television programs over the Internet at about the same time as the programs are broadcast over the air. We conclude that it does.” Justice Breyer parsed the questions presented, asking: is there a performance? If there’s a performance, is it a public performance? Does the fact that the users are watching separate copies matter?

He concluded that Aereo was performing the protected works. Looking at the public performance issue, and reviewing the history of the “Transmit Clause” in US copyright law, he concluded that the fact that each user watched a user-specific copy of the work did not mean that the performances were private. He found that the “one user, one copy” model was essentially irrelevant and focused on the result, which is that thousands of individuals could potentially watch the same work at the same time. Importantly – and this has been a source of controversy since the case was decided – he found that Aereo’s activities were “highly similar” to the activities of cable television companies, which are covered by copyright and are the subject of a statutory compulsory license (17 USC §111).

The “Transmit Clause” in US copyright law says that performing or displaying a work “publicly” includes transmission of the work “by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.” (17 USC §101).

Justice Antonin Scalia wrote for the three dissenting justices. Because the choices about what to watch and what to record were made entirely by the user, he saw Aereo as an automated service provider that was not itself performing the work. He was troubled by the majority opinion’s use of what he called a “looks-like-cable-TV” standard for imposing liability, and warned that this approach, at least in his view, could result in confusion about what rules would apply to future services.

But there was little support for Aereo or its business model in Justice Scalia’s dissent. He clearly shared the majority view that what Aereo was doing or enabling to be done “ought not to be allowed.” His disagreement was with the reasoning of the majority opinion, and he expressed frustration that the Supreme Court could only, as the case was presented, consider whether Aereo was directly (rather than secondarily) liable for infringement.

A gimmick to avoid paying royalties?

Another aspect common to the majority and dissenting opinions (and to the dissenting opinion written by Judge Denny Chin in the Second Circuit) was the view that the one antenna, one user, one copy structure was a gimmick designed to avoid paying royalties for delivering content – in other words, to exploit a perceived “loophole” in the law. The difference between Justice Scalia’s approach and those of Justice Breyer and Judge Chin was that Justice Scalia felt that if Aereo had found a loophole in the copyright law, it was up to Congress, not the courts, to close it.

The Supreme Court was well aware that the Aereo case was being closely watched. The majority opinion explicitly stated that the Court intended to make a limited holding based on Aereo’s particular facts, and that it wasn’t opining on cloud storage services or R-DVR services. But Justice Scalia was skeptical, saying that he did not believe the court could deliver on that promise, given what he called the “imprecision of its result-driven rule.”

An important source of broadcast revenue is preserved

It is too early to say whether Justice Scalia’s concerns are well founded. In the short term, an important source of revenue for broadcasters (retransmission fees from cable companies) has been preserved. If the Aereo model were upheld, the cable companies that now pay retransmission fees would have had the option of changing, or threatening to change, their technology to emulate Aereo’s. Also, other “Aereo-like” services would undoubtedly have sprung up, which brings up longer-term implications. Online streaming is rapidly becoming an important means of distributing content. It is critical for owners and developers of broadcast content to establish and preserve their right to be compensated for the delivery of their works over the Internet.

Cablevision is barely mentioned in the majority opinion and it certainly is not expressly overruled. An argument could be, and is being, made that its reasoning has been undercut, but that view may fail to take into account some important differences in the facts underlying the two cases. Justice Breyer referred in the majority decision to the “prior relationship” or lack thereof between the user and the work. He emphasized that Aereo’s users had no such “prior relationship.” Unlike a cable subscriber using an R-DVR service or an Internet user storing copies of music and videos already on his or her hard drive in a cloud locker, the Aereo subscriber was not already, in Justice Breyer’s words, “an owner or a possessor” of a copy of the work. Note that Justice Breyer did not say the user had to be a licensee of the copyrighted work. Given his choice of words (“owner or possessor” instead of “owner or licensee”) it would be difficult to read the decision as intending to impose liability on cloud storage services for pirated works that are uploaded by users. Also, a key benefit Aereo offered to its subscribers was delivery of copyrighted content owned by others for which it was not paying.

US courts have not generally been sympathetic to that business model. The value delivered by cloud storage services is additional storage space, unrelated to the nature of the content. The Aereo decision restates an underlying principle of copyright: copyright owners are entitled to be paid when their works are distributed within the exclusive rights that the law reserves to them. The fact that Aereo was not paying content providers, when others offering analogous services were, clearly bothered the majority and underlay the decision.

Will the decision have an impact on innovation?

There has been concern expressed that the Aereo decision may interfere with innovation by creating legal uncertainty that will limit investment. Although Aereo’s investors may sustain significant losses, whether the decision may have an impact on innovation generally will not be clear until courts begin to consider its application in subsequent cases. And it is worth noting that Aereo’s “innovation” was apparently driven not by a desire to produce the most efficient and effective service, but by an attempt to design a system around a court opinion for the purpose of avoiding paying royalties. It may be reasonable to ask whether that is truly innovative, and whether there might be other places that society could invest its financial and intellectual capital.

Immediately after the decision, Aereo “paused” its service and began a public relations effort, encouraging its subscribers and supporters to contact Congress and seek changes in copyright law. More recently, Aereo has argued, to both the US Copyright Office and New York District Court that it is a cable television company and should be entitled to statutory licenses for cable retransmission of broadcast content. So far, neither of those efforts appears to be accomplishing Aereo’s goals, and its future remains uncertain.

Whatever ultimately happens to Aereo and the service that the Supreme Court has now declared infringing, the dispute between Aereo and the broadcasters does have larger implications. Copyright seemed simpler when the concept that separate legal regimes applied to the work itself and to the pages on which it was printed was theoretical. Now, works travel completely independently of tangible objects and can be received, viewed, used and copied in myriad ways.

That creates an inherent tension, which in this case arose between those who would like to “cut the cord” connecting them to the content they want to watch and those who create and own that content. But if content that is of value to users requires investment to create, there has to be a mechanism for compensating creators and the entities that fund their work. Not all works require investment, and not everyone who is distributing copyrighted work cares about getting a financial return. Ideally, the law should accommodate all of those different circumstances. Hopefully the Aereo decision, which may now be frustrating for some and comforting for others, will turn out to be a step on the road toward achieving an appropriate balance.

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