Disney Enterprises, Inc. v. VidAngel, Inc.

          Argued and Submitted June 8, 2017 Pasadena, California

         Appeal from the United States District Court for the Central District of California D.C. No. 2:16-cv-04109-AB-PLA André Birotte, Jr., District Judge, Presiding.

          Peter K. Stris (argued), Elizabeth Rogers Brannen, Dana Berkowitz, and Victor O'Connell, Stris & Maher LLP, Los Angeles, California; Brendan S. Maher, Daniel L. Geyser, and Douglas D. Geyser, Stris & Maher LLP, Dallas, Texas; Ryan Geoffrey Baker, Jaime Wayne Marquart, and Scott M. Malzahn, Baker Marquart LLP, Los Angeles, California; David W. Quinto, VidAngel Inc., Beverly Hills, California; Shaun P. Martin, University of San Diego School of Law, San Diego, California; for Defendant-Counter-Claimant-Appellant.

          Donald B. Verrilli Jr. (argued), Munger Tolles & Olson LLP, Washington, D.C.; Glenn D. Pomerantz, Kelly M. Klaus, Rosa Leda Ehler, and Allyson R. Bennettt, Munger Tolles & Olson LLP, Los Angeles, California; for Plaintiffs-Counter-Defendants-Appellees.

          William A. Delgado, Willenken Wilson Loh & Delgado LLP, Los Angeles, California; Susanna Frederick Fischer, Columbus School of Law, The Catholic University of America, Washington, D.C.; for Amici Curiae U.S. Representatives John Hostettler and Spencer Bachus.

          Mitchell L. Stoltz and Kit Walsh, San Francisco, California, as and for Amicus Curiae Electronic Frontier Foundation.

          James M. Burger, Thompson Coburn LLP, Washington, D.C.; Mark Sableman, Thompson Coburn LLP, St. Louis, Missouri; for Amicus Curiae ClearPlay, Inc.

          Dean E. Short, Short Legal Group, Newport Coast, California; Bruce H. Turnbull, Turnbull Law Firm PLLC, Washington, D.C.; for Amici Curiae DVD Copy Control Association Inc., and Advanced Access Content System License Administrator LLC.

          Eleanor M. Lackman and Lindsay W. Bowen, Cowan DeBaets Abrahams & Sheppard LLP, New York, New York; Keith Kupferschmid and Terry Hart, The Copyright Alliance, Washington, D.C.; for Amicus Curiae The Copyright Alliance.

          Before: Carlos T. Bea and Andrew D. Hurwitz, Circuit Judges, and Leslie E. Kobayashi, ^[*] District Judge.

         SUMMARY^[**]

         Preliminary Injunction / Copyright

         The panel affirmed the district court's preliminary injunction against the defendant in an action under the Copyright Act and the Digital Millennium Copyright Act.

         Defendant VidAngel, Inc., operated an online streaming service that removed objectionable content from movies and television shows. VidAngel purchased physical discs containing copyrighted movies and television shows, decrypted the discs to "rip" a digital copy to a computer, and then streamed to its customers a filtered version of the work.

         The panel held that the district court did not abuse its discretion in concluding that VidAngel's copying infringed the plaintiffs' exclusive reproduction right. Because VidAngel did not filter authorized copies of movies, it was unlikely to succeed on the merits of its defense that the Family Movie Act of 2005 exempted it from liability for copyright infringement. VidAngel also was unlikely to succeed on its fair use defense.

         The panel held that the district court also did not abuse its discretion in concluding that the plaintiffs were likely to succeed on their DCMA claim. The panel held that the anti-circumvention provision of the DMCA, 17 U.S.C. § 1201(a), covered the plaintiffs' technological protection measures, which controlled both access to and use of the copyrighted works.

         The panel affirmed the district court's findings regarding the likelihood of irreparable harm, the balancing of the equities, and the public interest.

          OPINION

          HURWITZ, Circuit Judge.

         VidAngel, Inc. operates an online streaming service that removes objectionable content from movies and television shows. VidAngel purchases physical discs containing copyrighted movies and television shows, decrypts the discs to "rip" a digital copy to a computer, and then streams to its customers a filtered version of the work.

         The district court found that VidAngel had likely violated both the Digital Millennium Copyright Act and the Copyright Act, and preliminarily enjoined VidAngel from circumventing the technological measures controlling access to copyrighted works on DVDs and Blu-ray discs owned by the plaintiff entertainment studios, copying those works, and streaming, transmitting, or otherwise publicly performing or displaying them electronically. VidAngel's appeal presents two issues of first impression. The first is whether the Family Movie Act of 2005 exempts VidAngel from liability for copyright infringement. 17 U.S.C. § 110(11). The second is whether the anti-circumvention provision of the Digital Millennium Copyright Act covers the plaintiffs' technological protection measures, which control both access to and use of copyrighted works. 17 U.S.C. § 1201(a)(1). The district court resolved these issues against VidAngel. We agree and affirm the preliminary injunction.

         FACTUAL BACKGROUND

         I. The copyrighted works.

         Disney Enterprises, LucasFilm Limited, Twentieth Century Fox Film Corporation, and Warner Brothers Entertainment ("the Studios") produce and distribute copyrighted motion pictures and television shows. The Studios distribute and license these works for public dissemination through several "distribution channels": (1) movie theaters; (2) sale or rental of physical discs in DVD or Blu-ray format; (3) sale of digital downloads through online services, such as iTunes or Amazon Video; (4) on-demand rental for short-term viewing through cable and satellite television or internet video-on-demand platforms, such as iTunes or Google Play; and (5) subscription on-demand streaming online outlets, such as Netflix, Hulu, HBO GO, and cable television.

         To maximize revenue, the Studios employ "windowing, " releasing their works through distribution channels at different times and prices, based on consumer demand. Typically, new releases are first distributed through digital downloads and physical discs, and are only later available for on-demand streaming. The Studios often negotiate higher licensing fees in exchange for the exclusive rights to perform their works during certain time periods. Digital distribution thus provides a large source of revenue for the Studios.

         The Studios employ technological protection measures ("TPMs") to protect against unauthorized access to and copying of their works. They use Content Scramble System ("CSS") and Advanced Access Content System ("AACS"), with optional "BD, " to control access to their copyrighted content on DVDs and Blu-ray discs, respectively. These encryption-based TPMs allow consumers to use players from licensed manufacturers only to lawfully decrypt a disc's content, and then only for playback, not for copying.^[1]

         II. VidAngel's streaming service.

         VidAngel offers more than 2500 movies and television episodes to its consumers. It purchases multiple authorized DVDs or Blu-ray discs for each title it offers. VidAngel then assigns each disc a unique inventory barcode and stores it in a locked vault. VidAngel uses AnyDVD HD, a software program, to decrypt one disc for each title, removing the CSS, AACS, and BD TPMs on the disc, and then uploads the digital copy to a computer.^[2] Or, to use VidAngel's terminology, the "[m]ovie is ripped from Blu-Ray to the gold master file." After decryption, VidAngel creates "intermediate" files, converting them to HTTP Live Streaming format and breaking them into segments that can be tagged for over 80 categories of inappropriate content. Once tagged, the segments are encrypted and stored in cloud servers.

         Customers "purchase" a specific physical disc from VidAngel's inventory for $20. The selected disc is removed from VidAngel's inventory and "ownership" is transferred to the customer's unique user ID. However, VidAngel retains possession of the physical disc "on behalf of the purchasers, " with the exception of the isolated cases in which the consumer asks for the disc. To date, VidAngel has shipped only four discs to purchasers.

         After purchasing a disc, a customer selects at least one type of objectionable content to be filtered out of the work.^[3]VidAngel then streams the filtered work to that customer on "any VidAngel-supported device, including Roku, Apple TV, Smart TV, Amazon Fire TV, Android, Chromecast, iPad/iPhone and desktop or laptop computers." The work is streamed from the filtered segments stored in cloud servers, not from the original discs. Filtered visual segments are "skipped and never streamed to the user." If the customer desires that only audio content be filtered, VidAngel creates and streams an altered segment that mutes the audio content while leaving the visual content unchanged. VidAngel discards the filtered segments after the customer views them.

         After viewing the work, a customer can sell the disc "back to VidAngel for a partial credit of the $20 purchase price, " less $1 per night for standard definition purchases or $2 per night for high-definition purchases. VidAngel accordingly markets itself as a $1 streaming service. After a disc is sold back to VidAngel, the customer's access to that title is terminated.^[4] Virtually all (99.6%) of VidAngel's customers sell back their titles, on average within five hours, and VidAngel's discs are "re-sold and streamed to a new customer an average of 16 times each in the first four weeks" of a title's release.

         III. VidAngel's growth.

         In July 2015, VidAngel sent letters to the Studios describing its service. The letters explained that VidAngel was in "a limited beta test of its technology" and had only 4848 users, and concluded: "If you have any questions concerning VidAngel's technology or business model, please feel free to ask. If you disagree with VidAngel's belief that its technology fully complies with the Copyright Act . . . please let us know." The Studios did not respond, but began monitoring VidAngel's activities.

         VidAngel opened its service to the general public in August 2015. Its marketing emphasized that it could stream popular new releases that licensed video-on-demand services like Netflix could not, for only $1. For example, when VidAngel began streaming Disney's Star Wars: The Force Awakens, it was available elsewhere only for purchase on DVD or as a digital download, not as a short-term rental. Similarly, VidAngel began streaming Fox's The Martian and Brooklyn while those works were exclusively licensed to HBO for on-demand streaming. Customers responded favorably.^[5] And, a survey indicated that 51% of VidAngel's users would not otherwise watch their selections without filtering.

         VidAngel eventually reached over 100, 000 monthly active users. When the Studios filed this suit in June 2016, VidAngel offered over 80 of the Studios' copyrighted works on its website. VidAngel was not licensed or otherwise authorized to copy, perform, or access any of these works.

         PROCEDURAL BACKGROUND

         The Studios' complaint alleged copyright infringement in violation of 17 U.S.C. § 106(1), (4), and circumvention of technological measures controlling access to copyrighted works in violation of the Digital Millennium Copyright Act of 1998 ("DMCA"), 17 U.S.C. § 1201(a)(1)(A). VidAngel denied the statutory violations, raising the affirmative defenses of fair use and legal authorization by the Family Movie Act of 2005 ("FMA"), 17 U.S.C. § 110(11). The ...