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What Kaleidescape’s DVD CCA Lawsuit Settlement Means to Dealers

On June 2, Judge William Monahan of the Superior Court of California approved an agreement between the DVD Copy Control Association (DVD CCA) and Kaleidescape to end the decade-long litigation. Curious what implications this settlement meant for Kaleidescape and its business going forward, I reached out to company founders, Cheena Srinivasan, CEO, and Michael Malcolm, for some clarification.

On June 2, Judge William Monahan of the Superior Court of California approved an agreement between the DVD Copy Control Association (DVD CCA) and Kaleidescape to end the decade-long litigation.

Kaleidescape’s Media Server 

At the crux of the lawsuit, the DVD CCA alleged that because Kaleidescape allowed users to play copied content without requiring the DVD to be in the player during playback, Kaleidescape violated the “CSS General Specifications” section of the license agreement.

In March 2007, Judge Leslie Nichols ruled in Kaleidescape’s favor, finding the company in full compliance of the DVD CCA’s CSS licensing. However this lower court ruling was appealed to California’s 6th District Court of Appeal, and in August 2009, this court reversed the lower court’s decision.

According to the appeal filed by the DVD CCA, “When DVD CCA became aware of how the Kaleidescape system functioned, it was concerned that the system did not comply with the pertinent specifications for CSS. In or about December 2003, DVD CCA demanded that Kaleidescape cease manufacturing and selling its system until modifications could be made to bring it into compliance. Kaleidescape representatives met with representatives from DVD CCA in January 2004 but were unable to convince DVD CCA that its system complied with the license requirements. Further attempts to resolve the dispute were unsuccessful. DVD CCA filed this lawsuit on December 7, 2004.”

In March 2012, Judge Monahan ruled against Kaleidescape, finding it in breach of its contract with the DVD CCA, and imposed a permanent injunction against Kaleidescape. Kaleidescape appealed the ruling and was granted a request to stay the injunction while the appeal was pending.

This settlement definitively brings this lawsuit to a close.

Following the settlement, the DVD CCA issued this statement:

“Under the settlement agreement, two significant actions have occurred in the California courts.

“First, on May 19, 2014, at Kaleidescape’s request, the California Sixth District Court of Appeal dismissed Kaleidescape’s appeal of a California trial court’s 2012 judgment. The trial court had ruled that Kaleidescape’s DVD playback device known as the Kaleidescape System breached the License because it used CSS to make permanent copies of DVD content, which could then be played back without any need for the actual DVD.

“Second, following return of the case to that trial court, Judge William Monahan on June 2, 2014 granted the joint request of DVD CCA and Kaleidescape to put into effect the injunction previously issued by that court to prohibit Kaleidescape from using CSS in breach of the CSS License Agreement. The injunction was made effective as of November 30, 2014, and modified to give the trial court jurisdiction to enforce the terms of the settlement agreement.”

Curious what implications this settlement meant for Kaleidescape and its business going forward, I reached out to company founders, Cheena Srinivasan, CEO, and Michael Malcolm, for some clarification.

Cheena Srinivasan, CEO, Kaleidescape

What does finally settling this lawsuit mean for Kaleidescape?

Srinivasan: Settling the lawsuit is a watershed moment for us because it paves the way for expanding our relationships with the studios which will usher in a new era for Kaleidescape. This dispute has been a painful distraction for over a decade. By entering into a settlement agreement, Kaleidescape can now focus on the electronic distribution of movies to Kaleidescape Systems, in the highest quality via the Kaleidescape Store. This will allow many more customers to conveniently build a personal library of the finest movies and enjoy an immersive movie-watching experience at home without having to handle a disc.

What will this ruling mean for Kaleidescape’s dealers and customers?

For dealers, it will be easier to sell the system because they will no longer have to answer questions about the lawsuit. Getting rid of the lawsuit removes concerns that some prospective customers have had in the past. Customers will have easy access to many more electronic titles from our Store and will be able to enjoy the convenience of digital downloads, the quality of Blu-ray, and a catalog of titles that’s second to none.

As I read the release, following November 29, Kaleidescape systems will still play back DVDs – either via a single disc-in-tray or when stored in a vault – but discs will not be imported, correct?
Correct. However, it will still be possible to import DVDs that are not protected by CSS [such as home videos], just as we do today.

Will existing systems be impacted in any way?

“No. Systems that dealers purchase from Kaleidescape prior to November 30 will still be able to import DVDs and play them back without the physical DVD being present.”

Kaleidescape’s VaultThe release states: “For markets outside the United States, the Kaleidescape system will be sold after November 29 as a Blu-ray movie server only.” Does this mean that players outside the US will not be able to even playback DVD titles?
The Kaleidescape System is positioned as a Blu-ray server outside of the United States because our focus on developing the Store as well as many of our content license agreements are restricted to the United States – for now. We will introduce the Store in additional countries as it becomes practical. All Kaleidescape Systems, including those sold outside of the United States, will be able to play a DVD directly from the physical disc, without importing it. Even when played from the physical disc, you can start playing a DVD at the beginning of the feature, or jump to a favorite scene or song. A new feature will make it possible to play physical DVDs from a Vault, and playback from the tray will be improved.

Currently there are roughly 4,400 DVD quality titles available from the Kaleidescape store. The phrase, “Kaleidescape expects to have most DVD movies available for download from the Kaleidescape Store,” would imply there are additional studio agreements in the works…
We are working with the major studios and expect to have a much broader selection of content on our Store before the end of the year.

In a way, this kind of signals Kaleidescape 2.0; moving away from the feature the company was literally founded on. Looking to this digital download future, what kind of place will Kaleidescape have?

It is important to observe that the things our customers care about are quality, convenience and choice. Kaleidescape makes the user interface so beautiful and simple that it doesn’t matter whether the content is in DVD, Blu-ray Disc or in an electronically delivered format. When they browse and play titles from their personal movie library, they can enjoy the same Kaleidescape experience as their content formats evolve from physical discs to electronic downloads.

Will there be provisions for customers to convert DVD discs to digital copies? And if so, what will the process be?
It will be similar to today’s process whereby the player or the disc vault recognizes the DVD and permits you to download the same title in DVD quality or sometimes Blu-ray quality, enabling playback after the physical DVD has been removed from the system, just as an imported DVD can be played today.

There is a lot of buzz around 4K content and 4K delivery. Kaleidescape servers and the download store seem like a perfect vehicle for delivering this. Any comments on 4K plans?

Our engineers are working on a 4K offering. However, at this time we are not disclosing any details.

What happens to an owner of a “legacy” Kaleidescape system that breaks after the November 30, 2014 deadline? Will they lose their ability to import DVDs?

Kaleidescape has always had a strong commitment to our customers. One of our guiding principles while arguing the terms of the injunction and negotiating a settlement with the DVD CCA has been to preserve our ability to service the thousands of Kaleidescape customers and the dealers who have placed their trust in us for the past eleven years. We succeeded in maintaining our ability to provide repairs and upgrades to all of the “legacy” systems sold by Kaleidescape prior to November 30, 2014, when the injunction becomes effective.

Kaleidescape has an equally strong commitment not to sell or permit the creation of additional Legacy systems (capable of importing DVDs and playing them without the physical DVD being present) after November 29, 2014. Kaleidescape systems have proven to be extremely reliable—some are still running after 10 years of use. But beginning on November 30, 2014, the total number of Legacy Kaleidescape systems will stop increasing, and eventually decline.

We plan to service existing systems for a long, long time. We still service systems that are over 10 years old. We are not going to abandon our existing customers. We have resisted pressure to do so. It would be unethical if we did. Eventually the number of Legacy systems will decline simply because dealers may pull some out and throw them away, homes will burn down, yachts will sink, and airplanes will crash or go to the boneyard.

It is worth noting the first Kaleidescape system was introduced in 2003, meaning this lawsuit has loomed over the company for virtually its entire existence. Srinivasan expressed clear optimism for the future of the company and was excited that the company could stop fighting in the court room and return to focusing all of its energies on innovating.

Following is Kaleidescape’s official announcement regarding the settlement:

Kaleidescape and DVD CCA Announce Settlement Agreement to End Decade-Old Lawsuit

Ending license dispute clears the way for advancing electronic distribution

SUNNYVALE, CA – June 2, 2014 – Kaleidescape, Inc., the market leader in movie servers, and the DVD Copy Control Association, Inc., the licensor of CSS (Content Scramble System), today announced an agreement to jointly end a decade-long lawsuit, paving the way for Kaleidescape to become the de-facto platform for high-resolution content delivery.

Kaleidescape and the DVD CCA jointly settled the case in the 6th District of the California State Court of Appeal and the Superior Court of Santa Clara County. Under the settlement terms, Kaleidescape agreed to drop its appeal of the superior court injunction, which has been stayed by the Court of Appeal since 2012. DVD CCA and Kaleidescape have agreed that Kaleidescape will be subject to the injunction starting on November 30, 2014. Systems sold by Kaleidescape after that date will no longer be able to import CSS-protected DVDs, and such DVDs will only be playable from the physical disc. It will still be possible to play a physical DVD starting at the beginning of the feature, or jump directly to a favorite scene or song.

Pursuant to the settlement agreement, the superior court at the request of Kaleidescape and DVD CCA modified the injunction to provide that it takes effect November 30, 2014. This permits Kaleidescape to continue selling systems that import CSS-protected DVDs through November 29. By then, Kaleidescape expects to have most DVD movies available for download from the Kaleidescape Store in the United States. For markets outside the United States, the Kaleidescape system will be sold after November 29 as a Blu-ray movie server only.

“This agreement is a watershed moment for Kaleidescape. Electronically delivered movies are the future of home video. This agreement allows us to focus on creating the future of digital content ownership,” said Cheena Srinivasan, founder and CEO of Kaleidescape. “As the most trusted brand among home theater enthusiasts, who purchase far more movies than the average consumer, we are committed to delivering the best products and services for the most entertaining and immersive movie-watching experience at home.”