Kaleidescape Verdict: It is So Ordered!

by John Sciacca That booming sound you may have heard yesterday was the echoing ripple of a bit of your electronic freedom and innovation being smashed under the heavy-handed gavel of Judge William J. Monahan of the California Superior Court. As I wrote several weeks ago in my DVD CCA 1, Kaleidescape and Innovati
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by John Sciacca

That booming sound you may have heard yesterday was the echoing ripple of a bit of your electronic freedom and innovation being smashed under the heavy-handed gavel of Judge William J. Monahan of the California Superior Court.

As I wrote several weeks ago in my DVD CCA 1, Kaleidescape and Innovation 0 post (a good read to get the background info on this case), Kaleidescape has been fighting an on-going legal battle against the DVD CCA’s claim that Kaleidescape’s hard disk-based movie server system violates its licensing agreement that prohibits the copying (storing, archiving, backing-up, ripping – tomato, tomahto) of DVDs. Judge Monahan had handed down a tentative ruling in late January that went against Kaleidescape and its innovative movie server system. On Friday, his final “ORDER OF PERMANENT INJUNCTION” verdict was entered, with the ominous “IT IS SO ORDERED” written directly above the judge’s signature.

First, I’m bummed both personally and professionally to see that this latest ruling went against Kaleidescape. As someone that lives with and uses a Kaleidescape system on a near daily basis, I can say that it dramatically changes the way you use and enjoy your digital media.

As a dealer, I feel that the Kaleidescape system offers an end-user experience, quality-of-service, and performance that is unmatched by any other company in its class, and I truly believe that Kaleidescape is one of the most innovative companies in the industry. It's also disappointing that these legal issues have continued to hang over them for so many years, sapping resources away from being able to focus entirely on innovating and improving their system.

As I wrote in my original post, “Kaleidescape has been fighting this fight for eight years now. Consider that the company released its first product in 2003, and it’s apparent that they have been dealing with this suit almost every day that they’ve been around. Think what other cool things they might have been able to do if they could have allocated all of that litigation time, money and distraction into just making their system even more awesome…“ (Even so, they have managed to build a ground-up Blu-ray system, improve their user interface, add the amazing and industry exclusive Kid's Collection feature, add CinemaScope, add an iPad interface, add favorite scenes…)

And this ruling will not only directly affect Kaleidescape and the users of its system, but also on the next innovative company. Michael Malcolm, Kaleidescape’s founder and CEO, sums it up best on the legal update section of company’s websiteon the legal update section of company’s website: "We’ve been baffled about why this lawsuit ever happened, since our products don't encourage piracy, but do increase sales of movies. Maybe it's because the large CE companies in Japan and the big computer companies in the USA, on the board of the DVD CCA, are afraid that Kaleidescape is building a better way to enjoy DVDs and Blu-ray Discs than they are. Imagine a world where Apple wasn't allowed to build the iPod because Sony wanted a 'level playing field' for the Walkman."

After reading Malcolm’s letter to his dealer base (reprinted at the end of this post), I felt like this was bad news – a setback to be sure – but that Kaleidescape would be immediately filing an appeal and that we would see this go back through the courts over the next couple of years and that it would be business as usual in the meantime. In other words, this ruling was not "the nail in the coffin."

As someone who doesn’t understand the ins-and-outs of the legal system – and who pretty much gave up reading at “1. Capitalized terms in this Order shall be defined in accordance with the CSS Procedural Specifications (PRX 9) unless otherwise defined herein” – or the ramifications of this ruling, I turned directly to the source to clarify a few things. I e-mailed Kaleidescape a series of questions and received responses directly from Malcolm himself.

JS: From here you will appeal this decision. A process that will take some time – 1 to 2 years from your letter this morning. What does this ruling actually mean for Kaleidescape owners today?

Michael Malcolm: Kaleidescape owners today can continue enjoying their movie servers as they always have. The ruling has no impact on Blu-ray Discs or our music server, and we believe that there will be no impact to our DVD server while the injunction is stayed during the appeal. Kaleidescape is confident that when the Court of Appeal reviews the facts of this case, particularly in light of the complete absence of any harm to the DVD CCA or its members, that it will reverse the trial court decision.

Similarly, what does it mean for Kaleidescape dealers? Does this ruling mean that during the time while the appeal is filed/waiting to be heard that Kaleidescape and dealers will have to stop selling your product, essentially effective immediately?

Kaleidescape dealers can continue selling our products to help families enjoy their movie collections. Kaleidescape believes that under California law the injunction order should not come into effect unless the California Court of Appeal affirms Judge Monahan's decision. There are two types of injunctions: mandatory injunctions (which require time to comply and change the status quo), and prohibitory injunctions (which prevent a party from doing something in the future). During an appeal, mandatory injunctions are automatically stayed under California law. The status quo right now is that Kaleidescape is shipping products and dealers are installing them. To change the products to comply with the injunction would take a year or more. We would have to stop shipping them in the meantime or ship something that can’t do very much with DVDs. That’s why we believe it’s a mandatory injunction. We are still shipping our DVD movie servers today, and will continue unless a court determines that we are not entitled to a stay.

What does this mean that Kaleidescape will have to stop supporting installed systems? Will you be able to continue offering replacement drives, software updates, etc.?

Even if the injunction goes into effect, Kaleidescape will be able to continue supporting installed systems by replacing failed disks, updating KEAOS and the Movie Guide, etc.

If Kaleidescape is to lose this appeal – and Judge Monahan’s ruling stands – what does that mean? Are there more appeals left beyond that? I’m guessing that at some point there is a ruling that is handed down that is un-appealable. How far are we away from that?

If Kaleidescape loses the appeal, this injunction would go into effect. We could then petition the California Supreme Court, but they do not accept many cases.

And I’m assuming that if Kaleidescape wins the appeal, the DVD CCA will appeal *that* and then you’ll be back in court again at square one? Is that correct?

The most likely outcome in the event that we win the appeal is that the Court of Appeal would remand the case to the California Superior Court. We would then have our third “square one” trial.

What would losing the appeal mean to owners of existing systems? Would they cease to function or be required to meet some new requirement – such as disc-in-tray – to be compliant or would existing systems be grandfathered in?

The injunction does not call for any change in the behavior of systems sold prior to the injunction going into effect.

Assuming that it came to it, would the MDV-700 Disc Vault (my hands-on review here) holding DVDs be a compliant solution? Or perhaps a lesser priced DVD-only vault of similar design?

Unfortunately, the injunction goes far beyond a disc-in-tray requirement. It prevents playback from a hard-disk copy and requires that the encryption keys be obtained from the physical disc each time it is played. We do not believe that the DVD CCA license requires these things, but the Judge has so decided.

DVD is in many ways “past its prime.” With Blu-ray and digital downloads becoming far more important, what does this *really* mean to Kaleidescape and its users?

The DVD was revolutionary because the studios took a risk and made digital copies of movies available for sale. Even though the CSS scrambling was hacked very shortly after the introduction of the DVD, piracy hasn’t hurt the studios very much. To the contrary, the sale and rental of DVDs and Blu-ray Discs represented over $16 billion in the U.S. alone in 2011. The lesson this teaches us is that if movies are priced attractively and made available so consumers can easily purchase them and play them on all of their devices, they will do so. But DVD sales have declined 58 percent in the last five years. Blu-ray continues to increase in importance, and we expect that electronic sell-through of digital downloads will be the next big growth area. DVD continues to be a very important format, because many movies are available only on DVD and many families already have a significant library.

I know that Kaleidescape is working on a direct digital download service. Anything more you can share about that?

Our plans for digital downloads don’t include CSS scrambling, so the DVD CCA decision does not affect the Kaleidescape Store. We don’t have any further details to share at this time about when we’ll launch the store or what content will be available.

Any other comments that you would care to share?

The DVD CCA and other consortiums use the DMCA to force innovative companies like Kaleidescape to enter into licensing agreements that limit what their products can do, and then litigate if the company innovates within those agreements in ways that the members of the consortium don’t like. This ruling is a warning as to the dangers of the DMCA. The most valuable thing our dealers and customers can do is lobby to have this dangerous law repealed.

I appreciate Malcolm and team taking the time out on what was surely a busy day around the offices to address these questions and clarify the situation.

Far from hurting the movie studios, Kaleidescape owners are voracious consumers of media, and the “average Kaleidescape family owns 506 movies on Blu-ray and DVD.” Hopefully Kaleidescape will prevail in the appeal. Or, since “the injunction does not call for any change in the behavior of systems sold prior to the injunction going into effect” you could just go out and buy a system right now…

Here is Michael Malcolm’s letter to the Kaleidescape dealer base, as well as a link to read the full injunction order.

Dear Kaleidescape Dealer,

Six weeks ago, I wrote to explain that Judge William J. Monahan of the California Superior Court had filed a tentative decision in favor of the DVD CCA. Thursday, Judge Monahan filed his final decision on the matter, again in favor of the DVD CCA. Kaleidescape has appealed this decision, since we have always believed, and continue to believe, that our products fully comply with the DVD CCA's licensing agreement.

Judge Monahan entered his statement of decision and injunction order on March 8, 2012. Kaleidescape filed its appeal on March 9, 2012. Kaleidescape believes that under California law the injunction order should not come into effect unless the California Court of Appeal affirms Judge Monahan's decision. Kaleidescape is confident that when the Court of Appeal reviews the facts of this case, particularly in light of the complete absence of any harm to the DVD CCA or its members, it will reverse the trial court decision. The appeal process may take one to two years.

Since Cheena and I founded the company in 2001, we've been focused on bringing consumers a fantastic experience for enjoying their movie collections. We've invested in building one of the most comprehensive databases of information about DVDs and Blu-ray Discs, including high-resolution cover art and bookmarks for starting movies, scenes, and songs. We've developed two award-winning user interfaces, including one specifically for young children. More recently we released CinemaScape for 2.35 screens and our iPad app. All of these innovations make it more fun to enjoy a movie at home, which leads our customers to purchase even more movies from the motion picture studios.

We believe in a balance between consumer rights and copy control. We strongly believe that individuals have the right to make personal copies of movies they own so they can watch them instantly on any television in their home. We also believe in respecting and protecting the rights of the content creators. So we carefully designed our product not only to preserve the CSS scrambling on the original DVDs, but also to add encryption for greater security. We built a closed system that cannot be used to copy DVDs to or from the Internet, to writable DVDs, or to mobile devices or computers. We built a feature that detects rental DVDs and prevents them from being copied. We required and continue to require that our customers agree to only copy DVDs that they rightfully own, and to reaffirm this agreement each time they copy a disc.

This combination of business practices and technology has been so effective that after years of searching for evidence that Kaleidescape's customers use their systems to steal movies, the DVD CCA admitted in writing that we have done no harm to any of the motion picture studios or to the DVD CCA itself.

We won our first trial in 2007 when Judge Leslie C. Nichols of the California Superior Court found that Kaleidescape's products comply with the CSS license agreement. The DVD CCA appealed to the California Court of Appeal, who in 2009 sent the matter back to the California Superior Court for this second trial.

We appreciate your support through this prolonged struggle, and look forward to working with you to continue improving the way families enjoy their movie collections for years to come. We will continue to keep you informed.

If you are interested in reading the full text of the injunction order, it can be found here.

Sincerely,
Michael Malcolm
Chairman, Founder and CEO
Kaleidescape, Inc.

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