Angel on my shoulder…

The consumption of audio-visual contents has traditionally relied on the sale of tangible data carriers (video tapes, DVDs, Blu-ray discs etc.) or on the streaming of video contents via the Internet. Rental practices gained ground in the 1980s, but the rental of tangible copies is outdated by now. The purchase of digital copies has declined in the last few years, too.[1] Nowadays, online rental services dominate the market with a significant potential to expand further.[2] As audio-visual contents are purchased less frequently, there is almost no case law on the acceptability of the doctrine of exhaustion on the resale of these copies.

An exceptional proceeding is currently pending in the United States against VidAngel. There, several major Hollywood studios sued a California start-up that offers more than 2,500 movies and television episodes – among which over 80 are plaintiffs’ copyrighted works – for purchase on its website. All contents are originally purchased in DVD format. The DVDs are encrypted with commercially available software. They are entered in an inventory management application database, and they are assigned a unique barcode. The encrypted copies are broken into 1,300 fragments on average, and are tagged for over 80 different types of potentially objectionable contents. VidAngel claims that this tagging is in compliance with the Family Home Movie Act’s rules on making imperceptible limited portions of video contents that are offensive.[3] Clients of VidAngel can purchase any of these movies for 20 USD after logging in to defendant’s website. After the purchase of the content VidAngel either retains possession of the DVD, while the digital copy is removed from the inventory database, or clients might request that the DVD is shipped to them. Clients, finally, should select at least one of the different filters in order to stream the content on any VidAngel-supported device. After viewing the work the clients can resell the content to VidAngel for a reduced price. The sellback price is reduced 1 USD per night for standard definition (SD) copies and 2 USD per night for high-definition (HD) copies. The ultimate sellback-price is nonetheless 1 or 2 USD for SD and HD copies, respectively.[4]

The studios claim that VidAngel’s service infringes their rights under the Digital Millennium Copyright Act, according to which “no person shall circumvent a technological measure that effectively controls access to a work protected under this title”.[5] Plaintiffs also claim that VidAngel infringed their reproduction and public performance rights by copying the decrypted DVDs to the inventory database and by offering these contents via streaming to the end-users. Plaintiffs assert that the Family Home Movie Act is not providing any shield against the claims of infringement as that rule only allows for making imperceptible of pieces of lawful copies, but the decrypted movies are illegal in nature. Plaintiffs also state that defendant’s practices do not constitute a fair use under §107 of the USCA. Referring to the four factors of the fair use doctrine plaintiffs assert that the service is commercial in nature and it is not transformative (adds nothing new to the original works); the affected works are expressive; the clients view stream the heart of the works; finally the service has a negative impact upon the potential market of the studios’ distribution practices.

The District Court for the Central District of California agreed with the defendants claim of the studios, and grated plaintiffs’ motion for preliminary injunctions.[6] The case is now headed to a jury trial, where studios are seeking attorney fees, unspecified damages and profits from the company’s streaming service, and the cease of streaming the works of plaintiffs.[7]

Although this case looks like that it relates solely to the right of reproduction and public performance, the DMCA, and the Family Home Movie Act, it has serious implications on the first sale doctrine, too. VidAngel undoubtedly acquired lawful copies of audio-visual works, and it claimed that these copies were resold to the clients of the company. Although the court order did not address the first sale doctrine, it can easily be tested on jury trial.

Nevertheless, such a defence lacks merit. Irrespective of the lawful purchase and the sale of the tangible DVDs to the clients, videos are also streamed online by VidAngel. This can be treated as public performance under the USCA (and making available to the public in the E.U. law).

Some might come up with the argument – in compliance with the ratio of UsedSoft – that the sale of the DVDs to clients transforms the performance/making available of the videos to distribution of contents. This logic, however, lacks merit at least for two reasons. First, U.S. courts have not accepted any type of such transformation of economic rights. Indeed, ReDigi shows a significant rigidity in interpreting the digital resale of contents. It is plausible that such a transformation would not be accepted in this case either. Second, if we take a closer look at VidAngel’s service, it can be easily characterized as rental, rather than distribution, supposed that clients ultimately return the DVDs to the company. In fact, clients who most probably did not acquire physical possession over the purchased DVDs would practically sell back their right to stream the content from VidAngel’s servers. In case of a sellback of the videos to VidAngel, clients access the movies for a limited period of time in exchange of the payment of a consideration. Viewed from the parties’ contractual will all this system seems to work as rental rather than the sale and resale of copies of audiovisual contents.

[1] Apple’s iTunes, one of the leaders of digital marketplaces, “saw a 7% year-over-year decrease in net sales of digital media – consisting of music, movies, TV shows and e-books – in the period.” See Ingham (2015).

[2] Netflix launched its video streaming service in the United States in 2007. See Helft (2007). It started expanding internationally from 2010, when it launched its Canadian service. See Nowak (2010). By the end of 2016, Netflix offered video streaming at home in 190 countries of the world. See Scott (2017). Most recently, Netflix concluded a deal with a French mobile service operator, Orange. Under the deal Netflix subscribers can access their account on their smart phones via their Orange subscription. See ibid.

[3] USCA §110(11).

[4] On the facts of the case see Disney Enterprises, Inc., et al., v. VidAngel, Inc., 2016 WL 8292206 (2016) 2.

[5] USCA §1201(a)(1)(A).

[6] Disney v. VidAngel (2016) 3-14.

[7] See further Evans (2016).

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