Federal judge in California declares Aereo clone potentially eligible for compulsory copyright license.

FilmOn logo-1Sometimes, getting there first doesn’t mean that you’re the winner. Just look at Aereo, whose innovative technology was going to revolutionize the delivery of video programming.

Although supposedly embraced by the consuming public, Aereo was sued for copyright infringement by lots of broadcasters (including all the major networks). It won a string of victories in several lower courts, but ultimately lost the Big One in the Supreme Court, which held that Aereo’s system did indeed infringe on the broadcasters’ copyrights, including particularly their exclusive right to publicly perform their programs. (Anyone fuzzy on the Aereo saga may want to take a look through our posts on the topic.)

According to Aereo’s Plan A, Aereo was entitled to retransmit, without copyright liability, programming it received through its over-the-air antennas. The Supreme Court, however, viewed Aereo’s system to be more akin to cable systems, whose retransmissions of broadcast material are subject to copyright obligations. As we reported, following its loss in the Supremes, Aereo moved to Plan B: it argued that it was a cable system and offered to pay copyright royalties to participate in the cable compulsory license. The Copyright Office (from which Aereo sought a favorable determination) didn’t buy it. Aereo filed for bankruptcy, sold off most of its assets and is now, for all intents and purposes, dead.

Ironically, “FilmOn X” lives on, and may be on the verge of winning the fight that Aereo could not.

FilmOn X offers a video delivery system technologically similar to Aereo’s. Its continued existence is ironic because, when it debuted, it called itself “AereoKiller” and utilized the domain name “BarryDriller.com”, an obviously unsubtle reference to Aereo bigwig Barry Diller. (It dropped those and adopted “FilmOnX” and “FilmOn.com” in their place when sued by Aereo and Diller.) While FilmOn X did not “kill” Aereo, it has outlived Aereo and seems positioned to fulfill the promise that Aereo wasn’t able to.

FilmOn X was not always an Aereo clone. It was originally created to be an online-based cable system. Sued by the major networks, FilmOn (as it was then known) subjected to a temporary restraining order imposed by a federal judge in New York. It immediately ceased retransmission of over-the-air network television, although it continued to offer programming for which it had negotiated licenses, including programming from several independent broadcast television channels.

That happened in 2012, just when Aereo was making its big splash. FilmOn promptly pivoted to an Aereo-style system dubbed FilmOn X (née Aereokiller). Like Aereo, FilmOn X was sued, but in California, not New York. That distinction is important, because while Aereo was winning in federal courts in New York (first the Southern District of New York and then the United States Court of Appeals for the Second Circuit), on the West Coast FilmOn X was losing: District Judge George Wu shut FilmOn X down with a preliminary injunction barring it from operating in the Ninth Circuit. FilmOn X appealed to the U.S. Court of Appeals for the Ninth Circuit. But while that appeal was pending, two big things happened: (1) the Supreme Court agreed to hear the Aereo case and (2) a federal district judge in D.C. preliminarily enjoined FilmOn X from operating anywhere in the nation other the that Second Circuit states of New York, Vermont and Connecticut. FilmOn X was stalled.

You know what happened next. The networks prevailed in the Supreme Court, Aereo tried its Plan B back in the District Court (arguing that it’s entitled to treatment as a cable system) but ran out of money and that was that, right?

Nope. Not by a longshot. In the wake of the Supreme Court’s Aereo decision, the Ninth Circuit sent FilmOn X’s case back to Judge Wu, where the parties filed cross motions for summary judgment. The broadcasters argued that FilmOn X is not entitled to a cable compulsory license under Section 111 of the Copyright Act; FilmOn X argued that it is. And what do you know? Notwithstanding a contrary conclusion by the federal district judge in New York in the Aereo case, Judge Wu has concluded that FilmOn X is at last “potentially” entitled to a compulsory license under the Copyright Act.

That conclusion is a bit surprising, since Wu’s opinion is less than kind to FilmOn X in a number of respects. He starts off with a detailed description of FilmOn X’s technical system, noting that a number of the features which FilmOn X has touted in its own defense have not been shown to work as advertised; in some instances, they haven’t even been developed yet. Wu does note in FilmOn X’s favor that the company had filed with the Copyright Office the paperwork ordinarily required of a cable system for each six month period between August 2012 and July 2014, and it had paid the corresponding fees. But that plus is tempered by a serious minus: it turns out that FilmOn X omitted from its Copyright Office filings reference to “some” stations, an omission that wasn’t corrected until very late in the game. The omitted stations included the ABC, CBS, FOX and NBC stations in LA, San Francisco, Seattle and Phoenix. In other words, FilmOn X “managed not to pay the required royalties for the very network with whom they were then in litigation.” Quite an oversight – and one that seemed to impress Judge Wu, but not favorably.

So how did Wu end up siding with FilmOn X?

Through a thorough review of (1) the evolution of Section 111 and other Copyright Act provisions relating to the right of cable systems to retransmit broadcast signals, (2) relevant court cases (including, of course, Aereo), and (3) other materials from sources including the Copyright Office and the FCC.

The earliest Supreme Court cases – Fortnightly from 1968 and Teleprompter from 1974 – prompted Congress to create the Section 111 Cable Compulsory License in 1976, which generally provides a cable operator a copyright license for its retransmission of the programming of local television stations as long as the operator adheres to certain requirements, including the payment of governmentally-set royalty rates. In that provision Congress defined a cable system as

a facility, located in any State, territory, trust territory, or possession of the United States, that in whole or in part receives signals transmitted or programs broadcast by one or more television broadcast stations licensed by the Federal Communications Commission and makes secondary transmissions of such signals or programs by wires, cables, microwave, or other communications channels to subscribing members of the public who pay for such service.

As Wu noted, the precise interpretation of what constitutes a cable system for these purposes has been adjusted over the years to address changing technology. For instance, satellite systems were very quickly declared by the courts not to be cable systems, prompting the creation of the Satellite Home Viewer Act in Section 119 of the Copyright Act (followed later by Section 122), which provides satellite services a compulsory copyright license covering transmission of broadcast programming back into the local market.

In Judge Wu’s view, the Supreme Court’s Aereo decision – which was based in large part of the similarity between Aereo and a cable system – reflected that definitional flexibility. And while he declined to hold that the Aereo decision compelled the conclusion that FilmOn X should be deemed a cable service, he acknowledged that Aereo is

about as close a statement directly in the [FilmOn X’s] favor as could be made, and the decision’s reasoning continues the trajectory started in Fortnightly and seen again in the satellite decisions: courts consistently reject the argument that technological changes affect the balance of rights as between broadcasters and retransmitters in the wake of technological innovation. Instead, courts have left such rebalancing to Congress.

He also observed that, while the Copyright Office has on several occasions stated that it does not believe that Internet retransmission services (such as FilmOn X’s) qualify for the Cable Compulsory License, the Copyright Office is not the final authority on the subject, especially as the Copyright Office seems to disagree with Congress on this issue.

Judge Wu was similarly unimpressed by the ivi, Inc. decisions from the Second Circuit. There the Second Circuit concluded that an Internet-based system cannot be a cable system under Section 111 because there is no “facility” involved; the Internet, the Second Circuit held, “is neither a physical nor a tangible entity.” But, as Judge Wu concluded, FilmOn X does have “a facility”:

The signals are not received by “the Internet.” They are received by antennas, located in particular buildings wholly within particular states. They are then retransmitted out of those facilities on “wires, cables, microwave or other communications channels.”

As far as the FCC goes, Judge Wu acknowledged both the Commission’s role in defining a cable system and the fact that the Commission is currently engaged in a rulemaking on this very point. But be that as it may, he also noted that the broadcasters had not identified any ways in which FilmOn X might be violating any FCC regulations regarding cable systems. Further, there is, in Judge Wu’s view, a high likelihood that the FCC’s proceeding to redefine the notion of “MVPD” will include Internet-based systems.

It should not surprise you that Judge Wu believes that questions concerning the retransmission of broadcast programming must ultimately be resolved by Congress. But for the time being, in the absence of any clear Congressional direction, he has granted FilmOn X’s motion for summary judgment, holding that FilmOn X is potentially eligible for a Section 111 license. The fact that that ruling is issued merely on a “potential[ ]” basis is significant. Recognizing that his conclusion drastically changes the broadcasting and cable landscape, Judge Wu has authorized an immediate interlocutory appeal of his ruling to the Ninth Circuit. Meanwhile, his preliminary injunction against FilmOn X remains in effect pending the outcome of that appeal.

And what is the actual effect of Judge Wu’s decision on the broadcasting and cable landscape, you’re probably asking? Well, it could be nothing. This case is clearly going to be appealed. From all appearances, thanks to its billionaire owner, Alki David, FilmOn X seems to have almost limitless cash to fight in court as long as it takes. If the Ninth Circuit reverses Wu’s decision, it’s a good bet that FilmOn X will seek Supreme Court review; and if the Circuit affirms, you could expect the broadcasters to do the same. Either way, the split between the Second and Ninth Circuits with respect to the definition of an Internet-based “cable” system would present an apparent “circuit split” ripe for Supreme Court resolution.

Then again, what happens if Judge Wu’s FilmOn X-friendly views carry the day? Hard to tell, but the effect could clearly be profound. Just about anybody could become a cable system for purposes of Section 111 without a significantly expensive cable transmission facility. But it seems pretty clear that there must be some kind of facility – I’m not sure that Judge Wu would allow a completely Internet-based system without any physical structure whatsoever (à la the earlier, 2010 version of FilmOn X and the ivi, Inc. type system) to claim eligibility for Section 111.

But the more interesting wrinkle is what happens if Judge Wu’s ruling stands but the FCC’s current proceeding does not change the definition of an MVPD and Congress does not step in to address the issue. In that instance, a “Kevin’s Cable System” might be pretty easy to set up. Importantly, since I would not be a cable system (at least in the FCC’s eyes), it does not appear that the FCC’s current must-carry and retransmission consent rules would apply to me. I’d have some expenses but they’re certainly not as high as they would be for a traditional cable system. There’s a good argument to be made that I wouldn’t have to negotiate retransmission fees with every single station I carry – I could just carry and pay copyright royalty fees set under Section 111 directly to the Copyright Office. Imagine the possibilities.

An alternate scenario, though, could see an effort by broadcasters and cable operators to get Congress to statutorily redefine “MVPD” to include Internet-based retransmission systems. While the broadcast and the cable industries might have different reasons for seeking that particular legislative solution, they might both benefit from it. And if the lobbying forces of these two traditional foes were to be aligned toward a common goal, it’s not unrealistic to think that Congress might be persuaded.