Aereo: Round 2

It turns out Aereo has a Plan B after all. Two weeks after losing at the Supreme Court, which found that Aereo infringed broadcasters’ copyrights by retransmitting their signals without permission, the startup is back in court with a brand new legal theory for why it should be allowed to continue to operate. If it prevails, the implications could be nearly as far-reaching as if Aereo had won in the Supreme Court.

Last month’s Supreme Court ruling concerned the lower court’s denial of a preliminary injunction against Aereo. The court ruled that the broadcasters were entitled to an injunction based on Aereo’s ongoing infringement but it didn’t resolve the underlying litigation. Instead, the case was remanded to the district court to sort out how to proceed.

In a letter to the district court this week, Aereo raised a new argument it said was based on the Supreme Court’s holding. Since the court said it was just like a cable TV system, Aereo argued, that must mean it is entitled to the compulsory license that allows cable systems to retransmit copyrighted programming without securing individual licenses by paying a statutory fee to the U.S. Copyright Office:

The Supreme Court has now ruled that “having considered the details of Aereo’s practices, we find them highly similar to those of the CATV systems in Fortnightly and Teleprompter. And those are activities that the 1976 amendments sought to bring within the scope of the Copyright Act…. Accordingly, Aereo is entitled to a compulsory license under the Copyright Act, 17 U.S.C. § 111. And because Aereo is entitled to a license under Section 111, the transmissions Plaintiffs have sought to enjoin do not infringe Plaintiffs’ rights under the Copyright Act.

It’s an audacious as well as very subtle legal argument. It’s audacious because Aereo had not previously invoked Section 111 of the Copyright Act, which applies specifically to cable systems, in its defense. In fact, it expressly rejected a Section 111 defense, in the district court and at oral arguments at the Supreme Court, because that section concerns retransmission by cable operators and Aereo was arguing that it was its users, not Aereo, that were doing the transmitting. To raise it at this late stage in the game is certainly unorthodox and perhaps even “astonishing,” as the broadcasters called it in their own letter to the district court.

It’s also debatable whether, as a legal matter, the Supreme Court really held that Aereo qualifies as a cable TV service. The majority opinion never actually said that in so many words — only that Aereo looks like and acts like a cable system — and it’s not clear the court could make such a determination unilaterally in any case.

Aereo’s argument is quite subtle, however, in that it attempts to thread the needle between two distinct legal authorities concerning the definition of a cable system.

Both the Copyright Act and the Communications Act (as amended by the Cable Act) define what they mean by a “cable TV system.” The definitions do not quite align, however, because the two laws address different aspects of what a cable system does.

The Copyright Act governs the programming contained in TV broadcasts, and Section 111 of the Act establishes a compulsory license for that programming available to cable operators. The compulsory license was created because any given TV channel generally includes programming from many different copyright holders, and forcing cable operators to negotiate separately for the right to retransmit each particular show would be prohibitively expense and logistically difficult. Instead, operators that qualify as “cable TV systems” as defined by the Act can invoke the compulsory license and pay a nominal royalty to the Copyright Office, which disperses the fees to the copyright owners.

The Communications Act governs the actual signals sent out by broadcasters, irrespective of the programming contained in them, and establishes rules for their retransmission. The most salient of those rules, which are overseen by the FCC, are “must-carry” and “retransmission content,” under which cable operators and other multichannel video program distributors (MVPDs) are generally required to pay broadcasters to retransmit their signals.

With its new legal strategy, Aereo appears to be gambling that it can qualify for the compulsory license under the Copyright Act by paying the nominal royalties, while avoiding being subject to the must-carry and retransmission consent rules in the Communications Act, which would come at a much steeper price and likely make Aereo’s business model economically non-viable.

Could it work? The U.S. Copyright Office, which administers Section 111, has held in the past that online video providers are not cable TV systems for the purposes of the Copyright Act, and therefore do not qualify for the compulsory license. The case that put the question most directly involved ivi, a Seattle based startup that retransmitted broadcast TV signals over the internet to paying subscribers. In that case, the U.S. Second Circuit Court of Appeals adopted the Copyright Office’s reasoning in ruling that ivi was not a cable TV system and therefore did not qualify for the compulsory license and was, in fact, infringing broadcasters’ copyrights. Ivi appealed to the Supreme Court by but court let the Second Circuit’s ruling stand.

As attorney Gus Hurwitz points out in a very useful explainer on the American Enterprise Institute’s blog, however, ivi operated nationally and piped distant signals into local markets, whereas the Section 111 compulsory license concerns only the local retransmission of local broadcast signals. Aereo, on the other hand, uses geo-location to restrict its retransmissions to only those markets capable a receiving a particular over-the-air broadcast signal, so it might be able to differentiate itself from Aereo.

In its letter to the district court, in fact, Aereo insists the Supreme Court actually overruled ivi, ) “to the extent it might apply to Aereo.” We’ll see.

The more interesting issue concerns the applicability of the Communications Act to Aereo. Unlike the Copyright Office, the FCC has never formally ruled on whether online video services qualify as MVPDs, a category that includes cable systems, satellite services and telco TV systems, although it has been asked.

The case the put the question most squarely concerns Sky Angel, a Christian IPTV service that offered a package of family friendly of channels over the internet. In 2010 it reached an impasse in negotiations with Discovery over carriage of several Discovery-owned networks and Sky Angel filed a program access complaint with the FCC. The IPTV service claimed Discovery was violating FCC regulations that generally require networks to make their programming available to all MVPDs on fair and reasonable terms.

In response, the FCC opened a proceeding in 2012 asking for input on whether an online service such as Sky Angel could qualify as a MVPD under the Communications Act. As can be seen in the FCC’s Notice of Inquiry in the matter, however, the question is anything but straightforward. It raises a host of other, complicated questions involving the definition of a “channel” and of “video programming” that, depending on how it came out could have a major impact on traditional cable and satellite services. Two years on, the FCC is yet to issue a ruling in the matter, although the proceeding officially remains open.

Aereo seems to be betting that it can get a resolution on the Section 111 question by raising it in court, giving it access to the compulsory license, while the FCC delays indefinitely a ruling on whether to apply must-carry and retransmission consent rules to online service providers.

If Aereo manages to square that circle (still a major “if” since the court is not obliged to let it litigate an entirely new legal argument at this point) the broadcasters could find themselves in a position as bad as if they had lost in the Supreme Court. Aereo — and what would likely be a stampede of imitators — could legally retransmit their shows for a nominal fee without being subject to retransmission consent rules.

If, on the other hand, Aereo’s new strategy were somehow to force the FCC’s hand, leading to a ruling that online services can qualify as MVPDs, it would hold huge implications for incumbent cable and satellite providers. Over-the-top competitors would gain the benefit of program access rules, allowing them to offer a comparable bundle of channels without the huge capital costs associated with maintaining a cable or satellite system.

Say this for Aereo: It’s determined to disrupt something, even if it has to change its entire strategy to do it.

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Paul Sweeting

Principal Concurrent Media Strategies

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