Judge Rules Against DVD Consortium

SAN JOSE, Calif. — A Superior Court judge ruled Thursday (March 29) a startup's media server does not violate the security technology used to protect DVD disks because the standard licensing contract and specifications for the technology are so poorly worded.

The decision marks a rare, though small victory for a Silicon Valley startup facing the interests of a group of large movie studios and consumer and computer companies. The ruling also could open the door for other systems makers who want to design personal video libraries that store DVD movies on hard drives.

Judge Leslie C. Nichols ruled against the DVD Copy Control Association (DVD CCA) in a civil suit that asked the court to force startup Kaleidescape to change its design or stop selling its server that stores hundreds of DVD movies on a hard drive array. Nichols said the basis for his decision was his ruling that an entire section of the DVD CCA's spec for the Content Scramble System (CSS) was not technically included as part of the license agreement.

"This [CSS spec] is a product of a committee of lawyers," said Nichols in his ruling.

In testimony, witnesses said the CSS specification was drafted a decade ago by a team of lawyers mainly from Hollywood studios working with the advice of a small group of engineers over the course of more than 100 meetings. "It is almost self evident that there is potential for confusion there," said Nichols.

Specifically, Nichols ruled that a 20-page document known as the CSS General Specification was not part of an overall group of 170 pages of technical specifications defining CSS. The DVD CCA relied on language in the general spec to assert any system playing DVD movies has to have the physical disk present.

The Kaleidescape system imports DVDs into a hard drive array for future playback. The DVD disks do not remain in the system, something the DVD CCA said would allow users to keep unauthorized digital copies of rented or borrowed DVDs.

Kaleidescape maintained the CSS agreement allowed the company to build a system that kept a single, protected copy of a DVD on a hard drive for private use. The company has a policy against importing rented and borrowed DVDs. It said the fact such disks could still be imported is a problem for studios, not Kaleidescape to solve.

Nichols also faulted the DVD CCA's process. The group makes the CSS license available on the Internet, but does not provide legal or technical guidance on implementing it, something Kaleidescape sought. "I saw this as a case where no one sat down to talk," said Nichols. Michael Malcolm, founder and chief executive of Kaleidescape hailed the decision as a victory for innovation in the face of large consortiums. The DVD CCA is managed by a board of 12 executives, six drawn from the top movie studios and three each from top consumer and computer companies. It has 350 licensees for CSS.

"The ugly thing about the motion picture industry is the extent to which it operates by collusion and corporate lock step in organizations like the DVD CCA," said Malcolm. "It stifles competition in this country and it has for a long time.

"It's much better for the economy to have these things decided by competition and free enterprise," said Malcolm, a serial entrepreneur who also founded Network Appliance and CacheFlow. "This is a victory just one small battle in that war," he said.

Kaleidescape has sold more than 2,600 of its media servers since they were launched in August 2003 at prices starting at $10,000 and up. The company employs more than 100 people and has more than 900 dealers in 42 countries.

The DVD CCA sued the company in late 2004, a move that cast a cloud over the company for many of its employees and prospective dealers and users, said Malcolm who has invested $8 million of his own money into the startup to date.

"We were pretty nervous. It's a scary thing to come to court to hear a decision that may impact whether your company is around in a few months," said Malcolm before joining employees for a pizza and champagne lunch at its Mountain View, Calif., headquarters.

Bill Coates, lead attorney for the DVD CCA said he expects the group will appeal the decision.

This was the time the DVD CCA took a hardware company to court alleging it infringed its CSS contract. The consortium is in mediation with another hardware company, AMX (Richardson, Texas) over similar alleged violations in a media server.

The Motion Picture Association of America did warn a wide swath of as many as 80 chip and systems makers of possible violations of CSS in 2005. The group ultimately settled out of court cases raised with three chip makers-- MediaTek Inc. (Hsinchu, Taiwan), ESS Technology Inc. (Fremont, Calif.) and Sigma Designs Inc. (Milpitas, Calif.).

The DVD CCA has at least threatened to take action against one other startup, Molino Networks of San Jose. The company demonstrated in February 2004 a system aimed to sell for less than $2, 000 that could store up to 50 DVDs on a single hard drive, but it folded late that year when it failed to get venture financing, in part due to the threat of legal action from the DVD CCA.

"We spent a lot of time meeting lawyers and reading contracts instead of writing software," said Tim Sylvester a former Cisco engineer who was founder and chief executive of Molino. "Michael Malcolm is in a fortunate position that he can fund this himself," Sylvester said.

"We will see more competition now," said Malcolm. "That's probably the biggest loss in the eyes of the DVD CCA. They will see a lot more consumer companies going into this kind of product," he added.

In closing arguments Coats warned that a ruling in favor of Kaleidescape "could open the flood gates to copycatsPrices could come down to that of a laptop for products that are not as elegant as Kaleidescape's but have the same basic functionality," Coats said.