Judge Rules Against DVD Consortium

The court said a startup's media server does not violate the Content Scramble System security technology used to protect DVD disks because the standard licensing contract and specifications for the technology are so poorly worded.
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.